Edgar Filing: HUBSPOT INC

hubs-10q_20170630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2017

☐	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 001-36680

HubSpot, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-2632791

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

25 First Street, 2nd Floor

Cambridge, Massachusetts, 02141

(Address of principal executive offices)

(888) 482-7768

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth 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. YES ☐ NO ☐

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

There were 37,025,599 shares of the registrant’s Common Stock issued and outstanding as of July 27, 2017.

HUBSPOT, INC.

Table of Contents

Part I — Financial Information

Item 1.	Unaudited Consolidated Financial Statements:
	Unaudited Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	4
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016	5
	Unaudited Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016	6
	Unaudited Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2017	7
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	29

Part II — Other Information

Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Default Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
Signatures
EX-31.1	CERTIFICATION OF THE CEO PURSUANT TO SECTION 302
EX-31.2	CERTIFICATION OF THE CFO PURSUANT TO SECTION 302
EX-32.1	CERTIFICATION OF THE CEO AND CFO PURSUANT TO SECTION 906

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, and these statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross margin and operating expenses;

•

maintaining and expanding our customer base and increasing our average subscription revenue per customer;

•

the impact of competition in our industry and innovation by our competitors;

•

our anticipated growth and expectations regarding our ability to manage our future growth;

•

our predictions about industry and market trends;

•

our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll-out upgrades to our existing software platform and to develop new and enhanced applications to meet the needs of our customers;

•

our ability to maintain our brand and inbound marketing thought leadership position;

•

the impact of our corporate culture and our ability to attract, hire and retain necessary qualified employees to expand our operations;

•

the anticipated effect on our business of litigation to which we are or may become a party;

•

our ability to successfully acquire and integrate companies and assets; and

•

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

PART I — Financial Information

ITEM 1.

Financial Statements

HubSpot, Inc.

Unaudited Consolidated Balance Sheets

(in thousands)

	June 30,			December 31,
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	175,622		$	59,702
Short-term investments		316,798			54,648
Accounts receivable — net of allowance for doubtful accounts of $650 and $617 at June 30, 2017 and December 31, 2016, respectively		38,466			38,984
Deferred commission expense		11,149			9,025
Restricted cash		-			162
Prepaid hosting costs		1,521			5,299
Prepaid expenses and other current assets		20,224			8,433
Total current assets		563,780			176,253
Long-term investments		41,895			35,718
Property and equipment, net		37,618			30,201
Capitalized software development costs, net		7,774			6,523
Restricted cash		5,100			321
Other assets		1,579			966
Goodwill		9,773			9,773
Total assets	$	667,519		$	259,755
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,865		$	4,350
Accrued compensation costs		12,668			11,415
Other accrued expenses		27,354			15,237
Capital lease obligations		780			796
Deferred rent		157			159
Deferred revenue		109,919			95,426
Total current liabilities		153,743			127,383
Capital lease obligations, net of current portion		319			275
Deferred rent, net of current portion		16,780			10,079
Deferred revenue, net of current portion		1,394			1,171
Asset retirement obligations		872			591
Other long-term liabilities		1,944			1,556
Convertible senior notes		288,764			-
Total liabilities		463,816			141,055
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock		36			36
Additional paid-in capital		467,897			365,444
Accumulated other comprehensive loss		(266	)		(864	)
Accumulated deficit		(263,964	)		(245,916	)
Total stockholders’ equity		203,703			118,700
Total liabilities and stockholders’ equity	$	667,519		$	259,755

