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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018.
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Q2 Holdings, Inc.
(Exact name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
001-36350
(Commission File Number)
20-2706637
(IRS Employer
Identification No.)
13785 Research Blvd, Suite 150
Austin, Texas 78750
(512) 275-0072
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
Based on the closing price of the registrant's common stock on the last business day of the registrant's most recently completed second fiscal quarter,
which was June 30, 2018, the aggregate market value of its shares held by non-affiliates on that date was approximately $2,428,200,609. Shares of common
stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status was based on publicly filed documents and is not necessarily a conclusive determination
for other purposes.
There were 43,581,407 shares of the registrant’s common stock outstanding as of January 31, 2019.
Part III of this Annual Report on Form 10-K incorporates certain information by reference from the definitive proxy statement for the registrant’s 2019
Annual Meeting of Stockholders to be filed within 120 days of the registrant’s fiscal year ended December 31, 2018, or the Proxy Statement. Except with
respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this
Annual Report on Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1.
Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Financial Statements and Supplementary Data.
Change in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Principal Accounting Fees and Services.
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
Item 16.
Form 10-K Summary
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Special Note Regarding Forward-Looking Statements
PART I
This Annual Report on Form 10-K 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 Annual Report on
Form 10-K 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. 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 this Annual Report on Form 10-K 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 Annual Report on
Form 10-K. You should read this Annual Report on Form 10-K 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.
Item 1. Business.
Overview
Q2 is 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
regional and community financial institutions, or RCFIs, 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.
Our founding team has over 25 years of experience developing and delivering secure, advanced digital solutions designed
to help our customers compete in the complex and heavily-regulated financial services industry. Q2 began by providing digital
banking solutions to RCFIs with the mission of empowering them to leverage technology to compete more effectively and to
strengthen the communities and End Users they serve. Through investment in innovation and acquisitions, our solutions have
grown to include a broader range of services and experiences, including corporate banking, regulatory and compliance, digital
lending and leasing, BaaS and digital account opening and sales and marketing solutions, further serving the needs of RCFIs as
well as Alt-FIs and FinTechs.
The RCFI market includes approximately 11,000 banks and credit unions with less than $100 billion in assets according
to data compiled by BauerFinancial as of September 30, 2018. To date, a substantial majority of our revenues continue to come
from sales of our digital banking platform to RCFIs, and we continue to be focused on our founding mission of building
stronger communities by strengthening their financial institutions.
The growth and adoption of digital financial services creates challenges and opportunities in the markets served by RCFIs
as well as emerging providers such as Alt-FIs and FinTechs. The proliferation and ubiquity of mobile and tablet devices and
End Users' increasing expectations for digital services have driven increases in the number of providers, greater fragmentation
of financial services markets and a broadening set of new and innovative digital services. 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.
RCFIs, 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
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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. This combined investment by
traditional and emerging financial services providers is driving further competition, segmentation and innovation.
Despite the competition between traditional and emerging financial service providers, the digital solutions offered by
emerging financial services providers are often dependent upon core banking functions, creating an interdependency between
them. Financial institutions of all sizes provide two fundamental banking functions among others - they hold NCUA-insured or
FDIC-insured deposits and they transfer money. Providing these critical banking functions generally requires a federal or state
banking charter, as well as specialized expertise and infrastructure, and subjects the provider to complex regulatory oversight
by various authorities, which requires financial institutions to implement and maintain complex and costly operating policies,
procedures and infrastructure to protect End Users, their deposits and their personal information. As emerging financial services
providers explore new digital services offerings, they often utilize the banking services of financial institutions in partnership
rather than making the significant investments in expertise and infrastructure necessary to obtain a banking charter and
otherwise become regulatory-compliant.
The Alt-FI and FinTech markets consist of thousands of emerging financial services providers all over the world seeking
to provide End Users with financial services, experiences and solutions that can be competitive with, but also complimentary to
and dependent upon banking. Alt-FIs and FinTechs are typically less constrained than traditional financial services providers
are by legacy technology solutions, physical branch locations and regulation. Alt-FIs and FinTechs have received substantial
investment, estimated to be greater than $100 billion from 2008 through 2017, according to a September 2017 report published
by Deloitte Touche Tohmatsu Limited, or Deloitte, citing Venture Scanner source data entitled "FinTech by the Numbers -
Incumbents, startups, investors adapt to maturing ecosystem."
We have continuously invested in expanding and improving our digital banking platform since its introduction in 2005.
In addition, over the past three years we have acquired or developed new solutions and additional functions that serve a broader
range of needs of RCFIs as well as the needs of Alt-FIs and FinTechs. Our solutions now include a broad range of services and
experiences including corporate banking, regulatory and compliance, digital lending and leasing, BaaS and digital account
opening and sales and marketing solutions. We believe our expanded solution offerings and the corresponding growth of our
customer base and market opportunity have increased the addressable market for our solutions to greater than $8.0 billion.
Our solutions utilize a software-as-a-service, or SaaS, delivery model, designed to scale with our customers as they grow
their business, add End Users on our solutions and expand the breadth of digital services and solutions they offer. Our SaaS
delivery model is also designed to reduce the cost and complexity of implementing, maintaining and enhancing the digital
services and solutions our customers provide to their End Users.
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 designed to comply with the stringent security and technical regulations applicable to financial
institutions and financial services providers and to safeguard our customers' data and that of their End Users.
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 RCFI, 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.
As of December 31, 2018, we had 401 installed digital banking platform customers located in 48 states, and those
customers had approximately 12.8 million consumer and commercial users registered on our digital banking platform.
Registered users of our digital banking platform, or Registered Users, executed over $762 billion in financial transactions on
our digital banking platform during 2018. Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations—Key Operation Measures" for additional detail on how we define "Installed Customers" and
"Registered Users."
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We primarily sell subscriptions to our solutions through our direct sales organization and recognize the related revenues
over the terms of our customer agreements. The initial term of our digital banking platform agreements averages over
five years, although it varies by customer. Our digital banking platform revenues generally increase as we add new customers,
sell additional solutions to existing customers, the number of End Users on our solutions grows and the number of transactions
that End Users perform on our solutions increases. The structure and terms of our newer lending and leasing and BaaS solution
arrangements are varied, but generally are also sold 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. We had total revenues of $241.1 million, $194.0 million, and
$150.2 million in 2018, 2017 and 2016, respectively. We have invested, and intend to continue to invest, to grow our business
by expanding our sales and marketing activities, developing and acquiring new solutions, enhancing our existing solutions and
technical infrastructure and scaling our operations. We incurred net losses of $35.4 million, $26.2 million and $36.4 million in
2018, 2017 and 2016, respectively. As of December 31, 2018 and 2017, we had total assets of $463.7 million and $212.8
million, respectively.
We were incorporated in March 2005 in the state of Delaware under the name CBG Holdings, Inc. We changed our name
to Q2 Holdings, Inc. in March 2013. We are headquartered in Austin, Texas, and our principal executive offices are located at
13785 Research Blvd, Suite 150, Austin, Texas 78750. Our telephone number is (512) 275-0072.
Industry Background
The financial services market is intensely competitive. The growth and adoption of digital financial services has and
continues to create challenges and opportunities for both traditional providers such as RCFIs as well as emerging providers
such as Alt-FIs and FinTechs.
The proliferation and adoption of mobile and tablet devices and digital services are dramatically changing the financial
services market
The proliferation and ubiquity of mobile and tablet devices and End Users' increasing expectations for digital services
have driven increases in the number of financial services providers, greater fragmentation of the financial services market and a
broadening set of new and innovative digital financial services. End Users increasingly expect to transact and engage with
financial services providers anytime, anywhere and on any device, and seamlessly across devices. These changes in the
financial services market and in End User expectations create challenges and opportunities for RCFIs as well as emerging
financial services providers such as Alt-FIs and FinTechs.
RCFIs, Alt-FIs and FinTechs are seeking to address these challenges and opportunities and capture End User engagement
by providing an ever-broadening set of new and innovative digital financial services, solutions and experiences which better
align with End Users' increasingly digital lives, experiences and interactions. These services, experiences and solutions include,
among other things, account opening, deposits, investments, payments, money transfers, credit card management and loan
applications.
The digital solutions offered by emerging financial services providers are often dependent upon core banking functions,
creating an interdependency between emerging and traditional financial services providers. Financial institutions of all sizes
provide two fundamental banking functions among others - they hold NCUA-insured or FDIC-insured deposits and they
transfer money. Providing these critical banking functions generally requires a federal or state banking charter, as well as
specialized expertise and infrastructure, and subjects the provider to complex regulatory oversight by various authorities. As an
example, electronic payment transactions in the United States, other than wire transfers, are conducted as automated
clearinghouse, or ACH, transactions, which settle through the Federal Reserve System in most cases, and generally, only
financial institutions can obtain the necessary master account with a Federal Reserve Bank to settle transactions. These laws
and regulations have existed for decades, are extremely burdensome and constantly evolving, and require financial institutions
to implement and maintain complex and costly operating policies, procedures and infrastructure to protect End Users, their
deposits and their personal information. As emerging financial services providers explore new digital services offerings, they
often utilize the banking services of financial institutions in partnership rather than making the significant investments in
expertise and infrastructure necessary to obtain a banking charter and otherwise become regulatory-compliant.
Security is paramount for digital financial services
The risks of theft and fraud have always existed in banking and financial services. However, as the adoption, use, and
breadth of digital financial services offerings has increased, the incidence of fraud and theft in digital channels has grown
substantially. The methods by which criminals seek to commit fraud are constantly changing, requiring financial services
providers and their technology providers to continually modify their security strategies. In addition, safeguarding the funds and
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information of financial service providers and their End Users becomes increasingly complex as digital financial services grow
and extend across new channels, devices, and services not previously contemplated.
Digital financial services are highly regulated
Financial services providers and their solutions are subject to extensive and complex regulations and oversight by federal,
state and other regulatory authorities. These laws and regulations are constantly evolving and affect the conduct of financial
service providers' operations and, as a result, the business of their technology providers. The compliance of digital financial
solutions with these regulatory requirements depends on a variety of factors, including functionality and design, the
classification of the financial service provider and its services, and the manner in which the financial service provider and its
End Users utilize the solutions. In order to comply with and assist financial service providers in complying with these laws,
technology providers to financial service providers may be required to implement operating policies and procedures to protect
the privacy and security of their, the financial service providers' and their End Users' information, and to undergo periodic
audits and examinations. Maintaining such regulatory compliance becomes increasingly complex as digital financial services
grow and extend across new channels, devices, and services not previously contemplated.
Digital financial services are complex and often have limitations
The continued proliferation of mobile and tablet devices and digital solutions offered through open development
platforms makes it increasingly difficult to provide a consistent, intuitive and personalized End User experience and requires
digital solutions to support new and rapidly changing mobile operating systems and device types. The technical and operational
complexities of delivering integrated digital solutions across multiple operating systems, devices, channels, and complex
functionality increase the difficulty of providing a consistent, intuitive and personalized End User experience. Aging or
increasingly complex solutions can create the following challenges for financial services providers:
• integrating applications and systems from multiple vendors may increase costs and time-to-market;
• managing relationships with multiple vendors can be time consuming and require greater management infrastructure;
• building, maintaining and upgrading regulatory-compliant and secure solutions and infrastructure can be expensive
and time-consuming and require special expertise that can be hard to find and retain;
• operating, supporting and upgrading systems from multiple vendors can be difficult, costly and less secure and limit
the ability to provide a unified End User experience or comprehensive view of End User behavior;
• partnering with FinTechs and Alt-FIs and innovating and delivering new solutions can be difficult and cost-prohibitive
when integration with dated legacy infrastructure is required; and
• training End Users and internal personnel on the use of different point systems can be challenging, time-consuming
and costly.
The use of multiple point systems for digital financial services can require End Users to maintain different login
credentials across digital channels and learn and understand different systems. Additionally, the disjointed nature of the
underlying workflows, data and terminology caused by the implementation of multiple solutions can lead to decreased End
User adoption, retention and satisfaction. End Users' adoption, retention and satisfaction can also be adversely impacted by the
dated End User interfaces of older legacy systems.
The market for digital financial services is significant
We define RCFIs as federally-insured banks and credit unions with less than $100 billion in assets, which according to
data compiled by BauerFinancial as of September 30, 2018, consisted of approximately 11,000 financial institutions with
combined assets of $7.3 trillion, representing 38% of assets held by all federally-insured financial institutions. RCFIs have
historically sought to differentiate themselves by providing local, personalized banking services that are responsive to the
changing needs and circumstances of their communities. Many RCFIs are locally-owned and obtain deposits and make lending
decisions on a local basis. RCFIs account for a large portion of small business loans, helping local businesses create jobs and
drive economic growth in the communities they serve. RCFIs seek to develop strong, lasting relationships with their End Users
and can serve as centers of commerce and influence in their communities.
The Alt-FI and FinTech markets consist of thousands of emerging financial services providers all over the world seeking
to provide End Users with new and innovative financial services, experiences and solutions that can be competitive with, but
also complimentary to and dependent upon banking. Alt-FIs and FinTechs are typically more nimble and development-focused
and less constrained than traditional financial services providers are by legacy technology solutions, physical branch locations
and regulation. Alt-FIs and FinTechs have received substantial investment, estimated to be greater than $100 billion from 2008
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through 2017, according to a September 2017 report published by Deloitte citing Venture Scanner source data entitled "FinTech
by the Numbers - Incumbents, startups, investors adapt to maturing ecosystem."
We have continuously invested in expanding and improving our digital banking platform since its introduction in 2005.
In addition, over the past three years we have acquired or developed new solutions and additional functions that serve a broader
range of needs of RCFIs as well as the needs of Alt-FIs and FinTechs. Our solutions now include a broad range of services and
experiences including corporate banking, regulatory and compliance, digital lending and leasing, BaaS and digital account
opening and sales and marketing solutions. Our expanded solution offerings and the corresponding growth of our customer
base and market opportunity have increased our addressable market.
Based on our estimates of the number of target RCFIs for our digital banking solutions and our internal assumptions as to
the number and types of digital accounts they serve, the prices for our solutions and the number of transactions processed, we
believe that the market for our digital banking solutions, including retail, small business, corporate, digital account opening and
Centrix solutions is greater than $5.0 billion. Based on our estimate of the number of target providers of digital lending and
leasing services and our internal assumptions as to the number of End Users they serve and the prices for our solutions, we
believe that the market for our digital lending and leasing solutions, including the borrower portal, origination, underwriting,
servicing and collections modules, is greater than $2.0 billion. The market for our open application programming interface, or
API, solutions for financial services generally, including potential customer segments and product use cases, is relatively new,
broad and continually evolving. Based on our estimates of the number of target RCFIs, Alt-FIs and FinTechs for our BaaS
solutions and our internal assumptions as to the number of End Users they serve, the prices for our solutions and the number of
transactions processed, we believe the market for our BaaS solutions is greater than $1.0 billion. In the aggregate, we believe
that the worldwide market for our solutions is greater than $8.0 billion.
The continued proliferation of mobile and tablet devices and digital solutions offered through open development
platforms makes it increasingly difficult to provide a consistent, intuitive and personalized End User experience and requires
digital solutions to support new and rapidly changing mobile operating systems and device types. The technical and operational
complexities of delivering secure, regulatory-compliant, integrated digital solutions across multiple operating systems, devices,
channels, and complex functionality increases the difficulty of providing a consistent, intuitive and personalized End User
experience.
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 have deep domain expertise in new, innovative, secure
and regulatory-compliant digital solutions in the complex and highly-regulated financial services industry and with the
technical and operational complexities of delivering integrated financial services solutions across multiple operating systems,
devices and channels. As a result, we believe that the breadth and depth of our solution offerings across the RCFI, 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.
Our Solutions
We are a leading provider of secure, cloud-based digital solutions that transform the ways in which traditional and
emerging financial service providers engage with End Users. We sell our solutions to RCFIs, Alt-FIs, and FinTechs. Our
solutions are designed to deliver a robust suite of digital financial services that enable End Users of banking, lending, leasing
and BaaS solutions 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.
Key Solution Offerings
Our portfolio of digital solutions include the following key offerings:
• Digital Banking Platform: Our digital banking platform supports our RCFI customers in their delivery of unified
digital banking services across digital channels. Our open digital banking platform provides our RCFI customers with
the tools, knowledge, and access necessary to customize and extend the platform, allowing our RCFI customers to
deliver targeted experiences and branding to End Users.
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• Lending and Leasing: Our end-to-end digital lending and leasing platform allows our RCFI, Alt-FI and FinTech
customers to simplify the End User experiences of borrowers, accelerates loan decisioning, and reduces operational
inefficiencies through digitization and automation of the traditional loan application and underwriting process. The
lending and leasing platform also provides our RCFI, Alt-FI and FinTech customers with digital solutions for
consumer, commercial, small business, construction and equipment leasing.
• BaaS: Our portfolio of open API tools provides our RCFI, Alt-FI and FinTech customers with a cost-effective
platform to quickly develop and launch a variety of BaaS solutions that are complimentary to and, in most cases,
dependent on banking. In addition, our open API tools allow our RCFI customers to create their own digital deposit
and payment products, either by building their own custom solutions or by using Q2-developed white-label products
utilizing the API portfolio.
Key Benefits
Our solutions provide the following key benefits to our customers and their End Users:
• Intuitive design: We designed from inception the features and End User experience of our solutions to be optimized
for touch-based devices and then extend that design to other digital channels. This design process and our broad
feature offerings enable our solutions to deliver a modern, unified End User experience across digital channels.
• Comprehensive view of End Users: Our digital banking platform provides our RCFI customers with a comprehensive
view of End User access and activity across devices and channels. The understanding and analysis made possible by a
comprehensive view enable an enhanced, personalized End User experience, real-time risk and fraud assessment and
other analytic features that improve the function and security of our solutions.
• Flexible integration: We have developed a highly flexible set of integration tools, enabling the rapid integration of
third-party applications and data sources. These integration tools connect with over 200 third-party applications,
allowing us to seamlessly integrate with our customers' internal and third-party systems such as account services,
payments and imaging.
• SaaS delivery model: We developed our solutions to be cloud-based. Our customers subscribe and pay for their use of
our solutions over time, and our solutions do not require our customers to install any significant technical
infrastructure. While we host our digital banking platform for substantially all of our RCFI customers, our lending,
leasing, and BaaS solutions are hosted with industry leading public cloud services. Our SaaS delivery model can
reduce the total cost of ownership of our customers by providing the development, implementation, integration,
maintenance, monitoring and support of our cloud-based solutions on a subscription basis. Our solutions are designed
to support the rapid addition of new services as well as the introduction of new devices and digital channels. As a
result, our customers can easily scale the use of our solutions with their needs as they add End Users and expand the
digital services and solutions they offer.
• Regulatory compliance: Our solutions leverage our deep domain expertise and the significant investments we have
made in the design and development of our data center architecture and other technical infrastructure, including public
cloud services, to meet the stringent security and technical requirements on financial institutions and financial services
providers. Customers who use our cloud-based solutions are able to satisfy security and technical compliance
obligations by relying on the security programs and regulatory certification of our data centers and other technical
infrastructure. By doing so, our customers avoid the significant cost and effort associated with building, maintaining
and upgrading a regulatory-compliant and secure environment on their own.
• Delivery of robust digital financial services across multiple channels: Our solutions enable our customers to deliver
robust and integrated digital financial services to their End Users who increasingly expect and appreciate the freedom
to transact and engage anytime, anywhere and on any device. Through a single log-in and consistent workflow, End
Users are able to seamlessly conduct consumer and commercial transactions across digital channels and devices.
• Improved and more frequent engagement with End Users: The breadth of our solutions and quality of the End User
experience they provide enable our customers to increase the frequency and effectiveness of their interactions with
End Users. We believe the frequency and ease of these interactions can strengthen the relationships between End
Users and our customers and help our customers better serve their End Users through a more comprehensive
understanding of their behavior and activities.
• Drive End User loyalty: We believe our customers are able to drive loyalty by increasing their level of End User
engagement. Our customers are able to tailor our solutions by offering individually relevant functionality as well as
branded, localized End User experiences. Our digital banking platform provides our RCFI customers with a
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comprehensive view of operational and End User activity across channels and devices allowing them to look for
opportunities to improve End User engagement and grow their End User relationships with targeted offerings based on
specific behavior. We believe this further strengthens End User loyalty by enabling our customers to engage End Users
through customized and End User-friendly digital experiences.
• More effective marketing of products and services: Our customers' marketing of their new and existing products and
services through our solutions can be frequent, timely and targeted. The ease and availability of communications
within digital channels also make it easier for End Users to find information about products and services. Our
solutions also offer a simplified transaction experience, which can help improve sales of products and services.
• Real-time security: We employ multi-layered controls to help secure our customers' and End Users' information. Each
layer addresses specific areas of possible fraud or data vulnerability. Our customers can use transactional-based
controls to reduce fraudulent transactions by allowing them to adjust configurations such as transaction values,
payment windows or account suspension. Our digital banking platform customers who leverage our Q2 Sentinel
product are able to block suspected fraudulent activity in real-time at the application layer and notify operations staff
and End Users of suspect transactions prior to consummation of a transaction. This approach reduces and better
manages the security risks in financial services and help protect our customers' reputations.
Our Business Strengths
Since our inception, our mission has been to help financial institutions succeed and strengthen the markets they serve. We
are highly committed to this mission, and support it by focusing on designing, developing and acquiring new, innovative digital
banking and other financial services solutions to meet transforming End User expectations. We believe we are well positioned
to connect and serve traditional and emerging financial services providers as they transform the ways in which they engage,
either independently or in partnership, with End Users globally:
• Our purpose-built digital banking platform leads the RCFI digital banking market: We built our digital banking
platform to address unique challenges that RCFIs face in providing digital banking services. Our digital banking
platform was created to support the proliferation of mobile and tablet devices and the speed at which their use has
become a common part of daily life. Our digital banking platform reduces the inefficiencies of traditional point-to-
point integration strategies and replaces multiple management consoles with a single unified view of the rules, rights
and security involved with operating seamlessly across digital channels. Our digital banking solutions enable our
RCFI customers to provide a compelling, unified End User experience to consumer and commercial End Users using a
single login anywhere, anytime and on any device. We believe our deep domain experience as a leading provider of
digital banking solutions positions us well to provide new, innovative digital banking and other financial services
solutions to meet transforming End User expectations.
• We have acquired and developed solutions to better serve our RCFI customers and a broader set of global financial
service providers including Alt-FIs and FinTechs: Over the past few years, we have expanded our portfolio to
include offerings such as our end-to-end lending and leasing, BaaS and digital account opening and sales and
marketing solutions. As the financial services landscape has evolved to become more digitized and open, we have
strived to ensure our customers can offer a broader range of digital services to their End Users.
• We have a proven track record in providing digital solutions to financial services providers: Our founders and
management have a track record of successfully delivering technology for financial services providers. We have deep
domain expertise in financial services and community banking which we utilize to develop and deliver our solutions
and services to our customers.
• Our sales model is tailored to our different markets: The RCFI market is well defined and allows us to effectively
direct our go-to-market strategy for our sales and marketing efforts. Utilizing the deep industry experience of our
management and sales teams, we are able to leverage our relationships with leaders and influencers at many of our
RCFI customers as valuable sources of reference and promotion. We have also developed actionable insights into our
sales and marketing performance, enabling us to be efficient with our go-to-market investments. The Alt-FI and
FinTech markets are relatively new, broad and continually evolving. As a result, we utilize third-party partnerships and
insights from our experience with RCFI customers to effectively pursue these markets.
• We grow our customer relationships over time: Throughout our long-term customer relationships, we employ a
structured strategy designed to inform, educate and enhance customer confidence and help our customers identify and
implement additional solutions to benefit and grow their End User bases.
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• Our revenues are highly predictable: To date, a substantial majority of our revenues continue to result from sales of
our digital banking platform to RCFIs. We generally recognize our revenues over the terms of our customer
agreements. The initial term of our digital banking platform customer agreements averages over five years, although it
varies by customer. Our long-term agreements and our high customer retention, as well as the growth over time in the
number of End Users using our solutions, drive the recurring nature of our revenues and provide us with significant
visibility into future revenues. Furthermore, we believe our customer services model drives high retention rates and
incremental sales of our solutions.
• Our award-winning culture drives innovation and customer success: We believe our award-winning, innovation-
focused culture and the location of our operations facilitate recruiting and retaining top development, integration and
design talent. We are headquartered in Austin, Texas which is a vibrant city that continues to attract an increasing
number of young professionals and has close ties to leading research institutions. In each of the past eight years, the
Austin American Statesman recognized us as one of Austin's "Top Places to Work." We believe our mission, combined
with our focus on delivering leading-edge digital solutions, enables us to attract and retain top talent.
Our Growth Strategy
We believe we are well positioned to connect and serve traditional and emerging financial services providers as they
transform the ways in which they engage, either independently or in partnership, with End Users globally. To accomplish this
goal, we are pursuing the following growth strategies:
• Further penetrate our large market opportunity: We believe RCFIs are increasingly adopting cloud-based digital
banking solutions. With the ubiquity of mobile and tablet devices, and resulting proliferation of mobile digital
solutions provided through their open developer platforms, End Users are increasingly engaging with RCFIs, Alt-FIs
and FinTechs across a variety of digital channels. Over the past three years, in response to the increasing demand for
innovative digital banking and other financial services, we have expanded our addressable market by acquiring and
developing solutions that serve the needs of a broader, global set of emerging financial services providers such as Alt-
FIs and FinTechs and their End Users, which also facilitates partnerships with and integration to the digital solutions
of our RCFI customers. We intend to further penetrate our large market opportunity and increase our number of RCFI,
Alt-FI and FinTech customers using our broad range of digital solutions through acquiring and developing additional
solutions, investments in our sales and marketing organization and related activities.
• Grow revenues by expanding our relationships with existing customers: We believe there is significant opportunity
to expand our relationships with existing customers by selling additional solutions such as our lending and leasing and
digital account opening and sales and marketing solutions. In addition, our revenues from existing customers continue
to grow as these customers increase the number of End Users on our solutions and as the number of transactions these
End Users perform on our solutions increases. We believe our recent investments in digital lending, leasing, BaaS,
digital account opening and sales and marketing, and other innovative solutions will help our customers expand their
relationships with us by allowing them to more efficiently sell and market additional services and solutions to their
End Users.
• Continue to expand our solutions offerings and enhance our platform: We believe our history of innovation
distinguishes us in the market, and we intend to continue to invest in our software development efforts and introduce
new solutions that are largely informed by and aligned with the business objectives of our existing and new customers.
For example, in June 2017, we introduced Q2 Open, a portfolio of open API financial services which are designed to
allow RCFIs, Alt-FIs and FinTechs to develop and support their own digital financial services and solutions more
quickly and cost-effectively. Q2 Open additionally provides an opportunity for our RCFI customers to partner with
Alt-FIs and FinTechs in providing innovative digital services and solutions to meet evolving End User demands. In
October of 2018, we acquired Cloud Lending Solutions, or Cloud Lending. With the Cloud Lending acquisition, we
added to our portfolio of solutions an end-to-end digital lending and leasing platform which allows RCFIs, Alt-FIs and
FinTechs to automate and digitize lending and leasing related activities. In November of 2018, we acquired Gro
Solutions, or Gro. With the Gro acquisition, we added Q2 Gro to our portfolio of solutions, a digital online account
opening and sales and marketing platform which enables customers to make personalized recommendations and cross-
sell banking products, such as deposit accounts and loans.
• Selectively pursue acquisitions and strategic investments: In addition to continuing to develop our solutions
organically, we regularly evaluate strategic opportunities, such as our acquisitions of Centrix, Social Money, Unbill,
Cloud Lending and Gro. We anticipate that we will continue to selectively pursue acquisitions of and strategic
investments in technologies that will strengthen and expand the features and functionality of our solutions and provide
access to new customers and new markets.
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The Q2 Solutions
We design and develop our solutions with a platform approach intended to provide comprehensive integration between
our solution offerings and our customers' internal and third-party systems. This integrated approach allows our customers to
deliver a unified and robust financial experience across digital channels. We leverage the benefits of our open platform to
provide our customers the following solutions:
Digital Banking Platform
Our digital banking platform allows RCFIs to offer a comprehensive and unified suite of digital banking services to their
End Users. Our open platform architecture, deep integration with other systems and the multi-tenant aspects of our
infrastructure, enable us to develop digital banking solutions that allow our customers to harness the power of the information
within their other systems to gain greater insights and to improve the overall security of their End Users and themselves. To
date, a substantial majority of our revenues continue to result from sales of our digital banking platform to RCFIs.
Our digital banking platform provides our customers with the following benefits:
• single-login and multi-layered security across channels and devices;
• deep integration with numerous other internal and third-party systems;
• single interface to an FI's core transaction processing and other systems of record;
• unified End User experience and consistent workflows, languages and data;
• rapid configurability, development and deployment of new features and functionality;
• comprehensive view of End User activity across channels and devices;
• platform wide operational, administrative and customer experience/success reporting; and
• flexible, predictive branding and personalization.
We provide the following digital banking platform solutions:
Solution
Q2 Digital Banking and
Transactions - Q2 UUX
• Browser-based digital banking solution
• Unified and robust financial experience across digital channels
Features
• Comprehensive RCFI-branded digital banking capabilities such as account access, check balancing,
funds transfers, bill pay, recurring payments processing, statement viewing and new products and
service applications
• Support for single and batch ACH processing, payroll, state and federal tax payments and domestic
and international wires
• Management functionality such as End User enrollment, password management, permissions, rights
management, reports, integrated security as well as feature assignment for digital banking
Q2mobility App
• Mobile and tablet digital banking solution
• Enables consumer and commercial End Users to access, engage and complete banking transactions
such as adding and managing payees, transferring funds, executing single or recurring payments for
multiple bank accounts, viewing e-statements or check images and managing other general banking
services from their Apple iOS or Android-enabled mobile or tablet device
• Native functionality for mobile and tablet devices such as touch, camera and geolocation to enhance
the digital banking experience of End Users
Q2mobile Remote Deposit Capture
• Partnered solution that allows remote check deposit capture utilizing End Users' camera-ready
mobile and tablet devices
Q2 Person-to-Person Payments
• Partnered integrated person-to-person payments solution that gives End Users the ability to pay
anyone quickly, easily and securely, from any device
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Q2 Corporate
• Advanced digital banking solutions designed to support larger commercial End Users
• Allows commercial End Users to more effectively manage higher volume and more complex
transactions by restricting transactions based on accounts, subsidiaries, approval levels, End User
roles, date and time as well as geographic location
• Advanced reporting designed to help RCFIs deliver key business information to commercial End
Users
Q2 Sentinel
• Real-time security analytics solution designed to help RCFIs detect and block suspect transactions
• Behavioral analytics and policy-based decision prompts for RCFI administrators
• Continuous learning of End User behaviors while providing an analysis of transaction activity via
easy-to-use case management tools supporting either the authorization or interruption of
transactions
Q2 Patrol
• Event-driven validation product designed to mitigate certain high-risk, non-transactional fraudulent
activity
• Behavioral machine learning designed to identify fraudulent digital banking sessions
• Analyzes past login behavior and device details, including IP addresses, geolocation, device type,
time stamps and more to create a digital footprint for each End User
• Enhances security by requiring End Users to further authenticate a digital banking session if that
session is deemed suspect based on abnormal behavioral login and device detail
• Supplies session details in the End User interface to better involve End Users in their own account
safety
• Reporting for regulatory compliance and risk reduction
• Targeting and messaging platform that allows RCFIs to analyze End User data utilizing machine
learning and statistical analysis designed to identify opportunities to grow their End User
relationships with targeted offerings based on specific End User behavior
• Multichannel approach to identify traits across a broad range of End User behavioral patterns to help
RCFIs create new End User campaigns, conversations and offers based on specific End User
behaviors
• Recommendation engine to determine which products an End User is most likely to adopt
• Summarizes End User behavioral data using clear and easily understood metrics, graphs and charts
that are updated daily and presented through an intuitive End User interface
• Allows RCFIs who issue debit or credit cards to enable End Users receiving newly issued cards to
automatically change their payment information with existing subscription and digital point-of-sale
services, which have previously been set up for payment with a different card
• Assists End Users with compromised card replacement
Q2 SMART
Q2 CardSwap
Q2 Gro
• Digital account opening and digital sales and marketing platform that drives customer acquisition
growth across digital channels
• Enables RCFIs to make personalized recommendations and cross-sell banking products, such as
deposit accounts and loans, to both retail and business End Users
• Combines advanced, multichannel account opening with targeted marketing capabilities as well as a
shopping cart experience
Q2 Caliper Software Development
Kit
• Tools, knowledge, and access necessary to customize and extend our digital banking platform
• Enables the development and integration of workflows in the Q2 development environment through
open APIs
Q2 Biller Direct
• Bill payment solution that aggregates End Users' bills and payments into a single view, enabling bill
presentment, aggregation and bill pay functionality
Centrix Dispute Tracking System
• Electronic transaction dispute management solution
• Assists in the administration of disputed electronic transactions (debit card, ATM, ACH and
remittance transfers) for the purpose of compliance with Regulation E of the Electronic Fund
Transfer Act
• Includes an optional Fraud Alerts module which allows customers to quickly and accurately measure
the financial impact of data breaches involving card payments
Centrix Payments I.Q. System
• ACH file monitoring and risk reporting solution
• Simple and intuitive analytical reporting of both originated and inbound ACH activity, while also
safeguarding against ACH fraud with calendaring and real-time validation of originated files
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Centrix Exact/Transaction
Management System
• Fraud prevention tool focused on the transaction management needs of corporate End Users
• Encompasses check positive pay with payee match, ACH positive pay and full account
reconciliation
Lending and Leasing Solutions
Our Q2 Cloud Lending, or CL, digital lending and leasing platform is a cloud-based, end-to-end lending and leasing
solution that allows RCFIs, Alt-FIs and FinTechs to automate and digitize their lending and leasing activities, supporting digital
lending and leasing applications, scoring, underwriting, servicing and collections for multiple assets classes. The CL digital
lending and leasing platform allows RCFIs, Alt-FIs and FinTechs to originate and service a wide range of loan types including
online, consumer, commercial, small business and marketplace, or peer-to-peer, loans, and leases. The CL digital lending and
leasing platform utilizes the Force.com platform and includes the following distinct solutions, which RCFIs and Alt-FIs can use
as a complete package or individually to supplement existing operations:
Solution
Q2 CL Portal
• Configurable front-end portal that provides a differentiated borrowing experience for consumer,
commercial and small business loans for borrowers, investors and stakeholders
Features
Q2 CL Originate
• Customer-centric, agile loan origination and underwriting solution
• Designed to meet the needs of consumer, commercial, small business, marketplace, or peer-to-peer,
lending, and equipment leasing
• Manages the entire origination and underwriting process including loan file management,
workflows, auto-decisioning, parties management, credit memo, credit analysis, approvals and
covenants
Q2 CL Loan
• Loan servicing application that automates loan billing, payments, collections, and accounting within
one robust, flexible, and secure platform
• Manages portfolios, increases transaction volume, and rapidly brings new products to market
Q2 CL Lease
• Agile, customer-centric, cloud-based lease servicing application that enables lessors to efficiently
service equipment leases
Q2 CL Marketplace
Q2 CL Collections
• Automates operations, manages and tracks multiple assets in a single lease, and manages
repossessions and returns
• Integrates the work of collection agents, repossession agents, equipment resellers, and dealers
• Allows for automation to apply fees, calculate taxes, and collect payments through ACH and credit
cards
• Cloud-based marketplace application designed to handle the complexities of managing the entire
online marketplace, or peer-to-peer, loan cycle, including online origination, loan fractionalization,
servicing and managing multiple investor portfolios
• Customer-centric collections application that enables lenders to define and automate collection
strategies, optimize customer interaction across channels, lower risk, and reduce technical and
operational costs
• Allows lenders to track customer interactions, set priorities and optimize workloads
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BaaS Solutions
In June 2017, we introduced Q2 Open, a portfolio of open API financial services which are designed to allow RCFIs, Alt-
FIs and FinTechs to develop and support their own applications and digital financial services. Q2 Open additionally provides an
opportunity for our RCFI customers to partner with Alt-FIs and FinTechs in providing new innovative digital financial services
to meet evolving consumer expectations. Q2 Open is an open API portfolio which allows development-capable organizations to
build front-end interfaces and experiences on top of Q2 Open API infrastructure:
Solution
Q2 CorePro API
Features
• An agile, cloud-based core processor that provides API tools and supporting functionality designed
to enable customers to develop applications which leverage ledgering functionality and federally
insured checking accounts with branded debit cards integrated into Visa or MasterCard networks
and federally insured savings accounts and "for the benefit of", or FBO, accounts
Q2 Biller Direct
• Open API tools and supporting functionality designed to enable customers to aggregate End Users'
bills and payments into a single view, enabling bill presentment, aggregation and bill pay
functionality into the customers' applications
Implementation and Customer Support
We seek to deepen and grow our customer relationships by providing consistent, high-quality implementation and
customer support services, which we believe drive higher customer retention and incremental sales opportunities within our
existing customer base. We structure our implementation teams to effectively collaborate with the management and technology
teams of our customers ensuring the rapid deployment and effective utilization of our solutions. Under certain circumstances
for our digital lending and leasing solutions, we partner with third-party professional system integrators to support our
customers in the installation and configuration process. These implementation teams develop and execute a coordinated
implementation plan for our customers centered around five standard phases of IT transformation projects: initiation,
configuration, application testing, limited production and production.
