SEC Filing - Tenable, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2019



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission file number 001-38600

__________________

TENABLE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

__________________



Delaware		47-5580846
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7021 Columbia Gateway Drive, Suite 500, Columbia, Maryland, 21046

(Address of principal executive offices, including zip code)

(410) 872-0555

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	TENB	The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒
Emerging growth company	☒	Smaller reporting company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the Registrant's common stock outstanding as of November 8, 2019 was 98,187,608.

TENABLE HOLDINGS, INC.

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		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Loss	5
	Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	1. Business and Summary of Significant Accounting Policies	8
	2. Cash and Cash Equivalents and Short-Term Investments	12
	3. Fair Value Measurements	13
	4. Property and Equipment, Net	14
	5. Leases	14
	6. Debt	15
	7. Redeemable Convertible Preferred Stock and Common Stock	16
	8. Stock-Based Compensation	16
	9. Net Loss Per Share Attributable to Common Stockholders	19
	10. Geographic Information	19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 6.	Exhibits	64
	Signatures	65

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TENABLE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS



	September 30, 2019			December 31, 2018
(in thousands, except per share data)	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	171,303		$	165,116
Short-term investments	125,333			118,119
Accounts receivable (net of allowance for doubtful accounts of $557 and $188 at September 30, 2019 and December 31, 2018, respectively)	81,201			68,261
Deferred commissions	26,030			23,272
Prepaid expenses and other current assets	21,126			22,020
Total current assets	424,993			396,788
Property and equipment, net	18,525			11,348
Deferred commissions (net of current portion)	38,493			36,162
Operating lease right-of-use assets	40,346			8,504
Other assets	9,855			7,810
Total assets	$	532,212		$	460,612

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	795		$	171
Accrued expenses	9,474			5,554
Accrued compensation	24,244			29,594
Deferred revenue	245,985			213,644
Operating lease liabilities	3,970			4,262
Other current liabilities	701			1,079
Total current liabilities	285,169			254,304
Deferred revenue (net of current portion)	83,390			76,259
Operating lease liabilities (net of current portion)	37,788			6,055
Other liabilities	2,677			2,231
Total liabilities	409,024			338,849

Stockholders’ equity:
Common stock (par value: $0.01; 500,000 shares authorized; 97,960 and 93,126 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)	980			931
Additional paid-in capital	648,964			586,940
Accumulated other comprehensive income	60			—
Accumulated deficit	(526,816		)	(466,108		)
Total stockholders’ equity	123,188			121,763
Total liabilities and stockholders’ equity	$	532,212		$	460,612

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2019			2018			2019			2018
Revenue	$	91,852		$	69,440		$	257,537		$	192,139
Cost of revenue	15,245			12,161			42,389			30,768
Gross profit	76,607			57,279			215,148			161,371
Operating expenses:
Sales and marketing	56,699			44,550			165,403			125,964
Research and development	20,763			20,553			64,396			55,529
General and administrative	17,472			13,272			48,595			32,868
Total operating expenses	94,934			78,375			278,394			214,361
Loss from operations	(18,327		)	(21,096		)	(63,246		)	(52,990		)
Interest income, net	1,527			894			4,677			845
Other expense, net	(240		)	(185		)	(576		)	(605		)
Loss before income taxes	(17,040		)	(20,387		)	(59,145		)	(52,750		)
Provision for income taxes	600			482			1,563			1,157
Net loss	(17,640		)	(20,869		)	(60,708		)	(53,907		)
Accretion of Series A and B redeemable convertible preferred stock	—			(55		)	—			(434		)
Net loss attributable to common stockholders	$	(17,640	)	$	(20,924	)	$	(60,708	)	$	(54,341	)

Net loss per share attributable to common stockholders, basic and diluted	$	(0.18	)	$	(0.28	)	$	(0.64	)	$	(1.34	)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted	96,709			74,261			95,433			40,688

