Q2 Holdings, Inc.

QTWO

US74736L1098

Software

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Q2 HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

November 04, 2021 at 04:33 pm EDT

Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on our management's beliefs and assumptions and on information currently
available to our management. The statements contained in this Quarterly Report
on Form 10-Q that are not purely historical are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. You can identify these statements by words such as "anticipates,"
"believes," "can," "continue," "could," "estimates," "expects," "intends,"
"may," "plans," "seeks," "should," "will," "strategy," "future," "likely," or
"would" or the negative of these terms or similar expressions. These statements
are not guarantees of future performance or development and involve known and
unknown risks, uncertainties and other factors that are in some cases beyond our
control, including the COVID-19 outbreak and the associated efforts to limit the
spread of the disease. All of our forward-looking statements are subject to
risks and uncertainties that may cause our actual results to differ materially
from our expectations. Factors that may cause such differences include, but are
not limited to, the risks described under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2020 and in this Quarterly Report on
Form 10-Q and those discussed in other documents we file with the Securities and
Exchange Commission, or the SEC.
Given these risks and uncertainties, you should not place undue reliance on
these forward-looking statements. Also, forward-looking statements represent our
management's beliefs and assumptions only as of the date of this Quarterly
Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q
completely and with the understanding that our actual future results may be
materially different from what we expect. We hereby qualify our forward-looking
statements by these cautionary statements. Except as required by law, we assume
no obligation to update these forward-looking statements publicly, or to update
the reasons actual results could differ materially from those anticipated in
these forward-looking statements, even if new information becomes available in
the future.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and in our other SEC filings, including the audited
consolidated financial statements and the accompanying notes for the fiscal year
ended December 31, 2020, which are included in our Annual Report on Form 10-K,
filed with the SEC on February 19, 2021.
Overview
We are a leading provider of secure, cloud-based digital solutions that
transform the ways in which traditional and emerging financial services
providers engage with account holders and end users, or End Users. We sell our
solutions to financial institutions, alternative finance and leasing companies,
or Alt-FIs, and financial technology companies, or FinTechs. Our solutions
enable our customers to deliver robust suites of digital banking, lending,
leasing, and banking-as-a-service, or BaaS, services that make it possible for
End Users to transact and engage anytime, anywhere and on any device. Our
solutions are often the most frequent point of engagement between our customers
and their End Users. As such, we purpose-build our solutions to deliver
compelling and consistent End-User experiences across digital channels and to
drive the success of our customers by optimizing their digital brands and
enhancing End-User acquisition, retention and engagement.
The effective delivery and management of secure and advanced digital solutions
in the complex and heavily regulated financial services industry requires
significant resources, personnel and expertise. We provide digital solutions
that are designed to be highly configurable, scalable and adaptable to the
specific needs of our customers. We design and develop our solutions with an
open platform approach intended to provide comprehensive integration among our
solution offerings and our customers' internal and third-party systems. This
integrated approach allows our customers to deliver unified and robust financial
experiences across digital channels. Our solutions provide our customers the
flexibility to configure their digital services in a manner that is consistent
with each customer's specific workflows, processes and controls. Our solutions
also allow our customers to personalize the digital experiences they deliver to
their End Users by extending their individual services and brand requirements
across digital channels. Our solutions and our data center infrastructure and
resources are also designed to comply with the stringent security and technical
regulations applicable to financial institutions and financial services
providers and to safeguard our customers and their End Users.
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We began by providing digital banking solutions to domestic regional and
community financial institutions, or RCFIs, with the mission of empowering them
to leverage technology to compete more effectively and to strengthen the
communities and End Users they serve. To date, a substantial majority of our
revenues continue to come from sales of our digital banking platform, and we
continue to be focused on our founding mission of building stronger and more
diverse communities by strengthening their financial institutions. However, the
continued proliferation and ubiquity of mobile and tablet devices and End Users'
increasing expectations for digital services have driven increases in the number
of providers, greater fragmentation of financial services markets and a
broadening set of new and innovative digital services, creating challenges and
opportunities in the markets served by financial institutions as well as
emerging providers such as Alt-FIs and FinTechs. End Users increasingly expect
to transact and engage with financial services providers anytime, anywhere and
on any device, and seamlessly across devices. End Users also select digital
solutions based on the quality and intuitiveness of the digital user experience.
Financial institutions, Alt-FIs and FinTechs are seeking to address these
challenges and opportunities and capture End-User engagement by providing new,
innovative digital financial services, solutions and experiences. Traditional
financial services providers such as banks and credit unions are experiencing
reduced End-User engagement in their physical branches and increased End-User
engagement with their digital services and thus, they are increasing their
investment in digital services. Emerging providers such as Alt-FIs and FinTechs
are leveraging their digital focus and expertise and capitalizing on increased
End-User demand for digital financial services by creating new and expanding
existing digital service offerings. The combination of these two drivers of
investment by traditional and emerging financial services providers is driving
new competition, innovation and unique market opportunities.
We deliver our solutions to most of our customers using a software-as-a-service,
or SaaS, model under which our customers pay subscription fees for the use of
our solutions. A small portion of our revenues are derived from customers which
host our solutions in their own data centers under term license and maintenance
agreements. Our digital banking platform customers have numerous End Users, and
those End Users can represent one or more consumer or commercial users
registered to use one or more of our solutions on our digital banking platform,
or Registered Users. We generally price our digital banking platform solutions
based on the number of solutions purchased by our customers and the number of
Registered Users utilizing our solutions. We generally earn additional revenues
from our digital banking platform customers based on the number of transactions
that Registered Users perform on our solutions in excess of the levels included
in our standard subscription fee. As a result, our revenues from digital banking
platform customers grow as our customers buy more solutions from us and increase
the number of Registered Users utilizing our solutions and as those users
increase their number of transactions on our solutions. The structure and terms
of the arrangements for our newer lending, leasing and BaaS solutions are
varied, but we generally sell these solutions on a subscription basis through
our direct sales organization, and the related revenues are recognized over the
terms of the customer agreements.
We have achieved significant growth since our inception. During each of the past
eight years, our average number of Registered Users per installed customer on
our digital banking platform, or Installed Customer, has grown, and in many
instances we have been able to sell additional solutions to existing customers.
Our revenues per Installed Customer and per Registered User vary
period-to-period based on the length and timing of customer implementations,
changes in the average number of Registered Users per customer, sales of
additional solutions to existing customers, changes in the number of
transactions on our solutions by Registered Users and variations among existing
customers and new customers with respect to the mix of purchased solutions and
related pricing. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Key Operating Measures" for additional
detail on how we define "Installed Customers" and "Registered Users."
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The COVID-19 pandemic has created significant risks and uncertainties for our
customers, their End Users, our partners and suppliers, our employees and our
business generally. However, we believe that these events are accelerating the
transition to digital financial solutions and that our portfolio of digital
financial services solutions and our position and reputation in the market
provide us with an opportunity to continue to serve customers and grow our
business. We considered the uncertainties and risks posed by the continuing
COVID-19 pandemic when preparing our 2021 budget and hiring plans and though we
expect our headcount growth rate to be somewhat lower than we experienced in
2019 and prior, we expect our 2021 hiring growth rate to exceed that of 2020
based on an improved buying environment and reduced COVID-19 impacts. In the
long term, and subject to more clarity regarding when we may return to a more
normal operating environment post COVID-19 pandemic, we remain committed to
continuing to strategically invest across our organization to position us to
increase revenues and to improve operating efficiencies. We are also considering
how our physical facilities requirements might change when we return to
increased onsite operations, including the costs associated with ensuring a safe
work environment and the likely increased prevalence of working from home for
employees. The timing and amount of these investments will vary based on the
rate at which we expect to add new customers or sell additional solutions to
existing customers, our customer retention rates, the implementation and support
needs of our customers, our software development plans, our technology and
physical infrastructure requirements, and changes thereto resulting from the
COVID-19 pandemic, and other needs of our organization. Many of these
investments will occur in advance of our realizing any resultant benefit which
may make it difficult to determine if we are effectively allocating our
resources.
If we are successful in growing our revenues by increasing the number of
customers and scope of our customer relationships, we anticipate that greater
economies of scale and increased operating leverage will improve our margins
over the long term. We also anticipate that increases in the number of
Registered Users for existing digital banking platform customers in the longer
term will improve our margins. However, we do not have any control or influence
over whether End Users of our digital banking platform elect to become
Registered Users of our customers' digital banking services.
We sell our solutions primarily through our professional sales organization.
While the financial institutions market is well-defined due to the regulatory
classifications of those financial institutions, the Alt-FI and FinTech markets
are broader and more difficult to define due to the changing number of providers
in each market. Over the long term, we intend to continue to invest in
additional sales representatives to identify and address the financial
institution, Alt-FI and FinTech markets across the U.S. and internationally and
to increase our number of sales support and marketing personnel, as well as our
investment in marketing initiatives designed to increase awareness of our
solutions and generate new customer opportunities.
We have continuously invested in expanding and improving our digital banking
platform since its introduction in 2005, and we intend to continue investing
both organically and inorganically through acquisitions to expand our portfolio.
Over the past five years we have acquired or developed new solutions and
additional functions that serve a broader range of needs of financial
institutions as well as the needs of Alt-FIs and FinTechs. Our solutions now
include a broad range of services and experiences including commercial banking,
regulatory and compliance, digital lending and leasing, BaaS, digital account
opening and data-driven sales enablement and portfolio management solutions both
in the U.S. and internationally.
We believe that financial services providers are best served by a broad,
integrated portfolio of digital solutions that provide rapid, flexible and
comprehensive integration with internal and third-party systems allowing them to
provide modern, intuitive digital financial services in a secure,
regulatory-compliant manner. We also believe that the breadth and depth of our
solution offerings across the financial institution, Alt-FI and FinTech markets,
our open and flexible platform approach, our position as a leading provider of
digital banking solutions to a large network of RCFIs, and our expertise in
delivering new, innovative, secure and regulatory-compliant digital solutions
uniquely position us in the market for digital financial services solutions. We
currently intend to increase investments in technology innovation and software
development as we enhance our solutions and platforms and increase or expand the
number of solutions that we offer.
We believe that delivery of consistent, high-quality customer support is a
significant driver of purchasing and renewal decisions of our prospects and
customers. To develop and maintain a reputation for high-quality service, we
seek to build deep relationships with our customers through our customer service
organization, which we staff with personnel who are motivated by our common
mission of using technology to help our customers succeed and who are
knowledgeable with respect to the regulated and complex nature of the financial
services industry. As our business grows, we currently intend to continue to
invest in and grow our services and delivery organization to support our
customers' needs and maintain our reputation.
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COVID-19 Pandemic
Global health concerns with respect to the COVID-19 pandemic and related
government actions taken to reduce the spread of the virus have caused
disruption to the macroeconomic environment, and the pandemic has significantly
increased economic uncertainty and reduced economic activity, including consumer
and business spending. While there has been significant economic recovery in
certain markets due to broad vaccination availability, loosening of lock-down
measures and re-openings of businesses, the recovery is characterized by
additional uncertainty as a result of the disruption caused by the pandemic,
including supply chain constraints in many industries, significant price
increases for certain goods and services, rapid increases in demand as economies
re-open, increased employee attrition, skilled labor shortages, wage inflation
and businesses and labor markets navigating how they will operate post-pandemic.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on future developments unknown and
unpredictable at this time, including the continued duration, severity and
spread of the pandemic, including new variants, related restrictions on travel
and transportation and other actions that may be taken by governmental
authorities, the predictability and success of any re-opening efforts, the
impacts of the pandemic on labor markets, the impact to our customers, their End
