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 endedDecember 31, 2020 and in this Quarterly Report on Form 10-Q and those discussed in other documents we file with theSecurities and Exchange Commission , or theSEC . 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 otherSEC filings, including the audited consolidated financial statements and the accompanying notes for the fiscal year endedDecember 31, 2020 , which are included in our Annual Report on Form 10-K, filed with theSEC onFebruary 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. 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 36 -------------------------------------------------------------------------------- Table of Contents 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 the substantial majority 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 on our digital banking platform, or Registered Users, on our solutions. 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 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 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." 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 hiring plans to accelerate during 2021 based on our expectations that buying environments and cross sale opportunities continue to improve in 2021. 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 eventually 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. 37 -------------------------------------------------------------------------------- Table of Contents 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 theU.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 currently 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 theU.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. 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 significant 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, 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 under "Risk Factors" below. 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. 38 -------------------------------------------------------------------------------- Table of Contents In early 2020 we implemented enhanced health and safety protocols at our locations, and bymid-March 2020 virtually every one of our employees had transitioned to working remotely from home. We have now implemented protocols for any employee to enter any of our facilities where allowed by local regulations, including advance health screening for COVID-19 symptoms and social distancing requirements while onsite, including mask-wearing for unvaccinated employees. As of the filing date of this Quarterly Report on Form 10-Q, we continue to operate with the vast majority of our employees working remotely and believe our corporate culture, business model, customer relations, and technology and information technology infrastructure have effectively allowed our employees to substantially perform their roles while working remotely. However, during the quarter endedJune 30, 2021 , we began allowing employees to return to onsite work on a limited, voluntary basis, subject to health and safety protocols noted above. We currently plan to formally re-open our onsite facilities to all employees in the fall of 2021, subject to laws and recommendations applicable to each location, and are currently surveying employees on their preferences between remote or onsite attendance once we formally re-open our facilities. Based upon our success with employees working remotely during the pandemic and resulting changes in employee preferences, we are generally offering our employees the ability to elect between remote, hybrid or onsite attendance once we formally re-open our facilities. We continue to adapt our physical facilities and IT infrastructure to accommodate a safe and successful work experience for both our onsite and remote employees. We cancelled all in-person aspects of our spring 2021 customer conference and are currently evaluating to what extent and in what format we may hold the conference in the future. In addition, we 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. The COVID-19 pandemic and its related restrictions have caused challenges for financial institutions to execute in-branch operations which makes executing more complex projects, such as implementations of new technology solutions, more difficult. As an example, we have experienced delays in some implementations and the associated revenue recognition as our customers focus on other initiatives in response to the COVID-19 pandemic and manage their own operations in light of the pandemic. We also have experienced certain customers requesting reduced or extended payment terms to assist them with cost reduction measures as a result of the COVID-19 pandemic, although most customers are now back to normal payment terms. Accordingly, we expect to continue to see negative impacts of COVID-19 on our bookings, revenues, gross margins and cash flows from operations, although we anticipate gradual improvement during 2021 as compared to the impacts we experienced in 2020. Given the uncertainty that still surrounds the COVID-19 pandemic, during the first half of 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 endingDecember 31, 2021 . Based on feedback we have received from our existing and prospective customers and observations from our sales team during the first half of fiscal 2021, we continue to see delays and unpredictability in the purchasing decisions of our customers. However, we believe that for the remainder of fiscal 2021 we will 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. Despite these challenges among financial institutions, 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. Recent Events OnApril 1, 2021 , we completed our acquisition ofClickSWITCH Holdings Inc. , or Clickswitch, a provider of digital account switching solutions for financial institutions. 