Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are
based on our management's beliefs and assumptions and on information currently
available to our management. The statements contained in this Quarterly Report
on Form 10-Q that are not purely historical are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. You can identify these statements by words such as "anticipates,"
"believes," "can," "continue," "could," "estimates," "expects," "intends,"
"may," "plans," "seeks," "should," "will," "strategy," "future," "likely," or
"would" or the negative of these terms or similar expressions. These statements
are not guarantees of future performance or development and involve known and
unknown risks, uncertainties and other factors that are in some cases beyond our
control, including the COVID-19 outbreak and the associated efforts to limit the
spread of the disease. All of our forward-looking statements are subject to
risks and uncertainties that may cause our actual results to differ materially
from our expectations. Factors that may cause such differences include, but are
not limited to, the risks described under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2020 and in this Quarterly Report on
Form 10-Q and those discussed in other documents we file with the Securities and
Exchange Commission, or the SEC.
Given these risks and uncertainties, you should not place undue reliance on
these forward-looking statements. Also, forward-looking statements represent our
management's beliefs and assumptions only as of the date of this Quarterly
Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q
completely and with the understanding that our actual future results may be
materially different from what we expect. We hereby qualify our forward-looking
statements by these cautionary statements. Except as required by law, we assume
no obligation to update these forward-looking statements publicly, or to update
the reasons actual results could differ materially from those anticipated in
these forward-looking statements, even if new information becomes available in
the future.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and in our other SEC filings, including the audited
consolidated financial statements and the accompanying notes for the fiscal year
ended December 31, 2020, which are included in our Annual Report on Form 10-K,
filed with the SEC on February 19, 2021.
Overview
We are a leading provider of secure, cloud-based digital solutions that
transform the ways in which traditional and emerging financial services
providers engage with account holders and end users, or End Users. We sell our
solutions to financial institutions, alternative finance and leasing companies,
or Alt-FIs, and financial technology companies, or FinTechs. Our solutions
enable our customers to deliver robust suites of digital banking, lending,
leasing, and banking as a service, or BaaS, services that make it possible for
End Users to transact and engage anytime, anywhere and on any device. Our
solutions are often the most frequent point of engagement between our customers
and their End Users. As such, we purpose-build our solutions to deliver
compelling and consistent End-User experiences across digital channels and to
drive the success of our customers by optimizing their digital brands and
enhancing End-User acquisition, retention and engagement.
The effective delivery and management of secure and advanced digital solutions
in the complex and heavily regulated financial services industry requires
significant resources, personnel and expertise. We provide digital solutions
that are designed to be highly configurable, scalable and adaptable to the
specific needs of our customers. We design and develop our solutions with an
open platform approach intended to provide comprehensive integration among our
solution offerings and our customers' internal and third-party systems. This
integrated approach allows our customers to deliver unified and robust financial
experiences across digital channels. Our solutions provide our customers the
flexibility to configure their digital services in a manner that is consistent
with each customer's specific workflows, processes and controls. Our solutions
also allow our customers to personalize the digital experiences they deliver to
their End Users by extending their individual services and brand requirements
across digital channels. Our solutions and our data center infrastructure and
resources are also designed to comply with the stringent security and technical
regulations applicable to financial institutions and financial services
providers and to safeguard our customers and their End Users.
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 the U.S. and internationally and
to increase our number of sales support and marketing personnel, as well as our
investment in marketing initiatives designed to increase awareness of our
solutions and generate new customer opportunities.
We have continuously invested in expanding and improving our digital banking
platform since its introduction in 2005, and we 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 the U.S. and internationally.
We believe that financial services providers are best served by a broad,
integrated portfolio of digital solutions that provide rapid, flexible and
comprehensive integration with internal and third-party systems allowing them to
provide modern, intuitive digital financial services in a secure,
regulatory-compliant manner. We also believe that the breadth and depth of our
solution offerings across the financial institution, Alt-FI and FinTech markets,
our open and flexible platform approach, our position as a leading provider of
digital banking solutions to a large network of RCFIs, and our expertise in
delivering new, innovative, secure and regulatory-compliant digital solutions
uniquely position us in the market for digital financial services solutions. We
currently intend to increase investments in technology innovation and software
development as we enhance our solutions and platforms and increase or expand the
number of solutions that we offer.
We believe that delivery of consistent, high-quality customer support is a
significant driver of purchasing and renewal decisions of our prospects and
customers. To develop and maintain a reputation for high-quality service, we
seek to build deep relationships with our customers through our customer service
organization, which we staff with personnel who are motivated by our common
mission of using technology to help our customers succeed and who are
knowledgeable with respect to the regulated and complex nature of the financial
services industry. As our business grows, we currently intend to continue to
invest in and grow our services and delivery organization to support our
customers' needs and maintain our reputation.
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 by mid-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 ended June 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 ending December 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
On April 1, 2021, we completed our acquisition of ClickSWITCH Holdings Inc., or
Clickswitch, a provider of digital account switching solutions for financial
institutions.
                                       39
--------------------------------------------------------------------------------