Users, our suppliers and partners, and other items identified as risk factors in
this Quarterly Report on Form 10-Q and in our other SEC filings. There are no
comparable recent events that provide guidance as to the impacts that the
COVID-19 pandemic may have or the challenges and unpredictability of re-opening
efforts, and, as a result, the ultimate impacts of the pandemic remain highly
uncertain and subject to change. Based on the information available to us to
date, we believe we have taken an informed, proactive and effective approach to
addressing the direct known effects of the COVID-19 pandemic on us, our
customers and other third parties on which we rely and that we have been able to
effectively deliver and support our solutions for our customers utilizing
numerous remote capabilities and channels.
In early 2020 we implemented enhanced health and safety protocols at our
locations, and by mid-March 2020 virtually every one of our employees had
transitioned to working remotely from home. Through mid-2021, we continued to
operate with the vast majority of our employees working remotely. However,
during the quarter ended June 30, 2021, we began allowing employees to return to
onsite work on a limited, voluntary basis, subject to health and safety
protocols. Effective November 1, 2021, we re-opened all of our U.S. facilities,
and have provided each of our U.S. employees with the choice of either
continuing to work remotely, working in a hybrid capacity (one or two days per
week onsite) or fully returning to onsite attendance, with any onsite attendance
subject to health and safety protocols. As we navigate the reopening of our
onsite facilities, we believe employee preferences between remote, hybrid and
onsite attendance are likely to change over time, and we will continue to adapt
our physical facilities and IT infrastructure to accommodate a safe and
successful work experience for our onsite, hybrid and remote employees.
Throughout the pandemic we believe our corporate culture, business model,
customer relations, and technology and information technology infrastructure
have effectively allowed our employees to substantially perform their roles
whether remote, hybrid or onsite.
We also have performed additional due diligence with critical vendors and other
third parties on which we rely to assess their responses to the COVID-19
pandemic and impacts on their operations and services. To date, we have not
experienced any material adverse impacts from any of our vendors or other third
parties on which we rely. We intend to continue to conduct enhanced due
diligence on such vendors and third parties for the foreseeable future as the
uncertainty caused by the COVID-19 pandemic continues to persist.
We also are continuing to conduct outreach to our customers and many prospective
customers to assess their needs in the face of the COVID-19 pandemic and their
own re-opening efforts and to seek to identify ways that we may assist them with
our solutions and services. We believe the impacts of COVID-19 and related
re-opening efforts on our existing and prospective customers present both
challenges and opportunities. While we believe the pandemic and related
re-opening efforts have increased the importance and prominence of digital
financial solutions, the increased economic uncertainty, reduced economic
activity, including consumer and business spending, and challenges associated
with re-opening have resulted in delays in certain purchasing decisions and
implementations. Accordingly, we expect to continue to see negative impacts of
COVID-19 on our bookings, revenues, gross margins and cash flows from operations
relative to pre-pandemic levels, although we continue to anticipate gradual
improvement during 2021 as compared to the impacts we experienced in 2020.
Specifically, during the quarter ended September 30, 2021, we observed an
improved sales environment relative to the first half of 2021, and we believe
that for the remainder of fiscal 2021 we will continue to see improvements in
the predictability of purchasing decisions and implementations by customers as
compared to fiscal 2020. However, the duration and impacts of the COVID-19
pandemic continue to be highly unpredictable and may continue to disrupt any
seasonality trends that may otherwise typically be inherent in our historical
operating results.
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Despite these challenges among customers, the usage by End Users of digital
financial solutions has never been higher and we are making additional
investments to enhance our technology infrastructure to support this heightened
usage. We have seen increased online banking activity as a result of
shelter-in-place and similar orders as well as spikes in logins as End Users
check accounts for items such as government stimulus funds. We believe the
challenges and opportunities posed by the COVID-19 pandemic have and will
continue to cause financial institutions to increase their focus on maintaining
and improving their digital financial services offerings.
Key Operating Measures
In addition to the U.S. generally accepted accounting principles, or GAAP,
measures described below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Components of Operating Results," we monitor
the following operating measures to evaluate growth trends, plan investments and
measure the effectiveness of our sales and marketing efforts:
Installed Customers
We define Installed Customers as the number of customers on live implementations
(or installations) of our digital banking platforms. The average size of our
Installed Customers, measured in both Registered Users per Installed Customer
and revenues per Installed Customer, has increased over time as our existing
Installed Customers continue to add Registered Users and buy more solutions from
us, and as we add larger RCFIs to our Installed Customer base. The net rate at
which we add Installed Customers varies based on our implementation capacity,
the size and unique needs of our customers, the readiness of our customers to
implement our solutions and customer attrition, including as a result of merger
and acquisition activity among financial institutions. While we believe the
COVID-19 pandemic has increased the importance and prominence of our portfolio
of digital financial services solutions and provides us with an opportunity to
continue to grow our business, the increased economic uncertainty and reduced
economic activity resulting from the pandemic, including consumer and business
spending, has resulted in delays in certain purchasing decisions and
implementations, which has slowed the rate at which we add new Installed
Customers during 2021 as compared to what we believe our growth rate would have
been without the effects of the pandemic. We had 450, 414 and 401 Installed
Customers on our digital banking platform as of December 31, 2020, 2019 and
2018, respectively.
Registered Users
We define a Registered User as an individual related to an account holder of an
Installed Customer on our digital banking platform who has registered to use one
or more of our solutions and has current access to use those solutions as of the
last day of the reporting period presented. We price our digital banking
platform solutions based on the number of Registered Users, so as the number of
Registered Users of our solutions increases, our revenues generally tend to
grow. Our average number of Registered Users per Installed Customer grows as our
existing digital banking platform customers add more Registered Users and as we
add larger RCFIs to our Installed Customer base. We anticipate that the number
of Registered Users will grow at a faster rate than our number of Installed
Customers. The rate at which our customers add Registered Users and the
incremental revenues we recognize from new Registered Users vary significantly
period-to-period based on the timing of our implementations of new customers,
the timing of registration of new End Users, and varying contractual minimum
user counts. We add new Registered Users through both organic growth from
existing customers and from the addition of End Users from new Installed
Customers. We believe the COVID-19 pandemic has resulted in increased
registration of new End Users with existing customers; however, the increased
economic uncertainty and reduced economic activity, including consumer and
business spending, has also resulted in delays in certain purchasing decisions
and implementations, which has slowed the rate at which we add new Installed
Customers and with them, new Registered Users from such customers. Accordingly,
at this time we are unable to predict the anticipated long-term impact of the
COVID-19 pandemic on the growth in our number of Registered Users. Our Installed
Customers had approximately 17.8 million, 14.6 million and 12.8 million
Registered Users as of December 31, 2020, 2019 and 2018, respectively.
Registered Users at September 30, 2021 were 19.2 million compared to 17.1
million at September 30, 2020.
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Revenue Retention Rate
We believe that our ability to retain our customers and expand their use of our
products and services over time is an indicator of the stability of our revenue
base and the long-term value of our customer relationships. We assess our
performance in this area using a metric we refer to as our revenue retention
rate. We calculate our revenue retention rate as the total revenues in a
calendar year, excluding any revenues from solutions of businesses acquired
during such year, from customers who were implemented on any of our solutions as
of December 31 of the prior year, expressed as a percentage of the total
revenues during the prior year from the same group of customers. Our revenue
retention rate provides insight into the impact on current year revenues of: the
number of new customers implemented on any of our solutions during the prior
year; the timing of our implementation of those new customers in the prior year;
growth in the number of End Users on such solutions and changes in their usage
of such solutions; sales of new products and services to our existing customers
during the current year, excluding any products or services resulting from
businesses acquired during such year and customer attrition. The most
significant drivers of changes in our revenue retention rate each year have
historically been the number of new customers in the prior year and the timing
of our implementation of those new customers. The timing of our implementation
of new customers in the prior year is significant because we do not start
recognizing revenues from new customers until they are implemented. If
implementations are weighted more heavily in the first or second half of the
prior year, our revenue retention rate will be lower or higher, respectively. We
believe the COVID-19 pandemic has created incentives for our existing customers
to purchase additional features to support the increase in demand for digital
banking; however, the increased economic uncertainty and reduced economic
activity, including consumer and business spending, also has resulted in delays
in certain purchasing decisions and implementations, which may adversely affect
our revenue retention rate. We also have experienced contract terminations with
customers who became insolvent as a result of the COVID-19 pandemic.
Accordingly, at this time we are unable to predict the anticipated long-term
impact of the COVID-19 pandemic on our revenue retention rate. Our use of
revenue retention rate has limitations as an analytical tool, and investors
should not consider it in isolation. Other companies in our industry may
calculate revenue retention rate differently, which reduces its usefulness as a
comparative measure. Our revenue retention rate was 122%, 120% and 114% for the
years ended December 31, 2020, 2019 and 2018, respectively.
Churn
We utilize churn to monitor the satisfaction of our customers and evaluate the
effectiveness of our business strategies. We define churn as the amount of any
monthly recurring revenue losses due to customer cancellations and downgrades,
net of upgrades and additions of new solutions, during a year, divided by our
monthly recurring revenue at the beginning of the year. Cancellations refer to
customers that have either stopped using our services completely or remained a
customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price. We believe the COVID-19 pandemic has
created incentives for our existing customers to purchase additional features to
support the increase in demand for digital banking; however, the increased
economic uncertainty and reduced economic activity, including consumer and
business spending, has resulted in delays in certain purchasing decisions and
implementations and also may result in certain downgrades and cancellations from
existing customers, each of which may adversely affect our churn. We also have
experienced contract terminations with customers who became insolvent as a
result of the COVID-19 pandemic. Accordingly, at this time we are unable to
predict the anticipated long-term impact of the COVID-19 pandemic on our churn.
Our annual churn has ranged from 3.5% to 5.9% over the last nine years, and we
had annual churn of 5.9%, 5.1% and 5.0% for the years ended December 31, 2020,
2019 and 2018, respectively. Our use of churn has limitations as an analytical
tool, and investors should not consider it in isolation. Other companies in our
industry may calculate churn differently, which reduces its usefulness as a
comparative measure.
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Non-GAAP Financial Measures
In addition to financial measures prepared in accordance with GAAP, we use
certain non-GAAP financial measures to clarify and enhance our understanding,
and aid in the period-to-period comparison, of our performance. We believe that
these non-GAAP financial measures provide supplemental information that is
meaningful when assessing our operating performance because they exclude the
impact of certain categories that our management and board of directors do not
consider part of core operating results when assessing our operational
performance, allocating resources, preparing annual budgets and determining
compensation. Accordingly, these non-GAAP financial measures may provide insight
to investors into the motivation and decision-making of management in operating
the business. Set forth in the tables below are the corresponding GAAP financial
measures for each non-GAAP financial measure. Investors are encouraged to review
the reconciliation of each of these non-GAAP financial measures to its most
comparable GAAP financial measure included below. While we believe that these
non-GAAP financial measures provide useful supplemental information, non-GAAP
financial measures have limitations and should not be considered in isolation
from, or as a substitute for, their most comparable GAAP measures. These
non-GAAP financial measures are not prepared in accordance with GAAP, do not
reflect a comprehensive system of accounting and may not be comparable to
similarly titled measures of other companies due to potential differences in
their financing and accounting methods, the book value of their assets, their
capital structures, the method by which their assets were acquired and the
manner in which they define non-GAAP measures. Items such as the deferred
revenue reduction from purchase accounting, stock-based compensation,
acquisition related costs, amortization of acquired technology, amortization of
acquired intangible assets, partnership termination charges and unoccupied lease
charges can have a material impact on our GAAP financial results.
Non-GAAP Revenue
We define non-GAAP revenue as total revenue excluding the impact of purchase
accounting. We monitor these measures to assess our performance because we
believe our revenue growth rates would be understated without these adjustments.
We believe presenting non-GAAP revenue aids in the comparability between periods
and in assessing our overall operating performance.
                                                    Three Months Ended September 30,       Nine Months Ended September 30,
                                                        2021                2020               2021                2020
Revenue:
GAAP revenue                                        $  126,736          $ 103,804          $  366,829          $ 293,765
Deferred revenue reduction from purchase
accounting                                                 554                957               1,677              3,720
Total Non-GAAP revenue                              $  127,290          $ 104,761          $  368,506          $ 297,485