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net loss	$	(17,640	)	$	(20,869	)	$	(60,708	)	$	(53,907	)
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on available-for-sale securities	(20		)	—			60			—
Other comprehensive (loss) income	(20		)	—			60			—
Comprehensive loss	$	(17,660	)	$	(20,869	)	$	(60,648	)	$	(53,907	)

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)



	Redeemable Convertible Preferred Stock																		Accumulated Other Comprehensive Income
	Series A					Series B					Common Stock					Additional Paid-in Capital									Total Stockholders’ Equity (Deficit)
(in thousands)	Shares		Amount			Shares		Amount			Shares		Amount			Additional Paid-in Capital						Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance at June 30, 2019	—		$	—		—		$	—		96,808		$	968		$	629,087		$	80		$	(509,176	)	$	120,959
Exercise of stock options	—		—			—		—			383		4			2,717			—			—			2,721
Vesting of restricted stock units	—		—			—		—			431		5			(5		)	—			—			—
Issuance of common stock under employee stock purchase plan	—		—			—		—			338		3			6,547			—			—			6,550
Stock-based compensation	—		—			—		—			—		—			10,618			—			—			10,618
Other comprehensive loss	—		—			—		—			—		—			—			(20		)	—			(20		)
Net loss	—		—			—		—			—		—			—			—			(17,640		)	(17,640		)
Balance at September 30, 2019	—		$	—		—		$	—		97,960		$	980		$	648,964		$	60		$	(526,816	)	$	123,188

Balance at December 31, 2018	—		$	—		—		$	—		93,126		$	931		$	586,940		$	—		$	(466,108	)	$	121,763
Exercise of stock options	—		—			—		—			3,625		36			15,412			—			—			15,448
Vesting of restricted stock units	—		—			—		—			432		5			(5		)	—			—			—
Issuance of common stock under employee stock purchase plan	—		—			—		—			777		8			15,121			—			—			15,129
Stock-based compensation	—		—			—		—			—		—			31,496			—			—			31,496
Other comprehensive income	—		—			—		—			—		—			—			60			—			60
Net loss	—		—			—		—			—		—			—			—			(60,708		)	(60,708		)
Balance at September 30, 2019	—		$	—		—		$	—		97,960		$	980		$	648,964		$	60		$	(526,816	)	$	123,188

Balance at June 30, 2018	15,848		$	49,946		39,538		$	228,168		24,951		$	250		$	26,651		$	—		$	(425,625	)	$	(398,724	)
Accretion of Series A and B redeemable convertible preferred stock	—		2			—		53			—		—			(55		)	—			—			(55		)
Exercise of stock options	—		—			—		—			168		1			404			—			—			405
Stock-based compensation	—		—			—		—			—		—			8,836			—			—			8,836
Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions and other offering expenses	—		—			—		—			12,535		125			264,674			—			—			264,799
Conversion of redeemable convertible preferred stock to common stock upon initial public offering	(15,848	)	(49,948		)	(39,538	)	(228,221		)	55,386		554			277,615			—			—			278,169
Net loss	—		—			—		—			—		—			—			—			(20,869		)	(20,869		)
Balance at September 30, 2018	—		$	—		—		$	—		93,040		$	930		$	578,125		$	—		$	(446,494	)	$	132,561

Balance at December 31, 2017	15,848		$	49,935		39,538		$	227,800		24,472		$	246		$	20,676		$	—		$	(392,587	)	$	(371,665	)
Accretion of Series A and B redeemable convertible preferred stock	—		13			—		421			—		—			(434		)	—			—			(434		)
Exercise of stock options	—		—			—		—			654		6			1,409			—			—			1,415
Repurchase of common stock	—		—			—		—			(7	)	(1		)	(74		)	—			—			(75		)
Stock-based compensation	—		—			—		—			—		—			14,259			—			—			14,259
Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions and other offering expenses	—		—			—		—			12,535		125			264,674			—			—			264,799
Conversion of redeemable convertible preferred stock to common stock upon initial public offering	(15,848	)	(49,948		)	(39,538	)	(228,221		)	55,386		554			277,615			—			—			278,169
Net loss	—		—			—		—			—		—			—			—			(53,907		)	(53,907		)
Balance at September 30, 2018	—		$	—		—		$	—		93,040		$	930		$	578,125		$	—		$	(446,494	)	$	132,561