Our customer support personnel serve the comprehensive support-related needs of our customers. Due to the highly-
regulated and complex nature of the financial services industry, our implementation and customer support service teams,
including any third-party professional system integrators with which we partner, must be knowledgeable about our solutions
and the regulatory environment in which our customers are required to operate.
Partner Offerings
Our customers are reliant on an ever-growing ecosystem of third-party digital solutions to complement their financial
services offerings and we provide a broad range of tools to help our customers efficiently bring them to market. The flexible
nature of our solutions, along with an internally developed, highly flexible set of integration tools allows us to build rapid
integrations with our customers' internal and third-party systems to support End User activities and customer processes. These
integration tools connect with over 200 third-party applications, allowing us to seamlessly integrate with our customers' internal
and third-party systems such as account services, payments and imaging. Our ability to integrate with these systems enables our
customers to offer a comprehensive set of consumer and commercial functionality to their End Users.
Sales and Marketing
Our sales and marketing organization is responsible for growing our customer base and maintaining and expanding
relationships with our existing customers. We sell our solutions primarily through our direct sales organization but also through
partnerships for select solutions and global regions. Our direct sales organization consists of experienced sales professionals
who are organized by geography, account size, type of market and whether a prospect is a new or existing customer. Customers
are assigned a dedicated representative to provide ongoing assistance in the execution of the customer's digital strategy to meet
the needs of its End Users. Our sales representatives are supported by our solutions consulting and sales operations teams.
Our marketing team complements our sales organization through lead generation, brand building, analyst relations, public
relations and industry research. While the RCFI 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. We focus our marketing efforts on industry-specific tradeshows, publications, digital newsletters, digital
advertising as well as referral agreements with strategic industry partners. Our marketing team also conducts primary research
to support our industry thought leadership and to identify emerging trends in End User behavior and digital activities. Our
marketing programs primarily target digital transformation, technology, finance, operations and marketing executives as well as
senior business leaders.
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Research and Development
Our focus on innovation has fueled our growth and enables us to provide our customers secure, cloud-based digital
solutions that transform the ways in which traditional and emerging financial service providers engage with End Users. We
allocate significant resources to developing and improving our solutions to meet our customers' evolving needs. We monitor
and test our solutions regularly, and we maintain a disciplined release process to enhance our existing solutions and introduce
new capabilities without interrupting service delivery. We follow state-of-the-art practices in software development and design,
including using modern programming languages, data storage systems and other tools. Our multi-tiered architecture enables us
to scale, add and modify features quickly in response to changing market dynamics, customer needs and regulatory
requirements. Our platform approach supports rapid development and deployment of new features to address evolving market
needs. We also enable customers to address their market-specific needs via our extension and integration frameworks, which is
a key aspect of our technology strategy.
Technology and Operations
Due to the highly regulated nature of the financial services industry, our digital banking platform combines both multi-
tenant and single instance aspects. This structure is designed to maximize End User data security and minimize compliance cost
and risks. Our solutions utilize a multi-tiered architecture that allows for scalability, operational simplicity, security and disaster
recovery. We have also developed an internal operations and analytics platform that aggregates, and leverages customer
instance and End User experience captured within our solutions to drive future innovation and scale.
We serve our digital banking platform customers from two secure, third-party, American National Standards Institute
Tier 4 data center facilities, one located in Carrollton, Texas and the other located in Austin, Texas. Both data centers are
operated by the same third-party provider. Our digital lending and leasing and BaaS solutions are hosted by cloud-based
hosting services, including Amazon Web Services and Microsoft Azure. We believe that our current data centers have sufficient
capacity to meet our anticipated growth for the foreseeable future. Although we utilize a third party to manage our data center
facilities for our digital banking platform, we manage the hardware and software on which our digital banking platform
operates. We utilize industry standard hardware in resilient configurations to minimize service interruptions, and regularly
consider and implement improvements to enhance the resiliency of our services, including our recent improvements to actively
distribute services across both data centers. As a result of these improvements, our network infrastructure is fully redundant
within each of our data centers, including network teaming to provide network redundancy that includes multiple upstream
Internet connections. We have also purchased a private block of IP address space to simplify and expedite our disaster recovery
management operations for our digital banking platform customers.
Our digital banking platform has had average uptime in excess of 99.9% since January 2013. We actively monitor our
infrastructure 24x7 for any sign of failure, and we seek to take preemptive action to minimize and prevent downtime. Our data
centers employ advanced measures to ensure physical integrity and security, including redundant power from multiple
substations and cooling systems, fire and flood prevention mechanisms, continual security coverage and biometric readers at
entry points as well as perimeter boundary security measures. We have also implemented extensive disaster recovery measures
and continue to invest in data center and other technical infrastructure.
All End Users are authenticated, authorized and validated before they can access our solutions. End Users must have at a
minimum, a valid user ID and associated password. Many of our customers also employ other authentication methods such as
out-of-band one-time password delivery to log on to our solutions and hardware cryptographic tokens to authorize transactions.
Our layered security model allows different groups of End Users to have different levels of access to our solutions. Our
solutions' vulnerability is tested using internal tools prior to release, and an independent third party performs penetration and
vulnerability tests on our solutions periodically.
Intellectual Property
We rely on a combination of patent, trademark, trade secrets and copyright laws, as well as confidentiality procedures and
contractual restrictions, to establish, maintain and protect our proprietary rights. As of December 31, 2018, we had nine U.S.
patent applications pending and two issued U.S. patents. Our issued patents, which expire in March 2028, relate to our
intellectual property created to address technology integration challenges for RCFIs. We use the software components and
methods claimed in these patents to access the data from several different types of RCFIs and to allow us to deliver our online,
mobile, tablet, voice and text solutions to their End Users without having to individually integrate each solution with each
RCFI's data. Despite substantial investment in research and development activities, we have not focused on patents and patent
applications historically. We license third-party technologies, such as bill pay technologies, that are incorporated into some of
our solutions.
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The efforts we have taken to protect our intellectual property rights may not be sufficient or effective. It may be possible
for other parties to copy or otherwise obtain and use the content of our solutions without authorization. Failure to protect our
proprietary rights adequately could significantly harm our competitive position and operating results.
Companies in the Internet and technology industries, and other patent and trademark holders seeking to profit from
royalties in connection with grants of licenses, own large numbers of patents, copyrights, trademarks and trade secrets and
frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have
received in the past, and will likely in the future, receive notices that claim we have misappropriated or misused other parties'
intellectual property rights. There may be intellectual property rights held by others, including issued or pending patents and
trademarks that cover significant aspects of our solutions. Any intellectual property claim against us, regardless of merit, could
be time consuming and expensive to settle or litigate and could divert our management's attention and other resources. These
claims could also subject us to significant liability for damages and could result in our having to stop using solutions found to
be in violation of another party's rights. We might be required or may opt to seek a license for rights to intellectual property
held by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we could
be required to pay significant royalties, which would increase our operating expenses. We may also be required to develop
alternative non-infringing solutions, which could require significant effort and expense and which we may not be able to
perform efficiently or at all. If we cannot license the intellectual property at issue or develop non-infringing solutions for any
allegedly infringing aspect of our business, we may be unable to compete effectively.
Our Competition
The market for digital solutions for financial services providers is highly competitive. We compete with new and
established point solution vendors, core processing vendors, as well as internally developed solutions. We believe that the
comprehensive integration among our solution offerings and our customers' internal and third-party systems, combined with
our deep industry expertise, reputation for consistent, high-quality customer support, and our unified cloud-based digital
banking, digital lending and leasing and BaaS solutions distinguish us from the competition.
We currently compete with providers of technology and services in the financial services industry, including new and
established point system vendors and core processing vendors, as well as systems internally-developed by our customers. With
respect to our digital banking platform, we compete against a number of point system competitors, including NCR Corporation,
First Data Corporation, D3 Technology, Inc., Alkami Technology, Inc. and Kony, Inc. in the online, consumer and small
business banking space and Finastra, ACI Worldwide, Inc., Fidelity National Information Services, Inc., or FIS, and Bottomline
Technologies (de), Inc. in the commercial banking space. We also compete with core processing vendors that provide systems
and services such as Fiserv, Inc., or Fiserv, Jack Henry and Associates, Inc. and FIS. With respect to our lending and leasing
platform, we compete against a number of point system competitors, including Abrigo, Baker Hill Solutions, LLC, Fair Isaac
Corporation, nCino, Inc., Finastra, Moody's Analytics, Inc., Oracle corporation, Temenos AG, and core processing vendors,
including FIS and Fiserv. With respect to BaaS solutions, due to the vast number of potential use cases and customer segments,
the list of potential competitors is extremely broad and varied, but includes companies across the retail banking, financial
services, transaction processing, consumer technology and financial technology services industries.
Many of our competitors have significantly more financial, technical, marketing and other resources than we have, may
devote greater resources to the promotion, sale and support of their systems than we can, have more extensive customer bases
and broader customer relationships than we have and have longer operating histories and greater name recognition than we
have. In addition, many of our competitors expend more funds on research and development.
Although we compete with point system vendors and core processing vendors, we also partner with some of these
vendors for certain data and services utilized in our solutions and receive referrals from them. In addition, certain of our
customers have or can obtain the ability to create their own in-house systems, and while many of these systems have difficulties
scaling and providing an integrated platform, we still face challenges displacing in-house systems and retaining customers that
choose to develop an in-house system.
We believe the principal competitive factors for our solutions in the financial services markets we serve include the
following:
• alignment with the missions of our customers;
• ability to provide a single platform for consumer and commercial End Users;
• full-feature functionality across digital channels;
• ability to integrate targeted offers for End Users across digital channels;
• ability to support RCFIs in acquiring deposits with open API technologies;
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• SaaS delivery and pricing model;
• ability to support both internal and external developers to quickly integrate with third-party applications and systems
utilizing a software development kit;
• design of the End User experience, including modern, intuitive and touch-centric features;
• configurability and branding capabilities for customers;
• familiarity of workflows and terminology and feature-on-demand functionality;
• integrated multi-layered security and compliance of solutions with regulatory requirements;
• quality of implementation, integration and support services;
• domain expertise and innovation in financial services technology;
• ability to innovate and respond to customer needs rapidly; and
• rate of development, deployment and enhancement of solutions.
We believe that we compete favorably with respect to these factors within the RCFI, Alt-FI and FinTech markets we
serve, but we expect competition to continue and increase as existing competitors continue to evolve their offerings and as new
companies enter our market. To remain competitive, we believe we must continue to invest in research and development, sales
and marketing, customer support and our business operations generally.
Employees
As of December 31, 2018, we had 1,190 employees, of which 1,084 were employed in the United States, and 106 were
employed outside of the United States. We consider our current relationship with our employees to be good. None of our
employees are represented by a labor union or are a party to a collective bargaining agreement.
Culture
Since our inception, our culture has been rooted in our mission to strengthen communities by strengthening the financial
institutions that serve them. We believe our passion, dedication and commitment towards this mission is a significant
differentiator for us with our customers and employees. We share our culture through our customer interactions, employee
functions and collaborative and educational customer events like our CONNECT client conference, user groups and collaborate
focus groups. In each of the past eight years, the Austin American Statesman recognized us as one of Austin's "Top Places to
Work."
Presented with regular opportunities to help our customers more successfully compete and grow, we seek out ways to
enhance our culture and our ability to make a difference for our customers and their End Users. Our culture is visible across our
organization and highlighted through a host of initiatives, programs and committees including the following:
• our employee committees focused on culture, wellness, and charitable causes and communications help create
opportunities for employees to come together around important causes to make a difference in the work place and
local communities;
• our emerging leaders management training program identifies and cultivates new and emerging leadership talent
within our organization;
• our flexible work spaces promote a collaborative, high-energy work environment and help facilitate team-based
problem solving and cross-departmental learning;
• our work spaces reinforce our mission, guiding principles, promote a collaborative, high-energy work environment
and help facilitate team-based problem solving and cross-departmental learning; and
• we use technology to engage our own employees to take control of their development, recognize one another and
engage in charitable causes.
Government Regulation
As a technology service provider to banks and credit unions in the United States, we are not required to be chartered by
the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit
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Insurance Corporation, the National Credit Union Administration or other federal or state agencies that regulate or supervise
our customers and other providers of financial services in the United States.
Our customers and prospects are subject to extensive and complex regulations and oversight by federal, state and other
regulatory authorities. These laws and regulations are constantly evolving and affect the conduct of our customers' operations
and, as a result, our business. Our solutions must enable our customers to comply with applicable requirements such as the
following:
• the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act;
• the Electronic Funds Transfer Act;
• Mobile Banking Guidance;
• the Electronic Signatures in Global and National Commerce Act;
• federal, state and other usury laws;
• the Gramm-Leach-Bliley Act, or GLBA;
• the EU General Data Protection Regulation, or GDPR;
• laws against unfair, deceptive, or abusive acts or practices;
• the Privacy of Consumer Financial Information regulations;
• the Guidance on Supervision of Technology Services Providers promulgated by the Federal Financial Institutions
Examination Council, or FFIEC;
• the Guidance on Outsourcing Technology Services promulgated by the FFIEC; and
• other federal, state and international laws and regulations.
We are subject to periodic examination by banking regulators under the authority of the FFIEC under its Guidance on the
Supervision of Technology Services Providers and the Gramm-Leach-Bliley Act of 1999, and federal, state and other laws that
apply to technology service providers as a result of the services we provide to the institutions and entities they regulate. As an
independent technology service provider, we are examined by federal financial regulators on a rotating basis. These
examinations are based on guidance from the FFIEC, which is a formal interagency body empowered to prescribe uniform
principles, standards and report forms for the examination of financial institutions and to make recommendations to promote
uniformity in the supervision of financial institutions. The examinations cover a wide variety of subjects, including our
management, acquisition and development activities, support and delivery, IT audits, as well as our disaster preparedness and
business recovery planning. The banking regulators that make up the FFIEC have broad supervisory authority to remedy any
shortcomings identified in an examination. Following an examination, our financial institutions customers may request an
executive summary of the examination through their lead examination agency.
The Dodd-Frank Act granted the Consumer Financial Protection Bureau, or CFPB, authority to promulgate rules and
interpret certain federal consumer financial protection laws, some of which apply to the solutions we offer. In certain
circumstances, the CFPB also has examination and supervision powers with respect to service providers who provide a material
service to a financial institution offering consumer financial products and services.
The compliance of our solutions with these requirements depends on a variety of factors, including the functionality and
design of our solutions, the classification of our customers, and the manner in which our customers and their End Users utilize
our solutions. In order to comply with our obligations under these laws, we are required to implement operating policies and
procedures to protect the privacy and security of our customers' and their End Users' information and to undergo periodic audits
and examinations.
Privacy and Information Safeguard Laws
In the ordinary course of our business, we and our customers using our solutions access and transmit certain types of data,
which subjects us and our customers to certain privacy and information security laws in the United States and internationally,
including, for example, GLBA and GDPR, and other laws or rules designed to regulate consumer information and mitigate
identity theft. We are also subject to privacy laws of various states. These laws impose obligations with respect to the
collection, processing, storage, disposal, use and disclosure of personal information, and require that financial services
providers have in place policies regarding information privacy and security. In addition, under certain of these laws, we must
provide notice to consumers of our policies and practices for sharing nonpublic information with third parties, provide advance
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notice of any changes to our policies and, with limited exceptions, give consumers the right to prevent use of their nonpublic
personal information and disclosure of it to unaffiliated third parties. Certain of these laws may, in some circumstances, require
us to notify affected individuals of security breaches of computer databases that contain their personal information. These laws
may also require us to notify relevant law enforcement, regulators or consumer reporting agencies in the event of a data breach,
as well as businesses and governmental agencies that own data. In order to comply with the privacy and information safeguard
laws, we have confidentiality and information security standards and procedures in place for our business activities and our
third-party vendors and service providers. Privacy and information security laws evolve regularly, requiring us to adjust our
compliance program on an ongoing basis and presenting compliance challenges.
Available Information
Our website address is https://q2ebanking.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through the investor relations page of our Internet website free of charge as soon
as reasonably practicable after we electronically file such material with, or furnish it to the SEC. Our website and the
information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors.
Our business, prospects, financial condition, operating results and the trading price of our common stock could be
materially adversely affected by any of the risks and uncertainties described below, as well as other risks not currently known
to us or that are currently considered immaterial. In assessing these risks, you should also refer to the other information
contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
Risks Related to Our Business
We have experienced rapid growth in recent periods and if we fail to manage our growth effectively, we may be unable
to execute our business plan, maintain high levels of service and customer satisfaction or adequately address competitive
challenges, and our financial performance may be adversely affected.
Since our inception, our business has rapidly grown, which has resulted in large increases in our number of employees,
expansion of the types of solutions we sell and the customers we sell them to, expansion to international locations and
international customers, expansion of our infrastructure, enhancement of our internal systems and other significant changes and
additional complexities. Our revenues increased from $150.2 million for the twelve months ended December 31, 2016 to
$194.0 million for the twelve months ended December 31, 2017, and $241.1 million for the twelve months ended December 31,
2018. While we intend to further expand our overall business, customer base, and number of employees, our recent growth rate
is not necessarily indicative of the growth that we will achieve in the future. The growth in our business generally, our
management of a growing workforce and international customer base and the stress of such growth on our internal controls and
systems require substantial management effort, infrastructure and operational capabilities. To support our growth, we must
continue to improve our management resources and our operational and financial controls and systems, and these
improvements may increase our expenses more than anticipated and result in a more complex business, and our failure to
timely and effectively implement these improvements could have an adverse effect on our operations and financial results. In
addition, our increased focus on selling our solutions to larger customers and the increased breadth of our digital solution
offerings and the types of customers we serve may result in greater uncertainty and variability in our business and sales results.
We will also have to anticipate the necessary expansion of our relationship management, implementation, customer service and
other personnel to support our growth and achieve high levels of customer service and satisfaction, particularly as we sell to
larger customers that have heightened levels of complexity in their hardware, software and network infrastructure needs and as
we sell a broader range of digital solutions to a broader set of customers. Our success will depend on our ability to plan for and
manage this growth effectively. If we fail to anticipate and manage our growth or are unable to provide high levels of system
performance and customer service, our reputation, as well as our business, results of operations and financial condition, could
be harmed.
If the market for our solutions develops more slowly than we expect or changes in a way that we fail to anticipate, our
sales would suffer and our operating results would be harmed.
The market for financial services is dramatically changing, and we do not know whether RCFIs will continue to adopt
digital banking solutions such as ours in the future, whether traditional and emerging financial services providers will adopt our
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existing and new solutions or whether the market will change in ways that we do not anticipate. Many RCFIs have invested
substantial personnel and financial resources in legacy software, and these institutions may be reluctant or unwilling to convert
from their existing systems to our solutions. For RCFIs, switching from one provider of digital banking solutions (or from an
internally developed legacy system) to a new provider is a significant endeavor. Many potential customers believe switching
providers involves too many potential disadvantages such as disruption of business operations, loss of accustomed
functionality, and increased costs (including conversion and transition costs). Furthermore, some RCFIs may be reluctant or
unwilling to use a cloud-based solution over concerns such as the security of their data and reliability of the delivery model.
These concerns or other considerations may cause RCFIs to choose not to adopt cloud-based solutions such as ours or to adopt
alternative solutions, either of which would harm our operating results. We attempt to overcome these concerns through value
enhancing strategies such as a flexible integration process and continued investment in the enhanced functionality and features
of our solutions. If RCFIs are unwilling to transition from their legacy systems, the demand for our digital banking solutions
and related services could decline and adversely affect our business, operating results and financial condition.
Our future success also depends on our ability to sell new solutions and enhanced solutions to our current and new
customers. As we create new solutions and enhance our existing solutions to support new customer types, technologies and
devices, these solutions and related services may not be attractive to customers. In addition, promoting and selling these new
and enhanced solutions may require increasingly costly sales and marketing efforts, and if customers choose not to adopt these
solutions, our business could suffer.
Our business could be adversely affected if our customers are not satisfied with our solutions, particularly as we
introduce new products and solutions, or our systems, infrastructure and resources fail to meet their needs.
Our business depends on our ability to satisfy our customers and meet their needs. Our customers use a variety of network
infrastructure, hardware and software, which typically increases in complexity the larger the customer is, and our solutions
must support the specific configuration of our customers' existing systems, including in many cases the solutions of third-party
providers. If our solutions do not currently support a customer's required data format or appropriately integrate with a
customer's applications and infrastructure, then we must configure our solutions to do so, which could negatively affect the
performance of our systems and increase our expenses and the time it takes to implement our solutions. Any failure of or delays
in our systems or resources could cause service interruptions or impaired system performance. Some of our customer
agreements require us to issue credits for downtime in excess of certain thresholds, and in some instances give our customers
the ability to terminate the agreements in the event of significant amounts of downtime, or if we experience other defects with
our solutions. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to new and
existing customers, cause us to lose customers, and lower renewal rates by existing customers, each of which could adversely
affect our revenue and reputation. In addition, negative publicity resulting from issues related to our customer relationships,
regardless of accuracy, may damage our business by adversely affecting our ability to attract new customers and maintain and
expand our relationships with existing customers.
If the use of our solutions increases, or if our customers demand more advanced features from our solutions, we will need
to devote additional resources to improving our solutions, and we also may need to expand our technical infrastructure and
related resources at a more rapid pace than we have in the past. This would involve spending substantial amounts to purchase or
lease data center capacity and equipment, subscribe to new or additional third-party hosting services, upgrade our technology
and infrastructure or introduce new or enhanced solutions. It takes a significant amount of time to plan, develop and test
changes to our solutions and related infrastructure and resources, and we may not be able to accurately forecast demand or
predict the results we will realize from such improvements. There are inherent risks associated with changing, upgrading,
improving and expanding our technical infrastructure and related resources. Any failure of our solutions to operate effectively
with future infrastructure and technologies could reduce the demand for our solutions, resulting in customer dissatisfaction and
harm to our business. Also, any expansion of our infrastructure and related resources would likely require that we appropriately
scale our internal business systems and services organization, including implementation and customer support services, to serve
our growing customer base. If we are unable to respond to these changes or fully and effectively implement them in a cost-
effective and timely manner, our service may become ineffective, we may lose customers, and our operating results may be
negatively impacted.
The markets in which we participate are intensely competitive, and pricing pressure, new technologies or other
competitive dynamics could adversely affect our business and operating results.
We currently compete with providers of technology and services in the financial services industry, including point system
vendors and core processing vendors, as well as systems internally-developed by financial services providers. With respect to
our digital banking platform, we have a number of point system competitors, including NCR Corporation, First Data
Corporation, D3 Technology, Inc., Alkami Technology, Inc. and Kony, Inc. in the online, consumer and small business banking
space and Finastra, ACI Worldwide, Inc., FIS and Bottomline Technologies (de), Inc. in the commercial banking space. We also
compete with core processing vendors that provide systems and services such as Fiserv, Inc., Jack Henry and Associates, Inc.
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and FIS. With respect to our lending and leasing platform, we compete against a number of point system competitors, including
Abrigo, Baker Hill Solutions, LLC, Fair Isaac Corporation, nCino, Inc., Finastra, Moody’s Analytics, Inc., Oracle Corporation,
Temenos AG, and core processing vendors, including FIS and Fiserv. With respect to our BaaS solutions, due to the vast
number of potential use cases and customer segments, the list of potential competitors is extremely broad and varied, but
includes companies across the retail banking, financial services, transaction processing, consumer technology and financial
technology services industries. Many of our competitors have significantly more financial, technical, marketing and other
resources than we have, may devote greater resources to the promotion, sale and support of their systems than we can, have
more extensive customer bases and broader customer relationships than we have and have longer operating histories and greater
name recognition than we have. In addition, many of our competitors expend more funds on research and development.
We may also face competition from new companies entering our markets, which may include large established businesses
that decide to develop, market or resell competitive solutions, acquire one of our competitors or form a strategic alliance with
one of our competitors. In addition, new companies entering our markets may choose to offer competitive solutions at little or
no additional cost to the customer by bundling them with their existing applications, including adjacent financial services
technologies and core processing software. New entrants to the markets we serve might also include financial services
providers developing financial services solutions and other technologies, including solutions built using competing BaaS
solutions or open API platforms. Competition from these new entrants may make our business more difficult and adversely
affect our results.
If we are unable to compete in this environment, sales and renewals of our solutions could decline and adversely affect
our business, operating results and financial condition. With the introduction of new technologies and potential new entrants
into the markets for our solutions, we expect competition to intensify in the future, which could harm our ability to increase
sales and achieve profitability. In addition, we may face increased competition in our existing markets as we enter new markets
or sections of a market with larger or different customers and new solutions. Our industry has also experienced recent
consolidation which we believe may continue. Any further consolidation our industry experiences could lead to increased
competition and result in pricing pressure or loss of market share, either of which could have a material adverse effect on our
business, limit our growth prospects or reduce our revenues.
If we are unable to effectively integrate our solutions with other systems used by our customers and prospective
customers, including if we are forced to discontinue integration due to security or quality concerns with a third-party
system, or if there are performance issues with such third-party systems, our solutions will not operate effectively and our
operations will be adversely affected.
The functionality of our solutions depends on our ability to integrate with other third-party systems used by our
customers, including core processing software. Certain providers of these third-party systems also offer solutions that are
competitive with our solutions and may have an advantage over us with customers using their software by having better ability
to integrate with their software and by being able to bundle their competitive products with other applications used by our
customers and prospective customers at favorable pricing. We do not have formal arrangements with many of these third-party
providers regarding our access to their APIs to enable these customer integrations.
Our business may be harmed if any of our third-party providers:
• changes the features or functionality of its applications and platforms in a manner adverse to us;
• discontinues or limits our solutions' access to its systems;
• suffers a security incident or other incident that requires us to discontinue integration with its system;
• terminates or does not allow us to renew or replace our existing contractual relationships on the same or better terms;
• modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or our customers;
• establishes more favorable relationships with one or more of our competitors, or acquires one or more of our
competitors and offer competing services; or
• otherwise has or develops its own competitive offerings.
Such changes could limit or prevent us from integrating our solutions with these third-party systems, which could impair
the functionality of our solutions, prohibit the use of our solutions or limit our ability to sell our solutions to customers, each of
which could harm our business. If we are unable to integrate with such third-party software as a result of changes to or
restricted access to the software by such third parties during the terms of existing agreements with customers using such third-
party software, we may not be able to meet our contractual obligations to customers, which may result in disputes with
customers and harm to our business. In addition, if any third-party software providers experience an outage, our solutions
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integrated with such software will not function properly or at all, and our customers may be dissatisfied with our solutions. If
the software of such third-party providers has performance or other problems, such issues may reflect poorly on us and the
adoption and renewal of our solutions and our business may be harmed. Although our customers may be able to switch to
alternative technologies if a provider's services were unreliable or if a provider was to limit such customer's access and
utilization of its data or the provider's functionality, our business could nevertheless be harmed due to the risk that our
customers could reduce their use of our solutions.
Our customers are highly regulated and subject to a number of challenges and risks. Our failure to comply with laws
and regulations applicable to us as a technology provider to financial services providers and to enable our customers to
comply with the laws and regulations applicable to them could adversely affect our business and results of operations,
increase costs and impose constraints on the way we conduct our business.
Our customers and prospective customers are highly regulated and may be required to comply with stringent regulations
in connection with subscribing to and implementing our solutions. As a provider of technology to RCFIs, we are examined on a
periodic basis by various regulatory agencies and required to review certain of our suppliers and partners. The examination
handbook and other guidance issued by the FFIEC govern the examination of our operations and include a review of our
systems and data center and technical infrastructure, management, financial condition, development activities and our support
and delivery capabilities. If deficiencies are identified, customers may choose to terminate or reduce their relationships with us.
In addition, while much of our operations are not directly subject to the same regulations applicable to RCFIs, we are generally
obligated to our customers to provide software solutions and maintain internal systems and processes that comply with federal,
state and other regulations applicable to them. In particular, as a result of obligations under our customer agreements, we are
required to comply with certain provisions of the Gramm-Leach-Bliley Act related to the privacy of consumer information and
may be subject to other privacy and data security laws because of the solutions we provide. In addition, numerous regulations
have been proposed and are still being written to implement the Dodd-Frank Act, including requirements for enhanced due
diligence of the internal systems and processes of companies like ours by their financial institution customers. In general, larger
financial institutions are subject to more stringent regulations and as a result, as we sell our solutions to larger financial
institutions, we will become obligated to meet more stringent regulatory standards, including more in-depth audits. Still further,
President Donald Trump and the Congressional majority have indicated that the Dodd-Frank Act will be under further scrutiny
and some of the provisions of the Dodd-Frank Act rules promulgated thereunder may be revised, repealed, or amended. If we
have to make changes to our internal processes and solutions as a result of these regulatory changes, we could be required to
invest substantial additional time and funds and divert time and resources from other corporate purposes to remedy any
identified deficiency.
This evolving, complex and often unpredictable regulatory environment could result in our failure to provide regulatory-
compliant solutions, which could result in customers' not purchasing our solutions or terminating their agreements with us or
the imposition of fines or other liabilities for which we may be responsible. In addition, federal, state or foreign agencies may
attempt to further regulate our activities in the future. For example, Congress could enact legislation to regulate providers of
electronic commerce services as consumer financial services providers or under another regulatory framework. If enacted or
deemed applicable to us, such laws, rules or regulations could be imposed on our activities or our business thereby rendering
our business or operations more costly, burdensome, less efficient or impossible, any of which could have a material adverse
effect on our business, financial condition and operating results.
We are subject to various global data privacy and security regulations, which could result in additional costs and
liabilities to us.
Our business is subject to a wide variety of local, state, national and international laws, directives and regulations that
apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These data
protection and privacy-related laws and regulations continue to evolve and may result in ever-increasing regulatory and public
scrutiny and escalating levels of enforcement and sanctions and increased costs of compliance. In the United States, these
include rules and regulations promulgated under the authority of the Federal Trade Commission, and state breach notification
laws. If there is a breach of our systems and we know or suspect that unencrypted personal customer or End User information
has been stolen, we may be required to inform the representative state attorney general or federal or country regulator, media
and credit reporting agencies, and any customers whose information was stolen, which could harm our reputation and business.
Other states and countries have enacted different requirements for protecting personal information collected and maintained
electronically. We expect that there will continue to be new proposed laws, regulations and industry standards concerning
privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we
cannot yet determine the impact such future laws, regulations and standards will have on our business or the businesses of our
customers, including, but not limited to, the European Union's recently enacted General Data Protection Regulation, which
came into force in May 2018 and creates a range of new compliance obligations, which could require us to change our business
practices, and significantly increases financial penalties for noncompliance.
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Failure to comply with laws concerning privacy, data protection and information security could result in enforcement
action against us, including fines, imprisonment of company officials and public censure, claims for damages by customers,
End Users and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers
and End Users and prospective customers and End Users), any of which could have a material adverse effect on our operations,
financial performance and business. In addition, we could suffer adverse publicity and loss of customer confidence were it
known that we did not take adequate measures to assure the confidentiality of the personally identifiable information that our
customers had given to us. This could result in a loss of customers and revenue that could jeopardize our success. We may not
be successful in avoiding potential liability or disruption of business resulting from the failure to comply with these laws and,
even if we comply with laws, may be subject to liability because of a security incident. If we were required to pay any
significant amount of money in satisfaction of claims under these laws, or any similar laws enacted by other jurisdictions, or if
we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any of
these laws, our business, operating results and financial condition could be adversely affected. Further, complying with the
applicable notice requirements in the event of a security breach could result in significant costs.
Additionally, our business efficiencies and economies of scale depend on generally uniform solutions offerings and
uniform treatment of customers and their End Users across all jurisdictions in which we operate. Compliance requirements that
vary significantly from jurisdiction to jurisdiction impose added costs on our business and can increase liability for compliance
deficiencies.
If our or our customers' security measures are compromised or unauthorized access to customer data is otherwise
obtained, our solutions may not be secure or may be perceived as not being secure, and customers may curtail or cease their
use of our solutions, our reputation may be harmed, and we may incur significant liabilities.
Our operations involve access to and transmission of proprietary information and data and transaction and account details
of our customers and their End Users. Our security measures and the security measures of our customers may not be sufficient
to prevent our systems from being compromised as a result of third-party action, the error or intentional misconduct of
employees, customers or their End Users, malfeasance or stolen or fraudulently obtained log-in credentials. Security
incidents can result in unauthorized access to, loss of or unauthorized disclosure of this information, litigation, indemnity
obligations and other possible liabilities, as well as negative publicity, which could damage our reputation, impair our sales and
harm our business. Cyber-attacks, account take-over attacks, fraudulent representations and other malicious Internet-based
activity continue to increase and financial services providers, their End Users, and technology providers are often targets of
such attacks. In addition, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive
information such as user names, passwords or other information to gain access to our confidential or proprietary information or
the data of our customers and their End Users. A party who is able to compromise the security of our facilities could cause
interruptions or malfunctions in our operations. We may be unable to anticipate or prevent techniques used to obtain
unauthorized access or sabotage systems because they change frequently and generally are not detected until after an incident
has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become
more of a target for third parties seeking to compromise our security systems or gain unauthorized access to the data of our
customers and their End Users. A failure or inability to meet our customers' expectations with respect to security and
confidentiality could seriously damage our reputation and affect our ability to retain customers and attract new business.
Federal, state and other regulations may require us to notify customers and their End Users of data security incidents
involving certain types of personal data. Security compromises experienced by our competitors, by our customers or by us may
lead to public disclosures and widespread negative publicity. Any security compromise in our industry, whether actual or
perceived, could erode customer confidence in the effectiveness of our security measures, negatively impact our ability to
attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits,
regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
In addition, some of our customers contractually require notification of any data security compromise and include
representations and warranties that our solutions comply with certain regulations related to data security and privacy. Although
our customer agreements typically include limitations on our potential liability, there can be no assurance that such limitations
of liability would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to
any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or
omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more
claims, or that our insurers will not deny or attempt to deny coverage as to any future claim. The successful assertion of one or
more claims against us, the inadequacy of or denial of coverage under our insurance policies, litigation to pursue claims under
our policies or the occurrence of changes in our insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of
operations.
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We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future
results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of
factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may
not be meaningful. Our past results may not be indicative of our future performance. In addition to the other risks described in
this report, factors that may affect our quarterly operating results include the following:
• the addition or loss of customers, including through acquisitions, consolidations or failures;
• the amount of use of our solutions in a period and the amount of any associated revenues and expenses;
• budgeting cycles of our customers and changes in spending on solutions by our current or prospective customers;
• seasonal variations in sales of our solutions, which may be lowest in the first quarter of the calendar year;
• changes in the competitive dynamics of our industry, including consolidation among competitors, changes to pricing
or the introduction of new products and services that limit demand for our solutions or cause customers to delay
purchasing decisions;
• the amount and timing of cash collections from our customers;
• long or delayed implementation times for new customers, including larger customers, or other changes in the levels of
customer support we provide;
• the timing of customer payments and payment defaults by customers, including any buyouts by customers of the
remaining term of their contracts with us in a lump sum payment that we would have otherwise recognized over the
term of those contracts, and any costs associated with impairments of related contract assets;
• the amount and timing of our operating costs and capital expenditures;
• changes in tax rules or the impact of new accounting pronouncements, including the effects of our adoption of newly
issued accounting standards regarding revenue recognition;
• general economic conditions that may adversely affect our customers' ability or willingness to purchase solutions,
delay a prospective customer's purchasing decision, reduce our revenues from customers or affect renewal rates;
• unexpected expenses such as those related to litigation or other disputes;
• the timing of stock awards to employees and related adverse financial statement impact of having to expense those
stock awards over their vesting schedules; and
• the amount and timing of costs associated with recruiting, hiring, training and integrating new employees, many of
whom we hire in advance of anticipated needs.
Moreover, our stock price might be based on expectations of investors or securities analysts of future performance that are
inconsistent with our actual growth opportunities or that we might fail to meet and, if our revenues or operating results fall
below expectations, the price of our common stock could decline substantially.
We have a history of losses, and we do not expect to be profitable for the foreseeable future.
We have incurred losses from operations in each period since our inception in 2005, except for 2010 when we recognized
a gain on the sale of a subsidiary. We incurred net losses of $35.4 million, $26.2 million and $36.4 million for the years ended
December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $172.4 million.
These losses and accumulated deficit reflect the substantial investments we have made to develop our solutions and acquire
customers. As we seek to continue to grow our number of customers, including through acquisitions, we expect to incur
significant sales, marketing, implementation and other related expenses, including amortization of acquired intangibles. Our
ability to achieve or sustain profitability will depend on our obtaining sufficient scale and productivity so that the cost of adding
and supporting new customers does not adversely impact our margins. We also expect to make other significant expenditures to
develop and expand our solutions and our business, including continuing to increase our marketing, services and sales
operations and continuing our significant investment in research and development and our technical infrastructure. We expect to
incur losses for the foreseeable future as we continue to focus on adding new customers and solutions, and we cannot predict
whether or when we will achieve or sustain profitability. Our efforts to grow our business may be more costly than we expect,
and we may not be able to increase our revenues enough to offset our higher operating expenses. In addition, as a public
company, we incur significant legal, accounting and other expenses. These increased expenditures will make it harder for us to
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achieve and maintain profitability. While our revenues have grown in recent periods, such growth may not be sustainable, and
our revenues could decline or grow more slowly than we expect. We also may incur additional losses in the future for a number
of reasons, including due to litigation and other unforeseen reasons and the risks described in this report. Accordingly, we
cannot assure you that we will achieve profitability in the future, nor that, if we do become profitable, we will be able to sustain
profitability. If we are unable to achieve and sustain profitability, our customers may lose confidence in us and slow or cease
their purchases of our solutions and we may be unable to attract new customers, which would adversely impact our operating
results.