Non-GAAP Operating Income
We provide non-GAAP operating income using non-GAAP revenue as discussed above
and excluding such items as deferred revenue reduction from purchase accounting,
stock-based compensation, acquisition related costs, amortization of acquired
technology, amortization of acquired intangible assets, partnership termination
charges and unoccupied lease charges. We believe excluding these items is useful
for the following reasons:
•Deferred revenue reduction from purchase accounting. We provide non-GAAP
information that excludes the deferred revenue reduction from purchase
accounting. We believe that the exclusion of deferred revenue reduction from
purchase accounting allows users of our financial statements to better review
and understand the historical and current results of our continuing operations.
•Amortization of acquired technology and intangible assets. We provide non-GAAP
information that excludes expenses related to purchased technology and
intangible assets associated with our acquisitions. We believe that eliminating
this expense from our non-GAAP measures is useful to investors, because the
amortization of acquired technology and intangible assets can be inconsistent in
amount and frequency and is significantly impacted by the timing and magnitude
of our acquisition transactions, which also vary in frequency from period to
period. Accordingly, we analyze the performance of our operations in each period
without regard to such expenses.
•Stock-based compensation. We provide non-GAAP information that excludes
expenses related to stock-based compensation. We believe that the exclusion of
stock-based compensation expense provides for a better comparison of our
operating results to prior periods and to our peer companies as the calculations
of stock-based compensation vary from period to period and company to company
due to different valuation methodologies, subjective assumptions and the variety
of award types. Because of these unique characteristics of stock-based
compensation, we exclude these expenses when analyzing the organization's
business performance.
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•Acquisition related costs. We exclude certain expense items resulting from our
acquisitions, such as legal, accounting and consulting fees, changes in fair
value of contingent consideration and retention expense. We consider these
adjustments, to some extent, to be unpredictable and dependent on a significant
number of factors that are outside of our control. Furthermore, acquisitions
result in operating expenses that would not otherwise have been incurred by us
in the normal course of our organic business operations. We believe that
providing these non-GAAP measures that exclude acquisition related costs, allows
users of our financial statements to better review and understand the historical
and current results of our continuing operations, and also facilitates
comparisons to our historical results and results of less acquisitive peer
companies, both with and without such adjustments.
•Partnership termination charges. In the quarter ended June 30, 2020, in
connection with the termination of a strategic partnership, we agreed to pay a
termination fee of $5.6 million in May 2020 and $7.6 million in the third
quarter of 2021. We are excluding the charges associated with this partnership
termination as they are non-recurring in nature and would not otherwise have
been incurred by us in the normal course of our organic business operations. We
believe that providing these non-GAAP measures that exclude partnership
termination charges allows users of our financial statements to better review
and understand the historical and current results of our continuing operations,
and also facilitates comparisons to our historical results and results of peer
companies, both with and without such adjustments.
•Unoccupied lease charges. We provide non-GAAP information that excludes
restructuring charges related to the estimated costs of exiting and terminating
facility lease commitments, as they relate to our corporate restructuring and
exit activities. These charges are inconsistent in amount and are significantly
impacted by the timing and nature of these events. Therefore, although we may
incur these types of expenses in the future, we believe that eliminating these
charges for purposes of calculating the non-GAAP financial measures facilitates
a more meaningful evaluation of our operating performance and comparisons to our
past operating performance.
                                                      Three Months Ended

September 30, Nine Months Ended September 30,


                                                          2021                2020               2021                2020
GAAP operating loss                                   $  (22,972)         $ (19,847)         $  (60,428)         $ (79,357)
Deferred revenue reduction from purchase
accounting                                                   554                957               1,677              3,720
Partnership termination charges                                -                  -                   -             13,244
Stock-based compensation                                  14,069             11,596              40,791             36,915
Acquisition related costs                                    581              1,062               2,841                714
Amortization of acquired technology                        5,604              5,255              16,365             16,184
Amortization of acquired intangibles                       4,483              4,465              13,465             13,447
Unoccupied lease charges                                   1,244              1,468               2,056              2,136
Non-GAAP operating income                             $    3,563          $   4,956          $   16,767          $   7,003


Adjusted EBITDA
We define adjusted EBITDA as net loss before depreciation,
amortization, stock-based compensation, certain costs related to our recent
acquisitions, (benefit from) provision for income taxes, interest and other
(income) expense, net, deferred revenue reduction from purchase accounting,
partnership termination charges, loss on extinguishment of debt, and unoccupied
lease charges. We believe that adjusted EBITDA provides useful information to
investors and others in understanding and evaluating our operating results for
the following reasons:
•adjusted EBITDA is widely used by investors and securities analysts to measure
a company's operating performance without regard to items that can vary
substantially from company to company depending upon their financing, capital
structures and the method by which assets were acquired;
•our management uses adjusted EBITDA in conjunction with GAAP financial measures
for planning purposes, in the preparation of our annual operating budget, as a
measure of our operating performance, to assess the effectiveness of our
business strategies and to communicate with our board of directors concerning
our financial performance;
•adjusted EBITDA provides more consistency and comparability with our past
financial performance, facilitates period-to-period comparisons of our
operations and also facilitates comparisons with other companies, many of which
use similar non-GAAP financial measures to supplement their GAAP results; and
•our investor and analyst presentations include adjusted EBITDA as a
supplemental measure of our overall operating performance.
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Adjusted EBITDA should not be considered as an alternative to net loss or any
other measure of financial performance calculated and presented in accordance
with GAAP. The use of adjusted EBITDA as an analytical tool has limitations such
as:
•depreciation and amortization are non-cash charges, and the assets being
depreciated or amortized will often have to be replaced in the future and
adjusted EBITDA does not reflect cash requirements for such replacements;
•adjusted EBITDA may not reflect changes in, or cash requirements for, our
working capital needs or contractual commitments;
•adjusted EBITDA does not reflect the potentially dilutive impact of stock-based
compensation;
•adjusted EBITDA does not reflect interest or tax payments that could reduce
cash available for use; and
•other companies, including companies in our industry, might calculate adjusted
EBITDA or similarly titled measures differently, which reduces their usefulness
as comparative measures.
Because of these and other limitations, you should consider adjusted EBITDA
together with our GAAP financial measures including cash flow from operations
and net loss. The following table presents a reconciliation of net loss to
adjusted EBITDA for each of the periods indicated (in thousands):
                                                        Three Months Ended

September 30, Nine Months Ended September 30,


                                                            2021                2020               2021                2020
Reconciliation of net loss to adjusted EBITDA:
Net loss                                                $  (31,583)

$ (26,720) $ (87,365) $ (99,799)


   Deferred revenue reduction from purchase
accounting                                                     554                957               1,677              3,720
   Partnership termination charges                               -                  -                   -             13,244
   Stock-based compensation                                 14,069             11,596              40,791             36,915
   Acquisition related costs                                   581              1,062               2,841                714
   Depreciation and amortization                            14,082             12,929              40,580             38,975
 Unoccupied lease charges                                    1,244              1,468               2,056              2,136
   Provision for income taxes                                  596                116                 909                621
Loss on extinguishment of debt                                   -                  -               1,513                  -
   Interest (income) expense, net                            7,761              6,727              24,056             19,586
Adjusted EBITDA                                         $    7,304          $   8,135          $   27,058          $  16,112