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2019			2018
Cash flows from operating activities:
Net loss	$	(60,708	)	$	(53,907	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,604			4,580
Stock-based compensation	31,191			14,206
Other	(787		)	771
Changes in operating assets and liabilities:
Accounts receivable	(13,309		)	(8,190		)
Prepaid expenses and other current assets	820			941
Deferred commissions	(5,089		)	(2,708		)
Other assets	(2,386		)	315
Accounts payable and accrued expenses	3,892			1,930
Accrued compensation	(5,350		)	1,252
Deferred revenue	39,472			39,880
Other current liabilities	(195		)	(4		)
Other liabilities	173			(71		)
Net cash used in operating activities	(7,672		)	(1,005		)

Cash flows from investing activities:
Purchases of property and equipment	(10,262		)	(4,140		)
Purchases of short-term investments	(179,703		)	(34,114		)
Sales and maturities of short-term investments	174,485			—
Net cash used in investing activities	(15,480		)	(38,254		)

Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting discounts and commissions	—			268,531
Payments of costs related to initial public offering	—			(3,732		)
Principal payments under finance lease obligations	(12		)	(389		)
Proceeds from stock issued in connection with the employee stock purchase plan	15,129			—
Proceeds from the exercise of stock options	15,448			1,415
Repurchases of common stock	—			(75		)
Net cash provided by financing activities	30,565			265,750
Effect of exchange rate changes on cash and cash equivalents and restricted cash	(1,226		)	(675		)
Net increase in cash and cash equivalents and restricted cash	6,187			225,816
Cash and cash equivalents and restricted cash at beginning of period	165,378			27,472
Cash and cash equivalents and restricted cash at end of period	$	171,565		$	253,288

Supplemental disclosure of cash flow information:
Cash paid for interest	$	73		$	85
Cash paid for income taxes	1,507			920
Supplemental cash flow information related to leases:
Operating cash payments for operating leases	$	3,297		$	3,098
Operating cash payments for finance leases	5			29
Supplemental disclosure of non-cash investing and financing activities:
Asset retirement obligations	$	121		$	67

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business and Summary of Significant Accounting Policies

Business Description

Tenable Holdings, Inc. (the “Company,” “we,” "us," or “our”) is a provider of Cyber Exposure solutions, which is a discipline for managing, measuring and comparing cybersecurity risk in the digital era. Our enterprise software platform enables broad visibility into an organization’s cyber exposure across the modern attack surface and deep insights that help organizations translate technical data into business insights to understand and reduce their cybersecurity risk.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Tenable Holdings, Inc. and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information. The consolidated statements are unaudited and should be read in conjunction with the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K ("10-K") filed with the Securities and Exchange Commission on March 1, 2019. The consolidated financial statements have been prepared on a basis consistent with the audited annual consolidated financial statements included in the 10-K and, in the opinion of management, include all adjustments of a normal recurring nature necessary to fairly state our financial position, our results of operations, and cash flows.

The results for the nine months ended September 30, 2019 are not necessarily indicative of the operating results expected for the year ending December 31, 2019 or any other future period.

Initial Public Offering

On July 30, 2018, we completed our initial public offering ("IPO"), in which we issued and sold 12,535,000 shares of common stock at a price to the public of $23.00 per share, including 1,635,000 shares of common stock purchased by our underwriters from the full exercise of their over-allotment option. All of the shares sold in the IPO were sold by the Company. We received net proceeds of $264.6 million after deducting underwriting discounts and commissions and other offering expenses.