We incurred indebtedness by issuing the Convertible Notes, and our debt repayment obligations may adversely affect
our financial condition and cash flows from operations in the future.
In February 2018, we issued $230.0 million principal amount of 0.75% convertible senior notes, or Convertible Notes,
due February 15, 2023, unless earlier converted or repurchased in accordance with their terms prior to such date. Interest is
payable semi-annually on February 15 and August 15 of each year. Our indebtedness may impair our ability to obtain additional
financing in the future for general corporate purposes, including working capital, capital expenditures, potential acquisitions
and strategic transactions, and a portion of our cash flows from operations may have to be dedicated to repaying the principal in
2023 or earlier if necessary. Our ability to meet our debt obligations will depend on our future performance, which will be
affected by financial, business, economic, regulatory and other factors. We cannot control many of these factors. Our future
operations may not generate sufficient cash to enable us to repay our debt. If we fail to make a payment on our debt, we could
be in default on such debt. If we are at any time unable to pay our indebtedness when due, we may be required to renegotiate
the terms of the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be
no assurance that, in the future, we will be able to successfully renegotiate such terms, that any such refinancing would be
possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition
and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, note holders will be entitled to
convert their notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible
Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying
cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in
cash, which could adversely affect our liquidity. In addition, even if holders of Convertible Notes do not elect to convert their
Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding
principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our
net working capital.
Our sales cycle can be unpredictable, time-consuming and costly, which could harm our business and operating
results.
Our sales process involves educating prospective customers and existing customers about the use, technical capabilities
and benefits of our solutions. Prospective customers, especially larger financial services providers, often undertake a prolonged
evaluation process, which typically involves not only our solutions, but also those of our competitors and lasts from six to nine
months or longer. We may spend substantial time, effort and money on our sales and marketing efforts without any assurance
that our efforts will produce any sales. It is also difficult to predict the level and timing of sales opportunities that come from
our referral partners.
Events affecting our customers' businesses may occur during the sales cycle that could affect the size or timing of a
purchase, contributing to more unpredictability in our business and operating results. As a result of these factors, we may face
greater costs, longer sales cycles and less predictability in the future.
We do not have an adequate history with our subscription or pricing models to accurately predict the long-term rate of
customer subscription renewals or adoption, or the impact these renewals and adoption, or any customer terminations, will
have on our revenues or operating results.
We have limited experience with respect to determining the optimal prices for our solutions. As the markets for our
existing solutions develop, we may be unable to attract new customers at the same price or based on the same pricing model as
we have used historically. Moreover, large or influential financial services providers may demand more favorable pricing or
other contract terms, including termination rights. As a result, in the future we may be required to reduce our prices or accept
other unfavorable contract terms, each of which could adversely affect our revenues, gross margin, profitability, financial
position and cash flow.
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Our customers have no obligation to renew their subscriptions for our solutions after the expiration of the initial
subscription term, and if our customers renew at all, then our customers may renew for fewer solutions or on different pricing
terms. Our renewal rates may decline or fluctuate as a result of a number of factors, including our customers' satisfaction with
our pricing or our solutions or their ability to continue their operations and spending levels. Additionally, certain agreements
may include termination rights allowing customers to terminate their customer agreements in the event of, among other things,
defects with our solutions, changes in our solution, breach by us of our obligations, requirements from regulatory authorities or
a change in control of our company. If our customers terminate or do not renew their subscriptions for our solutions on similar
pricing terms, our revenues may decline and our business could suffer. As we create new solutions or enhance our existing
solutions to support new technologies and devices, our pricing of these solutions and related services may be unattractive to
customers or fail to cover our costs.
Defects or errors in our solutions could harm our reputation, result in significant costs to us, impair our ability to sell
our solutions and subject us to substantial liability.
Our solutions are inherently complex and may contain defects or errors, particularly when first introduced or as new
versions are released. Despite extensive testing, from time-to-time we have discovered defects or errors in our solutions. In
addition, due to changes in regulatory requirements relating to our customers or to technology providers to financial services
providers like us, we may discover deficiencies in our software processes related to those requirements. Material performance
problems or defects in our solutions might arise in the future.
Any such errors, defects, other performance problems or disruptions in service to provide bug fixes or upgrades, whether
in connection with day-to-day operations or otherwise, could be costly for us to remedy, damage our customers' businesses and
harm our reputation. In addition, if we have any such errors, defects or other performance problems, our customers could seek
to terminate their agreements, elect not to renew their subscriptions, delay or withhold payment or make claims against us. Any
of these actions could result in lost business, increased insurance costs, difficulty in collecting our accounts receivable, costly
litigation and adverse publicity. Such errors, defects or other problems could also result in reduced sales or a loss of, or delay
in, the market acceptance of our solutions.
Moreover, software development is time-consuming, expensive, complex and requires regular maintenance. Unforeseen
difficulties can arise. If we do not complete our periodic maintenance according to schedule or if customers are otherwise
dissatisfied with the frequency or duration of our maintenance services, customers could elect not to renew, or delay or
withhold payment to us or cause us to issue credits, make refunds or pay penalties. Because our solutions are often customized
and deployed on a customer-by-customer basis, rather than through a multi-tenant SaaS method of distribution, applying bug
fixes, upgrades or other maintenance services may require updating each instance of our software, which could be time
consuming and cause us to incur significant expense. We might also encounter technical obstacles, and it is possible that we
discover problems that prevent our solutions from operating properly. If our solutions do not function reliably or fail to achieve
customer expectations in terms of performance, customers could seek to cancel their agreements with us and assert liability
claims against us, which could damage our reputation, impair our ability to attract or maintain customers and harm our results
of operations.
Failures or reduced accessibility of third-party hardware or software on which we rely could impair the delivery of
our solutions and adversely affect our business.
We rely on hardware that we purchase or lease and software that we develop or license from, or that is hosted by third
parties, to offer our solutions. In addition, we obtain licenses from third parties to use intellectual property associated with the
development of our solutions. These licenses might not continue to be available to us on acceptable terms, or at all. While we
are not substantially dependent upon any third-party hardware or software, the loss of the right to use all or a significant portion
of our third-party hardware or software required for the development, maintenance and delivery of our solutions could result in
delays in the provision of our solutions until we develop or identify, obtain and integrate equivalent technology, which could
harm our business.
Any errors or defects in the hardware or software we use could result in errors, interruptions or a failure of our solutions.
Although we believe that there are alternatives, any significant interruption in the availability of all or a significant portion of
such hardware or software could have an adverse impact on our business unless and until we can replace the functionality
provided by these products at a similar cost. Furthermore, this hardware and software may not be available on commercially
reasonable terms, or at all. The loss of the right to use all or a significant portion of this hardware or software could limit access
to our solutions. Additionally, we rely upon third parties' abilities to enhance their current products, develop new products on a
timely and cost-effective basis and respond to emerging industry standards and other technological changes. We may be unable
to effect changes to such third-party technologies, which may prevent us from rapidly responding to evolving customer
requirements. We also may be unable to replace the functionality provided by the third-party software currently offered in
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conjunction with our solutions in the event that such software becomes obsolete or incompatible with future versions of our
solutions or is otherwise not adequately maintained or updated.
We depend on data centers operated by third parties and third-party Internet hosting providers, and any disruption in
the operation of these facilities or access to the Internet could adversely affect our business.
We currently host our digital banking platform solutions primarily from two third-party data center hosting facilities
located in Austin, Texas and Carrollton, Texas and certain of our lending and leasing and BaaS solutions are hosted by cloud-
based providers, including Amazon Web Services and Microsoft Azure. The owners and operators of these current and future
facilities and cloud-based hosting services do not guarantee that our customers' access to our solutions will be uninterrupted,
error-free or secure. We may experience website disruptions, outages and other performance problems. These problems may be
caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud,
spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of
these performance problems within an acceptable period of time. We do not control the operation of these data center facilities
and cloud-based services, and such facilities and services are vulnerable to damage or interruption from human error,
intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods,
earthquakes, hurricanes, tornadoes or similar catastrophic events. They also could be subject to break-ins, computer viruses,
sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a
decision to close the facilities without adequate notice or terminate our hosting arrangement or other unanticipated problems
could result in lengthy interruptions in the delivery of our solutions, cause system interruptions, prevent our customers' End
Users from accessing their accounts or services online, reputational harm and loss of critical data, prevent us from supporting
our solutions or cause us to incur additional expense in arranging for new facilities, services and support.
We also depend on third-party Internet-hosting providers and continuous and uninterrupted access to the Internet through
third-party bandwidth providers to operate our business. If we lose the services of one or more of our Internet-hosting or
bandwidth providers for any reason or if their services are disrupted, for example due to viruses or denial of service or other
attacks on their systems, or due to human error, intentional bad acts, power loss, hardware failures, telecommunications
failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes or similar catastrophic events, we could
experience disruption in our ability to offer our solutions and adverse perception of our solutions' reliability, or we could be
required to retain the services of replacement providers, which could increase our operating costs and harm our business and
reputation.
We do not have any control over the availability or performance of salesforce.com's Force.com platform, and if we or
our digital lending and leasing solution customers encounter problems with it, we may be required to replace Force.com
with another platform, which would be difficult and costly.
Our digital lending and leasing solutions run on salesforce.com's Force.com platform, and we do not have any control
over the Force.com platform or the prices salesforce.com charges to our customers. Salesforce.com may discontinue or modify
Force.com or increase its fees or modify its pricing incentives for our customers. If salesforce.com takes any of these actions,
we may suffer lower sales, increased operating costs and loss of revenue from our digital lending and leasing solutions until
equivalent technology is either developed by us, or, if available from a third party, is identified, obtained and integrated.
Additionally, we may not be able to honor commitments we have made to our customers and we may be subject to breach of
contract or other claims from our customers.
In addition, we do not control the performance of Force.com. If Force.com experiences an outage, our digital lending and
leasing solutions will not function properly, and our customers may be dissatisfied. If salesforce.com has performance or other
problems with its Force.com platform, they will reflect poorly on us and the adoption and renewal of our digital lending and
leasing solutions and our business may be harmed.
We derive substantially all of our revenues from customers in the financial services industry, and any downturn or
consolidation in the financial services industry, or unfavorable economic conditions affecting regions in which a significant
portion of our customers are concentrated, could harm our business.
Substantially all of our revenues are derived from RCFIs. RCFIs have experienced significant pressure in recent years due
to economic uncertainty, liquidity concerns and increased regulation. In recent years, many RCFIs have failed, merged or been
acquired. Failures and consolidations are likely to continue, and there are very few new RCFIs being created. Further, if our
customers merge with or are acquired by other entities such as financial institutions that have in-house developed digital
banking solutions or that are not our customers or use fewer of our solutions, our customers may discontinue, reduce or change
the terms of their use of our solutions. It is also possible that the larger RCFIs that result from mergers or consolidations could
have greater leverage in negotiating terms with us or could decide to replace some or all of our solutions. Any of these
developments could have an adverse effect on our business, results of operations and financial condition.
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In addition, any downturn in the financial services industry or unfavorable economic conditions affecting the regions in
which our customers are concentrated may cause our customers to reduce their spending on solutions such as ours, seek to
terminate or renegotiate their contracts with us or fail. A significant portion of our revenues is derived from RCFIs in states, in
particular Texas, whose economies are substantially dependent upon the energy and natural resources market, in particular oil
and gas exploration and production. Since 2014, the price of oil and gas has remained low resulting in economic uncertainty in
Texas and such other states. Should the price of oil and gas decline further or remain at the current low price for an extended
period, the general economic conditions in Texas and such other states could be negatively affected, which could have a
material adverse effect on our RCFI customers, and accordingly our business, results of operations, and financial condition.
Because we recognize revenues from our solutions over the terms of our customer agreements, the impact of changes
in the subscriptions for our solutions will not be immediately reflected in our operating results, and rapid growth in our
customer base may adversely affect our operating results in the short term since we expense a substantial portion of
implementation costs as incurred.
We generally recognize revenues monthly over the terms of our customer agreements. The initial term of our digital
banking platform customer agreements averages over five years, although it varies by customer. As a result, the substantial
majority of the revenues we report in each quarter are related to agreements entered into during previous quarters.
Consequently, a change in the level of new customer agreements or implementations in any quarter may have a small impact on
our revenues in that quarter but will affect our revenues in future quarters. Accordingly, the effect of significant downturns in
sales and market acceptance of our solutions, or changes in our rate of renewals may not be fully reflected in our results of
operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenues through
additional sales in any period.
Additionally, we recognize our expenses over varying periods based on the nature of the expense. In particular, we
recognize a substantial portion of implementation expenses as incurred even though we recognize the related revenues over
extended periods. As a result, we may report poor operating results in periods in which we are incurring higher implementation
expenses related to revenues that we will recognize in future periods, including implementations for larger customers that have
heightened levels of complexity in their hardware, software and network infrastructure needs. Alternatively, we may report
better operating results in periods due to lower implementation expenses, but such lower expenses may be indicative of slower
revenue growth in future periods. As a result, our expenses may fluctuate as a percentage of revenues and changes in our
business generally may not be immediately reflected in our results of operations.
As the number, size, type and complexity of customers that we serve increase and change, we may encounter
implementation challenges, and we may have to delay revenue recognition for some complex engagements, which would
harm our business and operating results.
We may face unexpected implementation challenges related to the complexity of our customers' implementation and
integration requirements, particularly implementations for larger customers that have heightened levels of complexity in their
hardware, software and network infrastructure needs. Our implementation expenses increase when customers have unexpected
data, hardware or software technology challenges, or complex or unanticipated business or regulatory requirements. In addition,
our customers typically require complex acceptance testing related to the implementation of our solutions. Implementation
delays may also require us to delay revenue recognition under the related customer agreement longer than expected. Further,
because we do not fully control our customers' implementation schedules, if our customers do not allocate the internal resources
necessary to meet implementation timelines or if there are unanticipated implementation delays or difficulties, our revenue
recognition may be delayed. Losses of End Users or any difficulties or delays in implementation processes could cause
customers to delay or forgo future purchases of our solutions, which would adversely affect our business, operating results and
financial condition.
Shifts over time in the number of End Users of our solutions, their use of our solutions and our customers'
implementation and customer support needs could negatively affect our profit margins.
Our profit margins can vary depending on numerous factors, including the scope and complexity of our implementation
efforts, the number of End Users on our solutions, the frequency and volume of their use of our solutions and the level of
customer support services required by our customers. For example, our services offerings typically have a much higher cost of
revenues than subscriptions to our solutions, so any increase in sales of services as a proportion of our subscriptions would have
an adverse effect on our overall gross margin and operating results. If we are unable to increase the number of End Users and
the number of transactions they perform on our solutions, the types of customers that purchase our solutions changes, or the
mix of solutions purchased by our customers changes, our profit margins could decrease and our operating results could be
adversely affected.
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If we fail to provide effective customer training on our solutions and high-quality customer support, our business and
reputation would suffer.
Effective customer training on our solutions and high-quality, ongoing customer support are important to the successful
marketing and sale of our solutions and for the renewal of existing customer agreements. Providing this training and support
requires that our customer training and support personnel have financial services knowledge and expertise, making it difficult
for us to hire qualified personnel and scale our training and support operations. The demand on our customer support
organization will increase as we expand our business and pursue new customers, and such increased support could require us to
devote significant development services and support personnel, which could strain our team and infrastructure and reduce our
profit margins. If we do not help our customers quickly resolve any post-implementation issues and provide effective ongoing
customer support, our ability to sell additional solutions to existing and future customers could suffer and our reputation would
be harmed.
If we fail to respond to evolving technological requirements or introduce adequate enhancements, new features or
solutions, our solutions could become obsolete or less competitive.
The markets for our solutions are characterized by rapid technological advancements, changes in customer requirements
and technologies, frequent new product introductions and enhancements and changing regulatory requirements. The life cycles
of our solutions are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements
by new or existing competitors or large financial services providers could undermine our current market position. Other means
of digital financial services solutions may be developed or adopted in the future, and our solutions may not be compatible with
these new technologies. In addition, the technological needs of, and services provided by, customers may change if they or their
competitors offer new services to End Users. Maintaining adequate research and development resources to meet the demands of
the markets we serve is essential. The process of developing new technologies and solutions is complex and expensive. The
introduction of new solutions by our competitors, the market acceptance of competitive solutions based on new or alternative
technologies or the emergence of new technologies or solutions in the broader financial services industry could render our
solutions obsolete or less effective.
The success of any enhanced or new solution depends on several factors, including timely completion, adequate testing
and market release and acceptance of the solution. Any new solutions that we develop or acquire may not be introduced in a
timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate
significant revenues. If we are unable to anticipate customer requirements or work with our customers successfully on
implementing new solutions or features in a timely manner or enhance our existing solutions to meet our customers'
requirements, our business and operating results may be adversely affected.
If we fail to effectively expand our sales and marketing capabilities and teams, including through partner
relationships, we may not be able to increase our customer base and achieve broader market acceptance of our solutions.
Increasing our customer base and achieving broader market acceptance of our solutions will depend on our ability to
expand our sales and marketing organizations and their abilities to obtain new customers and sell additional solutions and
services to new and existing customers. We believe there is significant competition for direct sales professionals with the skills
and knowledge that we require, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future.
Our ability to achieve significant future revenue growth will depend on our success in recruiting, training and retaining a
sufficient number of direct sales professionals. New hires require significant training and time before they become fully
productive and may not become as productive as quickly as we anticipate. As a result, the cost of hiring and carrying new
representatives cannot be offset by the revenues they produce for a significant period of time. Our growth prospects will be
harmed if our efforts to expand, train and retain our direct sales team do not generate a corresponding significant increase in
revenues. Additionally, if we fail to sufficiently invest in our marketing programs or they are unsuccessful in creating market
awareness of our company and solutions, our business may be harmed and our sales opportunities limited.
In addition to our direct sales team, we also extend our sales distribution through formal and informal relationships with
referral partners. While we are not substantially dependent upon referrals from any partner, our ability to achieve significant
revenue growth in the future will depend upon continued referrals from our partners and growth of the network of our referral
partners. These partners are under no contractual obligation to continue to refer business to us, nor do these partners have
exclusive relationships with us and may choose to instead refer potential customers to our competitors. We cannot be certain
that these partners will prioritize or provide adequate resources for promoting our solutions or that we will be successful in
maintaining, expanding or developing our relationships with referral partners. Our competitors may be effective in providing
incentives to third parties, including our partners, to favor their solutions or prevent or reduce subscriptions to our solutions
either by disrupting our relationships with existing customers or limiting our ability to win new customers. Establishing and
retaining qualified partners and training them with respect to our solutions requires significant time and resources. If we are
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unable to devote sufficient time and resources to establish and train these partners, or if we are unable to maintain successful
relationships with them, we may lose sales opportunities and our revenues could suffer.
We rely on our management team and other key employees, and the loss of one or more key employees could harm our
business.
Our success and future growth depend upon the continued services of our management team, in particular our Chief
Executive Officer, and other key employees, including in the areas of research and development, marketing, sales, services and
general and administrative functions. From time to time, there may be changes in our management team resulting from the
hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our
existing development professionals because of the complexity of our solutions, including complexity arising as a result of the
regulatory requirements that are applicable to our customers and the pace of technology changes impacting our customers and
their End Users. We may terminate any employee's employment at any time, with or without cause, and any employee may
resign at any time, with or without cause; however, our employment agreements with our named executive officers provide for
the payment of severance under certain circumstances. We have also entered into employment agreements with our other
executive officers which provide for the payment of severance under similar circumstances as in our named executive officers'
employment agreements. The loss of one or more of our key employees could harm our business.
Because competition for key employees is intense, we may not be able to attract and retain the highly-skilled
employees we need to support our operations and future growth.
Competition for executive officers, software developers and other key employees in our industry is intense. In particular,
we compete with many other companies for executive officers, for software developers with high levels of experience in
designing, developing and managing software, as well as for skilled sales and operations professionals and knowledgeable
customer support professionals, and we may not be successful in attracting the professionals we need. Competition for software
development and engineering personnel is intense. We may have difficulty hiring and retaining suitably skilled personnel or
expanding our research and development organization. In addition, job candidates and existing employees often consider the
actual and potential value of the equity awards they receive as part of their overall compensation. Thus, if the perceived value
or future value of our stock declines, our ability to attract and retain highly skilled employees may be adversely affected. In
addition, many of our existing employees may exercise vested options or vest in outstanding restricted stock units and sell our
stock, which may make it more difficult for us to retain key employees. If we fail to attract and retain new employees, our
business and future growth prospects could be harmed.
Our failure to comply with laws and regulations related to the Internet and mobile usage could adversely affect our
business and results of operations, increase costs and impose constraints on the way we conduct our business.
We and our customers are subject to laws and regulations applicable to doing business over the Internet and through the
use of mobile devices. It is often not clear how existing laws governing issues such as property ownership, sales and other taxes
apply to the Internet and mobile usage, as these laws have in some cases failed to keep pace with technological change. Laws
governing the Internet could also impact our business or the business of our customers. For instance, existing and future
regulations on taxing Internet use, pricing, characterizing the types and quality of services and products, or restricting the
exchange of information over the Internet or mobile devices could result in reduced growth of our business, a general decline in
the use of the Internet by financial services providers, or their End Users, or diminished viability of our solutions and could
significantly restrict our customers' ability to use our solutions. Changing laws and regulations, industry standards and industry
self-regulation regarding the collection, use and disclosure of certain data may have similar effects on our and our customers'
businesses. Any such constraint on the growth in Internet and mobile usage could decrease its acceptance as a medium of
communication and commerce or result in increased adoption of new modes of communication and commerce that may not be
supported by our solutions. Any such adverse legal or regulatory developments could substantially harm our operating results
and our business.
Legislation relating to consumer privacy may affect our ability to collect data that we use in providing our customers'
End User information, which, among other things, could negatively affect our ability to satisfy our customers' needs.
We collect and store personal and identifying information regarding our customers' End Users to enable certain
functionality of our solutions and provide our customers with data about their End Users. The enactment of new or amended
legislation or industry regulations pertaining to consumer or private sector privacy issues could have a material adverse impact
on our collection, storage and sharing of such information. Legislation or industry regulations regarding consumer or private
sector privacy issues could place restrictions upon the collection, sharing and use of information that is currently legally
available, which could materially increase our cost of collecting some data. These types of legislation or industry regulations
could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet
our customers' requirements and our profitability and cash flow targets. While every state, the District of Columbia and the
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FFIEC have enacted data breach notification laws or requirements, there is no such federal law generally applicable to our
businesses. These legislative measures impose strict requirements on reporting time frames for providing notice, as well as the
contents of such notices. The costs of compliance with, the inability to determine whether a data breach has occurred within the
time frame provided by, and other burdens imposed by, such laws and regulations may lead to significant fines, penalties or
liabilities for any noncompliance with such privacy laws. Even the perception of privacy concerns, whether or not valid, may
inhibit market adoption of our solutions.
In addition to government activity, privacy advocacy groups and the technology and other industries are considering
various new, additional or different self-regulatory standards that may place additional burdens on us. If the collecting, storing
and processing of personal information were to be curtailed, our solutions would be less effective, which may reduce demand
for our solutions and adversely affect our business.
Any use of our solutions by our customers in violation of regulatory requirements could damage our reputation and
subject us to additional liability.
If our customers or their End Users use our solutions in violation of regulatory requirements and applicable laws, we
could suffer damage to our reputation and could become subject to claims. We rely on contractual obligations made to us by our
customers that their use and their End Users' use of our solutions will comply with applicable laws. However, we do not audit
our customers or their End Users to confirm compliance. We may become subject to or involved with claims for violations by
our customers or their End Users of applicable laws in connection with their use of our solutions. Even if claims asserted
against us do not result in liability, we may incur costs in investigating and defending against such claims. If we are found
liable in connection with our customers' or their End Users' activities, we could incur liabilities and be required to redesign our
solutions or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
Any future litigation against us could be costly and time-consuming to defend.
We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business
such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or
former employees. Litigation might result in substantial costs and may divert management's attention and resources, which
might seriously harm our business, overall financial condition and operating results. Insurance might not cover such claims,
might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be
available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated
costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our
performance, which could reduce the trading price of our stock.
Lawsuits by third parties against us and our customers for alleged infringement of the third parties' proprietary rights
or for other intellectual property related claims could result in significant expenses and harm our operating results.
Our industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other
intellectual property and proprietary rights. Companies in our industry are often required to defend against litigation claims
based on allegations of infringement or other violations of intellectual property rights. Furthermore, our customer agreements
typically require us to indemnify our customers against liabilities incurred in connection with claims alleging our solutions
infringe the intellectual property rights of a third party. From time to time, we have been involved in disputes related to patent
and other intellectual property rights of third parties, none of which have resulted in material liabilities. We expect these types
of disputes to continue to arise in the future. Our business could be adversely affected by any significant disputes between us
and our customers as to the applicability or scope of our indemnification obligations to them. There can be no assurances that
any existing limitations of liability provisions in our contracts would be enforceable or adequate, or would otherwise protect us
from any such liabilities or damages with respect to any particular claim. If such claims are successful, or if we are required to
indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and
management and have an adverse effect on our business, operating results and financial condition.
Furthermore, our technologies may not be able to withstand any third-party claims or rights against their use. As a result,
our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a
number of other entities and individuals, may own or claim to own intellectual property relating to our industry. We have a very
limited patent portfolio, which will likely prevent us from deterring patent infringement claims, and our competitors and others
may now and in the future have significantly larger patent portfolios than we have. From time to time, we have received and
may continue to receive threatening letters or notices or in the future may be the subject of claims that our solutions and
underlying technology infringe or violate the intellectual property rights of others, and we may be found to be infringing upon
such rights. The risk of patent litigation has been amplified by the increase in the number of non-practicing patent asserting
entities, or patent trolls. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted
against us or our customers whom we indemnify, could require that we pay substantial damages or ongoing royalty payments,
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prevent us from offering our solutions or require that we comply with other unfavorable terms. Even if the claims do not result
in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the
resources of our management and harm our business and operating results.
The frequency of these types of claims may increase as we continue to add new customers and as a result of our being a
public company.
If we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends upon our ability to protect our intellectual property, which may require us to incur significant costs.
We have developed much of our intellectual property internally, and we rely on a combination of confidentiality obligations in
contracts, patents, copyrights, trademarks, service marks, trade secret laws and other contractual restrictions to establish and
protect our intellectual property and other proprietary rights. In particular, we enter into confidentiality and invention
assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with
whom we have business relationships in which they will have access to our confidential information. We also rely upon licenses
to intellectual property from third parties. No assurance can be given that these agreements or other steps we take to protect our
intellectual property or the third-party intellectual property used in our solutions will be effective in controlling access to and
distribution of our solutions and our confidential and proprietary information. We will not be able to protect our intellectual
property if we are unable to enforce our rights or if we do not detect unauthorized uses of our intellectual property.
Despite our precautions, it may be possible for third parties to copy our solutions and use information that we regard as
proprietary to create solutions and services that compete with ours. Third parties may also independently develop technologies
that are substantially equivalent to our solutions. Some license provisions protecting against unauthorized use, copying, transfer
and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions.
In some cases, litigation may be necessary to enforce our intellectual property rights or to protect our trade secrets.
Litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions
of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses,
counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights and exposing us to
significant damages or injunctions. Our inability to protect our intellectual property against unauthorized copying or use, as
well as any costly litigation or diversion of our management's attention and resources, could delay sales or the implementation
of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting less-
advanced or more-costly technologies into our solutions or harm our reputation. In addition, we may be required to license
additional intellectual property from third parties to develop and market new solutions, and we cannot assure you that we could
license that intellectual property on commercially reasonable terms or at all.
As of December 31, 2018, we had nine U.S. patent applications pending and two issued U.S. patents. We do not know
whether our pending patent applications will result in the issuance of patents or whether the examination process will require us
to narrow the scope of our claims. To the extent that our pending patent applications or any portion of such applications proceed
to issuance as a patent, any such future patent may be opposed, contested, circumvented, designed around by a third party or
found to be invalid or unenforceable. In addition, our existing and any future issued patents may be opposed, contested,
circumvented, designed around by a third party or found to be invalid or unenforceable. The process of seeking patent
protection can be lengthy and expensive. We rely on a combination of patent, copyright, trade secret, trademark and other
intellectual property laws to protect our intellectual property, and much of our technology is not covered by any patent or patent
application.
We use "open source" software in our solutions, which may restrict how we use or distribute our solutions, require
that we release the source code of certain software subject to open source licenses or subject us to litigation or other actions
that could adversely affect our business.
We currently use in our solutions, and may use in the future, software that is licensed under "open source," "free" or other
similar licenses where the licensed software is made available to the general public on an "as-is" basis under the terms of a
specific non-negotiable license. Some open source software licenses require that software subject to the license be made
available to the public and that any modifications or derivative works based on the open source code be licensed in source code
form under the same open source licenses. Although we monitor our use of open source software, we cannot assure you that all
open source software is reviewed prior to use in our solutions, that our programmers have not incorporated open source
software into our solutions, or that they will not do so in the future. In addition, some of our products may incorporate third-
party software under commercial licenses. We cannot be certain whether such third-party software incorporates open source
software without our knowledge. In the past, companies that incorporate open source software into their products have faced
claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software.
Therefore, we could be subject to suits by parties claiming noncompliance with open source licensing terms or infringement or
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misappropriation of proprietary software. Because few courts have interpreted open source licenses, the manner in which these
licenses may be interpreted and enforced is subject to some uncertainty. There is a risk that open source software licenses could
be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our solutions.
As a result of using open source software subject to such licenses, we could be required to release our proprietary source code,
pay damages, re-engineer our products, limit or discontinue sales or take other remedial action, any of which could adversely
affect our business.
The market data and forecasts included in this report may prove to be inaccurate, and even if the markets in which we
compete achieve the forecasted growth, we cannot assure you that our business will grow at similar rates, or at all.
The market data and forecasts included in our Annual Report on Form 10-K for the year ended December 31, 2018 and
our previous filings with the SEC, including the data and forecasts published by BauerFinancial, Deloitte and Venture Scanner
among others, and our internal estimates and research are subject to significant uncertainty and are based on assumptions and
estimates that may not prove to be accurate. If the forecasts of market growth or anticipated spending prove to be inaccurate,
our business and growth prospects could be adversely affected. Even if the forecasted growth occurs, our business may not
grow at a similar rate, or at all. Our future growth is subject to many factors, including our ability to successfully implement our
business strategy, which itself is subject to many risks and uncertainties. Such reports speak as of their respective publication
dates and the opinions expressed in such reports are subject to change. Accordingly, potential investors in our common stock
are urged not to put undue reliance on such forecasts and market data.
Uncertain or weakened economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends on economic conditions, which may remain challenging or uncertain for the foreseeable
future. Financial developments seemingly unrelated to us or our industry may adversely affect us. Domestic and international
economies have been impacted by threatened sovereign defaults and ratings downgrades, falling demand for a variety of goods
and services, restricted credit, threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility
in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty. These conditions affect the rate of
technology spending and could adversely affect our customers' ability or willingness to purchase our solutions, delay
prospective customers' purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, any of
which could adversely affect our operating results. We cannot predict the timing, strength or duration of the economic recovery
or any subsequent economic slowdown in the U.S. or in our industry.
We may not be able to utilize a significant portion of our net operating loss carryforwards, which could adversely affect
our operating results and cash flows.
As of December 31, 2018, we had approximately $276.9 million of U.S. federal net operating loss carryforwards.
Utilization of these net operating loss carryforwards depends on many factors, including our future income, which cannot be
assured. Our loss carryforwards begin to expire in 2026. In addition, Section 382 of the Internal Revenue Code generally
imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when
a corporation has undergone an ownership change. An ownership change is generally defined as a greater than 50% change in
equity ownership by value over a 3-year period. We have undergone one or more ownership changes as a result of prior
financings, and may have undergone an ownership change as a result of our Initial Public Offering, or our IPO, in March 2014
or our follow-on offerings in March 2015 and September 2015, and any such change in ownership and the corresponding
annual limitation may prevent us from using our current net operating losses prior to their expiration. In addition, our
acquisition of the various businesses acquired since 2015 may result in an ownership change, and any such change in
ownership may result in a corresponding annual limitation which may prevent us from being able to fully utilize the net
operating losses we acquired prior to their expiration. Future ownership changes or future regulatory changes could further
limit our ability to utilize our net operating loss carryforwards. To the extent we are not able to offset our future income against
our net operating loss carryforwards, this would adversely affect our operating results and cash flows if we attain profitability.
Our business may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be
subject to tax liability for past sales. Any successful action by state, local or other authorities to collect additional or past
sales tax could adversely harm our business.
We file sales tax returns in certain states within the U.S. as required by law and certain customer contracts for a portion of
the solutions that we provide. Our sales tax liabilities with respect to sales and use taxes in various states and local jurisdictions
were $0.6 million as of December 31, 2018. From time to time we face sales tax audits, and we will likely continue to do so in
the future, and our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are
obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities.
We do not collect sales or other similar taxes in other states and many of the states do not apply sales or similar taxes to
certain of our solutions. State and local taxing jurisdictions have differing rules and regulations governing sales and use taxes,
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and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability
of sales taxes to our solutions in various jurisdictions is unclear. We review these rules and regulations periodically and, when
we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities to
determine how to comply with their rules and regulations. A successful assertion by one or more states, including states for
which we have not accrued tax liability, requiring us to collect sales or other taxes with respect to sales of our solutions or
customer support could result in substantial tax liabilities for past transactions, including interest and penalties, discourage
customers from purchasing our solutions or otherwise harm our business and operating results.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting
fluctuations and affect our reported results of operations.
Financial accounting standards may change or their interpretation may change. A change in accounting standards or
practices can have a significant effect on our reported results and may even affect our reporting of transactions completed
before the change becomes effective. Changes to existing rules or the re-examining of current practices may adversely affect
our reported financial results or the way we conduct our business. Accounting for revenues from sales of our solutions is
particularly complex, is often the subject of intense scrutiny by the SEC and will evolve as the Financial Accounting Standards
Board, or FASB, continues to consider applicable accounting standards in this area. In particular, in order to be able to comply
and maintain compliance with the requirements of the new revenue recognition standard under Accounting Standards
Codification, or ASC, 606, we have updated and enhanced our internal accounting systems and processes and our internal
controls over financial reporting. This has required, and will continue to require, additional investments by us, and may require
incremental resources and system configurations that could increase our operating costs in future periods. Further, as companies
operate in compliance with ASC 606, its interpretation and application will likely evolve over time which could adversely
impact our current and historical financial results and require further changes to our disclosures, internal systems and processes
and internal controls.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could
have a material effect on our reported financial results.
Under ASC 470-20, "Debt with Conversion and Other Options," an entity must separately account for the liability and
equity components of the convertible debt instruments, such as the Convertible Notes, that may be settled entirely or partially in
cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting
for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of
stockholders' equity on our consolidated balance sheet at the issuance date and the value of the equity component would be
treated as debt discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we will be
required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value
of the Convertible Notes to their face amount over the term of the Convertible Notes. We will report larger net losses, or lower
net income, in our financial results because ASC 470-20 will require interest to include both the amortization of the debt
discount and the instrument's nonconvertible coupon interest rate, which could adversely affect our reported or future financial
results, the trading price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments, such as the Convertible Notes, that may be settled
entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable
upon conversion of such Convertible Notes are not included in the calculation of diluted earnings per share except to the extent
that the conversion value of such Convertible Notes exceeds their principal amount. Under the treasury stock method, for
diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be
necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting
standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to
use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted
earnings per share could be adversely affected. In addition, if the market price of our common stock exceeds the applicable
strike price of the warrants, or Warrants, we entered into concurrently with the pricing of the February 2018 convertible debt
offering, then our diluted earnings per share would also be adversely affected.
Because we operate our business internationally and sell our solutions to customers located outside of the United
States, our business is susceptible to risks associated with international operations.
We have operations in India, the United Kingdom, the Netherlands and Australia. We also expect to continue to expand
our international operations. The continued international expansion of our operations requires significant management attention
and financial resources and results in increased administrative and compliance costs. Our limited experience in operating our
business outside the United States increases the risk that our expansion efforts into those regions may not be successful. In
particular, our business model may not be successful in particular countries or regions outside the United States for reasons that
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we currently are unable to anticipate. In addition, conducting international operations subjects us to risks that we have not
generally faced in the United States. These include, but are not limited to:
• fluctuations in currency exchange rates;
• the complexity of, or changes in, foreign regulatory requirements;
• the cost and complexity of bringing our solutions into compliance with foreign regulatory requirements, and risks of
our solutions not being compliant;
• difficulties in managing the staffing of international operations, including compliance with local labor and
employment laws and regulations;
• potentially adverse tax consequences, including the complexities of foreign value added tax systems, overlapping tax
regimes, restrictions on the repatriation of earnings and changes in tax rates;
• dependence on resellers and distributors to increase customer acquisition or drive localization efforts;
• the burdens of complying with a wide variety of foreign laws and different legal standards;
• increased financial accounting and reporting burdens and complexities;
• longer payment cycles and difficulties in collecting accounts receivable;
• longer sales cycles;
• political, social and economic instability abroad;
• terrorist attacks and security concerns in general;
• integrating personnel with diverse business backgrounds and organizational cultures;
• difficulties entering new non-U.S. markets due to, among other things, consumer acceptance and business knowledge
of these new markets;
• reduced or varied protection for intellectual property rights in some countries; and
• the risk of U.S. regulation of foreign operations.