Components of Operating Results
Revenues
Revenue-generating activities directly relate to the sale, implementation and
support of our solutions within a single operating segment. We derive the
majority of our revenues from subscription fees for the use of our solutions
hosted in either our data centers or with cloud-based services, transactional
revenue from bill-pay solutions and interchange fees, and revenues for customer
support and implementation services related to our solutions. We recognize the
corresponding revenues over time on a ratable basis over the customer agreement
term. A small portion of our revenues are derived from customers which host and
manage our solutions on-premises or in third-party data centers under term
license and maintenance agreements. We recognize the software license revenue
once the customer obtains control of the license and the remaining arrangement
consideration for maintenance revenue over time on a ratable basis over the term
of the software license.
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Subscription fees are based on the number of solutions purchased by our
customers, the number of End Users using the solutions and the number of
bill-pay and certain other transactions those users conduct using our solutions
in excess of the levels included in our standard subscription fee. Subscription
fees are billed monthly, quarterly or annually and are recognized monthly over
the term of our customer agreements. The initial term of our digital banking
platform agreements averages over five years, although it varies by customer.
The structure and terms of the arrangements for our newer lending and leasing
and BaaS solutions are varied, but we generally sell these solutions on a
subscription basis through our direct sales organization, and the related
revenues are recognized over the terms of the customer agreements. We begin
recognizing subscription fees when the control of the service transfers to the
customer, generally when the solution is implemented and made available to the
customer. We recognize revenue for bill-pay transaction services and interchange
fees generated when End Users utilize debit cards integrated with its Q2 CorePro
API or Q2 Biller Direct products in the month incurred based on actual or
estimated transactions. The timing of our implementations varies
period-to-period based on our implementation capacity, the number of solutions
purchased by our customers, the size and unique needs of our customers and the
readiness of our customers to implement our solutions. We recognize any related
implementation services revenues ratably over the initial customer agreement
term beginning on the date we commence recognizing subscription fees. Contract
asset balances arise primarily when we provide services in advance of billing
for those services. Amounts that have been invoiced but not paid are recorded in
accounts receivable or other long-term assets, depending on the timing of
expected billing, and in revenues or deferred revenues, depending on when
control of the service transfers to the customer.
As a result of the economic and operational impact of the COVID-19 pandemic on
our customers, our bookings, in particular with respect to new customer
agreements, have been and we anticipate will continue to be adversely impacted
as a result of the COVID-19 pandemic relative to pre-pandemic levels, although
at this time we are unable to the predict the extent or duration of such impact.
Specifically, we have experienced delays and unpredictability in the purchasing
decisions of our customers and prospective customers and a slowing of net new
customer deals, relative to pre-pandemic levels, partially offset by an increase
in cross sales of additional features and functionality to our existing customer
base due to the increased utilization and demand for digital banking solutions
caused by the decreased in-branch operations resulting from the COVID-19
pandemic. However, during the quarter ended September 30, 2021, we observed an
improved sales environment relative to the first half of 2021, and we believe
that for the remainder of fiscal 2021 we will continue to see improvements in
the predictability of purchasing decisions and implementations by customers as
compared to fiscal 2020, although at this time we are unable to predict the full
extent of such improvement. However, the duration and impacts of the COVID-19
pandemic continue to be highly unpredictable and may continue to disrupt any
seasonality trends that may otherwise typically be inherent in our historical
operating results.
Cost of Revenues
Cost of revenues is comprised primarily of salaries and other personnel-related
costs, including employee benefits, bonuses and stock-based compensation, for
employees providing services to our customers. This includes the costs of our
personnel performing implementation, customer support, data center and customer
training activities. Cost of revenues also includes the direct costs of bill-pay
and other third-party intellectual property included in our solutions, the
amortization of deferred solution and services costs, co-location facility costs
and depreciation of our data center assets, debit card related pass-through
fees, cloud-based hosting services, an allocation of general overhead costs, the
amortization of acquired technology, and referral fees. We allocate general
overhead expenses to all departments based on the number of employees in each
department, which we consider to be a fair and representative means of
allocation.
We capitalize certain personnel costs directly related to the implementation of
our solutions to the extent those costs are recoverable from future revenues. We
amortize the costs for an implementation once revenue recognition commences, and
we amortize those implementation costs to cost of revenues over the expected
period of customer benefit, which has been determined to be the estimated life
of the technology. Other costs not directly recoverable from future revenues are
expensed in the period incurred.
We capitalize certain software development costs related to programmers,
software engineers and quality control teams working on our software solutions.
We have commenced amortization of capitalized costs in which products have
reached general release. Capitalized software development costs are computed on
an individual product basis and products available for market are amortized to
cost of revenues over the products' estimated economic lives.
We intend to continue to increase our investments in our implementation and
customer support teams and technology infrastructure to serve our customers and
support our growth. Over the long-term, we expect cost of revenues to continue
to grow in absolute dollars as we grow our business, but to fluctuate as a
percentage of revenues based principally on the level and timing of
implementation, support activities debit card related pass-through fees, and
other related costs, including during periods where revenues are lower or
implementations are delayed due to the effects of the COVID-19 pandemic.
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Operating Expenses
Operating expenses consist of sales and marketing, research and development and
general and administrative expenses. They also include costs related to our
acquisitions and the resulting amortization of acquired intangible assets from
those acquisitions. Over the long term, we intend to continue to hire new
employees and make other investments to support our anticipated growth. As a
result, we expect our operating expenses to increase in absolute dollars but to
decrease as a percentage of revenues over the long term as we grow our business.
The uncertainties and risks posed by the continuing COVID-19 pandemic were
considered while preparing our 2021 budget and hiring plans and though we
continue to expect our headcount growth rate to be somewhat lower than the
growth rates experienced in 2019 and prior, we continue to expect our 2021
hiring growth rate to exceed that of 2020 based on improved buying environments
and cross sale opportunities resulting from the reduced negative impacts of the
COVID-19 pandemic. We also expect to see continued intense competition for
technical talent which has the potential to drive increased inflation in the
wages we have to pay to hire and retain qualified employees. Additionally, while
most of our employees continued to work remotely from home and we have suspended
most non-essential business travel and conference participation, we expect that
with increased adoption of the COVID-19 vaccine and based on the expectation
that cases and/or case severity will correspondingly begin to decline, some of
these activities, including costs associated with onsite attendance, have and
will continue returning for the remainder of 2021. As a result, we anticipate
that we will continue to see a gradual increase in certain costs associated with
operating physical locations and facilitating employee travel for the remainder
of 2021. Specifically, during the quarter ended June 30, 2021, we began allowing
employees generally to return to onsite work on a limited, voluntary basis,
subject to health and safety protocols. Effective November 1, 2021, we re-opened
all of our U.S. facilities, and have provided each of our U.S. employees with
the choice of either continuing to work remotely, working in a hybrid capacity
(one or two days per week onsite) or fully returning to onsite attendance, with
any onsite attendance subject to health and safety protocols. As we navigate the
reopening of our onsite facilities, we believe employee preferences between
remote, hybrid and onsite attendance are likely to change over time, and we will
continue to adapt our physical facilities and IT infrastructure to accommodate a
safe and successful work experience for our onsite, hybrid and remote employees.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and other
personnel-related costs, including commissions, employee benefits, bonuses and
stock-based compensation. Sales and marketing expenses also include expenses
related to advertising, lead generation, promotional event programs, corporate
communications, travel and allocated overhead.
Sales and marketing expenses as a percentage of total revenues will change in
any given period based on several factors including the addition of newly hired
sales professionals, the number and timing of newly-installed customers and the
amount of sales commissions expense amortized related to those customers,
including during periods where revenues are lower or implementations are delayed
due to the effects of the COVID-19 pandemic. Commissions are generally
capitalized and then amortized over the expected period of customer benefit.
Research and Development
We believe that continuing to improve and enhance our solutions is essential to
maintaining our reputation for innovation and growing our customer base and
revenues. Research and development expenses include salaries and
personnel-related costs, including employee benefits, bonuses and stock-based
compensation, third-party contractor expenses, software development costs,
allocated overhead and other related expenses incurred in developing new
solutions and enhancing existing solutions.
Certain research and development costs that are related to our software
development, which include salaries and other personnel-related costs, including
employee benefits and bonuses attributed to programmers, software engineers and
quality control teams working on our software solutions, are capitalized and are
included in intangible assets, net on the condensed consolidated balance sheets.
General and Administrative
General and administrative expenses consist primarily of salaries and other
personnel-related costs, including employee benefits, bonuses and stock-based
compensation, of our administrative, finance and accounting, information
systems, legal and human resources employees. General and administrative
expenses also include consulting and professional fees, insurance and travel. We
expect to continue to incur incremental expenses associated with the growth of
our business and to meet increased compliance requirements associated with
operating as a regulated, public company. These expenses include costs to comply
with Section 404 of the Sarbanes-Oxley Act and other regulations governing
public companies, increased costs of directors' and officers' liability
insurance and investor relations activities.
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Acquisition Related Costs
Acquisition related costs include compensation expenses related to milestone
provisions and retention agreements with certain former shareholders and
employees of acquired businesses, which are recognized as earned, changes in
fair value of the contingent consideration related to potential acquisition
earnout payments and various legal and professional service expenses incurred in
connection with the acquisitions, which are recognized when incurred.
Amortization of Acquired Intangibles
Amortization of acquired intangibles represents the amortization of intangibles
recorded in connection with our business acquisitions which are amortized on a
straight-line basis over the estimated useful lives of the related assets.
Partnership Termination Charges
Partnership termination charges represent the fees paid related to termination
of a strategic partnership during the quarter ended June 30, 2020. These charges
are non-recurring in nature and would not otherwise have been incurred by us in
the normal course of our organic business operations.
Unoccupied Lease Charges
Unoccupied lease charges include costs related to the early vacating of certain
facilities, partially offset by anticipated sublease income from the associated
facilities.
Total Other Income (Expense), Net
Total other income (expense), net, consists primarily of interest income and
expense, loss on disposal of long-lived assets, and loss on extinguishment of
debt. We earn interest income on our cash, cash equivalents and investments.
Interest expense consists primarily of the interest from the amortization of
debt discount, issuance costs, and coupon interest attributable to our
convertible notes issued in February 2018, or 2023 Notes, our convertible notes
issued in June 2019, or 2026 Notes, and our convertible notes issued in November
2020, or 2025 Notes, as well as fees and interest associated with the letter of
credit issued to our landlord for the security deposit for our corporate
headquarters.
Benefit from (Provision for) Income Taxes
As a result of our current net operating loss position, current income tax
expenses and benefits consist primarily of state income taxes, deferred income
tax expenses relating to the tax amortization of recently acquired goodwill and
income tax expense from foreign operations.