39 -------------------------------------------------------------------------------- Table of Contents OnMay 24-25, 2021 , we completed repurchases of$37.1 million aggregate principal amount of our outstanding 0.75% Convertible Senior Notes due 2023, or 2023 Notes, pursuant to privately negotiated repurchase agreements for an aggregate cash purchase price of$63.7 million , or the Repurchases. In connection with the Repurchases, we also terminated a portion of: (i) the convertible note hedge transactions entered into in connection with the issuance of the repurchased 2023 Notes and (ii) the warrant transactions entered into in connection with the issuance of the repurchased 2023 Notes, or the Terminations. In connection with the Terminations, we received net proceeds equal to approximately$6.6 million . Key Operating Measures In addition to theU.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 provide 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, is resulting in delays in certain purchasing decisions and implementations, which we anticipate will continue to slow 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 ofDecember 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 ofDecember 31, 2020 , 2019 and 2018, respectively. Registered Users atJune 30, 2021 were 18.8 million compared to 16.3 million atJune 30, 2020 . 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 ofDecember 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 40 -------------------------------------------------------------------------------- Table of Contents 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 and customer decisions with respect to contract extensions, which may adversely affect our revenue retention rate. We also have experienced contract terminations with customers who become 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 endedDecember 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 customer decisions with respect to contract extensions 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 become 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 endedDecember 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. 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. 41 -------------------------------------------------------------------------------- Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: GAAP revenue$ 123,573 $ 97,581 $ 240,093 $ 189,961 Deferred revenue reduction from purchase accounting 595 1,321 1,123 2,763 Total Non-GAAP revenue$ 124,168 $ 98,902 $ 241,216 $ 192,724 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. •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 endedJune 30, 2020 , in connection with the termination of a strategic partnership, we agreed to pay a termination fee of$5.6 million inMay 2020 and$7.6 million in the third quarter of 2021. We are excluding the charges associated with this partnership termination as they are non-recurring in nature and would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude partnership termination charges allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of peer companies, both with and without such adjustments. 42 -------------------------------------------------------------------------------- Table of Contents •Unoccupied lease charges. We provide non-GAAP information that excludes restructuring charges related to the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities. These charges are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 GAAP operating loss$ (19,943)
595 1,321 1,123 2,763 Partnership termination charges - 13,244 - 13,244 Stock-based compensation 13,627 10,783 26,722 25,319 Acquisition related costs 1,294 1,361 2,260 (348) Amortization of acquired technology 5,604 5,452 10,761 10,929 Amortization of acquired intangibles 4,563 4,491 8,982 8,982 Unoccupied lease charges 812 668 812 668 Non-GAAP operating income$ 6,552 $ 5,013 $ 13,204 $ 2,047 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. 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. 43 -------------------------------------------------------------------------------- Table of Contents 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Reconciliation of net loss to adjusted EBITDA: Net loss$ (30,127)
Deferred revenue reduction from purchase accounting 595 1,321 1,123 2,763 Partnership termination charges - 13,244 - 13,244 Stock-based compensation 13,627 10,783 26,722 25,319 Acquisition related costs 1,294 1,361 2,260 (348) Depreciation and amortization 13,586 13,029 26,498 26,046 Unoccupied lease charges 812 668 812 668 Provision for income taxes 178 65 313 505 Loss on extinguishment of debt 1,513 - 1,513 - Interest and other (income) expense, net 8,388 6,584 16,295 12,859 Adjusted EBITDA$ 9,866 $ 8,084 $ 19,754 $ 7,977 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. 