Upon the completion of our IPO, all 15,847,500 shares of our Series A Redeemable Convertible Preferred Stock ("Series A") and 39,538,354 shares of our Series B Redeemable Convertible Preferred Stock ("Series B") automatically converted into an aggregate of 55,385,854 shares of our common stock. Our Amended and Restated Certificate of Incorporation adopted in connection with the IPO authorizes a total of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, the determination of the estimated economic life of perpetual licenses for revenue recognition, the estimated period of benefit for deferred commissions, useful lives of long-lived assets, the valuation of stock-based compensation, including the estimated underlying fair value of our common stock prior to our IPO, the incremental borrowing rate for operating leases, and the valuation of deferred tax assets. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable. Actual results could differ significantly from these estimates.

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Revenue Recognition

We recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve this, we apply the following steps:

•Identify the contract with a customer

•Identify the performance obligations in the contract

•Determine the transaction price

•Allocate the transaction price to the performance obligations in the contract

•Recognize revenue when or as performance obligations are satisfied

We generate revenue from subscription arrangements for software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses, and professional services and other revenue. We begin to recognize revenue when control of our software or services is transferred to the customer, which for sales made through distributors is concurrent with the transfer to the end user.

The following table presents a summary of revenue:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Subscription revenue	$	75,503	$	53,511	$	209,610	$	146,568
Perpetual license and maintenance revenue	13,797		13,864		40,877		40,753
Professional services and other revenue	2,552		2,065		7,050		4,818
Revenue	$	91,852	$	69,440	$	257,537	$	192,139

Subscription Revenue

Subscription arrangements generally have annual or multi-year contractual terms for the use of our software or cloud solutions, including ongoing software updates and the ability to identify the latest cybersecurity vulnerabilities. Revenue is recognized ratably over the subscription term given the critical utility provided by the ongoing updates that are released throughout the contract period.

Perpetual License and Maintenance Revenue

Our perpetual licenses are generally sold with one or more years of maintenance, which include ongoing software updates and the ongoing ability to identify the latest cybersecurity vulnerabilities. Given the critical utility provided by the ongoing software updates and updated ability to identify network vulnerabilities included in maintenance, we combine the perpetual license and the maintenance into a single performance obligation. Perpetual license arrangements generally contain a material right related to the customer’s ability to renew maintenance at a price that is less than the initial license fee. We apply a practical alternative to allocating a portion of the transaction price to the material right performance obligation and estimate a hypothetical transaction price which includes fees for expected maintenance renewals based on the estimated economic life of the perpetual license contracts. We allocate the transaction price between the cybersecurity subscription provided in the initial contract and the material right related to expected contract renewals based on the hypothetical transaction price. We recognize the amount allocated to the combined license and maintenance performance obligation over the initial contractual period, which is generally one year. We recognize the amount allocated to the material right over the expected maintenance renewal period, which begins at the end of the initial contractual term and is generally four years. We have estimated the five-year economic life of perpetual license contracts based on historical contract attrition, expected renewal periods, the lifecycle of the our technology and other factors. While we believe that the estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

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Professional Services and Other Revenue

Professional services and other revenue is primarily comprised of advisory services and training related to the deployment and optimization of our products. These services do not result in significant customization of our products. Professional services and other revenue is recognized as the services are performed.

Contracts with Multiple Performance Obligations

In cases where our contracts with customers contain multiple performance obligations, the contract transaction price is allocated on a relative standalone selling price basis. We typically determine standalone selling price based on observable selling prices of our products and services.

Variable Consideration

We record revenue from sales at the net sales price, which is the transaction price, including estimates of variable consideration when applicable. Certain of our customers may be entitled to receive credits and in certain circumstances, refunds, if service level commitments are not met. We have not historically experienced significant incidents affecting the ability to meet these service level commitments and any estimated refunds related to these agreements have not been material.