The occurrence of any one of these risks could negatively affect our international business and, consequently, our
operating results. We cannot be certain that the investment and additional resources required to establish, acquire or integrate
operations in other countries will produce desired levels of revenue or profitability. If we are unable to effectively manage our
expansion into additional geographic markets, our financial condition and results of operations could be harmed.
We may acquire or invest in companies, or pursue business partnerships, which may divert our management's
attention and present additional risks, and we may be unable to integrate acquired businesses and technologies successfully
or achieve the expected benefits of such acquisitions or investments, all of which could have a material adverse effect on our
business and results of operations.
We have completed, and may in the future evaluate and consider, potential strategic transactions, including acquisitions
of, or investments in, businesses, technologies, services, products and other assets. We also may enter into relationships with
other businesses to expand our solutions, which could involve preferred or exclusive licenses, additional channels of
distribution, discount pricing or investments in other companies. Negotiating these transactions can be time-consuming,
difficult and expensive, and our ability to close these transactions may be subject to approvals that are beyond our control. In
addition, we have limited experience in acquiring other businesses. We may not be able to find and identify desirable additional
acquisition targets, we may incorrectly estimate the value of an acquisition target, and we may not be successful in entering into
an agreement with any particular target. Consequently, these transactions, even if undertaken and announced, may not close.
We may not achieve the anticipated benefits from our past acquisitions or any additional businesses we acquire due to a
number of factors, including:
• our inability to integrate, manage or benefit from acquired operations, technologies or services;
• unanticipated costs or liabilities associated with the acquisition, including the assumption of liabilities or commitments
of the acquired business that were not disclosed to us or that exceeded our estimates;
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• difficulty integrating the accounting systems, operations and personnel of the acquired business;
• difficulties and additional expenses associated with supporting legacy solutions and hosting infrastructure of the
acquired business;
• uncertainty of entry into markets in which we have limited or no prior experience or in which competitors have
stronger market positions;
• difficulty converting the customers of the acquired business to our solutions and contract terms, including disparities
in the revenues, licensing, support or professional services model of the acquired company;
• diversion of management's attention from other business concerns;
• adverse effects to our existing business relationships with business partners and customers as a result of the
acquisition;
• use of resources that are needed in other parts of our business;
• the use of a substantial portion of our cash that we may need to operate our business and which may limit our
operational flexibility and ability to pursue additional strategic transactions;
• the issuance of additional equity securities that would dilute the ownership interests of our stockholders;
• incurrence of debt on terms unfavorable to us or that we are unable to repay;
• incurrence of large charges or substantial liabilities;
• our inability to apply and maintain internal standards, controls, procedures and policies with respect to the acquired
businesses;
• difficulties retaining key employees of the acquired company or integrating diverse software codes or business culture;
and
• becoming subject to adverse tax consequences, substantial depreciation or deferred compensation charges.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and
other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield
expected returns, we may be required to take charges to our operating results based on this impairment assessment process,
which could adversely affect our results of operations.
We may not be able to secure sufficient additional financing on favorable terms, or at all, to meet our future capital
needs.
We may require additional capital in the future to pursue business opportunities or acquisitions or respond to challenges
and unforeseen circumstances. We may also decide to engage in equity or debt financings or enter into credit facilities for other
reasons. We may not be able to secure additional debt or equity financing in a timely manner, on favorable terms, or at all. Any
debt financing we obtain in the future could involve restrictive covenants relating to our capital raising activities and other
financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business
opportunities, including potential acquisitions.
Risks Related to Ownership of Our Common Stock
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future
sale.
As of January 31, 2019, we had an aggregate of 43,581,407 outstanding shares of common stock. The shares sold in our
IPO and follow-on offerings can be freely sold in the public market without restriction. The remaining shares can be freely sold
in the public market, subject in some cases to volume and other restrictions under Rule 144 and 701 under the Securities Act of
1933, as amended, and various agreements.
In addition, we have registered 16,049,857 shares of common stock that we have issued and may issue under our stock
plans. These shares can be freely sold in the public market upon issuance, subject in some cases to volume and other
restrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition, some of our
employees, including some of our executive officers, have entered into 10b5-1 trading plans regarding sales of shares of our
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common stock. These plans provide for sales to occur from time to time. If any of these additional shares are sold, or if it is
perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Also, in the future, we may issue additional securities in connection with investments and acquisitions. The amount of our
common stock issued in connection with an investment or acquisition could constitute a material portion of our then
outstanding stock. Due to these factors, sales of a substantial number of shares of our common stock in the public market could
occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares,
could reduce the market price of our common stock.
If securities or industry analysts publish unfavorable or misleading research about our business, or cease coverage of
our company, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the securities or industry analysts who covers us downgrades our stock or
publishes unfavorable or misleading research about our business, our stock price would likely decline. If one or more of these
analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for
our stock, and demand for our stock could decrease, which could cause our stock price or trading volume to decline.
We have incurred and will continue to incur significant increased expenses and administrative burdens as a public
company, which could have a material adverse effect on our operations and financial results.
As a public company, we have incurred and will continue to incur significant legal, accounting, administrative and other
costs and expenses. For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and
regulations subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the New York Stock
Exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate
governance practices. Compliance with public company requirements has increased our costs and made some activities more
time-consuming. In addition, our management and other personnel have been required to divert attention from operational and
other business matters to devote substantial time to these public company requirements. In particular, we have incurred and will
continue to incur significant expenses as well as devote substantial management effort toward ensuring ongoing compliance
with the requirements of Section 404 of the Sarbanes-Oxley Act. Although we have hired additional employees to comply with
these requirements, we may need to hire additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge to comply with any regulatory changes.
Furthermore, if we identify any issues in complying with public company reporting requirements (for example, if our
financial systems prove inadequate or we or our auditors identify deficiencies in our internal control over financial reporting),
we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our
reputation or investor perceptions of us. It is also more expensive to maintain director and officer liability insurance as a public
company. Risks associated with our status as a public company may make it more difficult for us to attract and retain qualified
persons to serve on our board of directors or as executive officers. The additional reporting and other obligations imposed on us
by these rules and regulations have and we expect will continue to increase our legal and financial compliance costs and the
costs of our related legal, accounting and administrative activities. These costs require us to divert a significant amount of
money that we could otherwise use to expand our business and achieve our strategic objectives. Proposals submitted by
stockholders at our annual meeting or other advocacy efforts by stockholders and third parties may also prompt additional
changes in governance and reporting requirements, which could further increase our costs.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating
uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time
consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This situation could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a
diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to
comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to
ambiguities related to their application and practice, regulatory authorities may initiate investigations, inquiries, administrative
proceedings or legal proceedings against us and our business may be adversely affected.
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Insiders continue to have significant control over us, which may limit our stockholders' ability to influence corporate
matters and delay or prevent a third party from acquiring control over us.
As of January 31, 2019, our directors, executive officers and holders of more than 5% of our common stock, together with
their affiliates, beneficially owned, in the aggregate, approximately 15.0% of our outstanding common stock. This significant
concentration of ownership may adversely affect the trading price for our common stock because investors often perceive
disadvantages in owning stock in companies with one or more large stockholders. In addition, these stockholders will be able to
exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval
of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could
limit other stockholders' ability to influence corporate matters and may have the effect of delaying or preventing a change in
control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other
stockholders.
The Convertible Note hedge and Warrant transactions may affect the value of our common stock.
In connection with the pricing of the Convertible Notes, we entered into Convertible Note hedge transactions with one or
more financial institutions, which may include one or more of the initial purchasers of Convertible Notes or their respective
affiliates, or the option counterparties. We also entered into Warrant transactions with the option counterparties pursuant to
which we sold Warrants for the purchase of our common stock. The Convertible Note hedge transactions are expected generally
to reduce the potential dilution upon any conversion of Convertible Notes or offset any cash payments we are required to make
in excess of the principal amount upon conversion of any Convertible Notes. The Warrant transactions could separately have a
dilutive effect to the extent that the market price per share of our common stock exceeds the strike price of the Warrants. In
connection with establishing their initial hedges of the Convertible Note hedge and Warrant transactions, the option
counterparties or their respective affiliates purchased shares of our common stock or entered into various derivative transactions
with respect to our common stock concurrently with or shortly after the pricing of the Convertible Notes. The option
counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives
with respect to our common stock or purchasing or selling our common stock in secondary market transactions prior to the
maturity of the Convertible Notes, and are likely to do so during any observation period related to a conversion of Convertible
Notes or following any repurchase of Convertible Notes by us. This activity could also cause or avoid an increase or a decrease
in the market price of our common stock.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial
statements could be impaired, which could harm our operating results, our ability to operate our business and investors'
views of us.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce
accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently,
including if we acquire additional businesses and integrate their operations. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial
statements in accordance with United States generally accepted accounting principles, or GAAP. While we have documented
and assessed our internal controls, we continue to evaluate opportunities to further strengthen the effectiveness and efficiency
of our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which requires annual
management assessment and annual independent registered public accounting firm attestation reports of the effectiveness of our
internal control over financial reporting. If we make additional acquisitions, we will need to similarly assess and ensure the
adequacy of the internal financial and accounting controls and procedures of such acquisitions. If we fail to maintain proper and
effective internal controls, including with respect to acquired businesses, our ability to produce accurate and timely financial
statements could be impaired, which could harm our operating results, harm our ability to operate our business and reduce the
trading price of our stock.
Our stock price may be volatile.
The trading price of our common stock has been and is expected to continue to be highly volatile and could be subject to
wide fluctuations in response to various factors, including the risk factors described in this report, and other factors beyond our
control. Factors affecting the trading price of our common stock include:
• variations in our operating results or the operating results of similar companies;
• announcements of technological innovations, new solutions or enhancements or strategic partnerships or agreements
by us or by our competitors;
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• changes in the estimates of our operating results, our financial guidance or changes in recommendations by any
securities analysts that follow our common stock;
• the gain or loss of customers, particularly our larger customers;
• adoption or modification of regulations, policies, procedures or programs applicable to our business and our
customers' business;
• marketing and advertising initiatives by us or our competitors;
• threatened or actual litigation;
• changes in our senior management;
• recruitment or departure of key personnel;
• market conditions in our industry, the industries of our customers and the economy as a whole;
• the overall performance of the equity markets;
• sales of shares of our common stock by existing stockholders; and
• volatility in our stock price, which may lead to higher stock-based compensation expenses under applicable
accounting standards.
In addition, the stock market in general and the market for technology companies in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those
companies. Broad market and industry factors may harm the market price of our common stock regardless of our actual
operating performance. Each of these factors, among others, could adversely affect your investment in our common stock.
Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against
them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert
management's attention.
We currently do not intend to pay dividends on our common stock, and, consequently, your only opportunity to achieve
a return on your investment is if the price of our common stock appreciates.
We have never declared nor paid cash dividends on our capital stock. We currently do not plan to declare dividends on
shares of our common stock in the foreseeable future. We currently intend to retain any future earnings to finance the operation
and expansion of our business. Any payment of future dividends will be at the discretion of our board of directors and will
depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that
our board of directors may deem relevant. Consequently, your only opportunity to achieve a return on your investment in our
company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee
that the price of our common stock that will prevail in the market will ever exceed the price that you paid for your common
stock.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in
control of our company and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply
to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an
interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if a change in
control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and
amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that
stockholders may consider favorable. Our certificate of incorporation and bylaws:
• authorize the issuance of "blank check" preferred stock that could be issued by our board of directors to help defend
against a takeover attempt;
• establish a classified board of directors, as a result of which the successors to the directors whose terms have expired
will be elected to serve from the time of election and qualification until the third annual meeting following their
election;
• require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
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• provide that vacancies on the board of directors, including newly created directorships, may be filled only by a
majority vote of directors then in office rather than by stockholders;
• prevent stockholders from calling special meetings;
• include advance notice procedures for stockholders to nominate candidates for election as directors or bring matters
before an annual meeting of stockholders;
• prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
• provide that certain litigation against us can only be brought in Delaware.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our principal executive offices are located in Austin, Texas in two adjacent buildings under separate lease agreements,
pursuant to the first of which we lease approximately 67,000 square feet of office space under a lease agreement with an initial
term that expires on April 30, 2021, with the option to extend the lease for an additional five-year term, and pursuant to the
second of which we lease approximately 129,000 square feet of office space with an initial term that expires on April 30, 2028,
with the option to extend the lease for an additional ten-year term. We also lease office space in south Austin, Texas; Lincoln,
Nebraska; Des Moines, Iowa; Atlanta, Georgia; Asheville, North Carolina; San Mateo, California; Bangalore, India; Sydney
Australia; London, United Kingdom; and Amsterdam, Netherlands. We believe our current facilities will be adequate for our
needs for the foreseeable future.
Item 3. Legal Proceedings.
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Our
management believes that there are no claims or actions pending against us, the ultimate disposition of which would have a
material impact on our business, financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.
Market Information and Holders
Our common stock has been listed on the New York Stock Exchange under the symbol "QTWO" since March 20, 2014.
Prior to that date, there was no public trading market for our common stock. Our common stock was priced at $13.00 per share
in our initial public offering on March 20, 2014. The following table sets forth for the periods indicated the high and low intra-
day sale prices per share of our common stock as reported on the New York Stock Exchange:
2018
First Quarter 2018
Second Quarter 2018
Third Quarter 2018
Fourth Quarter 2018
2017
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
High
Low
$
$
$
$
48.75
63.55
67.10
61.00
37.58
40.50
41.80
44.35
36.97
44.20
56.45
43.41
28.30
34.65
31.95
36.25
As of December 31, 2018, we had 26 holders of record of our common stock. The actual number of holders of common
stock is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are
held in street name by brokers and nominees. The number of holders of record also does not include stockholders whose shares
may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. Any future determination to declare cash
dividends on our common stock will be made at the discretion of our board of directors and will depend on our financial
condition, results of operations, capital requirements, general business conditions and other factors that our board of directors
may deem relevant. We do not anticipate paying cash dividends on our common stock for the foreseeable future.
Use of Proceeds From Registered Securities
On March 25, 2014, we completed our IPO of 7,760,870 shares of common stock, at a price of $13.00 per share, before
underwriting discounts and commissions, and on April 2, 2014 we completed the sale of an additional 1,164,131 shares of our
common stock, at a price of $13.00 per share, before underwriting discounts and commissions, as a result of the underwriters'
exercise of their over-allotment option to purchase additional shares. We sold 7,414,131 of such shares and existing
stockholders sold an aggregate of 1,510,870 of such shares. We did not receive any proceeds from the sale of shares by the
selling stockholders in the IPO. The offer and sale of all of the shares in the IPO were registered under the Securities Act
pursuant to a registration statement on Form S-1 (File No. 333-193911), which was declared effective by the SEC on March 19,
2014.
There were no material changes in the planned use of proceeds from our IPO from that described in the final prospectus
filed with the SEC pursuant to Rule 424(b) on March 20, 2014. With the proceeds of the IPO, we repaid approximately $6.2
million of our previous outstanding indebtedness under a previous credit facility, completed the acquisition of Centrix for total
consideration of $21.0 million in cash (which included an escrow amount of $2.0 million), completed the acquisition of Social
Money for $10.7 million in cash (which included a hold-back of $2.5 million), paid $9.2 million to the former Centrix
shareholders based upon the achievement of certain milestones and continued employment with Q2, completed an asset
purchase for $1.5 million in cash in January 2017 (which included a hold-back of $150,000), and we paid a portion of the
purchase price for our acquisition of Cloud Lending, which we acquired for total consideration of $105.0 million (which
includes an escrow amount of $10.5 million).
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On March 4, 2015, we completed a follow-on offering of 5,890,705 shares of our common stock at a price of $19.75 per
share, before underwriting discounts and commissions, including 768,352 shares of our common stock resulting from the
underwriters' exercise of their over-allotment option. We sold 1,757,290 of such shares and existing stockholders sold an
aggregate of 4,133,415 of such shares. We did not receive any proceeds from the sale of shares by the selling stockholders in
the March follow-on offering. The offer and sale of all of the shares in the March follow-on offering were registered under the
Securities Act pursuant to a registration statement on Form S-1 (File No. 333-202109), which was declared effective by the
SEC on February 26, 2015.
There were no material changes in the planned use of proceeds from our March follow-on offering from that described in
the final prospectus filed with the SEC pursuant to Rule 424(b) on February 27, 2015. We used the proceeds from the March
follow-on offering to pay a portion of the purchase price for our acquisition of Cloud Lending, which we acquired for total
consideration of $105.0 million (which includes an escrow amount of $10.5 million).
On September 30, 2015, we completed a follow-on offering of 3,798,996 shares of our common stock at a price of $25.50
per share, before underwriting discounts and commissions, and on October 15, 2015 we completed the sale of an additional
569,850 shares of our common stock, at a price of $25.50 per share, before underwriting discounts and commissions, as a result
of the underwriters' exercise of their over-allotment option to purchase additional shares. We sold 853,409 of such shares and
existing stockholders sold an aggregate of 3,515,437 of such shares. We did not receive any proceeds from the sale of shares by
the selling stockholders in this follow-on offering or as a result of the underwriters exercising their over-allotment option in this
offering. The offer and sale of all of the shares in the September follow-on offering were registered under the Securities Act
pursuant to a registration statement on Form S-3 (File No. 333-206869), which was declared effective by the SEC on
September 24, 2015.
There were no material changes in the planned use of proceeds from our September follow-on offering from that
described in the final prospectus filed with the SEC pursuant to Rule 424(b) on September 25, 2015. We used the proceeds
from the September follow-on offering to pay a portion of the purchase price for our acquisition of Cloud Lending, which we
acquired for total consideration of $105.0 million (which includes an escrow amount of $10.5 million).
Equity Compensation Plan Information
Information regarding the securities authorized for issuance under our equity compensation plans will be included in our
Proxy Statement relating to our 2019 annual meeting of stockholders to be filed with the SEC within 120 days after the end of
our fiscal year ended December 31, 2018, and is incorporated herein by reference.
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Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between March 20,
2014 (the date of our IPO) and December 31, 2018, with the cumulative total return of (i) the Russell 2000 Index and (ii) the
S&P 1500 Application Software Index. This graph assumes the investment of $100 on March 20, 2014 in our common stock at
our IPO offering price of $13.00 per share, the S&P 1500 Application Software Index and the Russell 2000 Index, and assumes
the reinvestment of dividends, if any. Note that historic stock price performance is not necessarily indicative of future stock
price performance.
The information contained in the Stock Performance Graph shall not be deemed to be soliciting material or to be filed
with the SEC nor shall such information be incorporated by reference into any future filing under the Securities Act or the
Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
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Item 6. Selected Financial Data.
The following selected consolidated statements of operations data for the years ended December 31, 2018, 2017 and
2016, and the selected consolidated balance sheet data as of December 31, 2018 and 2017 are derived from our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement
of operations data for the years ended December 31, 2015 and 2014 and the balance sheet data as of December 31, 2016, 2015
and 2014 were derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.
The selected consolidated financial data should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements, related notes, and other financial information
included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results to
be expected in any future period. All amounts are in thousands, except per share data.
Consolidated Statements of Operations Data:
Revenues
Cost of revenues(1)(2)
Gross profit
Operating expenses:
Sales and marketing(2)
Research and development(2)
General and administrative(2)
Acquisition related costs
Amortization of acquired intangibles
Unoccupied lease charges(3)
Total operating expenses
Loss from operations
Total other income (expense), net
Loss before income taxes
Benefit from (provision for) income taxes
Net loss
Net loss per common share:
Net loss per common share, basic and diluted
Weighted average common shares outstanding:
Basic and diluted
Other Financial Data:
2018
Year Ended December 31,
2015
2016
2017
2014
$241,100
121,855
119,245
$193,978
99,485
94,493
$150,224
77,429
72,795
$108,867
59,128
49,739
$ 79,129
46,054
33,075
48,124
51,334
44,990
4,145
1,844
658
151,095
(31,850)
(7,350)
(39,200)
3,803
23,069
12,086
16,991
—
—
—
52,146
(19,071)
(492)
(19,563)
(71)
$ (35,397) $ (26,164) $ (36,354) $ (25,063) $ (19,634)
41,170
40,338
37,179
1,232
1,481
—
121,400
(26,907)
429
(26,478)
314
36,284
32,460
31,959
6,307
1,470
33
108,513
(35,718)
(209)
(35,927)
(427)
26,999
21,534
22,977
2,493
576
—
74,579
(24,840)
(3)
(24,843)
(220)
$
(0.83) $
(0.63) $
(0.92) $
(0.67) $
(0.67)
42,797
41,218
39,649
37,275
29,257
Adjusted EBITDA(4)
$ 18,975
_______________________________________________________________________________
$ 10,210
$ (4,539) $ (8,138) $ (10,418)
(1)
(2)
Includes amortization of acquired technology of $4.5 million, $3.6 million, $3.2 million, and $0.7 million for the years
ended December 31, 2018, 2017, 2016, and 2015, respectively, and zero for the year ended December 31, 2014.
Includes stock-based compensation expenses as follows:
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expenses
2018
$
4,773
5,837
6,852
11,758
$ 29,220
Year Ended December 31,
2015
2016
2017
$
3,729
3,243
4,464
9,503
$ 20,939
$
2,043
2,231
2,934
5,432
$ 12,640
$
$
1,134
1,570
1,186
3,472
7,362
2014
623
774
527
2,646
4,570
$
$
_____________________________________________________________________________
(3) Unoccupied lease charges in 2018 include costs related to the early exit from of a portion of our south Austin facility,
and in 2016 include the early exit from our previous Lincoln, Nebraska facility, partially offset by sublease income
from those facilities.
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(4) 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, total other (income) expense, net, and
unoccupied lease charges.
The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:
2018
Year Ended December 31,
2015
2016
2017
2014
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss
Depreciation and amortization
Stock-based compensation expense
Acquisition related costs
(Benefit from) provision for income taxes
Total other (income) expense, net
Unoccupied lease charges
Adjusted EBITDA
$ (35,397) $ (26,164) $ (36,354) $ (25,063) $ (19,634)
4,083
12,199
4,570
12,640
—
6,307
71
427
492
209
—
33
$ (4,539) $ (8,138) $ (10,418)
14,946
20,939
1,232
(314)
(429)
—
$ 10,210
16,802
29,220
4,145
(3,803)
7,350
658
$ 18,975
6,847
7,362
2,493
220
3
—
Consolidated Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Investments
Deferred implementation, solution, and other costs, total
Intangible assets, net
Goodwill
Convertible notes, net of current portion
Deferred revenues, total
Working capital
Total stockholders' equity
2018
$108,341
1,815
68,979
41,637
63,296
107,907
182,723
65,594
144,631
$158,900
Year Ended December 31,
2015
2016
2017
$ 57,961
2,315
41,685
34,076
12,034
12,876
—
66,668
63,014
$106,622
$ 54,873
1,315
42,249
30,998
15,208
12,876
—
61,830
66,458
$100,235
$ 67,049
2,123
43,571
24,599
17,192
12,876
—
52,239
87,525
$117,974
2014
$ 67,979
829
20,956
19,593
—
—
—
36,725
72,118
$ 78,940
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In
addition to historical consolidated financial information, the following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this
Annual Report on Form 10-K, particularly in the section titled "Risk Factors."
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
regional and community financial institutions, or RCFIs, 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 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 to RCFIs, and we continue to be focused
on our founding mission of building stronger communities by strengthening their financial institutions. However, the continued
proliferation and ubiquity of mobile and tablet devices and End Users' increasing expectations for digital services have driven
increases in the number of providers, greater fragmentation of financial services markets and a broadening set of new and
innovative digital services, creating challenges and opportunities in the markets served by RCFIs 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.
RCFIs, 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. This combined investment by
traditional and emerging financial services providers is driving further competition, segmentation and innovation.
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 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
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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 seven years, our average number of
Registered Users per installed customer on our digital banking platform, or Installed Customer, has grown, and 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 Operation Measures" for additional detail on how we define "Installed Customers" and "Registered Users."
We believe we have a significant opportunity to continue to grow our business, and we intend to invest across our
organization to increase our revenues and improve our operating efficiencies. These investments will increase our costs on an
absolute dollar basis, but the timing and amount of these investments will vary based on the rate at which we expect to add new
customers, the implementation and support needs of our customers, our software development plans, our technology
infrastructure requirements and the internal needs of our organization. Many of these investments will occur in advance of our
realizing any resultant benefit which may make it difficult to determine if we are effectively allocating our resources.
If we are successful in growing our revenues by increasing the number 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 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 RCFI 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. We intend to add sales representatives to identify and address
the RCFI, Alt-FI and FinTech markets across the U.S. and internationally. We also expect 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. In
addition, over the past three years we have acquired or developed new solutions and additional functions that serve a broader
range of needs of RCFIs as well as the needs of Alt-FIs and FinTechs. In addition to our acquisitions of Centrix and Social
Money in 2015, on October 15, 2018, we completed our acquisition of Cloud Lending, Inc., or Cloud Lending, a provider of an
end-to-end digital lending and leasing platform and on November 30, 2018, we completed our acquisition of Gro Solutions,
Inc., or Gro, a provider of digital account opening and digital sales and marketing solutions for financial institutions. Our
solutions now include a broad range of services and experiences including corporate banking, regulatory and compliance,
digital lending and leasing, BaaS and digital account opening and sales and marketing 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 RCFI, 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 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 we grow our business, we must continue to invest in and
grow our services organization to support our customers' needs and maintain our reputation.
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Key Operating Measures
In addition to the United States 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 our digital banking platform from which we are currently
recognizing revenues. 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. We had 401, 382 and 385 Installed Customers on our digital banking platform as of December 31, 2018,
2017 and 2016, 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 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 and the timing of registration of new End Users. Our Installed Customers had approximately 12.8 million, 10.4
million and 8.6 million Registered Users as of December 31, 2018, 2017 and 2016, respectively.
Revenue Retention Rate
We believe that our ability to retain our customers and expand their use of our products and services over time is an
indicator of the stability of our revenue base and the long-term value of our customer relationships. We assess our performance
in this area using a metric we refer to as our revenue retention rate. We calculate our revenue retention rate as the total revenues
in a calendar year, excluding any revenues from solutions of businesses acquired during such year, from customers who were
implemented on any of our solutions as of December 31 of the prior year, expressed as a percentage of the total revenues during
the prior year from the same group of customers. Our revenue retention rate provides insight into the impact on current year
revenues of: the number of new customers implemented on any of our solutions during the prior year; the timing of our
implementation of those new customers in the prior year; growth in the number of End Users on such solutions and changes in
their usage of such solutions; sales of new products and services to our existing customers during the current year, excluding
any products or services resulting from businesses acquired during such year; and customer attrition. The most significant
drivers of changes in our revenue retention rate each year have historically been the number of new customers in the prior year
and the timing of our implementation of those new customers. The timing of our implementation of new customers in the prior
year is significant because we do not start recognizing revenues from new customers until they are implemented. If
implementations are weighted more heavily in the first or second half of the prior year, our revenue retention rate will be lower
or higher, respectively. 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 114%, 122%, and 122% for the years ended December 31, 2018, 2017
and 2016, 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
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identical services at a lower price. Our annual churn has ranged from 5.1% to 3.5% over the last seven years, and we had annual
churn of 5.0%, 4.9% and 5.1% for the years ended December 31, 2018, 2017 and 2016, 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.
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, total other (income) expense, net, 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.
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):
Year Ended December 31,
2017
2016
2018
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss
Depreciation and amortization
Stock-based compensation expense
Acquisition related costs
(Benefit from) provision for income taxes
Total other (income) expense, net
Unoccupied lease charges
Adjusted EBITDA
50
$ (35,397) $ (26,164) $ (36,354)
12,199
12,640
6,307
427
209
33
(4,539)
16,802
29,220
4,145
(3,803)
7,350
658
18,975
14,946
20,939
1,232
(314)
(429)
—
10,210
$
$
$
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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 substantial majority of our revenues from subscription fees for the use of our solutions hosted
in our data centers or with our cloud-based hosting resources as well as revenues for implementation and customer support
services related to our solutions, and 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 our solutions in their own data centers
under term license and maintenance agreements, and we recognize the software license revenue once the customer obtains
control of the license and corresponding maintenance revenues 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. 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.
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
implementation, customer support, data center and customer training personnel, as well as costs related to research and
development personnel who perform implementation and customer support services. 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, 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 solution to the extent those costs are
considered to be recoverable from future revenues. We amortize the costs for a particular implementation once revenue
recognition commences, and we amortize those implementation costs 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. The costs related to software development that are incurred between reaching technological
feasibility of a solution and the point at which the solution is ready for general release are capitalized and are included in
intangible assets, net on the consolidated balance sheet. During the year ended December 31, 2017, all of the products related to
capitalized software development costs reached general release, and we have commenced amortization of these
costs. 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. 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.
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Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses.
They also include costs related to our acquisitions and the resulting amortization of acquired intangible assets from those
acquisitions. 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.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and other personnel-related costs, including commissions,
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. Commissions are generally capitalized and then amortized
over the expected period of customer benefit.
Sales and marketing expenses are also impacted by the timing of significant marketing programs such as our annual user
conference which we typically hold during the second quarter. We plan to continue investing in sales and marketing by
increasing our number of sales and marketing personnel and expanding our sales and marketing activities. We believe these
investments will help us build brand awareness, add new customers and expand sales to our existing customers as they continue
to buy more solutions from us, the number of End Users utilizing our solutions grows and those End Users increase the number
of transactions they perform on our solutions.
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 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. Research
and development expenses are expensed as incurred.
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 consolidated
balance sheet.
General and Administrative
General and administrative expenses consist primarily of salaries and other personnel-related costs, including 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 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, and various legal and
professional service expenses incurred in connection with the acquisitions, which were recognized when incurred.
Amortization of Acquired Intangibles
Amortization of acquired intangibles represent 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.
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Unoccupied Lease Charges
Unoccupied lease charges include costs related to the early exit from a portion of our south Austin facility, partially offset
by anticipated sublease income from that facility.
Total Other Income (Expense), Net
Total other income (expense), net, consists primarily of interest income and expense and loss on disposal of long-lived
assets. 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 Convertible Notes, fees and interest associated with the letter of credit issued to our landlord for the security
deposit for our corporate headquarters, and the interest incurred on our previously existing credit facility which expired in April
2017.
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 the release of
valuation allowance resulting in deferred tax benefits relating to acquired net deferred tax liabilities. We incurred minimal state
income taxes for each of the years ended December 31, 2018, 2017 and 2016. Our net operating loss carryforwards for federal
income tax purposes were $276.9 million and $168.1 million at December 31, 2018 and 2017, respectively, which will expire at
various dates beginning in 2026, if not utilized. We also held state tax credits of $1.2 million and $0.5 million for the years
ended December 31, 2018 and 2017, respectively, federal alternative minimum tax credits of zero and $0.1 million for the years
ended December 31, 2018 and 2017, respectively, and federal R&D tax credits of $3.2 million and $1.2 million for the years
ended December 31, 2018 and 2017, respectively. The state tax credits will expire in 2026 if not utilized, the federal R&D tax
credits will expire at various dates beginning in 2027, if not utilized, and the federal alternative minimum tax credits have an
indefinite carryforward period.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of
revenues and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. Actual results might differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our consolidated financial statements appearing elsewhere
in this Annual Report on Form 10-K, and we believe that the accounting policies discussed below involve the greatest degree of
complexity and exercise of significant judgments and estimates by our management. The methods, estimates and judgments
that we use in applying our accounting policies have a significant impact on our results of operations and, accordingly, we
believe the policies described below are the most critical for understanding and evaluating our financial condition and results of
operations.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for those goods or services over the term of the
agreement, generally when our solutions are implemented and made available to our customers. The promised consideration
may include fixed amounts, variable amounts or both. Revenues are recognized net of sales credits and allowances.
Revenue-generating activities are directly related 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 cloud-based hosting services, transaction revenue from bill-pay solutions, as well as 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. We account for revenue in accordance with the new revenue standard, ASU No.
2014-09, "Revenue from Contracts with Customers (Topic 606)," which was adopted on January 1, 2018, using the modified
retrospective method.
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Subscription Fee Revenues
A substantial majority of our software solutions are available for use as hosted application arrangements under
subscription fee agreements without licensing perpetual rights to the software. Subscription fees from these applications,
including contractual periodic price increases, are recognized over time on a ratable basis over the customer agreement term
beginning on the date our solution is made available to the customer. Amounts that have been invoiced are recorded in accounts
receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Periodic
price increases are estimated at contract inception and result in contract assets as revenue recognition may exceed the amount
billed early in the contract. Additional fees for monthly usage above the levels included in the standard subscription fee are
recognized as revenue in the month when the usage amounts are determined and reported.
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. Term licenses sold with maintenance entitle the customer to
technical support, upgrades and updates to the software on a when-and-if-available basis. Under the new revenue standard, we
recognize software license revenue once the customer obtains control of the license, which generally occurs at the start of each
license term. We recognize the remaining arrangement consideration for maintenance revenue over time on a ratable basis over
the term of the software license. If the expected length of time between when we transfer the software license to the customer
and when the customer pays for it results in a significant financing component, we adjust the promised amount of consideration
for the effects of the time value of money, which reflects the price the customer would have paid when the license was
transferred. Revenues from term licenses and maintenance agreements and the related financing component were not
significant in the periods presented.
Transactional Revenues
We earn the majority of our transactional revenues based on the number of bill-pay transactions that End Users initiate on
our digital banking platform. We also generate a smaller portion of our transactional revenues from interchange fees generated
when End Users utilize debit cards integrated with our Q2 CorePro API or Q2 Biller Direct products. We recognize revenue for
bill-pay transaction services and interchange fees in the month incurred based on actual transactions.
Services and Other Revenues
Implementation services are required for each new digital banking and lending and leasing platform and Centrix
standalone contract, and there is a significant level of integration and configuration for each customer. Our revenue for upfront
implementation services are billed upfront and recognized over time on a ratable basis over the customer agreement term for
our hosted application agreements. Upfront implementation services for on-premises agreements are recognized at
commencement date. Under certain circumstances, we partner with third-party professional system integrators to support the
installation and configuration process for our digital lending and leasing solutions, and therefore, we have determined that these
services qualify as a separate performance obligation in certain markets and geographies, and the upfront implementation
services for these agreements are recognized at commencement date.
Professional services revenues, which primarily consist of training, advisory services, core conversion services, web
design, and other general professional services, are generally billed and recognized when delivered. Certain out-of-pocket
expenses billed to customers are recorded as revenues rather than an offset to the related expense.
Significant Judgments
Performance Obligations and Standalone Selling Price
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of
accounting in the new revenue standard. Determining whether products and services are considered distinct performance
obligations that should be accounted for separately versus together may require significant judgment. We have contracts with
customers that often include multiple performance obligations, usually including multiple subscription and implementation
services. For these contracts, we account for individual performance obligations separately if they are distinct by allocating the
contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, or
SSP, of each distinct good or service in the contract. In determining whether implementation services are distinct from
subscription services, we considered various factors including the significant level of integration, interdependency, and
interrelation between the implementation and subscription service, as well as the inability of the customer's personnel or other
service providers to perform significant portions of the services. We have concluded that the implementation services included
in contracts with multiple performance obligations in the North American banking market are not distinct and, as a result, we
defer any arrangement fees for implementation services and recognize such amounts over time on a ratable basis as one
performance obligation with the underlying subscription revenue for the initial agreement term of the hosted application
agreements. We have concluded that outside the North American banking market, the implementation services for our lending
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and leasing platform included in contracts with multiple performance obligations are distinct and, as a result, we recognize
implementation fees on such arrangements as the related implementation services are performed.
The majority of our revenue recognized at a particular point in time is for professional services and usage revenue. These
services are performed within a relatively short period of time and are recognized at the point in time in which the customer
obtains control of the asset, which is generally upon completion of the service.
Judgment is required to determine the SSP for each distinct performance obligation. A contract's transaction price is
allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied. The primary method used to estimate SSP is the adjusted market assessment approach, which considers its overall
pricing objectives, market conditions and other factors, including the value of our contracts, its discounting practices, the size
and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and
agreement prices, and the number and types of End Users within its contracts.
Variable Consideration
We recognize usage revenue related to End Users accessing our solutions in excess of contracted amounts, bill-pay
transactions that End Users initiate on our digital banking platform, and interchange fees that End Users generate using our
solutions. Judgment is required to determine the accounting for these types of revenue. We consider various factors including
the degree to which usage is interdependent or interrelated to past services, costs to us per End User over the contract,
contractual price per End User changes and their relationship to market terms, forecasted data, and our cost to fulfill the
obligation. We have concluded that our usage revenue relates specifically to the transfer of the service to the customer and is
consistent with the allocation objective of Topic 606 when considering all of the performance obligations and payment terms in
the contract. Therefore, we recognize usage revenue on a monthly or quarterly basis in accordance with the agreement, as
determined and reported. This allocation reflects the amount we expect to receive for the services for the given period.
We sometimes provide credits or incentives to our customers. Known and estimable credits and incentives represent a
form of variable consideration, which are estimated at contract inception and reduce the revenues recognized for a particular
contract. These estimates are updated at the end of each reporting period as additional information becomes available. We
believe that there will not be significant changes to our estimates of variable consideration as of December 31, 2018.