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

HubSpot, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Revenues:
Subscription	$	84,363		$	60,916		$	161,866		$	115,852
Professional services and other		4,730			4,058			9,479			8,082
Total revenue		89,093			64,974			171,345			123,934
Cost of revenues:
Subscription		12,492			9,985			23,901			18,895
Professional services and other		6,099			5,210			11,762			10,271
Total cost of revenues		18,591			15,195			35,663			29,166
Gross profit		70,502			49,779			135,682			94,768
Operating expenses:
Research and development		15,889			11,278			29,259			21,082
Sales and marketing		50,708			39,140			97,380			74,338
General and administrative		14,482			10,391			27,620			20,239
Total operating expenses		81,079			60,809			154,259			115,659
Loss from operations		(10,577	)		(11,030	)		(18,577	)		(20,891	)
Other expense:
Interest income		734			201			1,037			380
Interest expense		(2,832	)		(93	)		(2,884	)		(180	)
Other expense		(97	)		(202	)		(225	)		(535	)
Total other expense		(2,195	)		(94	)		(2,072	)		(335	)
Loss before income tax benefit		(12,772	)		(11,124	)		(20,649	)		(21,226	)
Income tax benefit		3,251			60			3,053			8
Net loss	$	(9,521	)	$	(11,064	)	$	(17,596	)	$	(21,218	)
Net loss per share, basic and diluted	$	(0.26	)	$	(0.32	)	$	(0.48	)	$	(0.61	)
Weighted average common shares used in computing basic and diluted net loss per share		36,654			35,023			36,431			34,858

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

HubSpot, Inc.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net loss	$	(9,521	)	$	(11,064	)	$	(17,596	)	$	(21,218	)
Other comprehensive loss:
Foreign currency translation adjustment		445			(313	)		564			88
Changes in unrealized gain on investments, net of income taxes of $2 and $20 for the three and six months ended June 30, 2017 and $40 and $172 for the three and six months ended June 30, 2016		2			69			34			271
Comprehensive loss	$	(9,074	)	$	(11,308	)	$	(16,998	)	$	(20,859	)

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

HubSpot, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(In thousands, except per share amounts)

	Common Stock, $0.001 Par Value				Additional Paid-In		Accumulated Other Comprehensive			Accumulated Equity
	Shares		Amount		Capital		Loss			(Deficit)			Total
Balances at December 31, 2016		35,784	$	36	$	365,444	$	(864	)	$	(245,916	)	$	118,700
Issuance of common stock under stock plans, net of shares withheld for employee taxes		977		—		5,156		—			—			5,156
Stock-based compensation		—		—		23,132		—			—			23,132
Cumulative adjustment from adoption of stock compensation standard		—		—		452					(452	)		—
Cumulative translation adjustment		—		—		—		564			—			564
Unrealized gain on investments, net of income taxes of $20		—		—		—		34			—			34
Equity component of 2022 Notes (Note 6)		—		—		73,713		—			—			73,713
Net loss		—		—		—		—			(17,596	)		(17,596	)
Balances at June 30, 2017		36,761	$	36	$	467,897	$	(266	)	$	(263,964	)	$	203,703

HubSpot, Inc.

Unaudited Consolidated Statements of Cash Flow

(in thousands)