Sales through our channel network of distributors and resellers are generally discounted as compared to the price that we would sell to an end user. Revenue for sales through our channel network is recorded net of any distributor or reseller margin.

Concentrations

We sell and market our products and services through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our products and services to our distributors, which in turn sell to resellers, which then sell to end-users. We derived 91%, 88%, 90%, and 87% of revenue through our channel network in the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, respectively. One of our distributors accounted for 43% of revenue in the three and nine months ended September 30, 2019 and 46% of revenue in the three and nine months ended September 30, 2018. That same distributor accounted for 40% and 46% of accounts receivable at September 30, 2019 and December 31, 2018, respectively.

Contract Balances

We generally bill our customers in advance and accounts receivable are recorded when we have the right to invoice the customer. Contract liabilities consist of deferred revenue and include customer billings and payments received in advance of performance under the contract. In the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019 and 2018, we recognized revenue of $84.6 million, $62.5 million, $184.3 million and $133.3 million, respectively, that was included in the deferred revenue balance at the beginning of each of the respective periods.

Remaining Performance Obligations

At September 30, 2019, the future estimated revenue related to unsatisfied performance obligations was $333.4 million, with 74% expected to be recognized as revenue over the succeeding twelve months, and the remainder expected to be recognized over the four years thereafter.

Investments

We currently invest in commercial paper, corporate bonds and U.S. treasury and agency obligations. Our investments are classified as available-for-sale and recorded at fair value, with unrealized gains and losses reported in accumulated

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other comprehensive income within stockholders’ equity (deficit). We periodically review our investment portfolio to determine whether investments have indicators of possible impairment.

Deferred Commissions

Sales commissions, including related incremental fringe benefit costs, are considered to be incremental costs of obtaining a contract. Sales commissions on initial sales are not commensurate with sales commissions on contract renewals and therefore are recognized over an estimated period of benefit, which ranges between three and four years for subscription arrangements and five years for perpetual license arrangements. We estimate the period of benefit based on the expected contract term including renewal periods, the lifecycle of our technology, and other factors. Sales commissions on contract renewals are capitalized and amortized ratably over the contract term, with the exception of contracts with renewal periods that are one year or less, in which case the incremental costs are expensed as incurred.

The following summarizes the activity of deferred incremental costs of obtaining a contract in the periods presented:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Beginning balance	$	61,866		$	50,805		$	59,434		$	50,176
Capitalization of contract acquisition costs	9,612			7,138			24,846			16,985
Amortization of deferred contract acquisition costs	(6,955		)	(5,059		)	(19,757		)	(14,277		)
Ending balance	$	64,523		$	52,884		$	64,523		$	52,884

Amortization of deferred contract acquisition costs is included in sales and marketing expense in the consolidated statements of operations.

Leases

We early adopted Accounting Standards Codification Topic 842, Leases ("ASC 842"), as of January 1, 2018 using the modified retrospective method. We determine if an arrangement contains a lease and the classification of that lease, if applicable, at inception. We have elected to not recognize a lease liability or right-of-use ("ROU") asset for short-term leases (leases with a term of twelve months or less). For contracts with lease and non-lease components, we have elected to not allocate the contract consideration, and account for the lease and non-lease components as a single lease component. Additionally, we enter into arrangements to use shared office spaces and other facilities, and have determined that these arrangements do not contain leases as we do not have the right to use an identified asset. Operating leases are included in operating lease ROU assets, operating lease liabilities and operating lease liabilities (net of current portion) in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities and other liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our operating leases is generally not determinable and we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment and is estimated for each lease based on the rate we would have to pay for a collateralized loan with the same term and payments as the lease. We consider various factors, including our current borrowing rate, level of collateralization, estimated credit rating and currency of the lease. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. Options to extend or terminate a lease are considered in connection with calculating the ROU asset and related lease liability when it is reasonably certain that we will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

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Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13 — Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. This guidance is effective for us beginning January 1, 2020, and will be adopted using the modified-retrospective method. We are currently evaluating the potential impact of this standard on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15 — Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Under this ASU, implementation costs related to a cloud computing arrangement that is a service contract will be capitalized consistent with the requirements for capitalizing internal-use software development costs. The capitalized implementation costs are subsequently expensed over the term of the hosting arrangement. This guidance is effective for us beginning January 1, 2020, and will be adopted on a prospective basis. We are currently evaluating the potential impact of this standard.