Other Considerations
We evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net
basis) with respect to the vendor reseller agreements pursuant to which we resell certain third-party solutions along with our
solutions. Generally, we report revenues from these types of contracts on a gross basis, meaning the amounts billed to
customers are recorded as revenues, and expenses incurred are recorded as cost of revenues. Where we are the principal, we
first obtain control of the inputs to the specific good or service and direct their use to create the combined output. Our control is
evidenced by our involvement in the integration of the good or service on our solutions before it is transferred to our customers
and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing
pricing. Revenues provided from agreements in which we are an agent are immaterial.
Deferred Revenues
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue
recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well
as initial subscription fees. We recognize deferred revenues as revenues when the services are performed and the corresponding
revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to customers when
services are performed and billed.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between
invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment
before the products or services are delivered to the customer.
Deferred Implementation Costs
We capitalize certain personnel and other costs, such as employee salaries, benefits and the associated payroll taxes that
are direct and incremental to the implementation of our solutions. We analyze implementation costs that may be capitalized to
assess their recoverability, and only capitalize costs that we anticipate to be recoverable. We assess the recoverability of our
deferred implementation costs by comparing the greater of the amount of the non-cancellable portion of a customer's contract
and the non-refundable customer prepayments received as it relates to the specific implementation costs incurred. We begin
amortizing the deferred implementation costs for an implementation once the revenue recognition criteria have been met, and
we amortize those deferred implementation costs ratably over the expected period of customer benefit, which has been
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determined to be the estimated life of the technology, which we estimate to be five to seven years. We determined the period of
benefit by considering factors such as historically high renewal rates with similar customers and contracts, initial contract
length, an expectation that there will still be a demand for the product at the end of its term, and the significant costs to switch
to a competitor's product, all of which are governed by the estimated useful life of the technology.
The portion of deferred implementation costs expected to be amortized during the succeeding twelve-month period is
recorded in current assets as deferred implementation costs, current portion, and the remainder is recorded in long-term assets
as deferred implementation costs, net of current portion on the consolidated balance sheet.
Deferred Solution and Other Costs
We capitalize sales commissions and other third-party costs, such as third-party licenses and maintenance related to our
customer agreements. We capitalize sales commissions because the commission charges are so closely related to the revenues
from the non-cancellable customer agreements that they should be recorded as an asset and charged to expense over the same
period that the related revenue is recognized. Under the new revenue standard, we capitalize commissions and bonuses for
those involved in the sale, including direct employees and indirect supervisors, as these are incremental to the sale. We
typically pay commissions in two increments. The initial payment is made after the contract has been executed and the initial
deposit has been received from the customer, and the final payment is made upon commencement date. We require that an
individual remain employed to collect a commission when it is due. The service period between the first and second payment is
considered to be a substantive service period, and as a result, we expense the final payment when made. We begin amortizing
deferred solution and other costs for a particular customer agreement once the revenue recognition criteria are met and amortize
those deferred costs over the expected period of customer benefit, which has been determined to be the estimated life of the
technology, which we estimate to be five to seven years. We determined the period of benefit by considering factors such as
historically high renewal rates with similar customers and contracts, initial contract length, an expectation that there will still be
a demand for the product at the end of its term, and the significant costs to switch to a competitor's product, all of which are
governed by the estimated useful life of the technology.
We analyze solution and other costs that may be capitalized to assess their recoverability and only capitalize costs that we
anticipate being recoverable. The portion of capitalized costs expected to be amortized during the succeeding twelve-month
period is recorded in current assets as deferred solution and other costs, current portion, and the remainder is recorded in long-
term assets as deferred solution and other costs, net of current portion.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled
receivables (contract assets), and deferred revenues (contract liabilities). Billings scheduled to occur after the performance
obligation has been satisfied and revenue recognition has occurred result in contract assets. Contract assets that are expected to
be billed during the succeeding twelve-month period are recorded in contract assets, current portion, and the remaining portion
is recorded in contract assets, net of current portion on the accompanying consolidated balance sheets at the end of each
reporting period. A contract liability results when we receive prepayments or deposits from customers in advance for
implementation, maintenance and other services, as well as initial subscription fees. Customer prepayments are generally
applied against invoices issued to customers when services are performed and billed. We recognize contract liabilities as
revenues when the services are performed, and the corresponding revenue recognition criteria are met. Contract liabilities that
are expected to be recognized as revenues during the succeeding twelve-month period are recorded in deferred revenues,
current portion, and the remaining portion is recorded in deferred revenue, net of current portion, on the accompanying
consolidated balance sheets at the end of each reporting period.
Accounts Receivable, Net
Accounts receivable are stated at net realizable value, including both billed and unbilled receivables to customers.
Unbilled receivable balances included in accounts receivable arise primarily when we provide services in advance of billing for
those services. Generally, billing for revenues related to the number of End Users and the number of transactions processed by
our End Users that are included in our minimum subscription fee occurs in the month the revenue is recognized, resulting in
accounts receivable. Billing for revenues relating to the number of End Users and the number of transactions processed by our
End Users that are in excess of our minimum subscription fees are, generally, billed in the month following the month the
revenues were earned, resulting in an unbilled receivable.
We assess the collectability of outstanding accounts receivable on an ongoing basis and maintain an allowance for
doubtful accounts for accounts receivable deemed uncollectable. As of December 31, 2018 and December 31, 2017, we did not
provide for an allowance for doubtful accounts, as all amounts outstanding were deemed collectable. Historically, our
collection experience has not varied significantly, and bad debt expenses have been insignificant.
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We maintain a reserve for estimated sales credits issued to customers for billing disputes or other service-related reasons.
This allowance is recorded as a reduction against current period revenues and accounts receivable. In estimating this allowance,
we analyze prior periods to determine the amounts of sales credits issued to customers compared to the revenues in the period
that related to the original customer invoice. This estimate is analyzed quarterly and adjusted as necessary.
Stock-Based Compensation
Stock options, restricted stock units, and market stock units awarded to employees, directors, executives and consultants
are measured at fair value at each grant date. As of January 1, 2017, we no longer use a forfeiture rate to recognize
compensation expense as a result of the adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment
Accounting." Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over
the following 36 months, and restricted stock unit awards vest in four annual installments of 25% each. Market stock units are
performance-based awards that cliff vest based on our stockholder return relative to the total stockholder return of the Russell
2000 Index, or Index, over a three-year period on the anniversary of the date of grant. Up to one-third of the target shares of our
common stock subject to each market stock unit award are eligible to be earned after the first and second years of the
performance period and up to 200% of the full target number of shares subject to each market stock unit award are eligible to
be earned after the completion of the three-year performance period (less any shares earned for years one and two) based on the
average price of our common stock relative to the Index during the performance period.
We value stock options using the Black-Scholes option-pricing model, which requires the input of subjective assumptions,
including the risk-free interest rate, expected life, expected stock price volatility, and dividend yield. The risk-free interest rate
assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected
term of our employee stock options. The expected life represents the period of time the stock options are expected to be
outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is presumed to
be the mid-point between the vesting date and end of the contractual term. We use the simplified method due to the lack of
sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock
options. Due to our limited history as a public company, expected volatility is based on historical volatilities for publicly traded
stock of comparable companies over the estimated expected life of the stock options. We assume no dividend yield because we
do not expect to pay dividends in the near future, which is consistent with our history of not paying dividends. We recognize
compensation expense ratably over the requisite service period of the stock option award.
We value restricted stock units at the closing market price on the date of grant and recognize compensation expense
ratably over the requisite service period of the restricted stock unit award.
We estimate the fair value of market stock units on the date of grant using a Monte Carlo simulation model. The
determination of fair value of the market stock units is affected by our stock price and a number of assumptions including the
expected volatility and the risk-free interest rate. Our expected volatility at the date of grant was based on the historical
volatilities of our stock and peer firms' stocks and the Index over the performance period. We assumed no dividend yield and
recognize compensation expense using the graded attribution method on a straight-line basis over the performance period of the
market stock unit award.
Convertible Senior Notes
In February 2018, we issued $230.0 million principal amount of convertible senior notes due in February 2023, or the
Convertible Notes. In accounting for the issuance of the Convertible Notes, we separated each of the Convertible Notes into
liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value, as
of the date of issuance, of a similar debt without the conversion option. The carrying amount of the equity component
representing the conversion option was determined by deducting the fair value of the liability components from the total initial
proceeds. The difference between the par amount of the Convertible Notes and the carrying amount of the liability component
represents debt discounts that are amortized to interest expense over the respective terms of the Convertible Notes using the
effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for
equity classification. In accounting for the issuance costs related to the Convertible Notes, we allocated the total amount of
issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the
liability components are amortized to interest expense over the respective terms of the Convertible Notes using the effective
interest rate method. The issuance costs attributable to the equity components were netted against the respective equity
components in additional paid-in capital.
Purchase Price Allocation, Intangible Assets and Goodwill
The purchase price allocation for business combinations and asset acquisitions requires extensive use of accounting
estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities
assumed based on their respective fair values. We early adopted ASU No. 2017-01, "Business Combinations (Topic
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805): Clarifying the Definition of a Business" as of January 1, 2017. Under ASU 2017-01, we first determine whether
substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar
identifiable assets. If this threshold is met, the single asset or group of assets, as applicable, is not a business. If it is not met, we
determine whether the single asset or group of assets, as applicable, meets the definition of a business.
In connection with our acquisitions and asset purchase discussed in Note 3 - Business Combinations and Asset
Acquisition, we recorded certain intangible assets, including acquired technology, customer relationships, trademarks, non-
compete agreements and assembled workforce. Amounts allocated to the acquired intangible assets are being amortized on a
straight-line basis over the estimated useful lives. We periodically review the estimated useful lives and fair values of our
identifiable intangible assets, taking into consideration any events or circumstances which might result in a diminished fair
value or revised useful life.
The excess purchase price over the fair value of assets acquired is recorded as goodwill. We test goodwill for impairment
annually in October, or whenever events or changes in circumstances indicate an impairment may have occurred. Because we
operate in a single reporting unit, the impairment test is performed at the consolidated entity level by comparing the estimated
fair value of the company to the carrying value of the company. We estimate the fair value of the reporting unit using a "step
one" analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of
projected future results to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. Determining the fair value of goodwill is subjective in nature and often involves the use of estimates and assumptions
including, without limitation, use of estimates of future prices and volumes for our products, capital needs, economic trends
and other factors which are inherently difficult to forecast. If actual results, or the plans and estimates used in future impairment
analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment
charges in a future period. The annual impairment test was performed as of October 31, 2018. No impairment of goodwill was
identified during 2018.
Software Development Costs
Software development costs 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. The costs related to
software development that are incurred between reaching technological feasibility of a solution and the point at which the
solution is ready for general release are capitalized and are included in intangible assets, net on the consolidated balance sheet.
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.
Contingent Consideration
Certain former stockholders of Cloud Lending have the right to receive an earnout payment based upon satisfaction of
certain financial milestones. The estimated fair value of the contingent consideration related to the potential earnout payment is
calculated utilizing the Monte Carlo simulation method under the the option pricing model, and this amount is recorded in other
long-term liabilities in the consolidated balance sheets. The fair value of this contingent consideration is estimated on a
quarterly basis through a collaborative effort by our sales and finance departments. Changes in the fair value of the contingent
consideration subsequent to the purchase price finalization will be recorded as acquisition related costs in the consolidated
statements of comprehensive loss.
Income Taxes
We account for income taxes under the asset and liability method. We record deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. We measure deferred tax
assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or
settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the
results of operations in the period that includes the enactment date. We assess the likelihood that deferred tax assets will be
realized, and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will
not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax
jurisdiction. To date, we have provided a valuation allowance against our deferred tax assets as we believe the objective and
verifiable evidence of our historical pretax net losses outweighs any positive evidence of our forecasted future results. Although
we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment. We will continue
to monitor the positive and negative evidence and will adjust the valuation allowance as sufficient objective positive evidence
becomes available.
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We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based
upon technical merits, it is more likely than not that the position will be sustained upon examination. We recognize potential
accrued interest and penalties associated with unrecognized tax positions within our global operations in income tax expense.
The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act reduces the U.S. federal
corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign
subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Upon enactment, we
did not have any foreign subsidiaries and the international aspects of the Tax Act were not applicable.
In connection with the initial analysis of the impact of the Tax Act, we remeasured certain deferred tax assets and
liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of
our deferred tax balance was primarily offset by application of our valuation allowance. We applied the guidance in Staff
Accounting Bulletin, or SAB, 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018,
recording provisional amount of $0.2 million related to the remeasurement of the deferred tax balances in the fourth quarter of
2017. During 2018, we completed our 2017 income tax returns and our accounting for the enactment-date income tax effects of
the Act with no adjustments to the provisional amount recorded at December 31, 2017.
Results of Operations
Consolidated Statements of Operations Data
The following table sets forth our consolidated statements of operations data for each of the periods indicated (in
thousands):
Revenues
Cost of revenues(1)(2)
Gross profit
Operating expenses:
Sales and marketing(2)
Research and development(2)
General and administrative(2)
Acquisition related costs
Amortization of acquired intangibles
Unoccupied lease charges(3)
Total operating expenses
Loss from operations
Total other income (expense), net
Loss before income taxes
Benefit from (provision for) income taxes
Net loss
Year Ended December 31,
2017
$ 193,978
99,485
94,493
2016
$ 150,224
77,429
72,795
2018
$ 241,100
121,855
119,245
48,124
51,334
44,990
4,145
1,844
658
151,095
(31,850)
(7,350)
(39,200)
3,803
36,284
32,460
31,959
6,307
1,470
33
108,513
(35,718)
(209)
(35,927)
(427)
$ (35,397) $ (26,164) $ (36,354)
41,170
40,338
37,179
1,232
1,481
—
121,400
(26,907)
429
(26,478)
314
______________________________________________________________________________
(1)
(2)
Includes amortization of acquired technology of $4.5 million, $3.6 million and $3.2 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
Includes stock-based compensation expenses as follows (in thousands):
Year Ended December 31,
2017
2016
2018
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expenses
______________________________________________________________________________
59
$
$
4,773
5,837
6,852
11,758
29,220
$
$
3,729
3,243
4,464
9,503
20,939
$
$
2,043
2,231
2,934
5,432
12,640
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(3) Unoccupied lease charges in 2018 include costs related to the early exit from of a portion of our south Austin facility,
and in 2016 include the early exit from our previous Lincoln, Nebraska facility, partially offset by sublease income
from those facilities.
The following table sets forth our consolidated statements of operations data as a percentage of revenues for each of the
periods indicated:
Revenues
Cost of revenues(1)(2)
Gross profit
Operating expenses:
Sales and marketing(2)
Research and development(2)
General and administrative(2)
Acquisition related costs
Amortization of acquired intangibles
Unoccupied lease charges(3)
Total operating expenses
Loss from operations
Total other income (expense), net
Loss before income taxes
Benefit from (provision for) income taxes
Net loss
Year Ended December 31,
2017
100.0 %
51.3 %
48.7 %
2018
100.0 %
50.5 %
49.5 %
2016
100.0 %
51.5 %
48.5 %
20.0 %
21.3 %
18.7 %
1.7 %
0.8 %
0.3 %
62.7 %
(13.2)%
(3.0)%
(16.2)%
1.6 %
(14.6)%
21.2 %
20.8 %
19.2 %
0.6 %
0.8 %
— %
62.6 %
(13.9)%
0.2 %
(13.7)%
0.2 %
(13.5)%
24.2 %
21.6 %
21.3 %
4.2 %
1.0 %
— %
72.3 %
(23.7)%
(0.1)%
(23.8)%
(0.3)%
(24.1)%
_______________________________________________________________________________
(1)
(2)
Includes amortization of acquired technology of 1.9%, 1.9% and 2.1% for the years ended December 31, 2018, 2017
and 2016, respectively.
Includes stock-based compensation expenses as follows:
Year Ended December 31,
2017
2016
2018
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expenses
______________________________________________________________________________
2.0%
2.4%
2.8%
4.9%
12.1%
1.9%
1.7%
2.3%
4.9%
10.8%
1.4%
1.5%
2.0%
3.6%
8.5%
(3) Unoccupied lease charges in 2018 include costs related to the early exit from of a portion of our south Austin facility,
and in 2016 include the early exit from our previous Lincoln, Nebraska facility, partially offset by sublease income
from those facilities.
Due to rounding, totals may not equal the sum of the line items in the tables above.
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Comparison of Year Ended December 31, 2018 and 2017, and the Year Ended December 31, 2017 and 2016
Revenues
The following table presents our revenues for each of the periods indicated (dollars in thousands):
Year Ended December 31,
Change
Year Ended December 31,
Change
Revenues
$ 241,100
$ 193,978
2018
2017
$
$ 47,122
(%)
2017
2016
24.3% $ 193,978
$ 150,224
$
$ 43,754
(%)
29.1%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Revenues increased by $47.1 million,
or 24.3%, from $194.0 million for the year ended December 31, 2017 to $241.1 million for the year ended December 31, 2018.
This increase was primarily attributable to a $36.5 million increase from the sale of additional solutions to new and existing
customers and the growth in Registered Users from new and existing customers. In addition, $8.5 million of the increase was
generated from increases in the number of transactions processed using our solutions, and $2.1 million of the increase was
generated from the acquired businesses in the fourth quarter of 2018. The number of Registered Users on our online banking
platform increased from 10.4 million at December 31, 2017 to 12.8 million at December 31, 2018. The increases for the year
ended December 31, 2018 also included $7.7 million related to the adjustments from the new revenue standard.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Revenues increased by $43.8 million,
or 29.1%, from $150.2 million for the year ended December 31, 2016 to $194.0 million for the year ended December 31, 2017.
This increase was primarily attributable to a $38.9 million increase from the growth in new Registered Users from a
combination of strong customer retention, the purchase of additional solutions by existing customers and the addition of
Registered Users from new Installed Customers. The remaining $4.9 million increase was generated from increases in the
number of transactions processed using our solutions. The number of Registered Users on our digital banking platform
increased from 8.6 million at December 31, 2016 to 10.4 million at December 31, 2017.
While we anticipate that revenue growth from transactions processed by our solutions will increase in absolute dollars, we
expect the year over year growth rate to be lower than in recent periods.
Cost of Revenues
The following table presents our cost of revenues for each of the periods indicated (dollars in thousands):
Year Ended December 31,
Change
Year Ended December 31,
Change
Cost of revenues
$ 121,855
$ 99,485
2018
2017
$
$ 22,370
(%)
2017
2016
22.5% $ 99,485
$ 77,429
$
$ 22,056
(%)
28.5%
Percentage of
revenues
50.5%
51.3%
51.3%
51.5%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Cost of revenues increased by $22.4
million, or 22.5%, from $99.5 million for the year ended December 31, 2017 to $121.9 million for the year ended December
31, 2018. This increase was primarily attributable to a $11.7 million increase in personnel costs due to an increase in the
number of personnel who provide implementation and customer support and maintain our data centers and other technical
infrastructure, which included $1.1 million in personnel costs from the acquired businesses in the fourth quarter of 2018 and a
$1.0 million increase in stock-based compensation expense allocated to cost of revenue for the increase in the number of stock-
based awards vested during the period and the increased fair value of the awards granted due to the increase in our stock
price. In addition, there was a $4.1 million increase in direct costs related to bill-pay transaction processing and other third-
party intellectual property included in our solutions which was related to the increase in the number of new Registered Users
and transactions processed on our digital banking platform and increases in implementation and support expenses that are
reimbursable from our customers, a $3.0 million increase in co-location facility costs and depreciation of our data center assets
resulting from the increased infrastructure necessary to support our expanding customer base, a $1.3 million increase in
facilities and other overhead costs which were allocated to our implementation and support departments, a $0.8 million increase
in amortization of acquired customer technology from the acquired businesses in the fourth quarter of 2018, a $0.8 million
increase in travel and other discretionary expenses and a $0.6 million increase from capitalized services amortization.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Cost of revenues increased by $22.1
million, or 28.5%, from $77.4 million for the year ended December 31, 2016 to $99.5 million for the year ended December 31,
2017. This increase was primarily attributable to a $10.1 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,
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which included a $1.7 million increase in stock-based compensation expense allocated to cost of revenue for the increase in the
number of stock-based awards vested during the period and the increased fair value of the awards granted due to the increase in
our stock price. In addition, there was a $4.5 million increase in co-location facility costs and depreciation of our data center
assets resulting from the increased infrastructure necessary to support our expanding customer base, a $4.1 million increase in
direct costs related to bill-pay transaction processing and other third-party intellectual property included in our solutions which
was related to the increase in the number of new Registered Users and transactions processed on our digital banking platform
and increases in implementation and support expenses that are reimbursable from our customers, a $2.0 million increase in
facilities and other overhead costs which were allocated to our implementation and support departments, a $1.4 million increase
from capitalized services amortization, and a $0.4 million increase in amortization of acquired customer technology. These
increases were partially offset by a $0.4 million decrease in travel and other discretionary expenses.
We defer certain payroll costs directly related to the implementation of our solutions to the extent those costs are
considered to be 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 and process improvement.
Operating Expenses
The following tables present our operating expenses for each of the periods indicated (dollars in thousands):
Sales and Marketing
Sales and
marketing
Percentage of
revenues
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
$ 48,124
$ 41,170
$
6,954
16.9% $ 41,170
$ 36,284
$ 4,886
13.5%
20.0%
21.2%
21.2%
24.2%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Sales and marketing expenses
increased by $7.0 million, or 16.9%, from $41.2 million for the year ended December 31, 2017 to $48.1 million for the year
ended December 31, 2018. This increase was primarily attributable to a $5.5 million increase in personnel costs due to the
growth of our sales and marketing organizations. The increase in personnel costs includes a $2.6 million increase in stock-based
compensation expense allocated to sales and marketing for the increase in the number of stock-based awards vested during the
period and the increased fair value of the awards granted due to the increase in our stock price and $1.0 million in personnel
costs from the acquired businesses in the fourth quarter of 2018. In addition, there was a a $0.6 million increase in travel related
expenses due to increased employee travel to attract new customers and support our sales and marketing initiatives, $0.5
million increase in facilities and other overhead costs which were allocated to our sales and marketing departments, and a $0.4
million increase in discretionary marketing spend as a result of efforts to drive brand awareness and expanded marketing efforts
to attract new customers and retain and grow existing customers.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Sales and marketing expenses
increased by $4.9 million, or 13.5%, from $36.3 million for the year ended December 31, 2016 to $41.2 million for the year
ended December 31, 2017. This increase was primarily attributable to a $3.7 million increase in personnel costs due to the
growth of our sales and marketing organizations. The increase in personnel costs includes a $1.0 million increase in stock-based
compensation expense allocated to sales and marketing for the increase in the number of stock-based awards vested during the
period and the increased fair value of the awards granted due to the increase in our stock price. In addition, there was a $0.5
million increase in facilities and other overhead costs which were allocated to our sales and marketing departments, a $0.4
million increase in discretionary marketing spend as a result of efforts to drive brand awareness and expanded marketing efforts
to attract new customers and retain and grow existing customers and a $0.3 million increase in travel related expenses due to
increased employee travel to attract new customers and efforts to support our sales and marketing initiatives.
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 discretionary marketing spend to attract new customers, retain and
grow existing customers and drive brand awareness. We expect such expenses to decline as a percentage of our revenues over
time as our revenues grow.
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Research and Development
Research and
development
Percentage of
revenues
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
$ 51,334
$ 40,338
$ 10,996
27.3% $ 40,338
$ 32,460
$ 7,878
24.3%
21.3%
20.8%
20.8%
21.6%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Research and development expenses
increased by $11.0 million, or 27.3%, from $40.3 million for the year ended December 31, 2017 to $51.3 million for the year
ended December 31, 2018. This increase was primarily attributable to a $8.5 million increase in personnel costs as a result of
the growth in our research and development organization for continued enhancements to our solutions, which includes a $2.4
million increase in stock-based compensation expense allocated to research and development expenses for the increase in the
number of stock-based awards vested during the period and the increased fair value of the awards granted due to the increase in
our stock price and $0.9 million in personnel costs from the acquired businesses in the fourth quarter of 2018. An additional
$1.0 million of the increase resulted from the reduction of capitalization of research and development salaries as software
development costs during 2018 because all products previously being capitalized reached general release during 2017, a $0.7
million increase in facilities and other overhead costs, and a $0.7 million increase in travel and other discretionary expenses.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Research and development expenses
increased by $7.9 million, or 24.3%, from $32.5 million for the year ended December 31, 2016 to $40.3 million for the year
ended December 31, 2017. This increase was primarily attributable to a $4.9 million increase in personnel costs as a result of
the growth in our research and development organization for continued enhancements to our solutions, which includes a $1.5
million increase in stock-based compensation expense allocated to research and development expenses for the increase in the
number of stock-based awards vested during the period and the increased fair value of the awards granted due to the increase in
our stock price. An additional $1.7 million of the increase resulted from the reduction of capitalization of research and
development salaries as software development costs during 2017 because all products previously being capitalized reached
general release during 2017 and a $1.5 million increase in facilities and other overhead costs. These increases were partially
offset by a $0.2 million decrease in travel and other discretionary expenses.
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.
General and Administrative
General and
administrative
Percentage of
revenues
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
$ 44,990
$ 37,179
$
7,811
21.0% $ 37,179
$ 31,959
$ 5,220
16.3%
18.7%
19.2%
19.2%
21.3%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. General and administrative expenses
increased by $7.8 million, or 21.0%, from $37.2 million for the year ended December 31, 2017 to $45.0 million for the year
ended December 31, 2018. The increase in general and administrative expenses was primarily attributable to a $5.9 million
increase in personnel costs to support the growth of our business including the addition of certain senior executives. The
increase in personnel costs includes a $2.3 million increase in stock-based compensation expense allocated to general and
administrative expenses for the increase in the number of stock-based awards vested during the period and the increased fair
value of the awards granted due to the increase in our stock price and $0.4 million in personnel costs from the acquired
businesses in the fourth quarter of 2018. The remaining increase was attributable to a $0.7 million increase in professional
services for legal and consulting fees, a $0.6 million increase in facilities and other overhead costs, a $0.4 million increase in
travel and other discretionary expenses, and a $0.2 million increase in sales tax expense and other miscellaneous charges.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. General and administrative expenses
increased by $5.2 million, or 16.3%, from $32.0 million for the year ended December 31, 2016 to $37.2 million for the year
ended December 31, 2017. The increase in general and administrative expenses was primarily attributable to a $6.5 million
increase in personnel costs to support the growth of our business including the addition of certain senior executives. The
increase in personnel costs includes a $4.1 million increase in stock-based compensation expense allocated to general and
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administrative expenses for the increase in the number of stock-based awards vested during the period and the increased fair
value of the awards granted due to the increase in our stock price. The remaining increase was attributable to a $0.7 million
increase in facilities and other overhead costs. This increase was partially offset by a $1.2 million decrease in professional
services for legal and consulting fees and a $0.8 million decrease in sales tax expense and other miscellaneous charges.
General and administrative expenses 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. We anticipate that general and administrative expenses will continue to increase in absolute dollars in the future as
we continue to incur both increased external audit fees as well as additional spending to ensure continued regulatory and
Sarbanes-Oxley Act compliance. We expect such expenses to decline as a percentage of our revenues over time as our revenues
grow.
Acquisition Related Costs
Acquisition
related costs
Percentage of
revenues
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
$
4,145
$
1,232
$
2,913
236.4% $
1,232
$
6,307
$ (5,075)
(80.5)%
1.7%
0.6%
0.6%
4.2%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Acquisition related costs increased by
$2.9 million, or 236.4%, from $1.2 million for the year ended December 31, 2017 to $4.1 million for the year ended December
31, 2018. The expense for the year ended December 31, 2018 included $3.1 million of legal, professional services and other
costs related to the 2018 acquisitions of Cloud Lending and Gro, $0.6 million of compensation expense related to the remaining
retention bonuses for employees of companies acquired in 2015, and $0.3 million of compensation expense related to Cloud
Lending and Gro. The expense for the year ended December 31, 2017 was comprised solely of compensation expense related to
the employees of companies acquired in 2015. The final retention bonuses related to the companies acquired in 2015 were paid
out in the third quarter of 2018.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Acquisition related costs decreased by
$5.1 million, or 80.5%, from $6.3 million for the year ended December 31, 2016, to $1.2 million for the year ended December
31, 2017. The expense for the year ended December 31, 2017 was comprised of compensation expense related to the remaining
retention bonuses for employees of the companies acquired in 2015, while the expense for the year ended December 31, 2016
included $4.4 million of compensation expense related to the milestone provisions for certain former Centrix shareholders, $1.7
million related to retention bonuses for employees of the companies acquired in 2015, and $0.2 million of legal and other
expenses incurred related to the acquisitions. During the year ended December 31, 2017, we paid out $6.0 million to former
Centrix shareholders, based upon the achievement of certain milestone-based objectives and $1.4 million in retention bonuses
based upon continued employment.
Amortization of Acquired Intangibles
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
Amortization of
acquired
intangibles
Percentage of
revenues
$
1,844
$
1,481
$
363
24.5% $
1,481
$
1,470
$
11
0.7%
0.8%
0.8%
0.8%
1.0%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Amortization of acquired intangibles
increased by $0.4 million, or 24.5%, from $1.5 million for the year ended December 31, 2017 to $1.8 million for the year ended
December 31, 2018. The expense for the year ended December 31, 2018 included the amortization of acquired intangible assets
purchased in the fourth quarter of 2018 from Cloud Lending and Gro, as well as acquired intangible asset amortization related
to our business combinations in 2015 and asset purchase in 2017. The expense for the year ended December 31, 2017 was
comprised of acquired intangible asset amortization related to our business combinations in 2015 and asset purchase in 2017.
These amounts are amortized on a straight-line basis over the estimated useful lives of the related assets.
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Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Amortization of acquired intangibles
was relatively flat for the year ended December 31, 2017 compared to the year ended December 31, 2016. The acquired
intangible assets are related to our business combinations in 2015 and asset purchase in 2017, and these amounts are amortized
on a straight-line basis over the estimated useful lives of the related assets.
Total Other Income (Expense), Net
Total other income
(expense), net
Percentage of
revenues
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
$
(7,350)
$
429
$
(7,779)
(1,813.3)% $
429
$
(209)
$
638
(305.3)%
(3.0)%
0.2%
0.2%
(0.1)%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Total other income (expense), net
decreased by $7.8 million from income of $0.4 million for the year ended December 31, 2017 to an expense of $7.4 million for
the year ended December 31, 2018. Interest expense for the year ended December 31, 2018 consisted of a $10.0 million
increase in interest expense from the amortization of debt discount, issuance costs, and coupon interest attributable to our
Convertible Notes issued in February 2018, partially offset by a $2.2 million increase in interest income earned on cash, cash
equivalents, and investments.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Total other income (expense), net
increased by $0.6 million from expense of $0.2 million for the year ended December 31, 2016 to income of $0.4 million for the
year ended December 31, 2017. Interest expense for the year ended December 31, 2017 consisted of a decrease of $0.4 million
of interest expense from the expiration of our previously existing credit facility in 2017 and an increase of $0.2 million of
interest income earned on cash, cash equivalents, and investments.
Benefit from (provision for) income taxes
Year Ended December 31,
Change
Year Ended December 31,
Change
2018
2017
$
(%)
2017
2016
$
(%)
Benefit from
(provision for)
income taxes
Percentage of
revenues
$
3,803
$
314
$
3,489
1,111.1% $
314
$
(427)
$
741
(173.5)%
1.6%
0.2%
0.2%
(0.3)%
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017. Total benefit from income taxes
increased by $3.5 million from a benefit of $0.3 million for the year ended December 31, 2017 to a benefit of $3.8 million for
the year ended December 31, 2018. The increase in the tax benefit for the year ended December 31, 2018 consisted of a
reduction in the valuation allowance of $3.0 million due to the deferred tax liability for the acquired businesses in the fourth
quarter of 2018 after purchase accounting adjustments. Additionally, $0.5 million of the increase is related to the increase in
benefit from the state R&D tax credits and the deferred tax liability release from net operating loss and interest carryovers
during the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016. Total benefit from (provision for)
income taxes increased by $0.7 million from a provision of $0.4 million for the year ended December 31, 2016 to a benefit of
$0.3 million for the year ended December 31, 2017. The tax benefit for the year ended December 31, 2017 resulted from
utilization of the R&D tax credits beginning in the fourth quarter of 2017.
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 in growing our business. The timing of our implementation activities and corresponding revenues from new
customers are subject to fluctuation based on the timing of our sales. Sales may tend 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. 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 careful in
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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 IPO, follow-
on offerings, cash flows from operations and our February 2018 Convertible Note financing. At December 31, 2018, our
principal sources of liquidity were cash, cash equivalents and investments of $177.3 million.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
Year Ended December 31,
2018
2017
2016
$
$
4,595
(171,292)
216,577
49,880
$
$
9,472
(16,943)
11,559
4,088
$
3,394
(16,514)
944
$ (12,176)
Cash provided by (used in) operating activities is primarily influenced by 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 year ended December 31, 2018, our net cash and cash equivalents provided by operating activities were $4.6
million, which consisted of non-cash adjustments of $61.8 million, offset by a net loss of $35.4 million and cash outflows from
changes in operating assets and liabilities of $21.8 million. Cash outflows are the result of a $15.8 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 $5.8 million increase in contract assets due to the adoption of the new revenue standard, a
$4.7 million increase in accounts receivable due to the timing of billings at the end of the current year, a $1.4 million increase in
other long-term assets from the addition of deferred tax assets, and a $1.1 million decrease in deferred rents and other long-term
liabilities. Cash inflows were the result of a $4.5 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 $1.8 million decrease in other
prepaid assets, and a $0.7 million net increase 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 expanded facilities. Non-cash items
consisted primarily of $29.5 million of stock-based compensation expense, $16.8 million of depreciation and amortization
expense, $8.5 million in amortization of the Convertible Notes discount and related debt issuance costs, $8.4 million of
amortization of deferred implementation and deferred solution and other costs, a $2.1 million decrease in our deferred income
taxes, and $0.6 million of other non-cash items.
For the year ended December 31, 2017, our net cash and cash equivalents provided by operating activities were $9.5
million, which consisted of non-cash adjustments of $43.4 million, offset by a net loss of $26.2 million and cash outflows from
changes in operating assets and liabilities of $7.7 million. Cash outflows are the result of a $10.5 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 $4.4 million decrease in accrued liabilities mainly from the payment of milestone and
retention bonuses related to the companies acquired in 2015, a $1.0 million increase in accounts receivable due to the timing of
billings at the end of the current year, a $0.2 million increase in other long-term assets, and a $0.1 million decrease in deferred
rents and other long-term liabilities. Cash inflows were the result of a $4.8 million increase in deferred revenue due to increased
payments and deposits received from customers prior to the recognition of revenue from those related payments, a $3.4 million
increase in accounts payable due to timing of payments in support of our expanding customer base and related growth in our
technical infrastructure and expanded facilities, and a $0.2 million decrease in other prepaid assets. Non-cash items consisted
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primarily of $20.9 million of stock-based compensation expense, $14.9 million of depreciation and amortization expense, and
$7.5 million of amortization of deferred implementation and deferred solution and other costs.
For the year ended December 31, 2016, our net cash and cash equivalents provided by operating activities were $3.4
million, which consisted of a net loss of $36.4 million, offset by cash inflows from changes in operating assets and liabilities
of $7.1 million and non-cash adjustments of $32.7 million. Cash inflows were the result of a $11.1 million increase in accounts
payable and accrued liabilities as a result of increased spending in support of our expanding customer base, related growth in
our technical infrastructure and our expanding operations, a $9.6 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 $3.0
million increase in deferred rents and other accrued liabilities as a result of the tenant improvement allowances for our new
facilities. Cash outflows are the result of a $13.2 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 $3.2 million
increase in accounts receivable due to the timing of billings at the end of the current year, and a $0.2 million increase in other
prepaid assets. Non-cash items consisted primarily of $12.6 million of stock-based compensation expense, $12.2 million of
depreciation and amortization expense, $6.8 million of amortization of deferred implementation and deferred solution and other
costs, and $1.1 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 acquisitions,
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 year ended December 31, 2018, net cash used in investing activities was $171.3 million, consisting primarily of
$130.7 million for the acquisitions of Cloud Lending and Gro and release of the hold back from the asset acquisition in 2017,
$75.7 million for the purchase of investments, and $13.3 million for the purchase of property and equipment. These outflows
were partially offset by $48.4 million received from the maturities of investments.
For the year ended December 31, 2017, net cash used in investing activities was $16.9 million, consisting primarily of
$27.7 million for the purchase of investments, $12.3 million for the purchase of property and equipment, $3.8 million for an
asset purchase and release of the hold back from the Social Money acquisition, and a $1.0 million in capitalized software
development costs. These outflows were partially offset by $27.9 million received from the maturities of investments.
For the year ended December 31, 2016, net cash used in investing activities was $16.5 million, consisting primarily
of $40.2 million for the purchase of investments, $14.3 million for the purchase of property and equipment, $2.7 million in
capitalized software development costs and $0.3 million from the purchase of other intangible assets. These outflows were
partially offset by $41.1 million received from the maturities of investments.
Cash Flows from Financing Activities
Our recent financing activities have consisted primarily of our February 2018 Convertible Note financing, net proceeds
from exercises of options to purchase our common stock, as well as payments on financing obligations and payments on capital
lease obligations.