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Results of Operations
Condensed Consolidated Statements of Comprehensive Loss
The following table sets forth our condensed consolidated statements of
comprehensive loss data for each of the periods indicated (in thousands):
                                                          Three Months Ended September 30,       Nine Months Ended September 30,
                                                              2021                2020               2021                2020
Revenues(1)                                               $  126,736

$ 103,804 $ 366,829 $ 293,765 Cost of revenues(2)(3)

                                        69,726             57,366             201,278            163,676
Gross profit                                                  57,010             46,438             165,551            130,089
Operating expenses:
Sales and marketing(3)                                        22,664             18,403              63,067             54,597
Research and development(3)                                   30,763             23,568              86,987             72,168
General and administrative(3)                                 20,352             17,563              57,890             53,876
Acquisition related costs(4)                                     476                818               2,514                (22)
Amortization of acquired intangibles                           4,483              4,465              13,465             13,447
Partnership termination charges                                    -                  -                   -             13,244
Unoccupied lease charges(5)                                    1,244              1,468               2,056              2,136
Total operating expenses                                      79,982             66,285             225,979            209,446
Loss from operations                                         (22,972)           (19,847)            (60,428)           (79,357)
Total other income (expense), net                             (8,015)            (6,757)            (26,028)           (19,821)
Loss before income taxes                                     (30,987)           (26,604)            (86,456)           (99,178)
Provision for income taxes                                      (596)              (116)               (909)              (621)
Net loss                                                  $  (31,583)         $ (26,720)         $  (87,365)         $ (99,799)

_______________________________________________________________________________


(1) Includes deferred revenue reduction from purchase accounting of $0.6 million
and $1.0 million for the three months ended September 30, 2021 and 2020,
respectively, and $1.7 million and $3.7 million for the nine months ended
September 30, 2021 and 2020, respectively.
(2) Includes amortization of acquired technology of $5.6 million and $5.3
million for the three months ended September 30, 2021 and 2020, respectively,
and $16.4 million and $16.2 million for the nine months ended September 30, 2021
and 2020, respectively.
(3) Includes stock-based compensation expense as follows (in thousands):
                                                       Three Months Ended September 30,       Nine Months Ended September 30,
                                                           2021                2020               2021                2020
Cost of revenues                                       $    2,728          $   2,110          $    8,026          $   7,422
Sales and marketing                                         2,885              2,209               8,352              6,353
Research and development                                    3,388              2,901              10,039              9,780
General and administrative                                  5,068              4,376              14,374             13,360
Total stock-based compensation expense                 $   14,069

$ 11,596 $ 40,791 $ 36,915




(4) The nine months ended September 30, 2020 includes a $2.9 million reduction
to estimated contingent consideration as a result of the actual contingent
consideration calculated as of the final measurement date of March 31, 2020.
(5) Unoccupied lease charges include costs related to the early vacating of
various facilities, partially offset by anticipated sublease income from these
facilities. For the three and nine months ended September 30, 2021, the charges
related to an updated assessment and vacating of facilities in Georgia, Texas,
North Carolina and Nebraska, and for the three and nine months ended September
30, 2020, the charges related to the vacating of facilities in California, North
Carolina, and Texas.


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The following table sets forth our condensed consolidated statements of
comprehensive loss data as a percentage of revenues for each of the periods
indicated:
                                                               Three Months Ended September 30,                 Nine Months Ended September 30,
                                                                 2021                    2020                     2021                    2020
Revenues(1)                                                         100.0  %                100.0  %                 100.0  %                100.0  %
Cost of revenues(2)(3)                                               55.0                    55.3                     54.9                    55.7
Gross profit                                                         45.0                    44.7                     45.1                    44.3
Operating expenses:
Sales and marketing(3)                                               17.9                    17.7                     17.2                    18.6
Research and development(3)                                          24.3                    22.7                     23.7                    24.6
General and administrative(3)                                        16.1                    16.9                     15.8                    18.3
Acquisition related costs(4)                                          0.4                     0.8                      0.7                       -
Amortization of acquired intangibles                                  3.5                     4.3                      3.7                     4.6
Partnership termination charges                                         -                       -                        -                     4.5
Unoccupied lease charges(5)                                           1.0                     1.4                      0.6                     0.7
Total operating expenses                                             63.1                    63.9                     61.6                    71.3
Loss from operations                                                (18.1)                  (19.1)                   (16.5)                  (27.0)
Total other income (expense), net                                    (6.3)                   (6.5)                    (7.1)                   (6.7)
Loss before income taxes                                            (24.5)                  (25.6)                   (23.6)                  (33.8)
Provision for income taxes                                           (0.5)                   (0.1)                    (0.2)                   (0.2)
Net loss                                                            (24.9) %                (25.7) %                 (23.8) %                (34.0) %

______________________________________________________________________________


(1) Includes deferred revenue reduction from purchase accounting of 0.4% and
0.9% for the three months ended September 30, 2021 and 2020, respectively, and
0.5% and 1.3% for the nine months ended September 30, 2021 and 2020,
respectively.
(2) Includes amortization of acquired technology of 4.4% and 5.1% for the three
months ended September 30, 2021 and 2020, respectively, and 4.5% and 5.5% for
the nine months ended September 30, 2021 and 2020, respectively.
(3) Includes stock-based compensation expense as follows:
                                                           Three Months Ended September 30,                 Nine Months Ended September 30,
                                                              2021                    2020                    2021                    2020
Cost of revenues                                                   2.2  %                 2.0  %                   2.2  %                 2.5  %
Sales and marketing                                                2.3                    2.1                      2.3                    2.2
Research and development                                           2.7                    2.8                      2.7                    3.3
General and administrative                                         4.0                    4.2                      3.9                    4.5
Total stock-based compensation expense                            11.1  %                11.2  %                  11.1  %                12.6  %



(4) The nine months ended September 30, 2020 includes a 1.0% reduction to
estimated contingent consideration as a result of the actual contingent
consideration calculated as of the final measurement date of March 31, 2020.
(5) Unoccupied lease charges include costs related to the early vacating of
various facilities, partially offset by anticipated sublease income from these
facilities. For the three and nine months ended September 30, 2021, the charges
related to an updated assessment and vacating of facilities in Georgia, Texas,
North Carolina and Nebraska, and for the three and nine months ended September
30, 2020, the charges related to the vacating of facilities in California, North
Carolina, and Texas.
Due to rounding, totals may not equal the sum of the line items in the tables
above.