2. Cash and Cash Equivalents and Short-Term Investments

At September 30, 2019 and December 31, 2018, cash and cash equivalents excluded $0.3 million of restricted cash, which is related to an account established as collateral for a lease arrangement and was included in other assets on the consolidated balance sheets.

The following tables summarize the amortized cost, unrealized gain and loss and estimated fair value of cash equivalents and short-term investments:



	September 30, 2019
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
Cash equivalents:
Money market funds	$	28,043	$	—	$	—		$	28,043
Commercial paper	4,496		—		—			4,496
Total cash equivalents	$	32,539	$	—	$	—		$	32,539

Short-term investments:
Commercial paper	$	56,754	$	—	$	—		$	56,754
Corporate bonds	15,993		32		—			16,025
U.S. Treasury and agency obligations	52,526		35		(7		)	52,554
Total short-term investments	$	125,273	$	67	$	(7	)	$	125,333

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	December 31, 2018
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value
Cash equivalents:
Money market funds	$	38,022	$	—	$	—	$	38,022
Total cash equivalents	$	38,022	$	—	$	—	$	38,022

Short-term investments:
Commercial paper	$	79,634	$	—	$	—	$	79,634
Corporate bonds	16,119		—		—		16,119
U.S. Treasury and agency obligations	22,366		—		—		22,366
Total short-term investments	$	118,119	$	—	$	—	$	118,119

For any investments that were in an unrealized loss position, we considered if we intended on selling the investments before maturity and if it is more-likely-than-not that we would have to sell the security before the recovery of the amortized cost basis. We concluded that there were no other-than-temporary impairments at September 30, 2019.

At September 30, 2019 and December 31, 2018, all of our short-term investments had maturities within the next twelve months.

3. Fair Value Measurements

We measure certain financial instruments at fair value using a fair value hierarchy. In the hierarchy, assets are classified based on the lowest level inputs used in valuation into the following categories:


•	Level 1 — Quoted prices in active markets for identical assets and liabilities;


•	Level 2 — Observable inputs including quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, or inputs that are corroborated by observable market data; and


•	Level 3 — Unobservable inputs.

The following tables summarize assets that are measured at fair value on a recurring basis:



	September 30, 2019
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents
Money market funds	$	28,043	$	—	$	—	$	28,043
Commercial paper	—		4,496		—		4,496
	$	28,043	$	4,496	$	—	$	32,539

Short-term investments
Commercial paper	$	—	$	56,754	$	—	$	56,754
Corporate bonds	—		16,025		—		16,025
U.S. Treasury and agency obligations	—		52,554		—		52,554
	$	—	$	125,333	$	—	$	125,333

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	December 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Cash and cash equivalents
Money market funds	$	38,022	$	—	$	—	$	38,022
	$	38,022	$	—	$	—	$	38,022

Short-term investments
Commercial paper	$	—	$	79,634	$	—	$	79,634
Corporate bonds	—		16,119		—		16,119
U.S. Treasury and agency obligations	—		22,366		—		22,366
	$	—	$	118,119	$	—	$	118,119

We did not have any liabilities measured and recorded at fair value at September 30, 2019 or December 31, 2018.

4. Property and Equipment, Net

Property and equipment, net consisted of the following:



(in thousands)	September 30, 2019		December 31, 2018
Computer software and equipment	$	20,221	$	13,038
Furniture and fixtures