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, although at this time we are unable to the predict the extent or duration of such impact. We have experienced a slowing of net new customer deals, 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. Given the uncertainty that still surrounds the COVID-19 pandemic, during the first half of 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 endingDecember 31, 2021 . Based on feedback we have received from our existing and prospective customers and observations from 44 -------------------------------------------------------------------------------- Table of Contents our sales team during the first half of fiscal 2021, we continue to see delays and unpredictability in the purchasing decisions of our customers. However, we believe that for the remainder of fiscal 2021 we will 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 and support activities and other related costs, including during periods where revenues are lower or implementations are delayed due to the effects of the COVID-19 pandemic. 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 while hiring may be somewhat lower than the growth rates experienced in 2019 and prior, we expect hiring rates to accelerate in 2021 as compared to hiring in 2020 based on our expectation that buying environments and cross sale opportunities will continue to improve. Additionally, while nearly all of our employees are working remotely from home and we have suspended all non-essential business travel and conference participation, including cancelling in-person attendance at our own customer conference typically held in April of each year, we expect that as the COVID-19 vaccine becomes more widely available and based on the expectation that cases will correspondingly begin to decline, some of these activities will begin to return in the second half of 2021. As a result, certain costs associated with operating physical locations and facilitating employee travel will remain reduced in the first half of 2021, but we anticipate that we will see a gradual increase in such costs in the second half of 2021. During the quarter endedJune 30, 2021 , we began allowing employees to return to onsite work on a voluntary basis, subject to the health and safety protocols noted above. We currently plan to formally re-open our onsite facilities to all employees in the fall of 2021 and are currently surveying employees on their preferences between remote or onsite attendance once we formally re-open our facilities. Based upon our success with employees working remotely during the pandemic and resulting changes in employee preferences, we are generally offering our employees the ability to elect between remote, hybrid or onsite attendance once we formally re-open our facilities. We are continuing to consider how our physical facilities requirements will need to be adapted to ensure a safe work environment for onsite employees and to accommodate the likely increased prevalence of working from home for many employees. 45 -------------------------------------------------------------------------------- Table of Contents 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. 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 endedJune 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. 46 -------------------------------------------------------------------------------- Table of Contents 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 inFebruary 2018 , or 2023 Notes, our convertible notes issued inJune 2019 , or 2026 Notes, and our convertible notes issued inNovember 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. 47 -------------------------------------------------------------------------------- Table of Contents Results of Operations Condensed Consolidated Statements of Comprehensive Loss Data The following table sets forth our condensed consolidated statements of comprehensive loss data for each of the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues(1)$ 123,573 $ 97,581 $ 240,093 $ 189,961 Cost of revenues(2)(3) 68,233 53,203 131,552 106,310 Gross profit 55,340 44,378 108,541 83,651 Operating expenses: Sales and marketing(3) 20,587 16,310 40,403 36,194 Research and development(3) 29,429 23,642 56,224 48,600 General and administrative(3) 18,704 17,203 37,538 36,313 Acquisition related costs(4) 1,188 1,127 2,038 (840) Amortization of acquired intangibles 4,563 4,491 8,982 8,982 Partnership termination charges - 13,244 - 13,244 Unoccupied lease charges(5) 812 668 812 668 Total operating expenses 75,283 76,685 145,997 143,161 Loss from operations (19,943) (32,307) (37,456) (59,510) Total other income (expense), net (10,006) (6,599) (18,013) (13,064) Loss before income taxes (29,949) (38,906) (55,469) (72,574) Provision for income taxes (178) (65) (313) (505) Net loss$ (30,127) $ (38,971) $ (55,782) $ (73,079)
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(1) Includes deferred revenue reduction from purchase accounting of$0.6 million and$1.3 million for the three months endedJune 30, 2021 and 2020, respectively, and$1.1 million and$2.8 million for the six months endedJune 30 , 2021and 2020, respectively. (2) Includes amortization of acquired technology of$5.6 million and$5.5 million for the three months endedJune 30, 2021 and 2020, respectively, and$10.8 million and$10.9 million for the six months endedJune 30 , 2021and 2020, respectively. (3) Includes stock-based compensation expense as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Cost of revenues$ 2,763 $ 1,904 $ 5,298 $ 5,312 Sales and marketing 2,930 1,390 5,467 4,144 Research and development 3,506 3,109 6,651 6,879 General and administrative 4,428 4,380 9,306 8,984 Total stock-based compensation expense$ 13,627