  Table of Contents
On May 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 the U.S. generally accepted accounting principles, or GAAP,
measures described below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Components of Operating Results," we monitor
the following operating measures to evaluate growth trends, plan investments and
measure the effectiveness of our sales and marketing efforts:
Installed Customers
We define Installed Customers as the number of customers on live implementations
(or installations) of our digital banking platforms. The average size of our
Installed Customers, measured in both Registered Users per Installed Customer
and revenues per Installed Customer, has increased over time as our existing
Installed Customers continue to add Registered Users and buy more solutions from
us, and as we add larger RCFIs to our Installed Customer base. The net rate at
which we add Installed Customers varies based on our implementation capacity,
the size and unique needs of our customers, the readiness of our customers to
implement our solutions and customer attrition, including as a result of merger
and acquisition activity among financial institutions. While we believe the
COVID-19 pandemic has increased the importance and prominence of our portfolio
of digital financial services solutions and 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 of December 31,
2020, 2019 and 2018, respectively.
Registered Users
We define a Registered User as an individual related to an account holder of an
Installed Customer on our digital banking platform who has registered to use one
or more of our solutions and has current access to use those solutions as of the
last day of the reporting period presented. We price our digital banking
platform solutions based on the number of Registered Users, so as the number of
Registered Users of our solutions increases, our revenues generally tend to
grow. Our average number of Registered Users per Installed Customer grows as our
existing digital banking platform customers add more Registered Users and as we
add larger RCFIs to our Installed Customer base. We anticipate that the number
of Registered Users will grow at a faster rate than our number of Installed
Customers. The rate at which our customers add Registered Users and the
incremental revenues we recognize from new Registered Users vary significantly
period-to-period based on the timing of our implementations of new customers,
the timing of registration of new End Users, and varying contractual minimum
user counts. We add new Registered Users through both organic growth from
existing customers and from the addition of End Users from new Installed
Customers. We believe the COVID-19 pandemic has resulted in increased
registration of new End Users with existing customers; however, the increased
economic uncertainty and reduced economic activity, including consumer and
business spending, has also resulted in delays in certain purchasing decisions
and implementations, which has slowed the rate at which we add new Installed
Customers and with them, new Registered Users from such customers. Accordingly,
at this time we are unable to predict the anticipated long-term impact of the
COVID-19 pandemic on the growth in our number of Registered Users. Our Installed
Customers had approximately 17.8 million, 14.6 million and 12.8 million
Registered Users as of December 31, 2020, 2019 and 2018, respectively.
Registered Users at June 30, 2021 were 18.8 million compared to 16.3 million at
June 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
of December 31 of the prior year, expressed as a percentage of the total
revenues during the prior year from the same group of customers. Our revenue
retention rate provides insight into the impact on current year revenues of: the
number of new customers implemented on any of our solutions during the prior
year; the timing of our implementation of those new customers in the prior year;
growth in the number of End Users on such solutions and changes in
                                       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 ended December 31, 2020, 2019 and
2018, respectively.
Churn
We utilize churn to monitor the satisfaction of our customers and evaluate the
effectiveness of our business strategies. We define churn as the amount of any
monthly recurring revenue losses due to customer cancellations and downgrades,
net of upgrades and additions of new solutions, during a year, divided by our
monthly recurring revenue at the beginning of the year. Cancellations refer to
customers that have either stopped using our services completely or remained a
customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price. We believe the COVID-19 pandemic has
created incentives for our existing customers to purchase additional features to
support the increase in demand for digital banking; however, the increased
economic uncertainty and reduced economic activity, including consumer and
business spending, has resulted in delays in certain purchasing decisions and
implementations and 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 ended December 31, 2020, 2019 and 2018,
respectively. Our use of churn has limitations as an analytical tool, and
investors should not consider it in isolation. Other companies in our industry
may calculate churn differently, which reduces its usefulness as a comparative
measure.
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 ended June 30, 2020, in
connection with the termination of a strategic partnership, we agreed to pay a
termination fee of $5.6 million in May 2020 and $7.6 million in the third
quarter of 2021. We are excluding the charges associated with this partnership
termination as they are non-recurring in nature and would not otherwise have
been incurred by us in the normal course of our organic business operations. We
believe that providing these non-GAAP measures that exclude partnership
termination charges allows users of our financial statements to better review
and understand the historical and current results of our continuing operations,
and also facilitates comparisons to our historical results and results of peer
companies, both with and without such adjustments.
                                       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)