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Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Revenues
The following table presents our revenues for each of the periods indicated
(dollars in thousands):
                            Three Months Ended September 30,                   Change                    Nine Months Ended September 30,                    Change
                                2021                2020                $                 (%)                2021                2020                $                 (%)
Revenues                    $  126,736          $ 103,804          $ 22,932                22.1  %       $  366,829          $ 293,765          $ 73,064                24.9  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Revenues increased by $22.9 million, or 22.1%, from $103.8 million for
the three months ended September 30, 2020 to $126.7 million for the three months
ended September 30, 2021. This increase in revenue was primarily attributable to
a $20.0 million increase from the sale of additional solutions to new and
existing customers and growth in Registered Users from new and existing
customers. In addition, $2.9 million of the increase was generated from an
increase in the number of transactions processed using our solutions.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Revenues increased by $73.1 million, or 24.9%, from $293.8 million for the
nine months ended September 30, 2020 to $366.8 million for the nine months ended
September 30, 2021. This increase in revenue was primarily attributable to a
$62.9 million increase from the sale of additional solutions to new and existing
customers and growth in Registered Users from new and existing customers. In
addition, $10.1 million of the increase was generated from an increase in the
number of transactions processed using our solutions.
Cost of Revenues
The following table presents our cost of revenues for each of the periods
indicated (dollars in thousands):
                               Three Months Ended September
                                            30,                                 Change                       Nine Months Ended September 30,                       Change
                                  2021               2020                $                 (%)                   2021                   2020                $                 (%)
Cost of revenues              $  69,726           $ 57,366          $ 12,360                21.5  %       $       201,278           $ 163,676          $ 37,602                23.0  %
Percentage of revenues             55.0   %           55.3  %                                                        54.9   %            55.7  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Cost of revenues increased by $12.4 million, or 21.5%, from $57.4
million for the three months ended September 30, 2020 to $69.7 million for the
three months ended September 30, 2021. This increase was attributable to a $5.6
million increase in personnel costs due to an increase in the number of
personnel who provide implementation and customer support and maintain our data
centers and other technical infrastructure, a $3.2 million increase in
co-location facility costs and depreciation for our data center assets resulting
from the increased infrastructure necessary to support our growing customer
base, a $3.1 million increase in third-party costs related to intellectual
property included in our solutions, transaction processing costs incurred as a
result of the increase in Registered Users from new and existing customers, a
higher mix of debit card related pass-through fees, as well as implementation
and support personnel expenses that are reimbursable from our customers, and a
$0.3 million increase from amortization of acquired customer technology
resulting from the business acquired in the second quarter of 2021.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Cost of revenues increased by $37.6 million, or 23.0%, from $163.7 million
for the nine months ended September 30, 2020 to $201.3 million for the nine
months ended September 30, 2021. This increase was attributable to a $17.7
million increase in personnel costs due to an increase in the number of
personnel who provide implementation and customer support and maintain our data
centers and other technical infrastructure, an $11.7 million increase in
co-location facility costs and depreciation for our data center assets resulting
from the increased infrastructure necessary to support our growing customer
base, a $7.2 million increase in third-party costs related to intellectual
property included in our solutions, transaction processing costs incurred as a
result of the increase in Registered Users from new and existing customers, a
higher mix of debit card related pass-through fees, as well as implementation
and support personnel expenses that are reimbursable from our customers, a $0.6
million increase from amortization of capitalized implementation services as a
result of customer go lives during the nine months ended September 30, 2021, and
a $0.3 million increase from amortization of acquired customer technology
resulting from the business acquired in the second quarter of 2021.
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We defer certain personnel and other costs directly related to the
implementation of our solutions to the extent those costs are recoverable from
future revenues. However, a substantial portion of our implementation costs are
not eligible for deferral and, as a result, are expensed in the period incurred.
Costs related to implementations that have been deferred are amortized over the
expected period of customer benefit. Additionally, we invest in personnel,
business processes and systems infrastructure to standardize our business
processes and drive future efficiency in our implementations, customer support
and data center operations. We expect these investments will increase cost of
revenues in absolute dollars as we continue to make investments in capacity,
process improvement and systems infrastructure, and we expect such expenses to
decline as a percentage of revenue as our operations continue to scale and
revenues grow.
Operating Expenses
The following tables present our operating expenses for each of the periods
indicated (dollars in thousands):
Sales and Marketing
                               Three Months Ended September
                                            30,                                 Change                   Nine Months Ended September 30,                   Change
                                  2021               2020               $                 (%)                2021               2020               $                 (%)
Sales and marketing           $  22,664           $ 18,403          $ 4,261                23.2  %       $  63,067           $ 54,597          $ 8,470                15.5  %
Percentage of revenues             17.9   %           17.7  %                                                 17.2   %           18.6  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Sales and marketing expenses increased by $4.3 million, or 23.2%, from
$18.4 million for the three months ended September 30, 2020 to $22.7 million for
the three months ended September 30, 2021. This increase was primarily
attributable to a $3.0 million increase in personnel costs due to the growth of
our sales and marketing organizations to support bookings and revenue growth, a
$0.6 million increase in other discretionary expenses, including stadium
sponsorship expenses, a $0.3 million increase in overhead costs, and a $0.2
million increase in travel-related expenses.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Sales and marketing expenses increased by $8.5 million, or 15.5%, from
$54.6 million for the nine months ended September 30, 2020 to $63.1 million for
the nine months ended September 30, 2021. This increase was primarily
attributable to a $7.7 million increase in personnel costs due to the growth of
our sales and marketing organizations to support bookings and revenue growth, a
$1.0 million increase in other discretionary expenses, including stadium
sponsorship expenses, and a $0.3 million increase in overhead costs. These
increases were partially offset by a $0.5 million decrease in travel-related
expenses due to travel that did not occur as a result of the COVID-19 pandemic.
We anticipate that sales and marketing expenses will continue to increase in
absolute dollars in the future as we add personnel to support our revenue growth
and as we increase marketing spend to attract new customers, retain and grow
existing customers and build brand awareness. While we anticipate sales and
marketing expenses as a percentage of revenue may fluctuate on a
quarter-over-quarter basis, we expect such expenses to decline as a percentage
of our revenues over the longer-term as our revenues grow.
Research and Development
                                Three Months Ended September
                                             30,                                 Change                   Nine Months Ended September 30,                   Change
                                   2021               2020               $                 (%)                2021               2020                $                 (%)
Research and development       $  30,763           $ 23,568          $ 7,195                30.5  %       $  86,987           $ 72,168          $ 14,819                20.5  %
Percentage of revenues              24.3   %           22.7  %                                                 23.7   %           24.6  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Research and development expenses increased by $7.2 million, or 30.5%,
from $23.6 million for the three months ended September 30, 2020 to $30.8
million for the three months ended September 30, 2021. This increase was
primarily attributable to a $6.1 million increase in personnel costs as a result
of the growth in our research and development organization to support continued
enhancements to our solutions, a $1.2 million increase in facilities and other
overhead costs, and a $0.2 million increase in other discretionary expenses.
These increases were partially offset by a $0.6 million decrease as a result of
increased capitalized software development costs.
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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Research and development expenses increased by $14.8 million, or 20.5%,
from $72.2 million for the nine months ended September 30, 2020 to $87.0 million
for the nine months ended September 30, 2021. This increase was primarily
attributable to a $12.7 million increase in personnel costs as a result of the
growth in our research and development organization to support continued
enhancements to our solutions, a $2.8 million increase in facilities and other
overhead costs, and a $0.3 million increase in other discretionary expenses.
These increases were partially offset by a $1.3 million decrease as a result of
increased capitalized software development costs.
We anticipate that research and development expenses will increase in absolute
dollars in the future as we continue to support and expand our platform and
enhance our existing solutions, as we believe existing customers will have an
increased focus on maintaining and improving their digital banking offerings,
including functionality such as digital account opening and online lending.
General and Administrative
                                   Three Months Ended September
                                                30,                                 Change                   Nine Months Ended September 30,                  Change
                                      2021               2020               $                 (%)                2021               2020               $                (%)
General and administrative        $  20,352           $ 17,563          $ 2,789                15.9  %       $  57,890           $ 53,876          $ 4,014               7.5  %
Percentage of revenues                 16.1   %           16.9  %                                                 15.8   %           18.3  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. General and administrative expenses increased by $2.8 million, or
15.9%, from $17.6 million for the three months ended September 30, 2020 to $20.4
million for the three months ended September 30, 2021. The increase in general
and administrative expenses was primarily attributable to a $2.7 million
increase in personnel costs to support the growth of our business and a $0.7
million increase in professional services for legal and compliance fees,
partially offset by a $0.8 million decrease in remote working experience
expenses.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. General and administrative expenses increased by $4.0 million, or 7.5%,
from $53.9 million for the nine months ended September 30, 2020 to $57.9 million
for the nine months ended September 30, 2021. The increase in general and
administrative expenses was primarily attributable to a $6.2 million increase in
personnel costs to support the growth of our business and a $0.2 million
increase in professional services for legal and compliance fees. These increases
were partially offset by a $1.0 million decrease in bad debt expense due to
additional credit losses from the adoption of ASU 2016-13 in 2020, $0.8 million
decrease in discretionary spending and travel-related expenses, a $0.5 million
decrease for price concessions given to customers in 2020, and a $0.2 million
decrease in overhead costs.
General and administrative expenses consist primarily of salaries and other
personnel-related costs of our administrative, finance and accounting,
information systems, legal and human resources employees. General and
administrative expenses also include costs to comply with regulations governing
public companies, costs of directors' and officers' liability insurance,
investor relations activities and costs to comply with Section 404 of the
Sarbanes-Oxley Act, or SOX. Over the long term, we anticipate that general and
administrative expenses will continue to increase in absolute dollars as we
continue to incur both increased external audit fees as well as additional
spending to ensure continued regulatory and SOX compliance. We expect such
expenses to decline as a percentage of our revenues over the longer term as our
revenues grow.

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Acquisition Related Costs
                               Three Months Ended September                                              Nine Months Ended September
                                            30,                                Change                                30,                                   Change
                                   2021              2020              $                (%)                  2021              2020              $                   (%)
Acquisition related
costs                          $    476            $  818          $ (342)               (41.8) %       $   2,514            $  (22)         $ 2,536                11,527.3  %
Percentage of revenues              0.4    %          0.8  %                                                  0.7    %            -  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Acquisition related costs decreased by $0.3 million, or 41.8%, from
$0.8 million for the three months ended September 30, 2020 to $0.5 million for
the three months ended September 30, 2021. Acquisition related costs for both
periods primarily include compensation expense related to the retention bonuses
for employees of previous acquisitions.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Acquisition related costs increased by $2.5 million, or 11,527.3%, from a
net positive adjustment of $0.02 million for the nine months ended September 30,
2020 to an expense of $2.5 million for the nine months ended September 30, 2021.
Acquisition related costs for the nine months ended September 30, 2021 included
$1.4 million of compensation expense related to the retention bonuses for
employees of previous acquisitions and $1.1 million of legal, professional
services and other costs related to our acquisition of ClickSWITCH on April 1,
2021. The net positive adjustment for the nine months ended September 30, 2020
included a $2.9 million negative adjustment to the value of the contingent
consideration related to the acquisition of Cloud Lending based on actual
achievement, partially offset by $2.6 million of compensation expense related to
the retention bonuses for employees of previous acquisitions and $0.3 million of
additional legal, professional services and other costs.
Amortization of Acquired Intangibles
                                Three Months Ended September
                                             30,                               Change                   Nine Months Ended September 30,                  Change
                                    2021              2020              $                (%)                2021               2020               $                (%)
Amortization of acquired
intangibles                     $  4,483           $ 4,465          $    18                0.4  %       $  13,465           $ 13,447          $    18                0.1  %
Percentage of revenues               3.5   %           4.3  %                                                 3.7   %            4.6  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Amortization of acquired intangibles remained relatively unchanged
from the three months ended September 30, 2020 to the three months ended
September 30, 2021. Increases due to amortization of intangible assets acquired
during the acquisition of ClickSWITCH on April 1, 2021 were mostly offset by
decreases in amortization of intangible assets that became fully amortized.
These amounts are amortized on a straight-line basis over the estimated useful
lives of the related assets.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Amortization of acquired intangibles remained relatively unchanged from
the nine months ended September 30, 2020 to the nine months ended September 30,
2021. Increases due to amortization of intangible assets acquired during the
acquisition of ClickSWITCH on April 1, 2021 were mostly offset by decreases in
amortization of intangible assets that became fully amortized. These amounts are
amortized on a straight-line basis over the estimated useful lives of the
related assets.
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Unoccupied Lease Charges
                              Three Months Ended September                                              Nine Months Ended September
                                           30,                                Change                                30,                               Change
                                  2021              2020              $                (%)                 2021              2020              $                (%)
Unoccupied lease
charges                       $  1,244           $ 1,468          $ (224)               (15.3) %       $  2,056           $ 2,136          $  (80)               (3.7) %
Percentage of revenues             1.0   %           1.4  %                                                 0.6   %           0.7  %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Unoccupied lease charges decreased by $0.2 million, or (15.3)%, from
$1.5 million for the three months ended September 30, 2020 to $1.2 million for
the three months ended September 30, 2021. During the three months ended
September 30, 2021, the charges included costs related to an updated assessment
and vacating of facilities in North Carolina, Georgia and Nebraska, partially
offset by anticipated sublease income from these facilities. During the three
months ended September 30, 2020, the charges included costs related to the early
vacating of facilities in North Carolina and Texas, partially offset by
anticipated sublease income from these facilities.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Unoccupied lease charges decreased by $0.1 million, or (3.7)%, for the
nine months ended September 30, 2020 compared to the nine months ended September
30, 2021. During the nine months ended September 30, 2021, the charges included
costs related to an updated assessment and vacating of facilities in North
Carolina, Georgia, Texas and Nebraska, partially offset by anticipated sublease
income from these facilities. During the nine months ended September 30, 2020,
the charges included costs related to the early vacating of facilities in
California, North Carolina, and Texas, partially offset by anticipated sublease
income from these facilities.
Total Other Income (Expense), Net
                               Three Months Ended September
                                            30,                                  Change                       Nine Months Ended September 30,                        Change
                                  2021               2020                $                 (%)                    2021                   2020                $                 (%)
Total other income
(expense), net                $  (8,015)          $ (6,757)         $ (1,258)               (18.6) %       $       (26,028)          $ (19,821)         $ (6,207)               (31.3) %
Percentage of revenues             (6.3)  %           (6.5) %                                                         (7.1)  %            (6.7) %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Total other income (expense), net represented a net expense of $8.0
million for the three months ended September 30, 2021 compared to a net expense
of $6.8 million for the three months ended September 30, 2020. The change was
primarily attributable to a $1.2 million increase in interest expense from the
amortization of debt discount and issuance costs attributable to our convertible
notes.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Total other income (expense), net represented a net expense of $26.0
million for the nine months ended September 30, 2021 compared to a net expense
of $19.8 million for the nine months ended September 30, 2020. The change was
primarily attributable to a $4.1 million increase in interest expense from the
amortization of debt discount and issuance costs attributable to our convertible
notes, a $1.5 million loss from the early extinguishment of a portion of our
2023 Notes, and a $0.4 million loss on disposal of long-lived assets.
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Benefit from (provision for) income taxes
                              Three Months Ended September                                              Nine Months Ended September
                                           30,                                Change                                30,                               Change
                                  2021              2020              $                (%)                 2021              2020              $                (%)
Provision for income
taxes                         $   (596)           $ (116)         $ (480)               413.8  %       $   (909)           $ (621)         $ (288)               46.4  %
Percentage of revenues            (0.5)   %         (0.1) %                                                (0.2)   %         (0.2) %


Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020. Total provision for income taxes represented an expense of $0.6
million for the three months ended September 30, 2021 compared to an expense of
$0.1 million for the three months ended September 30, 2020. As a result of our
current net operating loss position, income tax expense for the three months
ended September 30, 2021 consisted primarily of federal income taxes of $0.2
million relating to the tax amortization of recently acquired goodwill, and $0.4
million in foreign and state income tax expense. The income tax expense for
three months ended September 30, 2020 consisted primarily of federal income
taxes of $0.2 million relating to tax amortization of goodwill, $0.1 million in
income tax expense from foreign operations, partially offset by $0.2 million in
income tax benefit relating to unrecognized tax benefits.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020. Total provision for income taxes represented an expense of $0.9 million
for the nine months ended September 30, 2021 compared to an expense of $0.6
million for the nine months ended September 30, 2020. As a result of our current
net operating loss position, current income tax expenses for the nine months
ended September 30, 2021 consist primarily of federal income taxes of $0.6
million relating to the tax amortization of recently acquired goodwill, and $0.7
million in income tax expense from foreign operations, partially offset by $0.3
million in state income tax benefit and $0.1 million in income tax benefit for
the acquisition of ClickSWITCH. The income tax expense for the nine months ended
September 30, 2020 consisted primarily of federal income taxes of $0.9 million
relating to tax amortization of goodwill, $0.2 million income tax expense from
foreign operations, and $0.1 million in state income tax expense, partially
offset by $0.6 million in income tax benefits, which consist primarily of $0.4
million relating to foreign tax reserves and $0.2 million relating to
unrecognized tax benefits.
Seasonality and Quarterly Results
Our overall operating results fluctuate from quarter to quarter as a result of a
variety of factors, including the timing of investments to grow our business.
The timing of our implementation activities and corresponding revenues from new
customers are subject to fluctuations based on the timing of our sales.
Historically, sales have tended to be lower in the first quarter of each year
than in subsequent quarters but any resulting impact on our results of operation
has been difficult to measure due to the timing of our implementations and
overall growth in our business. The timing of our implementations also varies
period-to-period based on our implementation capacity, the number of solutions
purchased by our customers, the size and unique needs of our customers and the
readiness of our customers to implement our solutions.
Given the uncertainty that still surrounds the COVID-19 pandemic, during 2021 we
have experienced and we expect to continue experiencing sales performance across
all our solutions that is slower than what we believe it otherwise would have
been for the year ending December 31, 2021. However, during the quarter ended
September 30, 2021, we observed an improved sales environment relative to the
first half of 2021, and we believe that for the remainder of fiscal 2021 we will
continue to see improvements in the predictability of purchasing decisions and
implementations by customers as compared to fiscal 2020, although at this time
we are unable to predict the full extent of such improvement. However, the
duration and impacts of the COVID-19 pandemic continue to be highly
unpredictable and may continue to disrupt any seasonality trends that may
otherwise typically be inherent in our historical operating results.
Our solutions are often the most frequent point of engagement between our
customers and their End Users. As a result, we and our customers are very
deliberate and measured in our implementation activities to help ensure a
successful roll-out of the solutions to End Users and increase the registration
of new End Users. Unusually long or short implementations, for even a small
number of customers, may result in short-term quarterly variability in our
results of operations.
Our quarterly results of operations may vary significantly in the future and
period-to-period comparisons of our operating results may not be meaningful and
should not be relied upon as an indication of future results.
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Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily through the proceeds from the issuance
of common stock in our initial public offering in March 2014, additional
registered common stock offerings, including our June 2019 and May 2020 common
stock offerings, our February 2018 convertible note offering, our June 2019
convertible note offering, our November 2020 convertible note offering, and cash
flows from operations. As of September 30, 2021, our principal sources of
liquidity were cash, cash equivalents and investments of $394.6 million. Based
upon our current levels of operations, and our current expectations regarding
the impacts of the COVID-19 pandemic on our operations and financial
performance, we believe that our cash flow from operations along with our other
sources of liquidity are adequate to meet our cash requirements for the next
twelve months. However, if we determine the need for additional short-term
liquidity, there is no assurance that such financing, if pursued, would be
adequate or available on terms acceptable to us.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):

Nine Months Ended September 30,


                                                                                 2021                2020
Net cash provided by (used in):
Operating activities                                                        $    (8,386)         $ (21,979)
Investing activities                                                            (53,826)           (15,939)
Financing activities                                                            (51,230)           303,027

Net increase (decrease) in cash, cash equivalents, and restricted cash

$ (113,442) $ 265,109




Cash Flows from Operating Activities
Cash used in operating activities is primarily influenced by net loss less
non-cash items, the amount and timing of customer receipts and vendor payments,
and by the amount of cash we invest in personnel and infrastructure to support
the anticipated growth of our business and increase in the number of installed
customers.
For the nine months ended September 30, 2021, our net cash and cash equivalents
used in operating activities was $8.4 million, which consisted of a net loss of
$87.4 million and cash outflows from changes in operating assets and liabilities
of $46.6 million, offset by non-cash adjustments of $125.6 million. Cash
outflows were the result of a $19.9 million increase in deferred solution and
implementation costs due to our increased customer growth and new and existing
customers undergoing implementations during the period, a $16.7 million increase
in accounts receivable primarily due to the timing of annual billings at the end
of the current quarter, a $10.0 million increase in prepaid and other current
assets related to timing of various prepaid expenses, most notably a payroll
date occurring at the very end of the quarter, a $7.5 million decrease in other
long-term liabilities primarily related to termination fees of a strategic
partnership, a $4.2 million decrease in accounts payable and accrued liabilities
due to timing of payments in support of our expanding customer base and related
growth in our technical infrastructure and payment of annual bonuses during the
first quarter, and a $3.2 million increase in contract assets. Cash outflows
were partially offset by cash inflows resulting from a $8.6 million increase in
deferred revenue due to the timing of annual billings and deposits received from
customers prior to the recognition of revenue from those related payments and a
$6.3 million decrease in other long-term assets primarily from amortization of
our right-of-use assets. Non-cash items consisted primarily of $41.8 million of
stock-based compensation expense, $40.6 million of depreciation and amortization
expense due to growth in our fixed assets and acquired intangible assets, $20.9
million in amortization of the 2023 Notes, 2025 Notes and 2026 Notes discount
and related debt issuance costs, $17.4 million of amortization of deferred
implementation and deferred solution and other costs, $2.1 million of unoccupied
lease charges, $1.5 million related to the early extinguishment of a portion of
the 2023 Notes, and $1.3 million of other non-cash items.
For the nine months ended September 30, 2020, our net cash and cash equivalents
used in operating activities was $22.0 million, which consisted of a net loss of
$99.8 million and cash outflows from changes in operating assets and liabilities
of $32.9 million, partially offset by non-cash adjustments of $110.8 million.
Cash outflows were the result of a $28.5 million increase in deferred solution
and implementation costs due to our increased customer growth and new and
existing customers undergoing implementations during the period, a $20.3 million
increase in accounts receivable due to the timing of annual billings at the end
of the current quarter, a $5.4 million decrease in accounts payable and accrued
liabilities due to timing of payments in support of our expanding customer base
and related growth in our technical infrastructure and payment of annual bonuses
during the first quarter, a $4.2 million increase in contract assets, and a $2.6
million increase in prepaid and other current assets related to timing of
various prepaid expenses. Cash outflows were partially offset by cash inflows
resulting from
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a $19.1 million increase in deferred revenue due to increased payments and
deposits received from customers prior to the recognition of revenue from those
related payments, a $5.6 million increase in other long-term liabilities, and a
$3.4 million decrease in other long-term assets primarily from amortization of
our right-of-use assets. Non-cash items consisted primarily of $39.0 million of
depreciation and amortization expense due to growth in our fixed assets and
acquired intangible assets, $38.1 million of stock-based compensation expense,
$16.8 million in amortization of the 2023 Notes and 2026 Notes discounts and
related debt issuance costs, $13.9 million of amortization of deferred
implementation and deferred solution and other costs, $2.1 million of unoccupied
lease charges and $0.8 million of other non-cash items.
Cash Flows from Investing Activities
Our investing activities have consisted primarily of purchases and maturities of
investments, our recent acquisition, purchases of property and equipment to
support our growth and costs incurred for the development of capitalized
software. Purchases of property and equipment may vary period-to-period due to
the timing of the expansion of our operations, data center and other technical
infrastructure.
For the nine months ended September 30, 2021, our net cash used in investing
activities was $53.8 million, consisting of $88.9 million from purchases of
investments, $64.7 million for the acquisition of ClickSWITCH, net of cash
acquired, $16.1 million for the purchase of property and equipment and $3.9
million from capitalized software development costs, partially offset by $119.7
million from maturities of investments.
For the nine months ended September 30, 2020, our net cash used in investing
activities was $15.9 million, consisting of $23.6 million from purchases of
investments, $16.5 million for the purchase of property and equipment and $0.7
million from capitalized software development costs, partially offset by $24.9
million from maturities of investments.
Cash Flows from Financing Activities
Our recent financing activities have consisted primarily of our May 2020 common
stock offering, our partial repurchase of the 2023 Notes, the payment of
contingent consideration related to the acquisition of Cloud Lending, and net
proceeds from exercises of options to purchase our common stock.
For the nine months ended September 30, 2021, our net cash used in financing
activities was $51.2 million, consisting of $63.7 million for the partial
repurchase of the 2023 Notes, partially offset by $6.6 million of net proceeds
received in connection with the early termination of bond hedges and warrants
related to the 2023 Notes and $5.8 million of cash received from the exercise of
stock options.
For the nine months ended September 30, 2020, our net cash provided by financing
activities of $303.0 million was primarily due to the proceeds from the issuance
of common stock of $311.3 million, net of issuance costs, from the May 2020
common stock offering and $8.6 million of cash received from the exercise of
stock options, partially offset by the payment of contingent consideration
related to the acquisition of Cloud Lending, of which $16.9 million of the
payment was estimated at acquisition date fair value and included in financing
activities.
Contractual Obligations and Commitments
During the nine months ended September 30, 2021, and subsequent to September 30,
2021, except as noted below, there were no material changes to our contractual
obligations and commitments disclosures as set forth under the caption,
"Contractual Obligations and Commitments" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, as reported in our
Annual Report on Form 10-K, filed with the SEC on February 19, 2021. As
of September 30, 2021, our total lease payment obligations were $75.5 million,
of which $63.7 million was included in lease liabilities, net of current portion
in our condensed consolidated balance sheets.
The following table summarizes our contractual obligations and commitments at
September 30, 2021 (in thousands):
                                                                                     Payment due by period
                                               Less Than 1                                                       More Than 5
                                                   Year             1 to 3 Years           3 to 5 Years             Years              Total
Convertible Notes, including interest          $   2,891          $      16,569          $     671,650          $        -          $ 691,110
Operating lease obligations                       12,183                 23,627                 19,949              19,768             75,527
Purchase commitments                              28,843                 26,825                  7,000               7,000             69,668
                                               $  43,917          $      67,021          $     698,599          $   26,768          $ 836,305