(4) The six months endedJune 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 ofMarch 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 six months endedJune 30, 2021 , the charges related to an updated assessment of facilities inGeorgia andTexas , and for the three and six months endedJune 30, 2020 , the charges related to the vacating of facilities inCalifornia . 48
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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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues(1) 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues(2)(3) 55.2 54.5 54.8 56.0 Gross profit 44.8 45.5 45.2 44.0 Operating expenses: Sales and marketing(3) 16.7 16.7 16.8 19.1 Research and development(3) 23.8 24.2 23.4 25.6 General and administrative(3) 15.1 17.6 15.6 19.1 Acquisition related costs(4) 1.0 1.2 0.8 (0.4) Amortization of acquired intangibles 3.7 4.6 3.7 4.7 Partnership termination charges - 13.6 - 7.0 Unoccupied lease charges(5) 0.7 0.7 0.3 0.4 Total operating expenses 60.9 78.6 60.8 75.4 Loss from operations (16.1) (33.1) (15.6) (31.3) Total other income (expense), net (8.1) (6.8) (7.5) (6.9) Loss before income taxes (24.2) (39.9) (23.1) (38.2) Benefit from (provision for) income taxes (0.1) (0.1) (0.1) (0.3) Net loss (24.4) % (39.9) % (23.2) % (38.5) %
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(1) Includes deferred revenue reduction from purchase accounting of 0.5% and 1.4% for the three months endedJune 30, 2021 and 2020, respectively, and 0.5% and 1.5% for the six months endedJune 30 , 2021and 2020, respectively. (2) Includes amortization of acquired technology of 4.5% and 5.6% for the three months endedJune 30, 2021 and 2020, respectively, and 4.5% and 5.8% for the six months endedJune 30 , 2021and 2020, respectively. (3) Includes stock-based compensation expense as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Cost of revenues 2.2 % 2.0 % 2.2 % 2.8 % Sales and marketing 2.4 1.4 2.3 2.2 Research and development 2.8 3.2 2.8 3.6 General and administrative 3.6 4.5 3.9 4.7 Total stock-based compensation expense 11.0 % 11.1 % 11.1 % 13.3 % (4) The six months endedJune 30, 2020 includes a 1.5% reduction to estimated contingent consideration as a result of the actual contingent consideration calculated as of the final measurement date ofMarch 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 six months endedJune 30, 2021 , the charges related to an updated assessment of facilities inGeorgia andTexas , and for the three and six months endedJune 30, 2020 , the charges related to the vacating of facilities inCalifornia . Due to rounding, totals may not equal the sum of the line items in the tables above. 49 -------------------------------------------------------------------------------- Table of Contents Comparison of the Three and Six Months EndedJune 30, 2021 and 2020 Revenues The following table presents our revenues for each of the periods indicated (dollars in thousands): Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Revenues$ 123,573 $ 97,581 $ 25,992 26.6 %$ 240,093 $ 189,961 $ 50,132 26.4 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Revenues increased by$26.0 million , or 26.6%, from$97.6 million for the three months endedJune 30, 2020 to$123.6 million for the three months endedJune 30, 2021 . This increase in revenue was primarily attributable to a$22.2 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,$3.8 million of the increase was generated from an increase in the number of transactions processed using our solutions. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Revenues increased by$50.1 million , or 26.4%, from$190.0 million for the six months endedJune 30, 2020 to$240.1 million for the six months endedJune 30, 2021 . This increase in revenue was primarily attributable to a$42.8 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,$7.3 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 June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Cost of revenues$ 68,233 $ 53,203 $ 15,030 28.3 %$ 131,552 $ 106,310 $ 25,242 23.7 % Percentage of revenues 55.2 % 54.5 % 54.8 % 56.0 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Cost of revenues increased by$15.0 million , or 28.3%, from$53.2 million for the three months endedJune 30, 2020 to$68.2 million for the three months endedJune 30, 2021 . This increase was attributable to a$7.2 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$4.6 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 and a$2.6 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. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Cost of revenues increased by$25.2 million , or 23.7%, from$106.3 million for the six months endedJune 30, 2020 to$131.6 million for the six months endedJune 30, 2021 . This increase was attributable to a$12.1 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$8.5 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$4.1 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$0.6 million increase from amortization of capitalized implementation services as a result of customer go lives during the six months endedJune 30, 2020 . 