For the year ended December 31, 2018, net cash provided by financing activities was $216.6 million, which was
primarily due to the issuance of $223.2 million principal amount of the Convertible Notes, net of issuance costs, and the related
sale of Warrants for $22.4 million, offset by the purchase of bond hedges for $41.7 million. In addition, cash flows from
financing activities included $12.7 million of cash received from the exercise of stock options.
For the year ended December 31, 2017, net cash provided by financing activities was $11.6 million, consisting solely of
cash received from the exercise of stock options.
For the year ended December 31, 2016, net cash provided by financing activities was $0.9 million, consisting primarily
of $6.0 million from the exercise of stock options, which was partially offset by $4.9 million of payments on financing
obligations and $0.2 million of payments on capital lease obligations.
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Contractual Obligations and Commitments
Our principal commitments consist of the Convertible Notes, non-cancelable operating leases related to our facilities,
minimum purchase commitments for third-party products, co-location fees and other product costs. In February 2018, we issued
$230.0 million in aggregate principal amount of 0.75% Convertible Notes due February 15, 2023, unless earlier converted or
repurchased in accordance with their terms. Interest on the Convertible Notes is payable semi-annually on February 15 and
August 15 of each year. We are also party to several purchase commitments for third-party products that contain both a
contractual minimum obligation and a variable obligation based upon usage or other factors which can change on a monthly
basis. The estimated amounts for usage and other factors are not included within the table below.
The following table summarizes our contractual obligations and commitments at December 31, 2018 (in thousands):
Contractual Obligations:
Convertible Notes, including interest
Operating lease obligations
Purchase commitments
Total
Off-Balance Sheet Arrangements
Payment due by period
Less Than 1
Year
$
$
1,725
7,230
15,202
24,157
1 to 3 Years
5,175
$
11,691
22,436
39,302
$
3 to 5 Years
230,863
$
9,139
18,873
258,875
$
More Than 5
Years
$
$
— $
16,721
—
16,721
$
Total
237,763
44,781
56,511
339,055
As of December 31, 2018, 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 May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, "Revenue from Contracts
with Customers (Topic 606)," which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based
on principles that govern the recognition of revenue at an amount an entity expects to be entitled to when products are
transferred to customers. ASU 2014-09 was modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and
2016-20. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which
requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to ASU 2014-09, as
amended, and Subtopic 340-40 as the "new revenue standard." On January 1, 2018, we adopted the new revenue standard for
all contracts which were not completed as of January 1, 2018, using the modified retrospective method. Adoption of the new
revenue standard resulted in changes to our accounting policies for revenue recognition, contract balances, accounts receivable,
deferred revenues, deferred implementation costs, and deferred solution and other costs. We recognized the cumulative effect of
initially applying the new revenue standard as a positive adjustment to the opening balance of accumulated deficit on the
consolidated balance sheet in the amount of $15.8 million, which reflects the acceleration of revenues and deferral of
incremental commission costs of obtaining subscription contracts. The comparative information in prior periods presented has
not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 2 Summary
of Significant Accounting Policies for the impact of this adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842 (Leases)," which
provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also
issued ASU 2018-11, "Targeted Improvements," which provides the option to adopt ASU No. 2016-02 retrospectively for each
prior period presented or as of the adoption date with a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. These standards are effective for public entities for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years, and early application is permitted. We anticipate that the adoption
of Topic 842 will impact our consolidated balance sheets as most of our operating lease commitments will be subject to the new
standard and recognized as right-of-use assets and corresponding operating lease liabilities upon the adoption of Topic 842,
which will increase the total assets and total liabilities that we report relative to such amounts prior to adoption. We intend to
adopt the standard using the adoption method outlined in ASU 2018-11, which allows entities to initially apply the new lease
standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. We intend to elect the package of practical expedients permitted under the transition guidance within Topic
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842, which among other things, will allow us to carry forward the historical lease classification and the practical expedient to
not separate lease and non-lease components of an agreement. We expect the adoption of Topic 842 to result in the recording of
additional net lease assets and lease liabilities of approximately $26 million to $28 million and approximately $35 million to
$37 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities is the
reclassification of deferred rent on our balance sheet at the date of adoption. We do not expect the standard to impact the
consolidated statements of comprehensive loss or the consolidated statements of cash flows.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments," to clarify and provide specific guidance on eight cash flow classification issues that are not
addressed by current GAAP and thereby reduce the current diversity in practice. We adopted ASU 2016-15, effective January 1,
2018, and there was no impact on the consolidated financial statements as a result of the adoption.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which
provides guidance on the classification of restricted cash in the statement of cash flows. We adopted this ASU retrospectively,
effective January 1, 2018. As a result, we included restricted cash with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts presented on the consolidated statements of cash flows, resulting in an
increase in net cash of $1.8 million for fiscal 2018 and $2.3 million for fiscal 2017.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment," which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill
impairment test and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying
amount of a reporting unit exceeds its fair value. The standard is effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years and early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. We do not expect the adoption of this standard to have a material impact on
our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718)," to provide clarity
and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock
Compensation, to a change to the terms or conditions of a share-based payment award. We adopted this standard effective
January 1, 2018, and there was no material impact on our consolidated financial statements as a result of the adoption.
In December 2017, the SEC issued SAB 118 to address the application of GAAP in situations in which a registrant does
not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the Tax Cuts and Jobs Act, or the Tax Act, which was signed into law on
December 22, 2017. In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)," which amended ASC 740 to incorporate the
requirements of SAB 118. Disclosures related to the effect of the Tax Act and our utilization of SAB 118 appear in Note 14 -
Income Taxes.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40)," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective beginning in our first
quarter of 2020, with early adoption permitted. The ASU may be applied retrospectively or prospectively to all implementation
costs incurred after the date of adoption. We are anticipating early adoption of the ASU for January 1, 2019 and are currently
evaluating the financial statement impact on the consolidated financial statements as a result of this adoption.
Item 7A. 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.
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Interest Rate Risk
We have cash and cash equivalents held primarily in cash and money market funds. In addition, we have marketable
securities which are primarily held in U.S. government agency bonds, 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 December 31, 2018, we had an outstanding principal amount
of $230.0 million of Convertible Notes, which have a fixed annual interest rate of 0.75%. If overall interest rates fell by 10% in
2018, 2017 or 2016, our interest income would not have been materially affected.
Foreign Currency Risk
During the quarter ended December 31, 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 December 31,
2018, our most significant currency exposures were the Indian rupee, British pound, and Australian dollar. As of December 31,
2018, we had operating subsidiaries in India, the United Kingdom, and Australia. Due to the relative 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 issue 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 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated by reference to the consolidated financial statements and
accompanying notes set forth on pages F-1 through F-42 of this Annual Report on Form 10-K.
Item 9. Change in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
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 December 31, 2018, the end of the period covered by this Annual
Report on Form 10-K. 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.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2018 based on the guidelines established in
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Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements for
external reporting purposes in accordance with U.S. generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on the financial statements. In the fourth quarter of 2018 we acquired Cloud Lending and Gro. For
purposes of determining the effectiveness of our internal control over financial reporting, management has excluded Cloud
Lending and Gro from its evaluation of these matters. The acquisitions of Cloud Lending and Gro constituted 1.9% and 0.4%
of total and net assets, respectively, as of December 31, 2018 and 0.9% and 1.9% of revenues and net loss, respectively, for the
year ended December 31, 2018.
Based on that evaluation, management concluded that our internal control over financial reporting was effective as of
December 31, 2018.
Our independent registered public accounting firm, Ernst & Young, LLP, issued an attestation report on our internal
control over financial reporting. This report appears on page F-3.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable
assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls
and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no
matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements
due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been
detected.
Item 9B. Other Information.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by Part III, Item 10, will be included in our Proxy Statement relating to our 2019 annual meeting of
stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, and is
incorporated herein by reference.
Item 11. Executive Compensation.
Information required by Part III, Item 11, will be included in our Proxy Statement relating to our 2019 annual meeting of
stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by Part III, Item 12, will be included in our Proxy Statement relating to our 2019 annual meeting of
stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by Part III, Item 13, will be included in our Proxy Statement relating to our 2019 annual meeting of
stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by Part III, Item 14, will be included in our Proxy Statement relating to our 2019 annual meeting of
stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, and is
incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents Filed with Report
(1) Financial Statements.
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Schedules required by this item have been omitted since they are either not required or not applicable or because the
information required is included in the consolidated financial statements included elsewhere herein or the notes thereto.
(3) Exhibits.
The information required by this Item is set forth on the exhibit index that precedes the signature page of this Annual
Report on Form 10-K.
73
2.1
2.2
3.1
3.2
4.1
4.2
4.3
Table of Contents
Exhibit Index
Exhibit
Number
Description
Stock Purchase Agreement, dated July 31, 2015, by and among
Q2 Software, Inc., Centrix Solutions, Inc., all shareholders of
Centrix Solutions, Inc. and Timothy Schnell, as Agent
Agreement and Plan of Merger, dated August 6, 2018, by and
among the Registrant, Montana Merger Subsidiary, Inc., Cloud
Lending, Inc. and Fortis Advisors, LLC, as a equity holder
representative
Incorporated by Reference
Form
8-K
Filing No.
001-36350
Filing Date
Exhibit
No.
7/31/2015
2.1
Filed /
Furnished
Herewith
8-K
001-36350
8/8/2018
2.1
Fourth Amended and Restated Certificate of Incorporation of
the Registrant
S-1/A
333- 193911
3/6/2014
Amended and Restated Bylaws of the Registrant
S-1/A
333- 193911
3/6/2014
Third Amended and Restated Investors' Rights Agreement,
dated March 1, 2013
Indenture, dated February 26, 2018, between the Registrant and
Wilmington Trust, National Association, as trustee
Form of Global Note, dated February 26, 2018, between the
Registrant and Wilmington Trust, National Association, as
trustee
10.1
Form of Indemnification Agreement for directors and officers
10.2.1
† 2007 Stock Plan, as amended
10.2.2
† Form of Stock Option Agreement under the 2007 Stock Plan
10.2.3
† Form of Stock Option Agreement for Executive Officers under
the 2007 Stock Plan
S-1
8-K
8-K
S-1/A
S-1/A
S-1
S-1
3.2
3.4
4.1
4.1
4.2
333- 193911
2/12/2014
001-36350
2/26/2018
001-36350
2/26/2018
333- 193911
2/25/2014
10.1
333- 193911
2/25/2014
10.2.1
333- 193911
2/12/2014
10.2.2
333- 193911
2/12/2014
10.2.3
10.2.4
† Form of Stock Option Agreement for Directors under the 2007
S-1
333- 193911
2/12/2014
10.2.4
10.3.1
10.3.2
10.3.3
10.3.4
10.3.5
10.3.6
10.3.7
Stock Plan
Credit Agreement, dated April 11, 2013, by and among Wells
Fargo Bank, National Association, as administrative agent for
the lenders named therein, the Registrant, and Q2
Software, Inc.
Amendment Number One to Credit Agreement, dated March
24, 2014, by and among Wells Fargo Bank, National
Association, as administrative agent for the lenders named
therein, the Company, and the Subsidiary
Amendment Number Two to Credit Agreement, dated August
11, 2014, by and among Wells Fargo Bank, National
Association, as administrative agent for the lenders named
therein, the Company, and the Subsidiary
Amendment Number Three to Credit Agreement, dated July
30, 2015, by and among Wells Fargo Bank, National
Association, as administrative agent for the lenders named
therein, Q2 Holdings, Inc., and Q2 Software, Inc.
Amendment Number Four to Credit Agreement, dated effective
March 31, 2016, by and among Wells Fargo Bank, National
Association, as administrative agent for the lenders named
therein, Q2 Holdings, Inc., and Q2 Software, Inc.
Guaranty and Security Agreement, dated April 11, 2013, by
and among Wells Fargo Bank, National Association, as
administrative agent for the lenders named therein, the
Registrant, and Q2 Software, Inc.
Patent Security Agreement, dated April 11, 2013, by and
among Wells Fargo Bank, National Association, as
administrative agent for the lenders named therein, the
Registrant, and Q2 Software, Inc.
S-1
333- 193911
2/12/2014
10.3.1
8-K
001-36350
3/28/2014
10.1
10-Q
001-36350
8/12/2014
10.1
8-K
001-36350
7/31/2015
10.1
10-Q
001-36350
8/4/2016
10.1
S-1
333- 193911
2/12/2014
10.3.2
S-1
333- 193911
2/12/2014
10.3.3
10.4.1
Lease Agreement, dated November 20, 2012, by and among the
Q2 Software, Inc. and 13785 Research Blvd, LLC
S-1
333- 193911
2/12/2014
10.4
Table of Contents
Exhibit
Number
10.4.2
10.4.3
10.4.4
10.4.5
10.4.6
10.4.7
10.5
Description
First Amendment to Lease Agreement and Tri-Party
Agreement, dated February 27, 2015, by and among Q2
Software, Inc., FPG Aspen Lake Owner, L.P. and FPG TOH
Owner, L.P., amending the Lease Agreement, dated November
20, 2012, by and among the Q2 Software, Inc. and 13785
Research Blvd, LLC
Second Amendment to Lease Agreement and Tri-Party
Agreement, dated April 1, 2015, by and among Q2 Software,
Inc., FPG Aspen Lake Owner, L.P. and FPG TOH Owner, L.P.,
amending the Lease Agreement, dated November 20, 2012, by
and among the Q2 Software, Inc. and 13785 Research Blvd,
LLC
Third Amendment to Lease Agreement, dated October 8, 2015,
by and among Q2 Software, Inc. and FPG Aspen Lake Owner,
L.P., amending the Lease Agreement, dated November 20,
2012, by and among the Q2 Software, Inc. and 13785 Research
Blvd, LLC
Lease Agreement, dated July 18, 2014, by and among Q2
Software, Inc. and CREF Aspen Lake Building II, LLC
First Amendment to Lease Agreement, dated May 1, 2015, by
and among Q2 Software, Inc. and CREF Aspen Lake Building
II, LLC
Second Amendment to Lease Agreement, dated February 3,
2016, by and among Q2 Software, Inc. and CREF Aspen Lake
Building II, LLC
Incorporated by Reference
Form
10-Q
Filing No.
001-36350
Filing Date
Exhibit
No.
5/8/2015
10.1
Filed /
Furnished
Herewith
10-Q
001-36350
5/8/2015
10.2
10-Q
001-36350
11/6/2015
10.2
8-K
8-K
001-36350
7/23/2014
10.1
001-36350
5/4/2015
10.1
10-Q
001-36350
5/10/2016
10.1
† Amended and Restated Employment Agreement, dated
February 20, 2014, by and among the Registrant and
Matthew P. Flake
S-1/A
333- 193911
2/25/2014
10.5
10.7
† Employment Agreement, dated February 20, 2014, by and
10-K
001-36350
2/12/2015
10.7
among the Registrant and Jennifer N. Harris
10.8
† Employment Agreement, dated February 20, 2014, by and
10-K
001-36350
2/12/2015
10.8
among the Registrant and Adam D. Blue
10.9.1
† 2014 Equity Incentive Plan and forms of agreements
S-1/A
333- 193911
3/6/2014
10.9
thereunder
10.9.2
† Forms of Restricted Stock Units Agreements under the
10-Q
001-36350
11/10/2014
10.2
Registrant's 2014 Equity Incentive Plan.
10.9.3
† Form of Stock Option Agreement and Restricted Stock Unit
Agreement for Remote Executive Officers under Registrant's
2014 Equity Incentive Plan
10-Q
001-36350
11/6/2015
10.3
10.9.4
† Form of Market Stock Units Agreement under the Registrant's
10-Q
001-36350
5/3/2018
10.4
2014 Equity Incentive Plan
10.10
† 2014 Employee Stock Purchase Plan
S-1/A
333- 193911
3/6/2014
10.11.1
10.11.2
Master Service Agreement dated January 11, 2010, by and
among the Registrant and Cyrus Networks, LLC
Service Level Agreement dated January 11, 2010, by and
among the Registrant and Cyrus Networks, LLC
S-1
S-1
333- 193911
2/12/2014
10.10
10.12
333- 193911
2/12/2014
10.12.1
10.12
† Employment Agreement, dated February 20, 2014, by and
10-K
001-36350
2/12/2016
10.13
among the Registrant and John E. Breeden
10.13
Employment Agreement, dated effective August 22, 2016, by
and among Q2 Software, Inc. and Odus Edward Wittenburg, Jr.
†
8-K
0001-36350
8/15/2016
10.1
10.14
† Employment Agreement, dated February 20, 2014, by and
S-1/A
333- 193911
2/25/2014
10.7
among the Registrant and William M. Furrer
10.15
† Employment Agreement, dated November 1, 2017, by and
10-K
0001-36350
2/16/2018
10.15
among the Registrant and Christine A. Petersen
10.16
Purchase Agreement, dated February 21, 2018, by and among
the Registrant, Morgan Stanley & Co. LLC, J.P. Morgan
Securities LLC and Stifel, Nicolaus & Company, Incorporated,
as representatives of the several initial purchasers named
therein
8-K
001-36350
2/26/2018
10.1
Table of Contents
Exhibit
Number
Description
10.17
Form of Bond Hedge Confirmation
10.18
Form of Warrant Confirmation
21.1
23.1
24.1
31.1
31.2
32.1
32.2
List of Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
Power of Attorney (see the signature pages to this Annual
Report on Form 10-K).
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. §1350 as adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Required under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. §1350 as adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
XBRL Taxonomy Extension Calculation Label Linkbase.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
* Filed herewith
# Furnished herewith
† Management contract, compensatory plan or arrangement
Incorporated by Reference
Form
8-K
8-K
Filing No.
001-36350
Filing Date
2/26/2018
001-36350
2/26/2018
Exhibit
No.
10.2
10.3
Filed /
Furnished
Herewith
*
*
*
*
*
#
#
*
*
*
*
*
*
Table of Contents
Item 16. Form 10-K Summary.
None.
Q2 HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
February 19, 2019
Q2 HOLDINGS, INC.
By:
/s/ MATTHEW P. FLAKE
Matthew P. Flake
Chief Executive Officer
SIGNATURES AND POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Matthew P. Flake, with full power
of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent
to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each
capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying
and confirming all that said attorney-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated.
Name
Title
/s/ MATTHEW P. FLAKE
Chief Executive Officer (Principal Executive Officer) and Director
Date
February 19, 2019
Matthew P. Flake
/s/ JENNIFER N. HARRIS
Chief Financial Officer (Principal Financial and Accounting Officer)
February 19, 2019
Jennifer N. Harris
/s/ R. H. SEALE, III
R.H. Seale, III
/s/ R. LYNN ATCHISON
R. Lynn Atchison
/s/ JEFFREY T. DIEHL
Jeffrey T. Diehl
/s/ CHARLES T. DOYLE
Charles T. Doyle
/s/ MICHAEL J. MAPLES, SR.
Michael J. Maples, Sr.
/s/ JAMES R. OFFERDAHL
James R. Offerdahl
/s/ CARL JAMES SCHAPER
Carl James Schaper
Executive Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
77
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
Q2 HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Q2 Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Q2 Holdings, Inc. (the Company) as of December 31,
2018 and 2017, the related consolidated statements of comprehensive loss, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated February 19, 2019 expressed an unqualified opinion thereon.
Adoption of ASC No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for
revenue in 2018 due to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2013.
Austin, Texas
February 19, 2019
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Q2 Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Q2 Holdings, Inc.'s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, Q2 Holdings, Inc. (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on the COSO criteria.
As indicated in the accompanying Management's Annual Report on Internal Control over Financial Reporting in Item 9A,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Cloud Lending, Inc. and Gro Solutions which are included in the 2018 consolidated financial statements of the Company and
constituted 1.9% and 0.4% of total and net assets, respectively, as of December 31, 2018 and 0.9% and 1.9% of revenues and net loss,
respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation
of the internal control over financial reporting of Cloud Lending, Inc. and Gro Solutions.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of Q2 Holdings, Inc. as of December 31, 2018 and 2017, the related consolidated statements of
comprehensive loss, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and
the related notes and our report dated February 19, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Controls
over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Austin, Texas
February 19, 2019
/s/ Ernst & Young LLP
F-3
Table of Contents
Q2 HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Investments
Accounts receivable, net
Contract assets, current portion
Prepaid expenses and other current assets
Deferred solution and other costs, current portion
Deferred implementation costs, current portion
Total current assets
Property and equipment, net
Deferred solution and other costs, net of current portion
Deferred implementation costs, net of current portion
Intangible assets, net
Goodwill
Contract assets, net of current portion
Other long-term assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued liabilities
Accrued compensation
Deferred revenues, current portion
Total current liabilities
Convertible notes, net of current portion
Deferred revenues, net of current portion
Deferred rent, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock: $0.0001 par value; 5,000 shares authorized, no shares issued or outstanding as of December
31, 2018 and 2017
Common stock: $0.0001 par value; 150,000 shares authorized, 43,535 shares issued and outstanding as of
December 31, 2018, and 41,994 shares issued, and 41,967 shares outstanding as of December 31, 2017
Treasury stock at cost; Zero and 27 shares at December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
2017
$
108,341
$
1,815
68,979
19,668
598
3,983
10,501
4,427
218,312
34,994
16,761
9,948
63,296
107,907
10,272
2,230
57,961
2,315
41,685
13,203
—
3,115
9,246
3,562
131,087
34,544
12,973
8,295
12,034
12,876
—
1,006
463,720
$
212,815
$
$
$
9,169
9,329
12,652
42,531
73,681
182,723
23,063
8,151
17,202
304,820
—
4
—
331,355
(37)
(172,422)
158,900
7,621
10,562
11,511
38,379
68,073
—
28,289
9,393
438
106,193
—
4
(855)
259,726
(139)
(152,114)
106,622
212,815
$
463,720
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Q2 HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per share data)
Revenues
Cost of revenues(1)
Gross profit
Operating expenses:
Sales and marketing(1)
Research and development(1)
General and administrative(1)
Acquisition related costs
Amortization of acquired intangibles
Unoccupied lease charges
Total operating expenses
Loss from operations
Other income (expense):
Interest and other income
Interest and other expense
Total other income (expense), net
Loss before income taxes
Benefit from (provision for) income taxes
Net loss
Other comprehensive gain (loss):
Unrealized gain (loss) on available-for-sale investments
Foreign currency translation adjustment
Comprehensive loss
Net loss per common share, basic and diluted
Weighted average common shares outstanding:
Basic and diluted
_______________________________________________________________________________
(1)
Includes stock-based compensation expenses as follows:
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expenses
Year Ended December 31,
2018
2017
2016
$
241,100
$
193,978
$
150,224
121,855
119,245
48,124
51,334
44,990
4,145
1,844
658
99,485
94,493
41,170
40,338
37,179
1,232
1,481
—
77,429
72,795
36,284
32,460
31,959
6,307
1,470
33
151,095
(31,850)
121,400
(26,907)
108,513
(35,718)
2,811
(10,161)
(7,350)
(39,200)
3,803
553
(124)
429
358
(567)
(209)
(26,478)
(35,927)
314
(427)
(35,397)
(26,164)
(36,354)
24
78
(85)
—
47
—
$
$
(35,295) $
(26,249) $
(36,307)
(0.83) $
(0.63) $
(0.92)
42,797
41,218
39,649
Year Ended December 31,
2018
2017
2016
$
4,773
$
3,729
$
5,837
6,852
11,758
3,243
4,464
9,503
2,043
2,231
2,934
5,432
$
29,220
$
20,939
$
12,640
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Q2 HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Balance at January 1, 2016
Stock-based compensation
Follow-on offerings, net of issuance costs
Shares acquired to settle the exercise of stock options
Exercise of stock options
Shares issued for the vesting of restricted stock awards
Other comprehensive gain
Net loss
Balance at December 31, 2016
Stock-based compensation
Shares acquired to settle the exercise of stock options
Exercise of stock options
Shares issued for the vesting of restricted stock awards
Adoption of new accounting standard (see Note 2)
Other comprehensive loss
Net loss
Balance at December 31, 2017
Stock-based compensation
Shares acquired to settle the exercise of stock options
Exercise of stock options
Shares issued for the vesting of restricted stock awards
Retirement of treasury stock
Equity component of convertible senior notes, less
issuance costs
Purchase of convertible notes hedges
Issuance of warrants
Adoption of new accounting standard (see Note 2)
Other comprehensive gain
Net loss
Balance at December 31, 2018
Common Stock
Shares
Amount
38,891
$
—
—
(14)
1,379
169
—
—
40,425
$
—
(11)
1,205
348
—
—
—
41,967
$
—
(7)
1,038
537
—
—
—
—
—
—
—
43,535
$
Treasury
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders'
Equity
$
(41) $
207,541
$
(101) $
(89,429) $
117,974
—
—
(376)
—
—
—
—
12,640
3
—
6,301
—
—
—
—
—
—
—
—
47
—
—
—
—
—
—
—
12,640
3
(376)
6,301
—
47
(36,354)
(36,354)
$
(417) $
226,485
$
(54) $ (125,783) $
100,235
—
(438)
—
—
—
—
—
20,939
—
12,135
—
167
—
—
—
—
—
—
—
(85)
—
—
—
—
—
(167)
—
20,939
(438)
12,135
—
—
(85)
(26,164)
(26,164)
$
(855) $
259,726
$
(139) $ (152,114) $
106,622
—
(62)
—
—
917
—
—
—
—
—
—
29,545
(333)
12,982
—
(164)
48,919
(41,699)
22,379
—
—
—
—
—
—
—
—
—
—
—
—
102
—
—
—
—
—
(753)
—
—
—
15,842
—
29,545
(395)
12,982
—
—
48,919
(41,699)
22,379
15,842
102
(35,397)
(35,397)
$
— $
331,355
$
(37) $ (172,422) $
158,900
4
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
—
—
4
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Q2 HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred implementation, solution and other costs
Depreciation and amortization
Amortization of debt issuance costs
Amortization of debt discount
Amortization of premiums on investments
Stock-based compensation expenses
Deferred income taxes
Allowance for sales credits
Loss on disposal of long-lived assets
Impairment of intangible assets
Unoccupied lease charges
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other current assets
Deferred solution and other costs
Deferred implementation costs
Contract assets
Other long-term assets
Accounts payable
Accrued liabilities
Deferred revenue
Deferred rent and other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Maturities of investments
Purchases of property and equipment
Business combinations and asset acquisitions, net of cash acquired
Purchase of intangible assets
Capitalized software development costs
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net of issuance costs
Purchase of convertible notes bond hedge
Proceeds from issuance of warrants
Payments on financing obligations
Payments on capital lease obligations
Proceeds from the issuance of common stock, net of issuance costs
Proceeds from exercise of stock options to purchase common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents, and restricted cash beginning of period
Cash, cash equivalents, and restricted cash end of period
Supplemental disclosures of cash flow information:
Cash paid for taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
Acquisition consideration payable to seller - hold back
Shares acquired to settle the exercise of stock options
Data center assets acquired under deferred payment arrangements or financing arrangements
Reconciliation of cash, cash equivalents, and restricted cash as shown in the statement of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
$
$
$
$
$
$
$
$
Year Ended December 31,
2017
2016
2018
$
(35,397) $
(26,164) $
(36,354)
8,448
16,802
829
7,646
(3)
29,545
(2,050)
(141)
19
17
658
(4,677)
1,844
(8,780)
(6,993)
(5,812)
(1,359)
(263)
952
4,454
(1,144)
4,595
(75,674)
48,407
(13,285)
(130,694)
(46)
—
(171,292)
223,167
(41,699)
22,379
—
—
—
12,730
216,577
49,880
60,276
110,156
215
810
$
$
$
7,455
14,946
28
—
319
20,939
(350)
(3)
33
—
—
(961)
240
(5,353)
(5,179)
—
(236)
3,367
(4,369)
4,837
(77)
9,472
(27,749)
27,907
(12,315)
(3,816)
—
(970)
(16,943)
—
—
—
—
—
—
11,559
11,559
4,088
56,188
60,276
128
68
$
$
$
— $
(395) $
— $
150
$
(438) $
$
4,102
6,775
12,199
96
—
425
12,640
281
17
184
20
33
(3,247)
(237)
(7,100)
(6,076)
—
47
426
10,641
9,593
3,031
3,394
(40,160)
41,105
(14,349)
(95)
(323)
(2,692)
(16,514)
—
—
—
(4,890)
(161)
(8)
6,003
944
(12,176)
68,364
56,188
120
217
—
(376)
—
108,341
1,815
110,156
$
$
57,961
2,315
60,276
$
$
54,873
1,315
56,188
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
1. Organization and Description of Business
Q2 Holdings, Inc. and its wholly-owned subsidiaries, collectively the "Company," is 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. The Company sells its solutions to regional and community financial institutions,
alternative finance and leasing companies, and financial technology companies. The Company's solutions enable customers to
deliver robust suites of digital banking, lending, leasing, and banking as a service, or BaaS, services that make it possible for
account holders and End Users to transact and engage anytime, anywhere and on any device. The Company delivers its
solutions to the substantial majority of its customers using a software-as-a-service, or SaaS, model under which its customers
pay subscription fees for the use of the Company's solutions. The Company was incorporated in Delaware in March 2005 and is
a holding company that owns 100% of the outstanding capital stock of Q2 Software, Inc. The Company's headquarters are
located in Austin, Texas.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States, or GAAP, and Securities and Exchange Commission, or SEC, requirements. The consolidated financial
statements include the accounts of Q2 Holdings, Inc. and its direct and indirect wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Effective January 1, 2018 the Company adopted the requirements of Accounting Standards Update, or ASU, No. 2014-09
"Revenue from Contracts with Customers (Topic 606)," or the new revenue standard, and ASU No. 2016-18 "Statement of Cash
Flows (Topic 230): Restricted Cash." All amounts and disclosures set forth in this Form 10-K have been updated to comply
with the new standards.
Reclassifications
Certain amounts appearing in the prior year's Consolidated Statements of Cash Flows have been reclassified to conform to
the current year's presentation.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses. Significant
items subject to such estimates include revenue recognition including determining the nature and timing of satisfaction of
performance obligations, variable consideration, standalone selling price, and other revenue items requiring significant
judgment; stock-based compensation; the carrying value of goodwill; the fair value of acquired intangibles; the capitalization of
software development costs; the useful lives of property and equipment and long-lived intangible assets; fair value of
contingent consideration; fair value of the conversion feature; and income taxes. In accordance with GAAP, management bases
its estimates on historical experience and on various other assumptions that management believes are reasonable under the
circumstances. Management regularly evaluates its estimates and assumptions using historical experience and other factors;
however, actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments acquired with an original maturity of ninety days or less at the date
of purchase to be cash equivalents. Cash equivalents are stated at cost or fair value based on the underlying security.
Restricted Cash
Restricted cash consists of deposits held as collateral for the Company's secured letters of credit issued in place of the
security deposit for the Company's corporate headquarters.
F-8
Table of Contents
Investments
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Investments consist primarily of U.S. government agency bonds, corporate bonds, commercial paper, certificates of
deposit and money market funds. All investments are considered available for sale and are carried at fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash
equivalents, restricted cash, investments and accounts receivable. The Company's cash and cash equivalents, restricted cash and
investments are placed with high credit quality financial institutions and issuers, and at times may exceed federally-insured
limits. The Company has not experienced any loss relating to cash and cash equivalents or restricted cash in these accounts. The
Company provides credit, in the normal course of business, to a number of its customers. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not require collateral. No individual customer
accounted for 10% or more of revenues for each of the years ended December 31, 2018, 2017 and 2016. No individual
customer accounted for 10% or more of accounts receivable, net, as of December 31, 2018 and 2017.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled
receivables (contract assets), and deferred revenues (contract liabilities). Billings scheduled to occur after the performance
obligation has been satisfied and revenue recognition has occurred result in contract assets. Contract assets that are expected to
be billed during the succeeding twelve-month period are recorded in contract assets, current portion, and the remaining portion
is recorded in contract assets, net of current portion on the accompanying consolidated balance sheets at the end of each
reporting period. A contract liability results when the Company receives prepayments or deposits from customers in advance for
implementation, maintenance and other services, as well as initial subscription fees. Customer prepayments are generally
applied against invoices issued to customers when services are performed and billed. The Company recognizes contract
liabilities as revenues when the services are performed, and the corresponding revenue recognition criteria are met. Contract
liabilities that are expected to be recognized as revenues during the succeeding twelve-month period are recorded in deferred
revenues, current portion, and the remaining portion is recorded in deferred revenue, net of current portion, on the
accompanying consolidated balance sheets at the end of each reporting period.
Accounts Receivable
Accounts receivable are stated at net realizable value, including both billed and unbilled receivables to customers.
Unbilled receivable balances arise primarily when the Company provides services in advance of billing for those services.
Generally, billing for revenues related to the number of End Users and the number of transactions processed by the Company's
End Users that are included in the Company's minimum subscription fee occurs in the month the revenue is recognized,
resulting in accounts receivable. Billing for revenues relating to the number of End Users and the number of transactions
processed by the Company's End Users that are in excess of the Company's minimum subscription fees are, generally, billed in
the month following the month the revenues were earned, resulting in an unbilled receivable. Included in the accounts
receivable balances as of December 31, 2018 and 2017 were unbilled receivables of $3.2 million and $2.1 million, respectively.
The Company assesses the collectability of outstanding accounts receivable on an ongoing basis and maintains an
allowance for doubtful accounts for accounts receivable deemed uncollectable. As of December 31, 2018 and 2017, the
Company did not provide for an allowance for doubtful accounts, as all amounts outstanding were deemed collectable.
Historically, the Company's collection experience has not varied significantly, and bad debt expenses have been insignificant.
The Company maintains a reserve for estimated sales credits issued to customers for billing disputes or other service-
related reasons. This allowance is recorded as a reduction against current period revenues and accounts receivable. In
estimating this allowance, the Company analyzes prior periods to determine the amounts of sales credits issued to customers
compared to the revenues in the period that related to the original customer invoice. This estimate is analyzed quarterly and
adjusted as necessary.
F-9
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The following table shows the Company's allowance for sales credits as follows:
Year Ended December 31, 2016
Year Ended December 31, 2017
Year Ended December 31, 2018
Deferred Revenues
Beginning
Balance
Additions
Deductions
Ending
Balance
$
$
212
228
226
$
$
488
683
508
$
$
(472) $
(685)
(367) $
228
226
367
Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue
recognition and prepayments received from customers in advance for implementation, maintenance and other services, as well
as initial subscription fees. The Company recognizes deferred revenues as revenues when the services are performed and the
corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued to
customers when services are performed and billed.
The net decrease in the deferred revenue balance for the year ended December 31, 2018, is primarily driven by the
recognition of $37.0 million of revenue that was included in the deferred revenue balance at December 31, 2017 and a $12.0
million decrease from the adoption of the new revenue standard and the related netting of contract assets and liabilities on a
contract-by-contract basis, partially offset by cash payments received or due in advance of satisfying the Company's
performance obligations of $47.9 million. Amounts recognized from deferred revenues represent primarily revenue from the
sale of subscription and implementation services.
The Company's payment terms vary by the type and location of its customer and the products or services offered. The
term between invoicing and when payment is due is not significant. For certain products or services and customer types, the
Company requires payment before the products or services are delivered to the customer.
On December 31, 2018, the Company had $872.2 million of remaining performance obligations, which represents
contracted revenue minimums that have not yet been recognized, including amounts that will be invoiced and recognized as
revenue in future periods. The Company expects to recognize approximately 48% percent of its remaining performance
obligations as revenue in the next 24 months, an additional 41% percent in the next 25 to 48 months, and the balance thereafter.
Deferred Implementation Costs
The Company capitalizes certain personnel and other costs such as employee salaries, benefits and the associated payroll
taxes that are direct and incremental to the implementation of its solutions. The Company analyzes implementation costs that
may be capitalized to assess their recoverability, and only capitalizes costs that it anticipates to be recoverable. The Company
assesses the recoverability of its deferred implementation costs by comparing the greater of the amount of the non-cancellable
portion of a customer's contract and the non-refundable customer prepayments received as it relates to the specific
implementation costs incurred. The Company begins amortizing the deferred implementation costs for an implementation once
the revenue recognition criteria have been met, and the Company amortizes those deferred implementation costs ratably over
the expected period of customer benefit, which has been determined to be the estimated life of the technology, which the
Company estimates to be five to seven years. The Company determined the period of benefit by considering factors such as
historically high renewal rates with similar customers and contracts, initial contract length, an expectation that there will still be
a demand for the product at the end of its term, and the significant costs to switch to a competitor's product, all of which are
governed by the estimated useful life of the technology.
The portion of deferred implementation costs expected to be amortized during the succeeding twelve-month period is
recorded in current assets as deferred implementation costs, current portion, and the remainder is recorded in long-term assets
as deferred implementation costs, net of current portion. The Company capitalized implementation costs in the amount of $7.3
million and $5.2 million during the years ended December 31, 2018 and 2017, respectively, and recognized $4.7 million and
$4.4 million of amortization during the years ended December 31, 2018 and 2017, respectively. Amortization expense is
included in cost of revenues in the accompanying consolidated statements of comprehensive loss.