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Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, special purpose entities or
variable interest entities.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, "Debt - Debt with Conversion
and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40)" which simplifies the accounting for
convertible debt instruments by eliminating the requirement to separate embedded
conversion features from the host contract when the conversion features are not
required to be accounted for as derivatives under Topic 815, Derivatives and
Hedging, or that do not result in substantial premiums accounted for as paid-in
capital. In addition, the guidance eliminates the treasury stock method to
calculate diluted earnings per share for convertible instruments and requires
the use of the if-converted method. The standard is effective for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal
years. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. We
will adopt this new guidance for the fiscal year beginning January 1, 2022,
using the modified retrospective approach with the cumulative effect of adoption
recognized at the date of initial application through an adjustment to the
opening balance of retained earnings. We expect the adoption of this guidance
will result in a material reclassification from equity to debt as well as a
reduction in non-cash interest expense.
In May 2021, the FASB issued ASU No. 2021-04, "Earnings Per Share (Topic 260),
Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock
Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40)" which clarifies and reduces diversity in the
accounting for modifications or exchanges of freestanding equity classified
written call options that remain equity classified after modification or
exchange. The ASU provides a principles-based framework to determine whether an
issuer should recognize the modification or exchange as an adjustment to equity
or an expense. The standard is effective for fiscal years beginning after
December 15, 2021, including interim periods within those fiscal years. Under
this standard, issuers should apply the new standard prospectively to
modifications or exchanges occurring after the effective date of the new
standard. We are currently evaluating the potential effects of this guidance on
our consolidated financial statements and will adopt for the fiscal year
beginning January 1, 2022.
Critical Accounting Policies and Estimates
The preparation of our interim unaudited condensed consolidated financial
statements in accordance with GAAP requires estimates, judgments and assumptions
that affect the reported amounts and classifications of assets and liabilities,
revenues and expenses and the related disclosures of contingent liabilities in
our interim unaudited condensed consolidated financial statements and
accompanying notes. The SEC has defined a company's critical accounting policies
as the ones that are most important to the portrayal of the company's financial
condition and results of operations, and which require the company to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition, we
have identified the following critical accounting policies and estimates:
•Revenue recognition;
•Contract balances;
•Accounts receivable;
•Deferred revenues;
•Deferred implementation costs;
•Deferred solution and other costs;
•Stock-based compensation;
•Convertible senior notes;
•Purchase price allocation, intangible assets and goodwill;
•Capitalization of software development costs;
•Leases;
•Contingent consideration; and
•Income taxes.
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We have other key accounting policies which involve the use of estimates,
judgments and assumptions that are significant to understanding our results. See
Note 2 - Summary of Significant Accounting Policies to the interim unaudited
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q. Of those policies, we believe that the accounting policies enumerated
above involve the greatest degree of complexity and exercise of judgment by our
management.
During the nine months ended September 30, 2021, there were no significant
changes in our critical accounting policies or estimates which were included in
the consolidated financial statements and the accompanying notes for the fiscal
year ended December 31, 2020, which are included in our Annual Report on Form
10-K, filed with the SEC on February 19, 2021.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and
while we believe that our estimates, judgments and assumptions are reasonable,
they are based upon information available at the time. Actual results may differ
significantly from these estimates under different assumptions, judgments or
conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, values or future cash flows
that may result from changes in the price of a financial instrument. The value
of a financial instrument might change as a result of changes in interest rates,
exchange rates, commodity prices, equity prices and other market changes. We do
not use derivative financial instruments for speculative, hedging or trading
purposes, although in the future we might enter into exchange rate hedging
arrangements to manage the risks described below.
Interest Rate Risk
We have cash and cash equivalents held primarily in cash and money market funds.
In addition, we have marketable securities which typically include U.S.
government securities, corporate bonds and commercial paper and certificates of
deposit. Cash and cash equivalents are held for working capital purposes.
Marketable securities are held and invested with capital preservation as the
primary objective. Due to the short-term nature of these investments, we believe
that we do not have any material exposure to changes in the fair value of our
investment portfolio as a result of changes in interest rates. Any declines in
interest rates will reduce future interest income. As of September 30, 2021, we
had an outstanding principal amount of $327.2 million of 2023 Notes and 2026
Notes, which each have a fixed annual interest rate of 0.75% and an outstanding
principal amount of $350.0 million of 2025 Notes with a fixed annual interest
rate of 0.125%. If overall interest rates fell by 10% in 2021 or 2020, our
interest income would not have been materially affected.
Foreign Currency Risk
During 2018, we commenced international operations. As a result, our results of
operations and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates. As of September 30, 2021, our most significant currency
exposures were the Indian rupee, British pound and Australian dollar. As of
September 30, 2021, we had operating subsidiaries in India, the United Kingdom
and Australia. Due to the relatively low volume of payments made by us through
these foreign subsidiaries, we do not believe we have significant exposure to
foreign currency exchange risks. However, fluctuations in currency exchange
rates could harm our results of operations in the future.
We currently do not use derivative financial instruments to mitigate foreign
currency exchange risks. We will continue to review this matter and may consider
hedging certain foreign exchange risks in future years.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. We continue to monitor the impact
of inflation in order to reduce its effects through pricing strategies,
productivity improvements and cost reductions. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could harm our business, financial condition and results of operations.
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Latest news about Q2 Holdings, Inc.

Q2 Holdings Insider Sold Shares Worth $450,900, According to a Recent SEC Filing	Apr. 19	MT
Truist Raises Price Target on Q2 Holdings to $60 From $50 on Increased Confidence in Sustained Bookings Strength, Keeps Buy Rating	Apr. 19	MT
Los Angeles Police Federal Credit Union Selects Q 2 Holdings, Inc. to Improve the Digital Banking Experience for Law Enforcement Members	Apr. 15	CI
Q2 Holdings, Inc. Appoints Katharine Briggs as Chief Product Officer, Effective March 31, 2024	Mar. 27	CI
Q2 Holdings to Provide Digital Banking Technology to Newly Formed Blaze Credit Union	Mar. 21	MT
Newly Formed Blaze Credit Union Selects Second Quarter Holdings, Inc. to Provide Personalized Digital Experience	Mar. 21	CI
Q2 Holdings Insider Sold Shares Worth $436,410, According to a Recent SEC Filing	Mar. 19	MT
Baird Raises Price Target on Q2 Holdings to $60 From $50, Maintains Outperform Rating	Mar. 18	MT
Q2 Holdings Insider Sold Shares Worth $268,388, According to a Recent SEC Filing	Mar. 14	MT
Q2 Holdings Insider Sold Shares Worth $719,860, According to a Recent SEC Filing	Mar. 14	MT
Q2 Holdings Insider Sold Shares Worth $304,024, According to a Recent SEC Filing	Mar. 14	MT
Q2 Holdings Insider Sold Shares Worth $664,134, According to a Recent SEC Filing	Mar. 06	MT
Talkdesk Announces Integration with Q2's Digital Banking Platform	Mar. 05	CI
Transcript : Q2 Holdings, Inc. Presents at Citi 13th Annual Fintech Conference, Feb-28-2024 02:00 PM	Feb. 28
DA Davidson Raises Price Target on Q2 Holdings to $58 From $48, Keeps Buy Rating	Feb. 27	MT
Canaccord Genuity Adjusts Q2 Holdings Price Target to $55 From $40, Maintains Buy Rating	Feb. 23	MT
Baird Raises Price Target on Q2 Holdings to $50 From $46, Maintains Outperform Rating	Feb. 22	MT
RBC Raises Price Target on Q2 Holdings to $46 From $38, 'Encouraged by the Continued Momentum,' Keeps Sector Perform Rating	Feb. 22	MT
Needham Adjusts Q2 Holdings to $58 from $50, Maintains Buy Rating	Feb. 22	MT
Q2 Holdings' Q4 Loss Narrows, Revenue Rises	Feb. 22	MT
Transcript : Q2 Holdings, Inc., Q4 2023 Earnings Call, Feb 21, 2024	Feb. 21
Earnings Flash (QTWO) Q2 HOLDINGS Posts Q2 Revenue $162.1M, vs. Street Est of $161.5M	Feb. 21	MT
Q2 Holdings, Inc. Reports Earnings Results for the Fourth Quarter Ended December 31, 2023	Feb. 21	CI
Q2 Holdings' Digital Banking Platform Integrates With Bits of Stock	Feb. 21	MT
Bits of Stock Announces Integration with Second Quarter Holdings, Inc	Feb. 21	CI

Q2 Holdings, Inc. is a provider of digital banking and lending solutions to financial institutions, financial technology companies, and alternative finance companies, and other companies or brands. The Companyâs portfolio of digital solutions includes Digital Banking Platform, Q2 Innovation Studio, Lending and Relationship Pricing, and Helix. Its end-to-end digital banking platform supports its financial institution customers in their delivery of retail, small to medium business and commercial functionalities across digital channels through a single technology platform. Q2 Innovation Studio is an application program interface based and software development kit based open technology platform. Its end-to-end digital lending portfolio allows its FinTech and Alt-FI customers to simplify the end-user experiences of borrowers, accelerate loan decisioning, and reduce operational inefficiencies. Helix is a cloud-native, real-time core processing platform.

Sector

Software

Calendar

2024-05-01 - Q1 2024 Earnings Release

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ESG Refinitiv

C+

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Sell

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Mean consensus

BUY

Number of Analysts

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53.39 USD

Average target price

52.54 USD

Spread / Average Target

-1.59%

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Sector Enterprise Software

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Enterprise Software

Q2 Holdings, Inc.

Equities

QTWO

US74736L1098

Software

Q2 HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

Latest news about Q2 Holdings, Inc.

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Sector Enterprise Software