50 -------------------------------------------------------------------------------- Table of Contents 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 June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Sales and marketing$ 20,587 $ 16,310 $ 4,277 26.2 %$ 40,403 $ 36,194 $ 4,209 11.6 % Percentage of revenues 16.7 % 16.7 % 16.8 % 19.1 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Sales and marketing expenses increased by$4.3 million , or 26.2%, from$16.3 million for the three months endedJune 30, 2020 to$20.6 million for the three months endedJune 30, 2021 . This increase was primarily attributable to a$3.5 million increase in personnel costs due to the growth of our sales and marketing organizations and a$0.5 million increase in other discretionary expenses including our stadium sponsorship expense. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Sales and marketing expenses increased by$4.2 million , or 11.6%, from$36.2 million for the six months endedJune 30, 2020 to$40.4 million for the six months endedJune 30, 2021 . This increase was primarily attributable to a$4.7 million increase in personnel costs due to the growth of our sales and marketing organizations, partially offset by a$0.7 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 June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Research and development$ 29,429 $ 23,642 $ 5,787 24.5 %$ 56,224 $ 48,600 $ 7,624 15.7 % Percentage of revenues 23.8 % 24.2 % 23.4 % 25.6 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Research and development expenses increased by$5.8 million , or 24.5%, from$23.6 million for the three months endedJune 30, 2020 to$29.4 million for the three months endedJune 30, 2021 . This increase was primarily attributable to a$5.1 million increase in personnel costs as a result of the growth in our research and development organization to support continued enhancements to our solutions and a$0.9 million increase in facilities and other overhead costs. These increases were partially offset by a$0.4 million decrease as a result of increased capitalized software development costs. 51 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Research and development expenses increased by$7.6 million , or 15.7%, from$48.6 million for the six months endedJune 30, 2020 to$56.2 million for the six months endedJune 30, 2021 . This increase was primarily attributable to a$6.6 million increase in personnel costs as a result of the growth in our research and development organization to support continued enhancements to our solutions and a$1.6 million increase in facilities and other overhead costs. These increases were partially offset by a$0.7 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 June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) General and administrative$ 18,704 $ 17,203 $ 1,501 8.7 %$ 37,538 $ 36,313 $ 1,225 3.4 % Percentage of revenues 15.1 % 17.6 % 15.6 % 19.1 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . General and administrative expenses increased by$1.5 million , or 8.7%, from$17.2 million for the three months endedJune 30, 2020 to$18.7 million for the three months endedJune 30, 2021 . The increase in general and administrative expenses was primarily attributable to a$1.9 million increase in personnel costs to support the growth of our business, partially offset by a$0.5 million decrease in bad debt expense due to additional estimated credit losses from the adoption of ASU 2016-13 in 2020. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . General and administrative expenses increased by$1.2 million , or 3.4%, from$36.3 million for the six months endedJune 30, 2020 to$37.5 million for the six months endedJune 30, 2021 . The increase in general and administrative expenses was primarily attributable to a$3.5 million increase in personnel costs to support the growth of our business. This increase was 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, a$0.5 million decrease in professional services for legal and compliance fees; a$0.5 million decrease for price concessions given to customers in 2020, a$0.2 million decrease in overhead costs which were allocated to our general and administrative departments, and a$0.2 million decrease in discretionary spending and travel-related expenses. 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. Acquisition Related Costs Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Acquisition related costs$ 1,188 $ 1,127 $ 61 5.4 %$ 2,038 $ (840) $ 2,878 342.6 % Percentage of revenues 1.0 % 1.2 % 0.8 % (0.4) % 52
-------------------------------------------------------------------------------- Table of Contents Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Acquisition related costs increased by$0.1 million , or 5.4%, from$1.1 million for the three months endedJune 30, 2020 to$1.2 million for the three months endedJune 30, 2021 . Acquisition related costs for the three months endedJune 30, 2021 included$0.7 million of legal, professional services and other costs related to our acquisition of ClickSWITCH onApril 1, 2021 and$0.5 million of compensation expense primarily related to the retention bonuses for employees of previous acquisitions. Acquisition related costs for the three months endedJune 30, 2020 included$0.8 million of compensation expense related to the retention bonuses for employees of previous acquisitions and a$0.2 million adjustment to the fair value of contingent consideration related to the acquisition ofCloud Lending based on actual achievement. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Acquisition related costs increased by$2.9 million , or 342.6%, from a gain of$0.8 million for the six months endedJune 30, 2020 to an expense of$2.0 million for the six months endedJune 30, 2021 . Acquisition related costs for the six months endedJune 30, 2021 included$1.1 million of legal, professional services and other costs related to our acquisition of ClickSWITCH onApril 1, 2021 and$0.9 million of compensation expense primarily related to the retention bonuses for employees of previous acquisitions. The gain for the six months endedJune 30, 2020 included a$2.9 million negative adjustment to the value of the contingent consideration related to the acquisition ofCloud Lending based on actual achievement, partially offset by$1.8 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 June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Amortization of acquired intangibles$ 4,563 $ 4,491 $ 72 1.6 %$ 8,982 $ 8,982 $ - - % Percentage of revenues 3.7 % 4.6 % 3.7 % 4.7 % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Amortization of acquired intangibles increased by$0.1 million , or 1.6%, from$4.5 million for the three months endedJune 30, 2020 to$4.6 million for the three months endedJune 30, 2021 as a result of increased amortization for intangibles assets acquired during the acquisition of ClickSWITCH onApril 1, 2021 , partially offset by intangible assets that became fully amortized since the three months endedJune 30, 2020 . These amounts are amortized on a straight-line basis over the estimated useful lives of the related assets. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Amortization of acquired intangibles remained flat from the six months endedJune 30, 2020 to the six months endedJune 30, 2021 . Increases due to amortization of intangible assets acquired during the acquisition of ClickSWITCH onApril 1, 2021 were fully offset by decreases in amortization of intangible assets that became fully amortized since the six months endedJune 30, 2021 . These amounts are amortized on a straight-line basis over the estimated useful lives of the related assets. Unoccupied Lease Charges Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Unoccupied lease charges$ 812 $ 668 $ 144 21.6 %$ 812 $ 668 $ 144 21.6 % Percentage of revenues 0.7 % 0.7 % 0.3 % 0.4 % Three and Six Months EndedJune 30, 2021 Compared to the Three and Six Months EndedJune 30, 2020 . Unoccupied lease charges increased by$0.1 million , or 21.6%, from$0.7 million for the three and six months endedJune 30, 2020 to$0.8 million for the three and six months endedJune 30, 2021 . During the three and six months endedJune 30, 2021 , the charges included costs related to an updated assessment of leases inGeorgia andTexas , partially offset by anticipated sublease income from these facilities. During the three and six months endedJune 30, 2020 , the charges included costs related to the early vacating of facilities inCalifornia , partially offset by anticipated sublease income from these facilities. 53 -------------------------------------------------------------------------------- Table of Contents Total Other Income (Expense), Net Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Total other income (expense), net$ (10,006) $ (6,599) $ (3,407) (51.6) %$ (18,013) $ (13,064) $ (4,949) (37.9) % Percentage of revenues (8.1) % (6.8) % (7.5) % (6.9) % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Total other income (expense), net represented a net expense of$10.0 million for the three months endedJune 30, 2021 compared to a net expense of$6.6 million for the three months endedJune 30, 2020 . The change was primarily attributable to a$1.5 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. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Total other income (expense), net represented a net expense of$18.0 million for the six months endedJune 30, 2021 compared to a net expense of$13.1 million for the six months endedJune 30, 2020 . The change was primarily attributable to a$3.0 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. Benefit from (provision for) income taxes Three Months Ended June 30, Change Six Months Ended June 30, Change 2021 2020 $ (%) 2021 2020 $ (%) Provision for income taxes$ (178) $ (65) $ (113) 173.8 %$ (313) $ (505) $ 192 (38.0) % Percentage of revenues (0.1) % (0.1) % (0.1) % (0.3) % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 . Total provision for income taxes represented an expense of$0.2 million for the three months endedJune 30, 2021 compared to an expense of$0.1 million for the three months endedJune 30, 2020 . As a result of our current net operating loss position, income tax expense for the three months endedJune 30, 2021 consisted primarily of federal income taxes of$0.2 million relating to the tax amortization of recently acquired goodwill,$0.1 million in foreign and state income tax expense, partially offset by$0.1 million in income tax benefit for the acquisition of ClickSWITCH. The income tax expense for three months endedJune 30, 2020 consisted primarily of federal income taxes of$0.4 million relating to tax amortization of goodwill,$0.1 million in income tax expense from foreign operations, and$0.1 million in state income tax expense, partially offset by$0.5 million in income tax benefit relating to foreign reserves. Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 . Total provision for income taxes represented an expense of$0.3 million for the six months endedJune 30, 2021 compared to an expense of$0.5 million for the six months endedJune 30, 2020 . As a result of our current net operating loss position, current income tax expenses for the six months endedJune 30, 2021 consist primarily of federal income taxes of$0.4 million relating to the tax amortization of recently acquired goodwill, and$0.3 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 benefit for the six months endedJune 30, 2020 consisted primarily of federal income taxes of$0.7 million relating to the amortization of recently acquired goodwill,$0.2 million income tax expense from foreign operations, and$0.1 million in state income tax expense, partially offset by$0.5 million in income tax benefit relating to foreign reserves. 