F-10
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Deferred Solution and Other Costs
The Company capitalizes sales commissions and other third-party costs such as third-party licenses and maintenance
related to its customer agreements. The Company capitalizes sales commissions because the commission charges are so closely
related to the revenues from the non-cancellable customer agreements that they should be recorded as an asset and charged to
expense over the same period that the related revenue is recognized. Under the new revenue standard, the Company capitalizes
commissions and bonuses for those involved in the sale, including direct employees and indirect supervisors, as these are
incremental to the sale. The Company typically pays commissions in two increments. The initial payment is made after the
contract has been executed and the initial deposit has been received from the customer, and the final payment is made upon
commencement date. The Company requires that an individual remain employed to collect a commission when it is due. The
service period between the first and second payment is considered to be a substantive service period, and as a result, the
Company expenses the final payment when made. The Company begins amortizing deferred solution and other costs for a
particular customer agreement once the revenue recognition criteria are met and amortizes those deferred costs over the
expected period of customer benefit, which has been determined to be the estimated life of the technology, which the Company
estimates to be five to seven years. The Company determined the period of benefit by considering factors such as historically
high renewal rates with similar customers and contracts, initial contract length, an expectation that there will still be a demand
for the product at the end of its term, and the significant costs to switch to a competitor's product, all of which are governed by
the estimated useful life of the technology.
The Company analyzes solution and other costs that may be capitalized to assess their recoverability and only capitalizes
costs that it anticipates being recoverable. The portion of capitalized costs expected to be amortized during the succeeding
twelve-month period is recorded in current assets as deferred solution and other costs, current portion, and the remainder is
recorded in long-term assets as deferred solution and other costs, net of current portion. The Company capitalized $6.7 million
and $4.6 million in deferred commissions costs during the years ended December 31, 2018 and 2017, respectively, and
recognized $3.6 million and $3.1 million of amortization during the years ended December 31, 2018 and 2017, respectively.
Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of
comprehensive loss.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives of the related assets. Maintenance and repairs that do not extend the life of or
improve an asset are expensed in the period incurred.
The estimated useful lives of property and equipment are as follows:
Computer hardware and equipment
Purchased software and licenses
Furniture and fixtures
Leasehold improvements
3 - 5 years
3 - 5 years
7 years
Lesser of estimated useful life or lease term
Purchase Price Allocation, Intangible Assets, and Goodwill
The purchase price allocation for business combinations and asset acquisitions requires extensive use of accounting
estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities
assumed based on their respective fair values. The Company early adopted Accounting Standards Update, or ASU, No.
2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" as of January 1, 2017. Under ASU
2017-01, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in
a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the single asset or group of assets, as
applicable, is not a business. If it is not met, the Company determines whether the single asset or group of assets, as applicable,
meets the definition of a business.
F-11
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
In connection with the Company's acquisitions and asset purchase discussed in Note 3 - Business Combinations and Asset
Acquisition, the Company recorded certain intangible assets, including acquired technology, customer relationships,
trademarks, non-compete agreements and assembled workforce. Amounts allocated to the acquired intangible assets are being
amortized on a straight-line basis over the estimated useful lives. The Company periodically reviews the estimated useful lives
and fair values of its identifiable intangible assets, taking into consideration any events or circumstances which might result in a
diminished fair value or revised useful life.
The excess purchase price over the fair value of assets acquired is recorded as goodwill. The Company tests goodwill for
impairment annually in October, or whenever events or changes in circumstances indicate an impairment may have occurred.
Because the Company operates in a single reporting unit, the impairment test is performed at the consolidated entity level by
comparing the estimated fair value of the Company to the carrying value of the Company. The Company estimates the fair
value of the reporting unit using a "step one" analysis using a fair-value-based approach based on the market capitalization or a
discounted cash flow analysis of projected future results to determine if it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. Determining the fair value of goodwill is subjective in nature and often involves
the use of estimates and assumptions including, without limitation, use of estimates of future prices and volumes for the
Company's products, capital needs, economic trends and other factors which are inherently difficult to forecast. If actual results,
or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the
recoverability of these assets, the Company could incur impairment charges in a future period.
Revenues
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an
amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services over the
term of the agreement, generally when the Company's solutions are implemented and made available to the customers. The
promised consideration may include fixed amounts, variable amounts or both. Revenues are recognized net of sales credits and
allowances.
Revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions
within a single operating segment. The Company derives the majority of its revenues from subscription fees for the use of its
solutions hosted in either the Company's data centers or cloud-based hosting services, transaction revenue from bill-pay
solutions, as well as revenues for customer support and implementation services related to the Company's solutions. The
Company recognizes the corresponding revenues over time on a ratable basis over the customer agreement term. The Company
accounts for revenue in accordance with the new revenue standard, Revenue from Contracts with Customers, which was
adopted on January 1, 2018, using the modified retrospective method.
The following tables disaggregate the Company's revenue by major source:
Total Revenues
$
168,226
$
39,232
$
33,642
$
241,100
Subscription
Transactional
Services and Other
Consolidated
Year Ended December 31, 2018
Subscription Fee Revenues
The Company's software solutions are available for use as hosted application arrangements under subscription fee
agreements without licensing perpetual rights to the software. Subscription fees from these applications, including contractual
periodic price increases, are recognized over time on a ratable basis over the customer agreement term beginning on the date the
Company's solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable
and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Periodic price
increases are estimated at contract inception and result in contract assets as revenue recognition may exceed the amount billed
early in the contract. Additional fees for monthly usage above the levels included in the standard subscription fee are
recognized as revenue in the month when the usage amounts are determined and reported.
A small portion of the Company's customers host and manage the Company's solutions on-premises or in third-party data
centers under term license and maintenance agreements. Term licenses sold with maintenance entitle the customer to technical
F-12
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
support, upgrades and updates to the software on a when-and-if-available basis. Under the new revenue standard, the Company
recognizes software license revenue once the customer obtains control of the license, which generally occurs at the start of each
license term. The Company recognizes the remaining arrangement consideration for maintenance revenue over time on a
ratable basis over the term of the software license. If the expected length of time between when the Company transfers the
software license to the customer and when the customer pays for it results in a significant financing component, the Company
adjusts the promised amount of consideration for the effects of the time value of money, which reflects the price the customer
would have paid when the license was transferred. Revenues from term licenses and maintenance agreements and the related
financing component were not significant in the periods presented.
Transactional Revenues
The Company earns the majority of its transactional revenues based on the number of bill-pay transactions that End Users
initiate on its digital banking platform. The Company also generates a smaller portion of its transactional revenues from
interchange fees generated when End Users utilize debit cards integrated with its Q2 CorePro API or Q2 Biller Direct products.
The Company recognizes revenue for bill-pay transaction services and interchange fees in the month incurred based on actual
transactions.
Services and Other Revenues
Implementation services are required for each new digital banking and lending and leasing platform and Centrix
standalone contract, and there is a significant level of integration and configuration for each customer. The Company's revenue
for upfront implementation services are billed upfront and recognized over time on a ratable basis over the customer agreement
term for its hosted application agreements. Upfront implementation services for on-premises agreements are recognized at
commencement date. Under certain circumstances, the Company partners with third-party professional system integrators to
support the installation and configuration process for its digital lending and leasing solutions, and therefore, the Company has
determined that these services qualify as a separate performance obligation in certain markets and geographies, and the upfront
implementation services for these agreements are recognized at commencement date.
Professional services revenues, which primarily consist of training, advisory services, core conversion services, web
design, and other general professional services, are generally billed and recognized when delivered.
Certain out-of-pocket expenses billed to customers are recorded as revenues rather than an offset to the related expense.
Revenues recorded from out-of-pocket expense reimbursements totaled approximately $1.7 million, $1.5 million and $1.5
million during the years ended December 31, 2018, 2017 and 2016, respectively. The out-of-pocket expenses are reported in
cost of revenues.
Significant Judgments
Performance Obligations and Standalone Selling Price
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of
accounting in the new revenue standard. Determining whether products and services are considered distinct performance
obligations that should be accounted for separately versus together may require significant judgment. The Company has
contracts with customers that often include multiple performance obligations, usually including multiple subscription and
implementation services. For these contracts, the Company accounts for individual performance obligations that are distinct
separately by allocating the contract's total transaction price to each performance obligation in an amount based on the relative
standalone selling price, or SSP, of each distinct good or service in the contract. In determining whether implementation
services are distinct from subscription services, the Company considered various factors including the significant level of
integration, interdependency, and interrelation between the implementation and subscription service, as well as the inability of
the customer's personnel or other service providers to perform significant portions of the services. The Company has concluded
that the implementation services included in contracts with multiple performance obligations in the North American banking
market are not distinct and, as a result, the Company defers any arrangement fees for implementation services and recognizes
such amounts over time on a ratable basis as one performance obligation with the underlying subscription revenue for the initial
agreement term of the hosted application agreements. The Company has concluded that outside the North American banking
market, the implementation services for its lending and leasing platform included in contracts with multiple performance
F-13
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
obligations are distinct and, as a result, the Company recognizes implementation fees on such arrangements as the related
implementation services are performed.
The majority of the Company's revenue recognized at a particular point in time is for professional services and usage
revenue. These services are performed within a relatively short period of time and are recognized at the point in time in which
the customer obtains control of the asset, which is generally upon completion of the service.
Judgment is required to determine the SSP for each distinct performance obligation. A contract's transaction price is
allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
The primary method used to estimate SSP is the adjusted market assessment approach, which considers its overall pricing
objectives, market conditions and other factors, including the value of the Company's contracts, its discounting practices, the
size and volume of its transactions, customer characteristics, price lists, go-to-market strategy, historical standalone sales and
agreement prices, and the number and types of users within its contracts.
Variable Consideration
The Company recognizes usage revenue related to End Users accessing its products in excess of contracted amounts, bill-
pay transactions that End Users initiate on its digital banking platform, and interchange fees that End Users generate using the
Company's solutions. Judgment is required to determine the accounting for these types of revenue. The Company considers
various factors including the degree to which usage is interdependent or interrelated to past services, costs to the Company per
user over the contract, and contractual price per user changes and their relationship to market terms, forecasted data, and the
Company's cost to fulfill the obligation. The Company has concluded that its usage revenue relates specifically to the transfer of
the service to the customer and is consistent with the allocation objective of Topic 606 when considering all of the performance
obligations and payment terms in the contract. Therefore, the Company recognizes usage revenue on a monthly or quarterly
basis in accordance with the agreement, as determined and reported. This allocation reflects the amount the Company expects to
receive for the services for the given period.
The Company sometimes provides credits or incentives to its customers. Known and estimable credits and incentives
represent a form of variable consideration, which are estimated at contract inception and reduce the revenues recognized for a
particular contract. These estimates are updated at the end of each reporting period as additional information becomes available.
The Company believes that there will not be significant changes to its estimates of variable consideration as of December 31,
2018.
Other Considerations
The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on
a net basis) with respect to the vendor reseller agreements pursuant to which the Company resells certain third-party solutions
along with the Company's solutions. Generally, the Company reports revenues from these types of contracts on a gross basis,
meaning the amounts billed to customers are recorded as revenues, and expenses incurred are recorded as cost of revenues.
Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to
create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on
its platform before it is transferred to its customers and is further supported by the Company being primarily responsible to its
customers and having a level of discretion in establishing pricing. Revenues provided from agreements in which the Company
is an agent are immaterial.
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 the Company's customers. Costs associated with
these services include the costs of the Company's implementation, customer support, data center and customer training
personnel, as well as costs related to research and development personnel who perform implementation and customer support
services. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in the
Company's solutions, the amortization of deferred solution and services costs, co-location facility costs and depreciation of the
Company's data center assets, cloud-based hosting services, an allocation of general overhead costs and referral fees. Direct
costs of third-party intellectual property include amounts paid for third-party licenses and related maintenance that are
F-14
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Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
incorporated into the Company's software and the amortization of acquired technology from the Company's recent acquisitions,
with the costs amortized to cost of revenues over the useful lives of the purchased assets.
The Company capitalizes certain personnel costs directly related to the implementation of its solutions to the extent those
costs are considered to be recoverable from future revenues. The Company amortizes the costs for a particular implementation
once revenue recognition commences, and the Company amortizes those implementation costs 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.
Software Development Costs
Software development costs include salaries and other personnel-related costs, including employee benefits and bonuses
attributed to programmers, software engineers and quality control teams working on the Company's software solutions. The
costs related to software development that are incurred between reaching technological feasibility of a solution and the point at
which the solution is ready for general release are capitalized and are included in intangible assets, net on the consolidated
balance sheet. 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. The Company capitalized software
development costs in the amount of zero, $1.0 million and $2.7 million during the years ended December 31, 2018, 2017, and
2016, respectively. The Company recognized $0.8 million and $0.5 million of amortization of capitalized software development
costs for the years ended December 31, 2018 and 2017, respectively, as all of the related individual products reached general
release during 2017.
Research and Development Costs
Research and development costs include salaries and other personnel-related costs, including employee benefits, bonuses
and stock-based compensation, third-party contractor expenses, software development tools, an allocation of facilities and
depreciation expenses and other related expenses incurred in developing new solutions and upgrading and enhancing existing
solutions. Research and development costs are expensed as incurred.
Advertising
All advertising costs of the Company are expensed the first time the advertising takes place. Advertising costs were $1.5
million, $0.7 million and $0.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Sales Tax
The Company presents sales taxes and other taxes collected from customers and remitted to governmental authorities on a
net basis and, as such, excludes them from revenues.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders' equity that result from transactions and
economic events other than those with stockholders. Other comprehensive loss consists of net loss, unrealized gains and losses
on available-for-sale investments, and foreign currency translation adjustments.
Stock-Based Compensation
Stock options, restricted stock units, and market stock units awarded to employees, directors, executives and consultants
are measured at fair value at each grant date. As of January 1, 2017, the Company no longer uses a forfeiture rate to recognize
compensation expense as a result of the adoption of ASU No. 2016-09, "Improvements to Employee Share-Based Payment
Accounting." Generally, options vest 25% on the one-year anniversary of the grant date with the balance vesting monthly over
the following 36 months, and restricted stock unit awards vest in four annual installments of 25% each. Market stock units are
performance-based awards that cliff vest based on the Company's stockholder return relative to the total stockholder return of
the Russell 2000 Index, or Index, over a three-year period on the anniversary of the date of grant. Up to one-third of the target
shares of the Company's common stock subject to each market stock unit award are eligible to be earned after the first and
second years of the performance period and up to 200% of the full target number of shares subject to each market stock unit
F-15
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Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
award are eligible to be earned after the completion of the three-year performance period (less any shares earned for years one
and two) based on the average price of the Company's common stock relative to the Index during the performance period.
The Company values stock options using the Black-Scholes option-pricing model, which requires the input of subjective
assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free
interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the
expected term of the Company's employee stock options. The expected life represents the period of time the stock options are
expected to be outstanding and is based on the simplified method. Under the simplified method, the expected life of an option is
presumed to be the mid-point between the vesting date and end of the contractual term. The Company used the simplified
method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the
expected life of the stock options. Due to the Company's limited history as a public company, expected volatility is based on
historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options.
The Company assumed no dividend yield because it does not expect to pay dividends in the near future, which is consistent
with the Company's history of not paying dividends. The Company recognizes compensation expense ratably over the requisite
service period of the stock option award.
The Company values restricted stock units at the closing market price on the date of grant, and recognizes compensation
expense ratably over the requisite service period of the restricted stock unit award.
The Company estimates the fair value of market stock units on the date of grant using a Monte Carlo simulation model.
The determination of fair value of the market stock units is affected by the Company's stock price and a number of assumptions
including the expected volatility and the risk-free interest rate. The Company's expected volatility at the date of grant was based
on the historical volatilities of its stock and peer firms' stocks and the Index over the performance period. The Company
assumed no dividend yield and recognizes compensation expense ratably over the performance period of the market stock unit
award. The Company recognizes compensation expense using the graded attribution method on a straight-line basis over the
performance period for each market stock unit award.
Convertible Senior Notes
In February 2018, the Company issued $230.0 million principal amount of convertible senior notes due in February 2023,
or the Convertible Notes. In accounting for the issuance of the Convertible Notes, the Company separated each of the
Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by
measuring the fair value, as of the date of issuance, of a similar debt without the conversion option. The carrying amount of the
equity component representing the conversion option was determined by deducting the fair value of the liability components
from the total initial proceeds. The difference between the par amount of the Convertible Notes and the carrying amount of the
liability component represents debt discounts that are amortized to interest expense over the respective terms of the Convertible
Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the
conditions for equity classification. In accounting for the issuance costs related to the Convertible Notes, the Company
allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance
costs attributable to the liability components are amortized to interest expense over the respective terms of the Convertible
Notes using the effective interest rate method. The issuance costs attributable to the equity components were netted against the
respective equity components in additional paid-in capital.
Contingent Consideration
On October 15, 2018, the Company's wholly-owned subsidiary, Q2 Software, Inc. acquired all of the outstanding capital
stock of Cloud Lending, Inc., a Delaware corporation, or Cloud Lending. Certain former stockholders of Cloud Lending have
the right to receive in the aggregate up to an additional $59.5 million earnout payment based upon satisfaction of certain
financial milestones. As of December 31, 2018, the estimated fair value of the contingent consideration related to the potential
earnout payment utilizing the Monte Carlo simulation method under the the option pricing model was $16.9 million, and this
amount is recorded in other long-term liabilities in the consolidated balance sheets. The fair value of this contingent
consideration is estimated on a quarterly basis through a collaborative effort by the Company's sales and finance departments.
Changes in the fair value of the contingent consideration subsequent to the purchase price finalization will be recorded as
acquisition related costs in the consolidated statements of comprehensive loss.
F-16
Table of Contents
Income Taxes
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Deferred income taxes are provided for the tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss carryforwards and
credits using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The
Company assesses the likelihood that deferred tax assets will be realized and recognizes a valuation allowance if it is more
likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the
likelihood and amounts of future taxable income by tax jurisdiction. To date, the Company has provided a valuation allowance
against its deferred tax assets as it believes the objective and verifiable evidence of its historical pretax net losses outweighs any
positive evidence of its forecasted future results. Although the Company believes that its tax estimates are reasonable, the
ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of
business. Although the Company believes that its tax estimates are reasonable, the ultimate tax determination involves
significant judgment that is subject to audit by tax authorities in the ordinary course of business. The Company will continue to
monitor the positive and negative evidence, and it will adjust the valuation allowance as sufficient objective positive evidence
becomes available. No tax related impact was recorded in the financial statements as a result of the adoption of the new revenue
standard.
The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit
taken by the Company in its tax filings or positions is more likely than not to be realized. Potential interest and penalties
associated with any uncertain tax positions are recorded as a component of income tax expense. Through December 31, 2018,
the Company has not identified any material uncertain tax positions for which liabilities would be required to be recorded other
than the liabilities related to acquisitions completed during the year.
Basic and Diluted Net Loss per Common Share
The following table sets forth the computations of net loss per share for the periods listed:
Numerator:
Net loss
Denominator:
Year ended December 31,
2018
2017
2016
$ (35,397) $ (26,164) $ (36,354)
Weighted-average common shares outstanding, basic and diluted
Net loss per common share, basic and diluted
42,797
41,218
$
(0.83) $
(0.63) $
39,649
(0.92)
Due to net losses for each of the years ended December 31, 2018, 2017 and 2016, basic and diluted loss per share were the
same, as the effect of all potentially dilutive securities would have been anti-dilutive. The following table sets forth the anti-
dilutive common share equivalents for the periods listed:
Stock options, restricted stock units, and market stock units
Year ended December 31,
2018
4,851
2017
5,372
2016
5,643
Because the Company has the intention and ability to settle the principal amount of its Convertible Notes in cash, the
treasury stock method is expected to be used for calculating any potential dilutive effect of the conversion spread on diluted net
income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common
stock when the average market price of common stock for a given period exceeds the conversion price of $57.38 per share for
the Convertible Notes. The warrants, or Warrants, issued by the Company in connection with its Convertible Note financing
will have a dilutive effect when the average market price of common stock for a given period exceeds the Warrant's strike price
of $78.75 per share.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which amends the existing
accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an
F-17
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
amount an entity expects to be entitled to when products are transferred to customers. ASU 2014-09 was modified by
subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20. Topic 606 also includes Subtopic 340-40, Other
Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract
with a customer. Collectively, the Company refers to ASU 2014-09, as amended, and Subtopic 340-40 as the "new revenue
standard." On January 1, 2018, the Company adopted the new revenue standard for all contracts which were not completed as
of January 1, 2018, using the modified retrospective method. Adoption of the new revenue standard resulted in changes to the
Company's accounting policies for revenue recognition, contract balances, accounts receivable, deferred revenues, deferred
implementation costs, and deferred solution and other costs. The Company recognized the cumulative effect of initially
applying the new revenue standard as a positive adjustment to the opening balance of accumulated deficit on the consolidated
balance sheet in the amount of $15.8 million, which reflects the acceleration of revenues and deferral of incremental
commission costs of obtaining subscription contracts. The comparative information in prior periods presented has not been
restated and continues to be reported under the accounting standards in effect for those periods.
The most significant impact of adoption of the new revenue standard relates to the accounting for arrangements that
include contractual provisions providing for periodic price increases in subscription fee arrangements. Under previous GAAP,
the Company accounted for periodic price increases in the period in which they occurred, and under the new revenue standard,
the Company recognizes revenue from periodic price increases on a ratable basis over the term of the contract. Additionally,
under previous GAAP, for contracts in which customers host and manage the Company's solutions on-premises or in third-party
data centers under term license and maintenance agreements, the Company recognized the entire arrangement consideration
monthly over the term of the software license as the Company did not have VSOE of fair value for the license and maintenance.
Under the new standard, the Company recognizes software license revenue once the customer obtains control of the license,
which generally occurs at the commencement of each license term. Under previous GAAP, the Company also deferred only
direct and incremental commission costs to obtain a contract and amortized those costs over the term of the related contract.
Under the new standard, the Company defers additional incremental costs related to the customer contract and amortizes those
costs over the expected period of customer benefit. Also, a portion of the commission payment is now being expensed as
incurred.
The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption
of the new revenue standard were as follows:
Balance sheet
Assets
Contract assets, current portion
Deferred solution and other costs, current portion
Deferred solution and other costs, net of current portion
Deferred implementation costs, net of current portion
Contract assets, net of current portion
Liabilities
Accrued compensation
Deferred revenues, current portion
Deferred revenues, net of current portion
Stockholders' equity
Accumulated deficit
Balance at
December 31, 2017
Adjustments due
to the new
revenue standard
Balance at
January 1, 2018
$
— $
9,246
12,973
8,295
—
11,511
38,379
28,289
$
517
64
265
(93)
4,541
(571)
(1,803)
(8,174)
517
9,310
13,238
8,202
4,541
10,940
36,576
20,115
$
(152,114) $
15,842
$
(136,272)
F-18
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company's
consolidated statement of comprehensive loss and balance sheet was as follows:
Income statement
Revenues
Costs and expenses
Cost of revenues
Sales and marketing
Interest and other income
Net loss
Net loss per common share, basic and diluted
Balance sheet
Assets
Contract assets, current portion
Deferred solution and other costs, current portion
Deferred implementation costs, current portion
Deferred solution and other costs, net of current portion
Deferred implementation costs, net of current portion
Contract assets, net of current portion
Liabilities
Accrued compensation
Deferred revenues, current portion
Deferred revenues, net of current portion
Stockholders' equity
Accumulated deficit
Year Ended December 31, 2018
As Reported
Balances without
new revenue
standard
Effect of Change
Higher/(Lower)
$
241,100
$
233,443
$
7,657
$
$
$
121,855
48,124
2,811
122,121
49,429
2,676
(266)
(1,305)
135
(35,397) $
(44,760) $
9,363
(0.83) $
(1.05) $
0.22
As of December 31, 2018
As Reported
Balances without
new revenue
standard
Effect of Change
Higher/(Lower)
598
10,501
4,427
16,761
9,948
10,272
12,652
42,531
23,063
$
— $
10,240
4,053
15,532
10,188
—
13,404
53,608
23,945
598
261
374
1,229
(240)
10,272
(752)
(11,077)
(882)
$
(172,422) $
(197,627) $
25,205
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842 (Leases)," which
provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also
issued ASU 2018-11, "Targeted Improvements," which provides the option to adopt ASU No. 2016-02 retrospectively for each
prior period presented or as of the adoption date with a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. These standards are effective for public entities for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years, and early application is permitted. The Company anticipates that
the adoption of Topic 842 will impact its consolidated balance sheets as most of its operating lease commitments will be subject
to the new standard and recognized as right-of-use assets and corresponding operating lease liabilities upon the adoption
of Topic 842, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.
F-19
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The Company intends to adopt the standard using the adoption method outlined in ASU 2018-11, which allows entities to
initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The Company intends to elect the package of practical expedients permitted
under the transition guidance within Topic 842, which among other things, will allow the Company to carry forward the
historical lease classification and the practical expedient to not separate lease and non-lease components of an agreement. The
Company expects the adoption of Topic 842 to result in the recording of additional net lease assets and lease liabilities of
approximately $26 million to $28 million and approximately $35 million to $37 million, respectively, as of January 1, 2019.
The difference between the additional lease assets and lease liabilities is the reclassification of deferred rent on its consolidated
balance sheet at the date of adoption. The Company does not expect the standard to impact the consolidated statements of
comprehensive loss or the consolidated statements of cash flows.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments," to clarify and provide specific guidance on eight cash flow classification issues that are not
addressed by current GAAP and thereby reduce the current diversity in practice. The Company adopted ASU 2016-15, effective
January 1, 2018, and there was no impact on the consolidated financial statements as a result of the adoption.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which
provides guidance on the classification of restricted cash in the statement of cash flows. The Company adopted this ASU
retrospectively, effective January 1, 2018. As a result, the Company included restricted cash with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts presented on the consolidated statements of cash
flows, resulting in an increase in net cash of $1.8 million, $2.3 million, and $1.3 million for the years ended December 31,
2018, 2017, and 2016, respectively.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment," which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill
impairment test and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying
amount of a reporting unit exceeds its fair value. The standard is effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years and early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company does not expect the adoption of this standard to have a material
impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718)," to provide clarity
and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock
Compensation, to a change to the terms or conditions of a share-based payment award. The Company adopted ASU 2017-09,
effective January 1, 2018, and there was no impact on the consolidated financial statements as a result of the adoption.
In December 2017, the SEC issued Staff Accounting Bulletin, or SAB, 118 to address the application of GAAP in
situations in which a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act, or the
Tax Act, which was signed into law on December 22, 2017. In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes
(Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)," which
amended ASC 740 to incorporate the requirements of SAB 118. Disclosures related to the effect of the Tax Act and the
Company's utilization of SAB 118 appear in Note 14 - Income Taxes.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40)," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
(and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company
beginning in its first quarter of 2020, with early adoption permitted. The ASU may be applied retrospectively or prospectively
to all implementation costs incurred after the date of adoption. The Company is anticipating early adoption of the ASU for
January 1, 2019 and is currently evaluating the financial statement impact on the consolidated financial statements as a result of
this adoption.
F-20
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
3. Business Combinations and Asset Acquisitions
Gro Solutions
On November 30, 2018, the Company's wholly-owned subsidiary, Q2 Software, Inc. acquired all of the outstanding shares
of Gro Solutions, or Gro, a privately-owned provider of digital account opening and sales and marketing solutions. The
purchase price paid was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill.
Gro was acquired for approximately $25.5 million in cash from existing balances. At closing, the Company deposited into
an escrow account $0.4 million of the initial consideration, or Gro Escrow Amount, to compensate for any breach of a
representation or warranty or any violation or default of any obligation by the sellers subsequent to the acquisition during an
escrow period of 12 or 18 months following the acquisition date depending upon the nature of the breach, violation or default.
To the extent not utilized, half of the Gro Escrow Amount less any utilized amounts shall be paid to the former stockholders of
Gro at the end of each of the 12 and 18 month escrow periods unless there are any unresolved claims remaining at that time.
The Company accrues for payouts contingent upon continued and future employment of acquired employees and
contractors, and the unpaid amounts due to the continuing employees are recorded in accrued compensation in the consolidated
balance sheets. The Company recognized $0.1 million under these agreements in compensation expense which is included in
acquisition related costs in the consolidated statement of comprehensive loss for the year ended December 31, 2018.
The Company recorded the purchase of Gro using the acquisition method of accounting and accordingly, recognized
assets acquired and liabilities assumed at their fair values as of the date of acquisition. The results of Gro's operations are
included in the Company's consolidated results of operations beginning with the date of acquisition. Pro forma results of
operations related to this acquisition have not been presented since Gro's operating results up to the date of acquisition were not
material to the Company's consolidated financial statements. Acquisition related transaction costs of $0.5 million were
expensed as incurred during the year ended December 31, 2018, and were recorded within acquisition related expenses in the
consolidated statements of comprehensive loss.
The table below summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired
and the liabilities assumed. The fair values of assets acquired and liabilities assumed, including valuations of intangible assets,
accruals, and income taxes, may change as additional information is received during the measurement period. The measurement
period will end no later than one year from the acquisition date.
Assets acquired:
Cash
Accounts receivable, net
Prepaid expenses and other current assets
Property and equipment, net
Other long-term assets
Intangible assets, net
Goodwill
Total assets acquired
Liabilities assumed:
Accounts payable and accrued liabilities
Deferred revenues
Total liabilities assumed
Fair value of assets acquired and liabilities assumed
$
$
2,116
335
139
22
35
8,275
17,828
28,750
2,058
1,200
3,258
25,492
The goodwill recognized is attributable primarily to synergies expected from the integration of the acquired product
offering into the Company's integrated solutions, the expanded service capabilities that are expected to become available from
planned investments in the acquired products, and the value of the assembled work force in accordance with generally accepted
accounting principles.
F-21
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Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated useful lives are as follows
(in thousands, except years):
Customer Relationships
Trademark
Non-compete agreements
Acquired technology
Total acquisition-related intangible assets
Estimated Fair Values
265
$
270
210
7,530
8,275
$
Estimated Useful Lives
3
2
5
5
The fair value of the intangible assets was based on the income approach using various methods such as with and without,
relief from royalty, and multi-period excess earnings. Intangible assets are amortized on a straight-line basis over their
estimated useful lives, ranging from two to five years. The acquisition is expected to be treated as a stock acquisition for tax
purposes, resulting in no additional amortizable tax basis in acquired intangibles.
Cloud Lending
On October 15, 2018, the Company's wholly-owned subsidiary, Q2 Software, Inc. acquired all of the outstanding capital
stock of Cloud Lending Inc., or Cloud Lending, a privately-owned provider of end-to-end digital lending and leasing platform
solutions. The purchase price paid was in excess of the fair value of the net assets acquired and, as a result, the Company
recorded goodwill.
Cloud Lending was acquired for approximately $107.3 million in cash from existing balances. At closing, the Company
deposited into an escrow account $10.5 million of the initial consideration, or CL Escrow Amount, to compensate for any
breach of a representation or warranty or any violation or default of any obligation by the sellers subsequent to the acquisition
during a period of 18 months following the acquisition date. To the extent not utilized, the CL Escrow Amount shall be paid to
the former stockholders of Cloud Lending at the end of the 18 month period unless there are any unresolved claims remaining
at that time. The total purchase price is as follows:
Cash purchase price
Estimated working capital and other adjustments
Fair value contingent consideration
Total purchase price
Purchase
Consideration
$
$
107,293
970
16,862
125,125
Certain former stockholders of Cloud Lending also have the right to receive in the aggregate up to an additional $59.5
million earnout payment based upon satisfaction of certain financial milestones. As of December 31, 2018, the estimated fair
value of the contingent consideration related to the potential earnout payment was $16.9 million.
The Company accrues for payouts contingent upon continued and future employment of acquired employees and
contractors, and the unpaid amounts due to the continuing employees are recorded in accrued compensation in the consolidated
balance sheets. The Company recognized $0.3 million under these agreements in compensation expense which is included in
acquisition related costs in the consolidated statement of comprehensive loss for the year ended December 31, 2018.
The Company recorded the purchase of Cloud Lending using the acquisition method of accounting and accordingly,
recognized assets acquired and liabilities assumed at their fair values as of the date of acquisition. The results of Cloud
Lending's operations are included in the Company's consolidated statements of comprehensive loss from the date of acquisition.
Acquisition related transaction costs of $2.6 million were expensed as incurred during the year ended December 31, 2018, and
were recorded within acquisition related expenses in the consolidated statements of comprehensive loss.
F-22
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The table below summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired
and the liabilities assumed. The fair values of assets acquired and liabilities assumed, including valuations of intangible assets,
accruals, and income taxes, may change as additional information is received during the measurement period. The measurement
period will end no later than one year from the acquisition date.
Assets acquired:
Cash
Accounts receivable, net
Prepaid expenses and other current assets
Property and equipment, net
Other long-term assets
Intangible assets, net
Goodwill
Total assets acquired
Liabilities assumed:
Accounts payable, accrued liabilities, and accrued compensation
Deferred revenues
Total liabilities assumed
Fair value of assets acquired and liabilities assumed
$
$
796
1,311
4,704
101
167
50,100
77,203
134,382
6,007
3,250
9,257
125,125
The goodwill recognized is attributable primarily to synergies expected from the integration of the acquired product
offering into the Company's integrated solutions including an increasing customer base, the expanded service capabilities that
are expected to become available from planned investments in the acquired products, and the value of the assembled work force
in accordance with generally accepted accounting principles.
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated useful lives are as follows
(in thousands, except years):
Customer Relationships
Trademark
Non-compete agreements
Acquired technology
Total acquisition-related intangible assets
Estimated Fair Values
7,245
$
9,525
970
32,360
50,100
$
Estimated Useful Lives
5
10
5
7
The fair value of the intangible assets was based on the income approach using various methods such as with and without,
relief from royalty, and multi-period excess earnings. Intangible assets are amortized on a straight-line basis over their
estimated useful lives, ranging from five to ten years. The acquisition is expected to be treated as a stock acquisition for tax
purposes, resulting in no additional amortizable tax basis in acquired intangibles.
F-23
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The pro forma statements of operations data for years ended December 31, 2018 and December 31, 2017, shown in the
table below, give effect to the Cloud Lending acquisition, described above, as if it had occurred at January 1, 2017. These
amounts have been calculated after applying the Company's accounting policies and adjusting the results of Cloud Lending to
reflect the additional intangible amortization, stock compensation, debt payoff and related items, and the adjustments to
acquired deferred revenue that would have occurred assuming the fair value adjustments had been applied and incurred since
January 1, 2017. This pro forma data is presented for informational purposes only and does not purport to be indicative of the
Company's future results of operations. The table below shows the pro forma statements of operations data for the respective
years ending December 31:
Total Revenues
Net loss
Asset Acquisition and Other Business Combinations
(Unaudited)
Year ended December 31,
2018
$ 252,541
(49,033)
2017
$ 199,220
(43,069)
In January 2017, the Company acquired the outstanding shares of a privately-owned company. In accordance with ASU
2017-01, the Company determined the set of assets acquired was not a business as substantially all of the fair value of the gross
assets acquired was concentrated in a single identifiable asset, and the transaction was accounted for as an asset purchase. The
Company acquired the assets for $1.5 million in cash from existing balances which included a hold-back of $0.2 million, which
was paid in the first quarter of 2018. Consideration was allocated on a relative fair value basis and resulted in $1.5 million in
intangible assets including acquired technology and assembled workforce. Intangible assets are amortized on a straight-line
basis over their estimated useful lives of three years. The acquired intangible assets are not amortizable for income tax
purposes, which will result in an increase to deferred tax liabilities and a decrease of valuation allowance of $0.3 million.
During 2015, the Company acquired all of the outstanding shares of Centrix Solutions, Inc., or Centrix, a privately-owned
company that provides financial institutions with products that detect fraud, manage risk and simplify compliance and acquired
all of the outstanding ownership interests of Smarty Pig, LLC, doing business as Social Money, or Social Money, a privately-
owned financial services software company that offers a modern, cloud-based platform that assists financial institutions in their
direct digital strategies. During 2017 and 2018, the Company paid out $7.2 million and $1.0 million, respectively, to the former
Centrix shareholders based upon the achievement of certain milestone-based objectives and continued employment. During
2017, the Company paid out $0.2 million in retention bonuses to certain of the Social Money employees based upon their
continued employment with the Company and also released the entire $2.5 million hold-back to the former owners of Social
Money upon the expiration of the hold-back period. The Company has recognized $0.6 million and $1.1 million under these
agreements in compensation expense included in acquisition related costs in the consolidated statement of comprehensive loss
for the years ended December 31, 2018 and 2017, respectively.
4. Fair Value Measurements
The carrying values of the Company's financial instruments, principally cash equivalents, investments, accounts
receivable, restricted cash and accounts payable, approximated their fair values due to the short period of time to maturity or
repayment.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation
hierarchy for disclosures as follows:
F-24
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
• Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;
• Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
• Level III—Unobservable inputs that are supported by little or no market activity, which requires the Company to
develop its own assumptions.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring
basis as of December 31, 2018:
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Cash Equivalents:
Money market funds
Investments:
U.S. government agency bonds
Corporate bonds and commercial paper
Certificates of deposit
Liabilities
Other long-term liabilities:
Contingent consideration
$
54,559
$
54,559
$
— $
—
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
22,293
44,734
1,952
68,979
$
$
— $
—
—
— $
22,293
44,734
1,952
68,979
$
$
—
—
—
—
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
16,862
$
— $
— $
16,862
F-25
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The following table details the fair value hierarchy of the Company's financial assets measured at fair value on a recurring
basis as of December 31, 2017:
Description
Fair Value
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Cash Equivalents:
Money market funds
Investments:
U.S. government agency bonds
Corporate bonds and commercial paper
Certificates of deposit
$
9,279
$
9,279
$
— $
—
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
16,194
15,815
9,676
41,685
$
$
— $
—
—
— $
16,194
15,815
9,676
41,685
$
$
—
—
—
—
The Company determines the fair value of its investment holdings based on pricing from its pricing vendors. The
valuation techniques used to measure the fair value of financial instruments having Level 2 inputs were derived from non-
binding consensus prices that are corroborated by observable market data or quoted market prices for similar instruments. Such
market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs
other than quoted prices that are observable either directly or indirectly (Level 2 inputs).