$ (32,307) $ (37,456) $ (59,510) 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)
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)

$ (38,971) $ (55,782) $ (73,079)


   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 ending December 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 ended June
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 ended June 30, 2020. These charges
are non-recurring in nature and would not otherwise have been incurred by us in
the normal course of our organic business operations.
Unoccupied Lease Charges
Unoccupied lease charges include costs related to the early vacating of certain
facilities, partially offset by anticipated sublease income from the associated
facilities.
                                       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 in February 2018, or 2023 Notes, our convertible notes
issued in June 2019, or 2026 Notes, and our convertible notes issued in November
2020, or 2025 Notes, as well as fees and interest associated with the letter of
credit issued to our landlord for the security deposit for our corporate
headquarters.
Benefit from (Provision for) Income Taxes
As a result of our current net operating loss position, current income tax
expenses and benefits consist primarily of state income taxes, deferred income
tax expenses relating to the tax amortization of recently acquired goodwill and
income tax expense from foreign operations.

                                       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)

_______________________________________________________________________________


(1) Includes deferred revenue reduction from purchase accounting of $0.6 million
and $1.3 million for the three months ended June 30, 2021 and 2020,
respectively, and $1.1 million and $2.8 million for the six months ended June
30, 2021and 2020, respectively.
(2) Includes amortization of acquired technology of $5.6 million and $5.5
million for the three months ended June 30, 2021 and 2020, respectively, and
$10.8 million and $10.9 million for the six months ended June 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