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. 54 -------------------------------------------------------------------------------- Table of Contents Given the uncertainty that still surrounds the COVID-19 pandemic, during the first half of 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 endingDecember 31, 2021 . Based on feedback we have received from our existing and prospective customers and observations from our sales team during the first half of fiscal 2021, we continue to see delays and unpredictability in the purchasing decisions of our customers. However, we believe that for the remainder of fiscal 2021 we will 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. 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 inMarch 2014 , additional registered common stock offerings, including ourJune 2019 andMay 2020 common stock offerings, cash flows from operations, ourFebruary 2018 convertible note offering, ourJune 2019 convertible note offering, and ourNovember 2020 convertible note offering. As ofJune 30, 2021 , our principal sources of liquidity were cash, cash equivalents and investments of$411.3 million . Based upon our current levels of operations, and our current expectations regarding the impacts of the COVID-19 pandemic on our operations and financial performance, we believe that our cash flow from operations along with our other sources of liquidity are adequate to meet our cash requirements for the next twelve months. However, if we determine the need for additional short-term liquidity, there is no assurance that such financing, if pursued, would be adequate or available on terms acceptable to us. Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands):
Six Months Ended
2021 2020 Net cash provided by (used in): Operating activities$ 6,009 $ (27,214) Investing activities (43,780) 4,383 Financing activities (52,487) 298,990
Net increase (decrease) in cash, cash equivalents, and restricted cash
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 six months endedJune 30, 2021 , our net cash and cash equivalents provided by operating activities were$6.0 million , which consisted of a net loss of$55.8 million and cash outflows from changes in operating assets and liabilities of$21.1 million , offset by non-cash adjustments of$82.9 million . Cash inflows from changes in operating assets and liabilities were the result of a$3.5 million decrease in other long-term assets primarily from amortization of our right-of-use assets, a$1.8 million increase in deferred revenue due to increased payments and deposits received from customers prior to the recognition of revenue from those related payments, and a$1.6 million increase in prepaid and other current assets related to timing of various prepaid expenses. These cash inflows were partially offset by cash outflows resulting from a$17.5 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$4.9 million decrease in other long-term liabilities, a$2.6 million increase in contract assets, a$1.8 million increase in accounts receivable due to the timing of annual billings at the end of the current quarter, and a$1.3 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. Non- 55 -------------------------------------------------------------------------------- Table of Contents cash items consisted primarily of$27.4 million of stock-based compensation expense,$26.5 million of depreciation and amortization expense due to growth in our fixed assets and acquired intangible assets,$14.1 million in amortization of the 2023 Notes, 2025 Notes and 2026 Notes discount and related debt issuance costs,$11.6 million of amortization of deferred implementation and deferred solution and other costs,$1.5 million related to the early extinguishment of a portion of the 2023 Notes,$0.8 million of unoccupied lease charges, and$0.9 million of other non-cash items. For the six months endedJune 30, 2020 , our net cash and cash equivalents used in operating activities were$27.2 million , which consisted of a net loss of$73.1 million and cash outflows from changes in operating assets and liabilities of$27.3 million , partially offset by non-cash adjustments of$73.2 million . Cash outflows were the result of a$18.4 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$11.7 million increase in accounts receivable due to the timing of annual billings at the end of the current quarter, a$9.7 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$3.0 million increase in contract assets, and a$2.5 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 a$10.5 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$5.7 million increase in other long-term liabilities primarily as a result of the second installment of the partnership termination fee to be paid in July of 2021, and a$1.9 million decrease in other long-term assets primarily from amortization of our right-of-use assets. Non-cash items consisted primarily of$26.1 million of stock-based compensation expense,$26.0 million of depreciation and amortization expense due to growth in our fixed assets and acquired intangible assets,$11.1 million in amortization of the 2023 Notes and 2026 Notes discounts and related debt issuance costs,$8.6 million of amortization of deferred implementation and deferred solution and other costs,$0.7 million of unoccupied lease charges and$0.7 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 six months endedJune 30, 2021 , our net cash used in investing activities was$43.8 million , consisting of$64.7 million for the acquisition of ClickSWITCH, net of cash acquired,$53.6 million from purchases of investments,$14.4 million for the purchase of property and equipment and$2.3 million from capitalized software development costs, partially offset by$91.1 million from maturities of investments. For the six months endedJune 30, 2020 , net cash provided by investing activities was$4.4 million , consisting of$19.6 million from maturities of investments, partially offset by$14.8 million for the purchase of property and equipment and$0.4 million from capitalized software development costs. Cash Flows from Financing Activities Our recent financing activities have consisted primarily of ourMay 2020 common stock offering, our partial repurchase of the 2023 Notes, the payment of contingent consideration related to the acquisition ofCloud Lending , and net proceeds from exercises of options to purchase our common stock. For the six months endedJune 30, 2021 , net cash used in financing activities was$52.5 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$4.6 million of cash received from the exercise of stock options. For the six months endedJune 30, 2020 net cash provided by financing activities of$299.0 million was primarily due to the proceeds from the issuance of common stock of$311.6 million , net of issuance costs, from theMay 2020 common stock offering and$4.2 million of cash received from the exercise of stock options, partially offset by the payment of contingent consideration related to the acquisition ofCloud Lending , of which$16.9 million of the payment was estimated at acquisition date fair value and included in financing activities 56 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments During the six months endedJune 30, 2021 , and subsequent toJune 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 theSEC onFebruary 19, 2021 . As ofJune 30, 2021 , our total lease payment obligations were$77.1 million , of which$66.3 million was included in lease liabilities, net of current portion in our condensed consolidated balance sheets. In the quarter endedJune 30, 2020 , in connection with the termination of a strategic partnership, we paid a termination fee of$5.6 million inMay 2020 with a remaining payment of$7.6 million to be made in the third quarter of 2021. The unpaid portion of the termination fee was included in accrued liabilities in our condensed consolidated balance sheets as ofJune 30, 2021 . The following table summarizes our contractual obligations and commitments atJune 30, 2021 (in thousands): Payment due by period Less Than 1 More Than 5 Year 1 to 3 Years 3 to 5 Years Years Total
Convertible Notes, including interest
11,506 23,666 20,155 21,816 77,143 Purchase commitments 36,442 31,191 7,000 8,750 83,383$ 50,820 $ 71,467 $ 698,805 $ 30,566 $ 851,658 Off-Balance Sheet Arrangements As ofJune 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 InAugust 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 afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 , including interim periods within those fiscal years. We are currently evaluating the potential effects of this guidance on our consolidated financial statements and plan to adopt for the fiscal year beginningJanuary 1, 2022 . InMay 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 afterDecember 15, 2021 , including interim periods within those fiscal years. We are currently evaluating the potential effects of this guidance on our consolidated financial statements and plan to adopt for the fiscal year beginningJanuary 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. TheSEC 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: 57 --------------------------------------------------------------------------------
Table of Contents •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. 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 six months endedJune 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 endedDecember 31, 2020 , which are included in our Annual Report on Form 10-K, filed with theSEC onFebruary 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 includeU.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 ofJune 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. 58 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 30, 2021 , our most significant currency exposures were the Indian rupee, British pound and Australian dollar. As ofJune 30, 2021 , we had operating subsidiaries inIndia , theUnited Kingdom andAustralia . 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. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as ofJune 30, 2021 , the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date. Changes in Internal Control over Financial Reporting There were no material changes in our internal control over financial reporting during the three-month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management's evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 59 --------------------------------------------------------------------------------
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