	For the Six Months Ended June 30,
	2017			2016
Operating Activities:
Net loss	$	(17,596	)	$	(21,218	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by operating activities
Depreciation and amortization		6,977			5,223
Stock-based compensation		22,309			14,705
Benefit for deferred income taxes		(3,544	)		(165	)
Amortization of debt discount and issuance costs		2,683			—
(Accretion) amortization of bond discount premium		(55	)		411
Noncash rent expense		2,999			1,949
Unrealized currency translation		(195	)		(63	)
Changes in assets and liabilities, net of acquisition
Accounts receivable		1,161			(385	)
Prepaid expenses and other assets		(7,918	)		(2,624	)
Deferred commission expense		(1,901	)		(3	)
Accounts payable		(327	)		302
Accrued expenses		6,969			1,937
Deferred rent		3,602			(34	)
Deferred revenue		12,655			11,786
Net cash and cash equivalents provided by operating activities		27,819			11,821
Investing Activities:
Purchases of investments		(305,277	)		(21,111	)
Maturities of investments		37,060			21,343
Purchases of property and equipment		(11,072	)		(11,269	)
Capitalization of software development costs		(3,340	)		(2,512	)
Purchases of strategic investments		(600	)		—
Restricted cash		(4,589	)		—
Net cash and cash equivalents used in investing activities		(287,818	)		(13,549	)
Financing Activities:
Employee taxes paid related to the net share settlement of stock-based awards		(2,097	)		(1,342	)
Proceeds related to the issuance of common stock under stock plans		7,485			6,168
Repayments of capital lease obligations		(518	)		(319	)
Proceeds of the issuance of convertible notes, net of issuance costs paid of $10,755		389,245			-
Purchase of note hedge related to convertible notes		(78,920	)		-
Proceeds from the issuance of warrants related to convertible notes, net of issuance costs paid of $200		58,880			-
Net cash and cash equivalents provided by financing activities		374,075			4,507
Effect of exchange rate changes on cash and cash equivalents		1,844			302
Net increase in cash and cash equivalents		115,920			3,081
Cash and cash equivalents, beginning of period		59,702			55,580
Cash and cash equivalents, end of period	$	175,622		$	58,661
Supplemental cash flow disclosure:
Cash paid for interest	$	191		$	104
Cash paid for income taxes	$	410		$	197
Non-cash investing and financing activities:
Property and equipment acquired under capital lease	$	547		$	473
Convertible notes offering costs incurred but not yet paid	$	12		$	—
Capital expenditures incurred but not yet paid	$	206		$	867
Asset retirement obligations	$	400		$	—

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

HubSpot, Inc.

Notes to Unaudited Consolidated Financial Statements

1. Organization and Operations

HubSpot, Inc. (the “Company”) was formed as a limited liability company in Delaware on April 4, 2005. The Company converted to a Delaware corporation on June 7, 2007. The Company provides a cloud-based inbound marketing and sales platform which features integrated applications to help businesses attract visitors to their websites, convert visitors into leads, close leads into customers and delight customers so they become promoters of those businesses. These integrated applications include social media, search engine optimization, blogging, website content management, marketing automation, email, CRM, analytics, and reporting.

The Company is headquartered in Cambridge, Massachusetts, and has wholly-owned subsidiaries in Dublin, Ireland, which commenced operations in January 2013, in Sydney, Australia, which commenced operations in August 2014, in Singapore, which commenced operations in October 2015, and in Tokyo, Japan, which commenced operations in July 2016. Additionally, the Company has announced that it will open an office in Berlin, Germany in July 2017.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2016, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2017. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 16, 2017. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes, except the adoption of updated guidance related to certain aspects of share-based payments to employee described within the Recent Accounting Pronouncements below.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

The Company adopted updated guidance related to certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. As a result of the adoption, we recorded an increase to deferred tax assets with a corresponding increase to the valuation allowance of $30.4 million to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized as additional paid-in capital. In addition, the Company changed its policy election to account for forfeitures as they occur rather than on an estimated basis. The change in the policy election related to forfeitures resulted in the Company reclassifying $452 thousand from additional paid-in capital to accumulative deficit for the net cumulative-effect adjustment in stock compensation expense related to prior periods.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2016, the FASB issued guidance related to the presentation of restricted cash within the statement of cash flows. The guidance requires entities to show the changes in cash, cash equivalents, and restricted cash in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. As of June 30, 2017, we had $5.1 million in restricted cash. The new standard is effective beginning in the first quarter of 2018, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. In July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard now is effective for annual reporting periods beginning January 1, 2018. The FASB will permit companies to adopt the new standard early, but not before the original effective date of January 1, 2017. The Company will adopt the standard on January 1, 2018, and currently anticipates adopting the standard using the modified retrospective method, which would result in a cumulative effect adjustment as of the date of adoption. The Company has established a team that is continuing to assess potential impacts of the standard on the timing of revenue recognition and accounting for deferred commission balances and whether the adoption will have a material impact on the consolidated financial statements and footnote disclosures. The Company expects there may be a change to the period over which sales commissions will be amortized to align to an estimated customer life and a change to the scope of capitalized sales commissions based on the definition of incremental costs of obtaining a contract. In addition, there may be a change in relation to the timing of revenue recognition for certain sales contracts, due primarily to the removal of the current limitation on contingent revenue. These changes are being evaluated to determine the potential impact to our financial statements and disclosures.

2. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), Employee Stock Purchase Plan (“ESPP”), and the Conversion Option of the 2022 Notes (Note 6) are considered to be potential common stock equivalents.

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Net loss	$	(9,521	)	$	(11,064	)	$	(17,596	)	$	(21,218	)
Weighted-average common shares outstanding — basic		36,654			35,023			36,431			34,858
Dilutive effect of share equivalents resulting from stock options, RSUs, ESPP and the Conversion Option of the 2022 Notes		—			—			—			—
Weighted-average common shares, outstanding — diluted		36,654			35,023			36,431			34,858
Net loss per share, basic and diluted	$	(0.26	)	$	(0.32	)	$	(0.48	)	$	(0.61	)

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding stock options, RSUs, ESPP, and Conversion Option of the 2022 Notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents.

	As of June 30,
		2017	2016
	(in thousands)
Options to purchase common shares		2,501	3,003
RSUs		2,304	2,405
ESPP		5	—

The Company expects to settle the principal amount of the 2022 Notes in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the Conversion Option on diluted net income per share, if applicable. The Conversion Option will have a dilutive impact on net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of the 2022 Notes of $94.77 per share. During the three and six months ended June 30, 2017, the Company's weighted average common stock price was below the conversion price of the 2022 Notes.

3. Fair Value of Financial Instruments

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at June 30, 2017 and December 31, 2016.

	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents and investments:
Money market funds	$	35,003	$	—	$	—	$	35,003
Commercial paper		—		7,743		—		7,743
Corporate bonds		—		74,399		—		74,399
U.S. government agency obligations		—		8,981		—		8,981
U.S. Treasury securities		—		367,532		—		367,532
Restricted cash:
Certificates of deposit		—		5,100		—		5,100
Other assets:
Strategic investments		—		—		600		600
Total	$	35,003	$	463,755	$	600	$	499,358

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents and investments:
Money market funds	$	32,260	$	—	$	—	$	32,260
Commercial paper		—		12,439		—		12,439
Corporate bonds		—		66,947		—		66,947
U.S. government agency obligations		—		10,980		—		10,980
Total	$	32,260	$	90,366	$	—	$	122,626

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At June 30, 2017 and December 31, 2016, our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

As of June 30, 2017, the fair value of the 2022 Notes (Note 6) was $392.9 million. The fair value was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.

For certain other financial instruments, including accounts receivable, accounts payable, capital leases and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

Restricted cash is comprised of certificates of deposit related to landlord guarantees for our leased facilities. These restricted cash balances have been excluded from our cash and cash equivalents balance on our consolidated balance sheets.

The following tables summarize the composition of our short- and long-term investments at June 30, 2017 and December 31, 2016.

	June 30, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
	(in thousands)
Commercial paper	$	7,750	$	—	$	(7	)	$	7,743
Corporate bonds		74,530		7		(138	)		74,399
U.S. government agency obligations		8,998		-		(17	)		8,981
U.S. Treasury securities		267,569		10		(9	)		267,570
Total	$	358,847	$	17	$	(171	)	$	358,693

	December 31, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
	(in thousands)
Commercial paper	$	12,446	$	—	$	(7	)	$	12,439
Corporate bonds		67,126		—		(179	)		66,947
U.S. government agency obligations		10,998		—		(18	)		10,980
Total	$	90,570	$	—	$	(204	)	$	90,366

For all of our securities for which the amortized cost basis was greater than the fair value at June 30, 2017, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, the Company considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.