The Company added contingent consideration on October 15, 2018 with the acquisition of Cloud Lending, and there were
no changes to the fair value during 2018. The Company's contingent consideration is valued using a Monte Carlo simulation
model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates,
revenue volatility, revenue recognition periods, risk-free rates, and discount rates.
5. Cash, Cash Equivalents and Investments
The Company's cash, cash equivalents and investments as of December 31, 2018 and 2017 consisted primarily of cash,
U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and money market funds.
The Company classifies investments as available-for-sale at the time of purchase and reevaluates such classification as of
each balance sheet date. All investments are recorded at estimated fair value. Unrealized gains and losses on available-for-sale
investments are included in accumulated other comprehensive loss, a component of stockholders' equity. The Company
evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The
Company considers impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely the
Company will sell the investments before the recovery of their cost basis. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the specific identification method and are reported in other income
(expense), net, in the consolidated statements of comprehensive loss. Interest, amortization of premiums and accretion of
discount on all investments classified as available-for-sale are also included as a component of other income (expense), net, in
the consolidated statements of comprehensive loss.
As of December 31, 2018 and 2017, the Company's cash was $53.8 million and $48.7 million, respectively.
F-26
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
A summary of the cash equivalents and investments as of December 31, 2018 is as follows:
Cash Equivalents:
Money market funds
Investments:
U.S. government agency bonds
Corporate bonds and commercial paper
Certificates of deposit
Amortized Cost
54,559
$
Amortized Cost
22,330
$
44,812
1,952
69,094
$
$
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
— $
— $
54,559
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
— $
—
—
— $
(37) $
(78)
—
(115) $
22,293
44,734
1,952
68,979
A summary of the cash equivalents and investments as of December 31, 2017 is as follows:
Cash Equivalents:
Money market funds
Investments:
U.S. government agency bonds
Corporate bonds and commercial paper
Certificates of deposit
Amortized Cost
9,279
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
— $
— $
9,279
Amortized Cost
16,277
$
15,871
9,676
41,824
$
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
— $
—
—
— $
(83) $
(56)
—
(139) $
16,194
15,815
9,676
41,685
The Company may sell its investments at any time, without significant penalty, for use in current operations or for other
purposes, even if they have not yet reached maturity. As a result, the Company classifies its investments, including investments
with maturities beyond twelve months, as current assets in the accompanying consolidated balance sheets.
The following table summarizes the estimated fair value of the Company's investments, designated as available-for-sale
and classified by the contractual maturity date of the investments as of the dates shown:
Due within one year or less
Due after one year through five years
December 31,
2018
2017
$
$
61,514
7,465
68,979
$
$
27,324
14,361
41,685
The Company has certain available-for-sale investments in a gross unrealized loss position, all of which have been in such
position for less than twelve months. The Company reviews its debt securities classified as short-term investments on a regular
basis to evaluate whether or not any security has experienced an other than temporary decline in fair value. The Company
considers factors such as the length of time and extent to which the market value has been less than the cost, the financial
position and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be
required to sell the investment before recovery of the investment's amortized-cost basis. If the Company determines that an
other than temporary decline exists in one of these investments, the respective investment would be written down to fair value.
For debt securities, the portion of the write-down related to credit loss would be recognized in other income, net in the
consolidated statements of comprehensive loss. Any portion not related to credit loss would be included in accumulated other
comprehensive loss. Because the Company does not intend to sell any investments which have an unrealized loss position at
F-27
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
this time, and it is not more likely than not that the Company will be required to sell the investment before recovery of its
amortized cost basis, which may be maturity, the Company does not consider the investments with unrealized loss positions to
be other than temporarily impaired as of December 31, 2018.
The following table shows the fair values and the gross unrealized losses of these available-for-sale investments
aggregated by investment category as of December 31, 2018:
$
$
$
$
U.S. government agency bonds
Corporate bonds and commercial paper
Adjusted
Cost
22,330
44,812
67,142
$
$
Gross
Unrealized
Loss
Fair Value
22,293
44,734
67,027
(37) $
(78)
(115) $
The following table shows the fair values and the gross unrealized losses of these available-for-sale investments
aggregated by investment category as of December 31, 2017:
U.S. government agency bonds
Corporate bonds and commercial paper
6. Deferred Solution and Other Costs
Adjusted
Cost
16,277
15,871
32,148
$
$
Gross
Unrealized
Loss
Fair Value
16,194
15,815
32,009
(83) $
(56)
(139) $
Deferred solution and other costs, current portion and net of current portion, consisted of the following:
Deferred solution costs
Deferred commissions
Deferred solution and other costs, current portion
Deferred solution costs
Deferred commissions
Deferred solution and other costs, net of current portion
December 31,
2018
2017
$
$
$
$
7,142
3,359
10,501
6,625
10,136
16,761
$
$
$
$
6,505
2,741
9,246
5,291
7,682
12,973
F-28
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
7. Property and Equipment
Property and equipment consisted of the following:
Computer hardware and equipment
Purchased software and licenses
Furniture and fixtures
Leasehold improvements
Accumulated depreciation
Property and equipment, net
December 31,
2018
2017
37,825
9,687
5,934
13,054
66,500
(31,506)
34,994
$
$
30,734
8,788
5,387
13,470
58,379
(23,835)
34,544
$
$
Depreciation expense was $9.7 million, $9.2 million and $7.3 million for the years ended December 31, 2018, 2017 and
2016, respectively.
8. Goodwill and Intangible Assets
The carrying amount of goodwill was $107.9 million and $12.9 million at December 31, 2018 and 2017, respectively.
During the fourth quarter of 2018, the Company added $77.2 million of goodwill for the Cloud Lending acquisition and $17.8
million for the Gro acquisition. Goodwill represents the excess purchase price over the fair value of assets acquired. During
2015, the Company completed the acquisitions of Centrix and Social Money. The Company has one operating segment and one
reporting unit. Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential
impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. The annual
impairment test was performed as of October 31, 2018. No impairment of goodwill was identified during 2018, nor has any
impairment of goodwill been recorded to date.
Intangible assets at December 31, 2018 and 2017 were as follows:
As of December 31, 2018
As of December 31, 2017
Customer relationships
Non-compete agreements
Trademarks
Acquired technology
Assembled workforce
Capitalized software development
costs
Gross Amount
10,640
$
2,064
11,935
53,183
79
Accumulated
Amortization
$
(2,148) $
(668)
(2,350)
(12,030)
(51)
Net Carrying
Amount
8,492
1,396
9,585
41,153
28
Gross Amount
3,130
$
884
2,140
13,293
121
Accumulated
Amortization
$
Net Carrying
Amount
(1,294) $
(451)
(1,724)
(7,464)
(38)
1,836
433
416
5,829
83
3,975
81,876
$
(1,333)
(18,580) $
2,642
63,296
$
3,975
23,543
$
(538)
(11,509) $
3,437
12,034
$
F-29
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The estimated useful lives and weighted average amortization periods for intangible assets at December 31, 2018 are as
follows (in years):
Customer relationships
Non-compete agreements
Trademarks
Acquired technology
Assembled workforce
Capitalized software development costs
Total
Estimated
Useful Life
3 - 6
2 - 5
2 - 10
3 - 7
3
5
Weighted
Average
Amortization
Period
4.5
4.3
9.8
6.3
1.0
3.4
6.4
The Company recorded intangible assets from the business combinations and asset acquisition discussed in Note 3,
Business Combinations and Asset Acquisitions. Intangible assets are amortized on a straight-line basis over their estimated
useful lives, which range from two to ten years. Amortization expense included in cost of revenues in the consolidated
statement of comprehensive loss was $4.5 million and $3.6 million for the years ended December 31, 2018 and 2017,
respectively, and amortization expense included in operating expenses in the consolidated statement of comprehensive loss was
$1.8 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively.
Gross capitalized software development costs were $4.0 million as of December 31, 2018 and 2017. During the year
ended 2017, all of the products related to capitalized software development costs reached general release, and the Company
commenced amortization of these costs. The Company amortized $0.8 million and $0.5 million for the years ended December
31, 2018 and 2017, respectively. Capitalized software development costs are computed on an individual product basis and those
products available for market are amortized to cost of revenues over the products' estimated economic lives, which are expected
to be five years.
The estimated future amortization expense related to intangible assets as of December 31, 2018 was as follows:
Year Ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total amortization
Amortization
$
$
12,159
11,053
9,919
9,023
8,295
12,847
63,296
F-30
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
9. Accrued Liabilities
Accrued liabilities consisted of the following:
Accrued data center equipment and software purchases
Accrued transaction processing fees
Accrued professional services
Deferred rent
Other
10. Debt
December 31,
2018
2017
81
2,911
1,382
1,260
3,695
9,329
$
$
4,410
1,687
1,419
1,197
1,849
10,562
$
$
In April 2013, the Company entered into a secured credit facility agreement, or Credit Facility, with Wells Fargo Bank,
National Association, or Wells Fargo, which the Company and Wells Fargo subsequently amended several times, most recently
on March 31, 2016, to modify the Credit Facility to allow for the acquisition of Social Money. The Credit Facility, as amended,
provided for a line of credit of up to $25.0 million, with an accordion feature, or Accordion Feature, allowing the Company to
increase its maximum borrowings by up to an additional $25.0 million, subject to certain conditions and limitations, including
that borrowings at any time would be limited to 75% of the Company's trailing twelve-month recurring revenues. Access to the
total borrowings available under the Credit Facility was restricted based on covenants related to the Company's minimum
liquidity and adjusted EBITDA. Amounts borrowed under the Credit Facility accrued interest, at the Company's election at
either: (i) the per annum rate equal to the LIBOR rate plus an applicable margin; or (ii) the then current base rate plus the
greater of the U.S. Federal Funds rate plus one percentage point, the one-month LIBOR plus one percentage point, or the
lending financial institution's prime rate. The Company paid a monthly fee based on the total unused borrowings balance, an
annual administrative fee and the initial closing fee, which was paid in three equal annual installments over the first three years
of the Credit Facility. The Accordion Feature expired in October 2016, at which time maximum borrowings under the Facility
were reduced to $25.0 million.
On April 11, 2017, the Credit Facility expired pursuant to its original terms. Upon the expiration of the Credit Facility, the
Company paid off the outstanding balance, which was less than $0.1 million, and the secured letter of credit which had been
issued against the facility for the security deposit for its corporate headquarters is now secured by a $0.5 million restricted
deposit with Wells Fargo.
11. Commitments and Contingencies
Operating Lease Commitments
The Company leases office space under non-cancellable operating leases for its corporate headquarters in Austin, Texas in
two adjacent buildings under separate lease agreements. Pursuant to the first of which the Company leases approximately 67
square feet of office space with an initial term that expires on April 30, 2021, with the option to extend the lease for an
additional five-year term, and pursuant to the second of which the Company leases approximately 129 square feet of office
space with an initial term that expires on April 30, 2028, with the option to extend the lease for an additional ten-year term. The
Company also leases office space in south Austin, Texas; Lincoln, Nebraska; Des Moines, Iowa; Atlanta, Georgia; Asheville,
North Carolina; San Mateo, California; Bangalore, India; Sydney Australia; London, United Kingdom; and Amsterdam,
Netherlands. In the second quarter of 2018, the Company vacated a portion of its south Austin office and recorded an
unoccupied lease charge of $0.7 million for the remaining contractual lease payments, associated asset disposal, and related
fees, less estimated sublease income. The remaining associated lease liability of $0.2 million is recorded in other long-term
liabilities, on the accompanying consolidated balance sheet at December 31, 2018. The Company believes its current facilities
will be adequate for its needs for the current term and will evaluate its need for expansion beyond the 2021 lease
expiration. Rent expense under operating leases was $4.4 million, $4.4 million and $3.7 million for the years ended December
31, 2018, 2017 and 2016, respectively.
F-31
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Future minimum payments required under operating leases that have initial or remaining non-cancelable lease terms in
excess of one year at December 31, 2018 were as follows:
Year Ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Contractual Commitments
Operating
Leases
$
$
7,230
6,507
5,184
4,702
4,437
16,721
44,781
The Company has non-cancelable contractual commitments related to the Convertible Notes and related interest, third-
party products, co-location fees and other product costs. The Company is party to several purchase commitments for third-party
products that contain both a contractual minimum obligation and a variable obligation based upon usage or other factors which
can change on a monthly basis. The interest on the Convertible Notes is payable semi-annually on February 15 and August 15
of each year. The estimated amounts for usage and other factors are not included within the table below. Future minimum
contractual commitments that have initial or remaining non-cancelable terms in excess of one year were as follows:
Year Ended December 31,
2019
2020
2021
2022
2023 and thereafter
Total commitments
Legal Proceedings
Contractual
Commitments
$
$
16,927
13,713
12,173
12,136
239,325
294,274
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business.
The Company is not presently a party to any legal proceedings that, if determined adversely to the Company, would have a
material adverse effect on the Company.
12. Convertible Senior Notes
The Company issued $230 million principal amount of convertible senior notes in February 2018. The interest rates for
the Convertible Notes are fixed at 0.75% per annum with interest payable semi-annually on February 15 and August 15 of each
year, commencing on August 15, 2018. The Convertible Notes mature on February 15, 2023, unless earlier converted or
repurchased in accordance with their terms prior to such date.
Each $1,000 of principal of the Convertible Notes will initially be convertible into 17.4292 shares of the Company's
common stock, which is equivalent to an initial conversion price of approximately $57.38 per share. The initial conversion
price for each of the Convertible Notes is subject to adjustment upon the occurrence of certain specified events.
F-32
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The Convertible Notes are the Company's senior unsecured obligations and will rank senior in right of payment to any of
the Company's indebtedness that is expressly subordinated in right of payment to the Convertible Notes, will rank equally in
right of payment with any of the Company's indebtedness that is not so subordinated, are effectively junior in right of payment
to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are
structurally junior to all indebtedness and other liabilities (including trade payables) of the Company's current or future
subsidiaries.
On or after November 15, 2022, holders may convert all or any portion of their Convertible Notes at any time prior to the
close of business on the second scheduled trading day immediately preceding the maturity date regardless of the succeeding
conditions described herein. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common
stock or a combination of cash and shares of its common stock, at its election, as described in the indenture governing the
Convertible Notes.
Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day
immediately preceding November 15, 2022 only under the following circumstances:
• during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such
calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable
trading day;
• during the five consecutive business day period after any five consecutive trading day period in which the trading price
per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98%
of the product of the last reported sale price of the Company's common stock and the conversion rate on each such
trading day; or
• upon the occurrence of specified corporate events.
If a fundamental change (as defined in the relevant indenture governing the Convertible Notes) occurs prior to the
maturity date, holders of each of the Convertible Notes may require the Company to repurchase all or a portion of their notes
for cash at a repurchase price equal to 100% of the principal amount of the Convertible Notes, plus any accrued and unpaid
interest to, but excluding, the fundamental change repurchase date. As of December 31, 2018, the Convertible Notes were not
yet convertible.
In accordance with accounting guidance for cash conversion features, the Company valued the liability component at the
estimated fair value, as of the date of issuance, of a similar debt without the conversion option. The effective interest rate for the
liability component was 5.875%. The liability component of the Convertible Notes is recorded in long-term debt, and the
interest payable within the next twelve months is recorded in accrued liabilities on the consolidated balance sheets as of
December 31, 2018. The Company recorded the difference between the initial proceeds of the convertible debt and the fair
value of the conversion feature, and the difference was allocated to additional paid-in capital on the consolidated balance sheet
as the carrying amount of the equity component.
In accounting for the transaction costs for the Convertible Notes issuance, the Company allocated the costs incurred to the
liability and equity components in proportion to the allocation of the proceeds from issuance to the liability and equity
components. Issuance costs attributable to the liability component, totaling $5.3 million for the Convertible Notes are being
amortized to expense over the expected life the Convertible Notes using the effective interest method. Issuance costs
attributable to the equity component related to the conversion option, totaling $1.5 million for the Convertible Notes were
netted with the equity component.
F-33
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The Convertible Notes consist of the following:
Liability component:
Principal
Unamortized debt discount
Unamortized debt issuance costs
Net carrying amount
Equity component
Net allocation of proceeds
Net issuance costs
Net carrying amount
The following table sets forth total interest expense recognized related to the Convertible Notes:
Contractual interest expense
Amortization of debt issuance costs
Amortization of debt discount
Total
As of December 31, 2018
230,000
(42,790)
(4,487)
182,723
31,116
(1,517)
29,599
As of December 31, 2018
1,482
829
7,646
9,957
$
$
$
$
As of December 31, 2018, the remaining period over which the debt discount and debt issuance costs will be amortized
was 4.2 years.
Bond Hedges and Warrants Transactions
Concurrent with the offering of the Convertible Notes, the Company entered into separate convertible bond hedges, or
Bond Hedges, and Warrants transactions. The Bond Hedges are generally expected to reduce potential dilution to the
Company's common stock upon conversion of the Convertible Notes. The Bond Hedges are call options that give the Company
the option to purchase, subject to anti-dilution adjustments substantially identical to those in the Convertible Notes,
approximately 0.9 million shares of its common stock for $57.38 per share, exercisable upon conversion of the Convertible
Notes and expires in February 2023. The total cost of the Bond Hedges transactions was $41.7 million.
Under the Warrants, the Company issued warrants to acquire, subject to anti-dilution adjustments, up to approximately 4.0
million shares over 80 scheduled trading days beginning on May 15, 2023 at an exercise price of $78.75 per share. If the
Warrants are not exercised on their exercise dates, they will expire. Pursuant to the Warrants, if the average market value per
share of the Company's common stock for the reporting period, as measured under the Warrants, exceeds the exercise price of
the Warrants of $78.75, the Warrants will have a dilutive effect on the Company's earnings per share, assuming the Company is
profitable. The Company received $22.4 million in cash proceeds from the sale of the Warrants.
The Bond Hedges and the Warrants are separate transactions, in each case, entered into by the Company with
counterparties, and are not part of the terms of the Convertible Notes and will not affect any holders' rights under the
Convertible Notes. The holders of the Convertible Notes will not have any rights with respect to the Bond Hedges or Warrants
transactions. The Bond Hedges and Warrants do not meet the criteria for derivative accounting as they are indexed to the
Company's stock. The amounts paid for the Bond Hedges and the proceeds received from the sale of the Warrants have been
included as a net reduction to additional paid-in capital.
13. Stock-Based Compensation
In March 2014, the Company's board of directors approved the 2014 Equity Incentive Plan, or 2014 Plan, under which
stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash-
based or stock-based awards may be granted to employees, consultants and directors. Shares of common stock that are issued
F-34
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
and available for issuance under the 2014 Plan consist of authorized, but unissued or reacquired shares of common stock or any
combination thereof.
As of December 31, 2017, a total of 7,297 shares had been reserved for issuance under the 2014 Plan. The 2014 Plan
contains a provision that automatically increases the shares available for issuance under the plan on January 1 of each year
subsequent to the 2014 Plan's adoption through 2024, by an amount equal to the smaller of (a) 4.5% of the number of shares of
common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the
Company's board of directors. On January 1, 2018, 1,889 shares were added to the 2014 Plan in accordance with the annual
automatic increase provision of the 2014 Plan. In addition, the 2014 Plan reserve is automatically increased to include any
shares issuable upon expiration or termination of options granted under the Company's 2007 Stock Plan, or 2007 Plan, for
options that expire or terminate without having been exercised. For the year ended December 31, 2018, no shares have been
transferred to the 2014 Plan from the 2007 Plan, and as of December 31, 2018, a total of 9,186 shares were allocated for
issuance under the 2014 Plan. As of December 31, 2018, options to purchase a total of 2,706 shares of common stock have been
granted under the 2014 Plan, 3,596 shares have been reserved under the 2014 Plan for the vesting of restricted stock units and
market stock units, 567 shares have been returned to the 2014 Plan as a result of termination of options that expired or
terminated without having been exercised and restricted stock awards that terminated prior to the awards vesting,
and 3,451 shares of common stock remain available for future issuance under the 2014 Plan.
In July 2007, the Company adopted the 2007 Plan under which options or stock purchase rights may be granted to
employees, consultants and directors. Upon the completion of the Company's initial public offering, or IPO, in March 2014, the
board of directors terminated the 2007 Plan in connection with the IPO and all shares that were available for future issuance
under the 2007 Plan at such time were transferred to the 2014 Plan. The 2007 Plan will continue to govern the terms and
conditions of all outstanding equity awards granted under the 2007 Plan. As of December 31, 2018, no shares remain available
for future issuance under the 2007 Plan.
Stock Options
The following summarizes the assumptions used for estimating the fair value of stock options granted during the periods
indicated:
Risk-free interest rate
Expected life (in years)
Expected volatility
Dividend yield
Weighted-average grant date fair value per share
Year Ended December 31,
2017
1.7 - 2.1%
4.8
41.5 - 43.1%
—
$14.17
2016
1.0 - 1.8%
3.8 - 4.8
43.9 - 46.5%
—
$9.32
2018
2.6%
4.8
41.0%
—
$18.14
F-35
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Stock option activity was as follows:
Balance as of January 1, 2016
Granted
Exercised
Forfeited
Balance as of December 31, 2016
Granted
Exercised
Forfeited
Balance as of December 31, 2017
Granted
Exercised
Forfeited
Balance as of December 31, 2018
Number of
Options
Weighted Average
Exercise Price
5,044
892
(1,379)
(123)
4,434
643
(1,205)
(180)
3,692
12
(1,038)
(12)
2,654
$
$
8.84
23.49
4.57
16.08
12.91
36.44
10.07
19.15
17.63
47.00
10.07
27.93
19.72
The summary of stock options outstanding as of December 31, 2018 is as follows:
Options Outstanding
Options Exercisable
Range of Exercise
Prices
$0.84 - $5.05
$5.93 - $13.00
$15.07 - $24.33
$24.89 - $39.75
$41.90 - $47.00
Number of
Options
Weighted Average
Exercise Price
237
744
720
875
78
2,654
$
$
2.46
8.52
18.67
32.73
42.66
19.72
Weighted Average
Remaining
Contractual Life
(in years)
2.6
2.0
3.5
4.9
5.9
3.5
Number of
Options
Weighted Average
Exercise Price
237
744
591
392
20
1,984
$
$
2.46
8.52
18.46
32.60
41.90
15.86
Weighted Average
Remaining
Contractual Life
(in years)
2.6
2.0
3.3
4.8
5.8
3.1
F-36
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Restricted Stock Units
The Company's restricted stock units typically vest over a four-year period and upon vesting, the vested shares are issued
to the recipient of the restricted stock units.
Restricted stock unit activity was as follows:
Nonvested as of January 1, 2016
Granted
Vested
Forfeited
Nonvested as of December 31, 2016
Granted
Vested
Forfeited
Nonvested as of December 31, 2017
Granted
Vested
Forfeited
Nonvested as of December 31, 2018
Number of
Shares
Weighted Average
Grant Date Fair
Value
716
751
(171)
(86)
1,210
939
(349)
(120)
1,680
910
(537)
(116)
1,937
$
$
26.19
25.55
26.00
25.54
25.87
38.58
26.35
28.94
32.65
55.60
31.68
35.96
43.50
The aggregate intrinsic value of stock options exercised during each of the years ended December 31, 2018, 2017 and
2016 was $42.8 million, $33.9 million and $29.4 million, respectively. The total fair value of stock options vested during each
of the years ended December 31, 2018, 2017 and 2016 was $7.7 million, $8.1 million and $8.7 million, respectively.
As of December 31, 2018, the aggregate intrinsic value of options outstanding was $79.1 million, the total unrecognized
stock-based compensation expense related to stock options was $7.9 million, which the Company expects to recognize over the
next 1.9 years, and total unrecognized stock-based compensation expense related to restricted stock units was $71.9 million,
which the Company expects to recognize over the next 3.0 years.
Market Stock Units
In the first quarter of 2018, the Company began granting market stock units to certain executives under the 2014 Plan. The
market stock units are performance-based awards that vest based upon the Company's relative stockholder return. The actual
number of market stock units that will be eligible to vest is based on the total stockholder return of the Company relative to the
total stockholder return of the Index over the three-year performance period. Up to one-third of the target shares of the
Company's common stock subject to each market stock unit award are eligible to be earned after the first and second years of
the performance period and up to 200% of the full target number of shares subject to each market stock unit award are eligible
to be earned after the completion of the three-year performance period (less any shares earned for years one and two) based on
the average price of the Company's common stock relative to the Index during the performance period.
Market stock unit activity was as follows:
Nonvested as of January 1, 2018
Granted
Vested
Forfeited
Nonvested as of December 31, 2018
F-37
Number of Shares
—
260
—
—
260
Weighted Average
Grant Date Fair
Value
—
21.98
—
—
21.98
$
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
The Company estimates the fair value of market stock units on the date of grant using a Monte Carlo simulation model.
The determination of fair value of the market stock units is affected by the Company's and peer firms' stock prices and a
number of assumptions including the expected volatilities of the Company's and peer firms' stock and the Index, and its risk-
free interest rate. The Company's expected volatility at the date of grant was based on the historical volatilities of its stock and
peer firms' stocks and the Index over the performance period. The Company did not estimate a dividend rate or a forfeiture rate
for the market stock units due to the limited size, the vesting period and nature of the grantee population and the lack of history
of granting this type of award.
Significant assumptions used in the Monte Carlo simulation model for the market stock units granted during the year
ended December 31, 2018 are as follows:
Volatility
Risk-free interest rate
Dividend yield
Longest remaining performance period (in years)
As of
December 31,
2018
34.5 - 36.6%
2.4 - 2.8%
—
3
Total unrecognized stock-based compensation expense related to market stock units was $3.6 million, which the
Company expects to recognize over the next 1.9 years.
14. Provision for Income Taxes
The U.S. and non-U.S. components of loss before income taxes consisted of the following:
U.S.
Non-U.S.
Loss before income taxes
December 31,
2018
(39,360) $
160
(39,200) $
2017
(26,478)
—
(26,478)
$
$
The components of the Company's (benefit from) provision for income taxes consisted of the following:
Current taxes:
Federal
Foreign
State
Total current taxes
Deferred taxes:
Federal
Change in valuation allowance - acquisitions
Foreign
State
Total deferred taxes
(Benefit from) provision for income taxes
Year Ended December 31,
2018
2017
2016
$
$
$
$
— $
83
69
152
$
(305) $
(2,970)
(2)
(678)
(3,955)
(3,803) $
(100) $
62
74
36
$
$
32
—
—
(382)
(350)
(314) $
—
33
112
145
262
—
—
20
282
427
The Company had federal net operating loss carryforwards of approximately $276.9 million and $168.1 million at
December 31, 2018 and 2017, respectively, which will expire at various dates beginning in 2026, if not utilized. The Company
F-38
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
also held state tax credits of $1.2 million and $0.5 million for the years ended December 31, 2018 and 2017, respectively,
federal alternative minimum tax credits of zero and $0.1 million for the years ended December 31, 2018 and 2017, respectively,
and federal R&D tax credits of $3.2 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively.
The state tax credits will expire in 2026 if not utilized, the federal R&D tax credits will expire at various dates beginning in
2027, if not utilized, and the federal alternative minimum tax credits have an indefinite carryforward period.
Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of
net operating losses and credit carryforwards before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consisted of the following:
Deferred tax assets:
NOL and credit carryforwards
Deferred revenue
Accrued expenses and other
Stock-based compensation
Foreign
Total deferred tax assets
Deferred tax liabilities:
Deferred expenses
Convertible debt
Depreciation and amortization
Capitalized software
Total deferred tax liabilities
Deferred tax assets less tax liabilities
Less: valuation allowance
Net deferred tax asset
December 31,
2018
2017
$
$
69,339
5,064
5,347
5,494
41
85,285
(6,717)
(10,045)
(12,830)
(637)
(30,229)
55,056
(53,936)
1,120
$
$
40,716
8,216
6,802
4,615
—
60,349
(6,198)
—
(1,426)
—
(7,624)
52,725
(52,629)
96
The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings history. During 2018, the valuation allowance increased by approximately $19.9
million due to continuing operations. The valuation allowance change included a reduction of $3.0 million due to acquired
income tax benefits as a result of the 2018 business combinations, which was recorded as an income tax benefit in the year
ended December 31, 2018.
At December 31, 2018, the Company did not provide deferred income taxes on temporary differences resulting from
earnings of certain foreign subsidiaries which are indefinitely reinvested. The reversal of these temporary differences could
result in additional tax; however, it is not practicable to estimate the amount of any unrecognized deferred income tax liabilities
at this time.
The Company's benefit from (provision for) income taxes attributable to continuing operations differs from the expected
tax benefit amount computed by applying the statutory federal income tax rate of 21% to income before taxes for the year
ended December 31, 2018 and applying the statutory federal income tax rate of 34% to income before taxes for the years ended
December 31, 2017, and 2016 primarily as a result of the following:
F-39
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
Income tax at U.S. statutory rate
Effect of:
Increase in deferred tax valuation allowance
Stock compensation
Acquisitions
R&D Credit
State taxes, net of federal benefit
Tax impact of federal law change
Other permanent items
Income tax benefit (provision) effective rate
Year Ended December 31,
2018
2017
21.0%
34.0%
(50.6)
21.9
5.9
5.0
7.6
—
(1.1)
9.7%
(77.1)
32.7
—
4.7
6.2
1.2
(0.5)
1.2%
2016
34.0 %
(36.3)
—
—
—
1.7
—
(0.6)
(1.2)%
The Company files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, and several foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by
tax authorities for years before 2015. Operating losses generated in years prior to 2015 remain open to adjustment until the
statute of limitations closes for the tax year in which the net operating losses are utilized. The tax years 2015 through 2018
remain open to examination by all the major taxing jurisdictions to which the Company is subject, though the Company is not
currently under examination by any major taxing jurisdiction.
The total amount of unrecognized benefits as of December 31, 2018 and 2017 was $0.3 million and zero. The
reconciliation of unrecognized tax benefits at the beginning and end of the year is as follows:
Balance at January 1, 2018
Gross increase related to acquisitions
Balance at December 31, 2018
Gross
unrecognized
tax benefits
$
$
—
293
293
The Company's policy is to accrue interest and penalties related to uncertain tax positions as a component of income tax
expense. For the years ended December 31, 2018, and 2017, the Company did not recognize any interest or penalties.
The Tax Act was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things,
lowering U.S. corporate income tax rates, implementing a modified territorial tax system, and imposing a one-time transition
tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduced the U.S. corporate income tax rate from 35% to
21%, effective January 1, 2018.
In connection with the initial analysis of the impact of the Tax Act, the Company remeasured certain deferred tax assets
and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The
remeasurement of the Company's deferred tax balance was primarily offset by application of its valuation allowance. The
Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout
2018, recording a provisional amount of $0.2 million related to the remeasurement of the deferred tax balances in the fourth
quarter of 2017. During 2018, the Company completed its 2017 income tax returns and its accounting for the enactment-date
income tax effects of the Act with no adjustments to the provisional amounts recorded at December 31, 2017.
While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income,
or GILTI, provisions will be applied providing an incremental tax on certain foreign income. The GILTI provisions require the
Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign
subsidiary's tangible assets. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating
taxes due on the future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred, or the
period cost method, or (2) factoring such amounts into the Company's measurement of its deferred taxes, or the deferred
method. The Company has selected the period cost method as its accounting policy with respect to the new GILTI tax rules.
F-40
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
15. Employee Benefit Plan
In January 2009, the Company adopted a 401(k) profit-sharing plan, or 401(k) Plan, covering substantially all employees.
Employees can contribute between 1% and 90% of their total earnings. The 401(k) Plan also provides for employer
contributions to be made at the Company's discretion.
For fiscal 2018, the Board of Directors elected to make matching contributions equal to 25% of employee contributions,
which could be applied to up to 6% of each participant's compensation during 2018. Employees with at least 90 days of
continuous service are eligible to participate, and certain employees are eligible for matching contributions after one year of
continuous service. The Company's contributions vest 50% after one year of continuous service and 100% after two years of
continuous service. The Company's policy prohibits participants from direct investment in shares of its common stock within
the plan. The Company's contributions charged to expense were $0.9 million for the year ended December 31, 2018.
16. Segments and Geographic Information
All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions
in a single operating segment. The Company's chief operating decision maker, the Chief Executive Officer, reviews financial
information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Substantially all of the Company's principal operations, assets and decision-making functions are located in the United States.
The Company acquired Cloud Lending in the fourth quarter of 2018, adding operations internationally. The revenues and assets
related to this acquisition are immaterial to the Company for the year ended December 31, 2018.
17. Related Parties
For the years ended December 31, 2018, 2017 and 2016, the Company recorded revenues from a related-party customer
of $0.4 million, $0.4 million and $0.5 million, respectively.
F-41
Table of Contents
Q2 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts and unless otherwise indicated)
18. Selected Quarterly Financial Data (unaudited)
Selected summarized quarterly financial information for the years ended 2018 and 2017 is as follows:
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
Three Months Ended
$
44,534
$ 47,625
$
50,116
$
51,703
$
54,808
$
58,574
$
60,541
$
Revenues
Cost of revenues
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Acquisition related costs
Amortization of acquired
intangibles
Unoccupied lease charges
Total operating expenses
Loss from operations
Total other income (expense), net
22,772
21,762
9,878
9,651
8,452
348
371
—
28,700
(6,938)
34
24,328
23,297
11,096
9,922
9,268
351
373
—
31,010
(7,713)
109
25,813
24,303
9,904
10,092
9,596
270
369
—
30,231
(5,928)
149
(5,779)
26,572
25,131
10,292
10,673
9,863
263
368
—
31,459
(6,328)
137
(6,191)
26,977
27,831
10,966
11,157
10,296
256
368
—
29,303
29,271
12,108
11,756
10,798
258
368
658
33,043
35,946
(5,212)
(1,023)
(6,235)
(6,675)
(2,105)
(8,780)
30,140
30,401
11,467
12,904
11,237
1,811
251
—
37,670
(7,269)
(1,877)
(9,146)
67,177
35,435
31,742
13,583
15,517
12,659
1,820
857
—
44,436
(12,694)
(2,345)
(15,039)
Loss before income taxes
(6,904)
(7,604)
Benefit from (provision for) income
taxes
Net loss
Net loss per common share, basic
and diluted
$
$
(136)
(217)
(3)
670
187
153
287
3,176
(7,040) $
(7,821) $
(5,782) $
(5,521) $
(6,048) $
(8,627) $
(8,859) $
(11,863)
(0.17) $
(0.19) $
(0.14) $
(0.13) $
(0.14) $
(0.20) $
(0.21) $
(0.27)
F-42
List of Subsidiaries of the Registrant
EXHIBIT 21.1
Wholly-Owned Subsidiaries of the Registrant:
Name of Subsidiary
Q2 Software, Inc.
Indirect Subsidiaries of the Registrant:
Jurisdiction of Organization
Delaware
Jurisdiction of Organization
Ownership
Name of Subsidiary
Centrix Solutions, LLC
SmartyPig, L.L.C.
pingplot, L.L.C.
Cloud Lending, Inc.
Gro Solutions Inc.
Nebraska
Iowa
Delaware
Delaware
Delaware
Cloud Lending U.K. Ltd.
United Kingdom
Cloud Lending Australia Pty. Ltd.
MFIFLEX Tech. Pvt. Ltd.
Australia
India
100% by Q2 Software, Inc.
100% by Q2 Software, Inc.
100% by Q2 Software, Inc.
100% by Q2 Software, Inc.
100% by Q2 Software, Inc.
100% by Cloud Lending, Inc.
100% by Cloud Lending, Inc.
100% by Cloud Lending, Inc.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-195981, 333-202062,
333-209522, 333-216156, and 333-223087) pertaining to the 2007 Stock Plan, 2014 Employee Stock Purchase Plan, and 2014
Equity Incentive Plan of Q2 Holdings, Inc. of our reports dated February 19, 2019, with respect to the consolidated financial
statements of Q2 Holdings, Inc. and the effectiveness of internal control over financial reporting of Q2 Holdings, Inc., included
in this Annual Report (Form 10-K) for the year ended December 31, 2018, filed with the Securities and Exchange Commission.
EXHIBIT 23.1
/s/ Ernst & Young LLP
Austin, Texas
February 19, 2019
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Matthew P. Flake, certify that:
1. I have reviewed this Annual Report on Form 10-K of Q2 Holdings, Inc.;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 19, 2019
/s/ MATTHEW P. FLAKE
Matthew P. Flake
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Jennifer N. Harris, certify that:
1. I have reviewed this Annual Report on Form 10-K of Q2 Holdings, Inc.;
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 19, 2019
/s/ JENNIFER N. HARRIS
Jennifer N. Harris
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
The undersigned, the Chief Executive Officer of Q2 Holdings, Inc. (the “Company”), does hereby certify under the
standards set forth and solely for the purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2018 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in such
Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 19, 2019
/s/ MATTHEW P. FLAKE
Matthew P. Flake
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
The undersigned, the Chief Financial Officer of Q2 Holdings, Inc. (the “Company”), does hereby certify under the
standards set forth and solely for the purposes of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2018 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in such
Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 19, 2019
/s/ JENNIFER N. HARRIS
Jennifer N. Harris
Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.