$ 10,783 $ 26,722 $ 25,319




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




                                       48

--------------------------------------------------------------------------------

Table of Contents



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) %

______________________________________________________________________________


(1) Includes deferred revenue reduction from purchase accounting of 0.5% and
1.4% for the three months ended June 30, 2021 and 2020, respectively, and 0.5%
and 1.5% for the six months ended June 30, 2021and 2020, respectively.
(2) Includes amortization of acquired technology of 4.5% and 5.6% for the three
months ended June 30, 2021 and 2020, respectively, and 4.5% and 5.8% for the six
months ended June 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 ended June 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 of March 31, 2020.
(5) Unoccupied lease charges include costs related to the early vacating of
various facilities, partially offset by anticipated sublease income from these
facilities. For the three and six months ended June 30, 2021, the charges
related to an updated assessment of facilities in Georgia and Texas, and for the
three and six months ended June 30, 2020, the charges related to the vacating of
facilities in California.
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 Ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Revenues increased by $26.0 million, or 26.6%, from $97.6 million for the three
months ended June 30, 2020 to $123.6 million for the three months ended June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.
Revenues increased by $50.1 million, or 26.4%, from $190.0 million for the six
months ended June 30, 2020 to $240.1 million for the six months ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Cost of revenues increased by $15.0 million, or 28.3%, from $53.2 million for
the three months ended June 30, 2020 to $68.2 million for the three months ended
June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020. Cost
of revenues increased by $25.2 million, or 23.7%, from $106.3 million for the
six months ended June 30, 2020 to $131.6 million for the six months ended June
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 ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Sales and marketing expenses increased by $4.3 million, or 26.2%, from $16.3
million for the three months ended June 30, 2020 to $20.6 million for the three
months ended June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020. Sales
and marketing expenses increased by $4.2 million, or 11.6%, from $36.2 million
for the six months ended June 30, 2020 to $40.4 million for the six months ended
June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Research and development expenses increased by $5.8 million, or 24.5%, from
$23.6 million for the three months ended June 30, 2020 to $29.4 million for the
three months ended June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.
Research and development expenses increased by $7.6 million, or 15.7%, from
$48.6 million for the six months ended June 30, 2020 to $56.2 million for the
six months ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
General and administrative expenses increased by $1.5 million, or 8.7%, from
$17.2 million for the three months ended June 30, 2020 to $18.7 million for the
three months ended June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.
General and administrative expenses increased by $1.2 million, or 3.4%, from
$36.3 million for the six months ended June 30, 2020 to $37.5 million for the
six months ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Acquisition related costs increased by $0.1 million, or 5.4%, from $1.1 million
for the three months ended June 30, 2020 to $1.2 million for the three months
ended June 30, 2021. Acquisition related costs for the three months ended June
30, 2021 included $0.7 million of legal, professional services and other costs
related to our acquisition of ClickSWITCH on April 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 ended June
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 of Cloud
Lending based on actual achievement.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.
Acquisition related costs increased by $2.9 million, or 342.6%, from a gain of
$0.8 million for the six months ended June 30, 2020 to an expense of $2.0
million for the six months ended June 30, 2021. Acquisition related costs for
the six months ended June 30, 2021 included $1.1 million of legal, professional
services and other costs related to our acquisition of ClickSWITCH on April 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
ended June 30, 2020 included a $2.9 million negative adjustment to the value of
the contingent consideration related to the acquisition of Cloud Lending based
on actual achievement, partially offset by $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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Amortization of acquired intangibles increased by $0.1 million, or 1.6%, from
$4.5 million for the three months ended June 30, 2020 to $4.6 million for the
three months ended June 30, 2021 as a result of increased amortization for
intangibles assets acquired during the acquisition of ClickSWITCH on April 1,
2021, partially offset by intangible assets that became fully amortized since
the three months ended June 30, 2020. These amounts are amortized on a
straight-line basis over the estimated useful lives of the related assets.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.
Amortization of acquired intangibles remained flat from the six months ended
June 30, 2020 to the six months ended June 30, 2021. Increases due to
amortization of intangible assets acquired during the acquisition of ClickSWITCH
on April 1, 2021 were fully offset by decreases in amortization of intangible
assets that became fully amortized since the six months ended June 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 Ended June 30, 2021 Compared to the Three and Six Months
Ended June 30, 2020. Unoccupied lease charges increased by $0.1 million, or
21.6%, from $0.7 million for the three and six months ended June 30, 2020 to
$0.8 million for the three and six months ended June 30, 2021. During the three
and six months ended June 30, 2021, the charges included costs related to an
updated assessment of leases in Georgia and Texas, partially offset by
anticipated sublease income from these facilities. During the three and six
months ended June 30, 2020, the charges included costs related to the early
vacating of facilities in California, 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Total other income (expense), net represented a net expense of $10.0 million for
the three months ended June 30, 2021 compared to a net expense of $6.6 million
for the three months ended June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020. Total
other income (expense), net represented a net expense of $18.0 million for the
six months ended June 30, 2021 compared to a net expense of $13.1 million for
the six months ended June 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 Ended June 30, 2021 Compared to Three Months Ended June 30, 2020.
Total provision for income taxes represented an expense of $0.2 million for the
three months ended June 30, 2021 compared to an expense of $0.1 million for the
three months ended June 30, 2020. As a result of our current net operating loss
position, income tax expense for the three months ended June 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 ended
June 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 Ended June 30, 2021 Compared to Six Months Ended June 30, 2020. Total
provision for income taxes represented an expense of $0.3 million for the six
months ended June 30, 2021 compared to an expense of $0.5 million for the six
months ended June 30, 2020. As a result of our current net operating loss
position, current income tax expenses for the six months ended June 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 ended June 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 ending December 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 in March 2014, additional
registered common stock offerings, including our June 2019 and May 2020 common
stock offerings, cash flows from operations, our February 2018 convertible note
offering, our June 2019 convertible note offering, and our November 2020
convertible note offering. As of June 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 June 30,


                                                                                  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

$ (90,258) $ 276,159




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 ended June 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 ended June 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 ended June 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 ended June 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 our May 2020 common
stock offering, our partial repurchase of the 2023 Notes, the payment of
contingent consideration related to the acquisition of Cloud Lending, and net
proceeds from exercises of options to purchase our common stock.
For the six months ended June 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 ended June 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 the May 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 of Cloud 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 ended June 30, 2021, and subsequent to June 30, 2021,
except as noted below, there were no material changes to our contractual
obligations and commitments disclosures as set forth under the caption,
"Contractual Obligations and Commitments" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations, as reported in our
Annual Report on Form 10-K, filed with the SEC on February 19, 2021. As
of June 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 ended June 30, 2020, in connection with the termination of a
strategic partnership, we paid a termination fee of $5.6 million in May 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 of June 30, 2021.
The following table summarizes our contractual obligations and commitments at
June 30, 2021 (in thousands):
                                                                                     Payment due by period
                                               Less Than 1                                                       More Than 5
                                                   Year             1 to 3 Years           3 to 5 Years             Years              Total

Convertible Notes, including interest $ 2,872 $ 16,610 $ 671,650 $ - $ 691,132 Operating lease obligations

                       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 of June 30, 2021, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, special purpose entities or
variable interest entities.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, "Debt - Debt with Conversion
and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40)" which simplifies the accounting for
convertible debt instruments by eliminating the requirement to separate embedded
conversion features from the host contract when the conversion features are not
required to be accounted for as derivatives under Topic 815, Derivatives and
Hedging, or that do not result in substantial premiums accounted for as paid-in
capital. In addition, the guidance eliminates the treasury stock method to
calculate diluted earnings per share for convertible instruments and requires
the use of the if-converted method. The standard is effective for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal
years. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020, including interim periods within those fiscal years. We
are currently evaluating the potential effects of this guidance on our
consolidated financial statements and plan to adopt for the fiscal year
beginning January 1, 2022.
In May 2021, the FASB issued ASU No. 2021-04, "Earnings Per Share (Topic 260),
Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock
Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40)" which clarifies and reduces diversity in the
accounting for modifications or exchanges of freestanding equity classified
written call options that remain equity classified after modification or
exchange. The ASU provides a principles-based framework to determine whether an
issuer should recognize the modification or exchange as an adjustment to equity
or an expense. The standard is effective for fiscal years beginning after
December 15, 2021, including interim periods within those fiscal years. We are
currently evaluating the potential effects of this guidance on our consolidated
financial statements and plan to adopt for the fiscal year beginning January 1,
2022.
Critical Accounting Policies and Estimates
The preparation of our interim unaudited condensed consolidated financial
statements in accordance with GAAP requires estimates, judgments and assumptions
that affect the reported amounts and classifications of assets and liabilities,
revenues and expenses and the related disclosures of contingent liabilities in
our interim unaudited condensed consolidated financial statements and
accompanying notes. The SEC has defined a company's critical accounting policies
as the ones that are most important to the portrayal of the company's financial
condition and results of operations, and which require the company to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition, we
have identified the following critical accounting policies and estimates:
                                       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 ended June 30, 2021, there were no significant changes in
our critical accounting policies or estimates which were included in the
consolidated financial statements and the accompanying notes for the fiscal year
ended December 31, 2020, which are included in our Annual Report on Form 10-K,
filed with the SEC on February 19, 2021.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and
while we believe that our estimates, judgments and assumptions are reasonable,
they are based upon information available at the time. Actual results may differ
significantly from these estimates under different assumptions, judgments or
conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss to future earnings, values or future cash flows
that may result from changes in the price of a financial instrument. The value
of a financial instrument might change as a result of changes in interest rates,
exchange rates, commodity prices, equity prices and other market changes. We do
not use derivative financial instruments for speculative, hedging or trading
purposes, although in the future we might enter into exchange rate hedging
arrangements to manage the risks described below.
Interest Rate Risk
We have cash and cash equivalents held primarily in cash and money market funds.
In addition, we have marketable securities which typically include U.S.
government securities, corporate bonds and commercial paper and certificates of
deposit. Cash and cash equivalents are held for working capital purposes.
Marketable securities are held and invested with capital preservation as the
primary objective. Due to the short-term nature of these investments, we believe
that we do not have any material exposure to changes in the fair value of our
investment portfolio as a result of changes in interest rates. Any declines in
interest rates will reduce future interest income. As of June 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 of June 30, 2021, our most significant currency
exposures were the Indian rupee, British pound and Australian dollar. As of
June 30, 2021, we had operating subsidiaries in India, the United Kingdom and
Australia. Due to the relatively low volume of payments made by us through these
foreign subsidiaries, we do not believe we have significant exposure to foreign
currency exchange risks. However, fluctuations in currency exchange rates could
harm our results of operations in the future.
We currently do not use derivative financial instruments to mitigate foreign
currency exchange risks. We will continue to review this matter and may consider
hedging certain foreign exchange risks in future years.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. We continue to monitor the impact
of inflation in order to reduce its effects through pricing strategies,
productivity improvements and cost reductions. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could harm our business, financial condition and results of operations.
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 the SEC'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 of June 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
--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses