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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2022
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number: 001-39149
_____________________
BILL.COM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_____________________
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Delaware | | 83-2661725 |
| | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
6220 America Center Drive, Suite 100, San Jose, CA | | 95002 |
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(Address of principal executive offices) | | (Zip Code) |
(650) 621-7700
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| (Registrant’s telephone number, including area code) | |
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| (Former name, former address and former fiscal year, if changed since last report ) | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.00001 par value | | BILL | | The New York Stock Exchange |
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | Accelerated filer | o |
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Non-accelerated filer | o | Smaller reporting company | o |
| | | |
Emerging growth company | o | | |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of January 27, 2023, the registrant had 106,385,536 shares of common stock, $0.00001 par value per share, outstanding.
BILL.COM HOLDINGS, INC.
TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements | 1 |
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Item 1A. | Risk Factors | 49 |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “target,” “plan,” “expect,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses (including any components of the foregoing), and our ability to achieve, and maintain, future profitability;
•our business plan and our ability to effectively manage our growth;
•our market opportunity, including our total addressable market;
•our international expansion plans and ability to expand internationally;
•anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
•beliefs and objectives for future operations;
•our ability to further attract, retain, and expand our customer base;
•our ability to develop new products and services and bring them to market in a timely manner;
•the effects of seasonal trends on our results of operations;
•our expectations concerning relationships with third parties, including partners;
•our ability to maintain, protect, and enhance our intellectual property;
•the effects of increased competition in our markets and our ability to compete effectively;
•the COVID-19 pandemic, economic downturns or recessions, inflation, foreign currency rate and interest rate fluctuations and supply chain shortages, and their impact on our customers, partners, vendors, employees, results of operations, liquidity, and financial condition;
•future acquisitions or investments in complementary companies, products, services, or technologies;
•our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business;
•economic and industry trends, projected growth, or trend analysis;
•our ability to attract and retain qualified talent;
•the increased expenses associated with being a public company; and
•the future market prices of our common stock.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in Part I, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q
may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or to changes in our expectations, except as required by law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.
You should read this Quarterly Report on Form 10-Q and the documents that we reference herein, that we have filed with the SEC as exhibits, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
In this Quarterly Report on Form 10-Q, the words "we," "us," and "our" refer to Bill.com Holdings, Inc. (BILL) and its wholly-owned subsidiaries, including Bill.com, LLC (BILL standalone), DivvyPay, LLC (Divvy), Invoice2go, LLC (Invoice2go), and Cimrid Pty, Ltd (Cimrid), unless the context requires otherwise.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILL.COM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
| | | | | | | | | | | |
| December 31, 2022 | | June 30, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,616,758 | | | $ | 1,596,542 | |
Short-term investments | 1,066,538 | | | 1,108,493 | |
Accounts receivable, net | 31,261 | | | 24,045 | |
Acquired card receivables, net | 380,895 | | | 256,392 | |
Prepaid expenses and other current assets | 178,688 | | | 151,258 | |
Funds held for customers | 3,474,048 | | | 3,142,660 | |
Total current assets | 6,748,188 | | | 6,279,390 | |
Non-current assets: | | | |
Operating lease right-of-use assets, net | 72,725 | | | 76,445 | |
Property and equipment, net | 69,383 | | | 56,985 | |
Intangible assets, net | 401,869 | | | 432,583 | |
Goodwill | 2,396,509 | | | 2,362,893 | |
Other assets | 49,600 | | | 47,730 | |
Total assets | $ | 9,738,274 | | | $ | 9,256,026 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 14,262 | | | $ | 9,948 | |
Accrued compensation and benefits | 31,021 | | | 29,004 | |
Deferred revenue | 30,358 | | | 31,868 | |
Other accruals and current liabilities | 181,551 | | | 120,080 | |
Borrowings from revolving credit facility, net | — | | | 75,097 | |
Customer fund deposits | 3,474,048 | | | 3,142,660 | |
Total current liabilities | 3,731,240 | | | 3,408,657 | |
Non-current liabilities: | | | |
Deferred revenue | 2,013 | | | 2,159 | |
Operating lease liabilities | 78,207 | | | 82,728 | |
Borrowings from revolving credit facility, net | 112,570 | | | — | |
Convertible senior notes, net | 1,701,397 | | | 1,697,985 | |
Other long-term liabilities | 28,970 | | | 20,803 | |
Total liabilities | 5,654,397 | | | 5,212,332 | |
Commitments and contingencies (Note 12) | | | |
Stockholders' equity: | | | |
Common stock | 2 | | | 2 | |
Additional paid-in capital | 4,811,780 | | | 4,598,737 | |
Accumulated other comprehensive loss | (6,361) | | | (10,217) | |
Accumulated deficit | (721,544) | | | (544,828) | |
Total stockholders' equity | 4,083,877 | | | 4,043,694 | |
Total liabilities and stockholders' equity | $ | 9,738,274 | | | $ | 9,256,026 | |
See accompanying notes to condensed consolidated financial statements.
BILL.COM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | $ | 260,006 | | | $ | 156,478 | | | $ | 489,930 | | | $ | 274,827 | |
Cost of revenue | | | | | | | |
Service costs | 36,965 | | | 24,338 | | | 71,786 | | | 45,051 | |
Depreciation and amortization of intangible assets (1) | 10,502 | | | 10,048 | | | 20,789 | | | 19,170 | |
Total cost of revenue | 47,467 | | | 34,386 | | | 92,575 | | | 64,221 | |
Gross profit | 212,539 | | | 122,092 | | | 397,355 | | | 210,606 | |
Operating expenses | | | | | | | |
Research and development | 78,910 | | | 51,377 | | | 154,030 | | | 93,261 | |
Sales and marketing | 164,683 | | | 69,896 | | | 283,308 | | | 123,525 | |
General and administrative | 69,381 | | | 64,965 | | | 136,119 | | | 122,480 | |
Depreciation and amortization of intangible assets (1) | 12,028 | | | 11,929 | | | 24,055 | | | 21,620 | |
Total operating expenses | 325,002 | | | 198,167 | | | 597,512 | | | 360,886 | |
Loss from operations | (112,463) | | | (76,075) | | | (200,157) | | | (150,280) | |
Other income (expenses), net | 17,022 | | | (5,000) | | | 22,970 | | | (8,475) | |
Loss before benefit from income taxes | (95,441) | | | (81,075) | | | (177,187) | | | (158,755) | |
Benefit from income taxes | (365) | | | (635) | | | (471) | | | (4,056) | |
Net loss | $ | (95,076) | | | $ | (80,440) | | | $ | (176,716) | | | $ | (154,699) | |
| | | | | | | |
Net loss per share attributable to common stockholders: | | | | | | | |
Basic and diluted | $ | (0.90) | | | $ | (0.78) | | | $ | (1.68) | | | $ | (1.56) | |
Weighted-average number of common shares used to compute net loss per share attributable to common stockholders: | | | | | | | |
Basic and diluted | 105,906 | | | 102,910 | | | 105,494 | | | 99,401 | |
| | | | | | | |
(1) Depreciation expense does not include amortization of capitalized internal-use software costs.
See accompanying notes to condensed consolidated financial statements.
BILL.COM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net loss | $ | (95,076) | | | $ | (80,440) | | | $ | (176,716) | | | $ | (154,699) | |
Other comprehensive income (loss): | | | | | | | |
Net unrealized gain (loss) on investments in available-for-sale securities | 4,126 | | | (1,711) | | | 3,856 | | | (1,750) | |
Comprehensive loss | $ | (90,950) | | | $ | (82,151) | | | $ | (172,860) | | | $ | (156,449) | |
See accompanying notes to condensed consolidated financial statements.
BILL.COM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2022 |
| Common stock | | Additional paid-in capital | | Accumulated other comprehensive loss | | Accumulated deficit | | Total stockholders' equity |
| Shares | | Amount | | | | |
Balance at June 30, 2022 | 104,731 | | | $ | 2 | | | $ | 4,598,737 | | | $ | (10,217) | | | $ | (544,828) | | | $ | 4,043,694 | |
Issuance of common stock upon exercise of stock options and release of restricted stock units | 835 | | | — | | | 3,901 | | | — | | | — | | | 3,901 | |
Issuance of common stock under the employee stock purchase plan | 67 | | | — | | | 8,494 | | | — | | | — | | | 8,494 | |
Stock-based compensation | — | | | — | | | 73,352 | | | — | | | — | | | 73,352 | |
Other comprehensive loss | — | | | — | | | — | | | (270) | | | — | | | (270) | |
Net loss | — | | | — | | | — | | | — | | | (81,640) | | | (81,640) | |
Balance at September 30, 2022 | 105,633 | | | $ | 2 | | | $ | 4,684,484 | | | $ | (10,487) | | | $ | (626,468) | | | $ | 4,047,531 | |
Issuance of common stock upon exercise of stock options and release of restricted stock units | 663 | | | — | | | 4,316 | | | — | | | — | | | 4,316 | |
Issuance of common stock as consideration for an acquisition | 40 | | | — | | | 3,376 | | | — | | | — | | | 3,376 | |
Stock-based compensation | — | | | — | | | 119,604 | | | — | | | — | | | 119,604 | |
Other comprehensive income | — | | | — | | | — | | | 4,126 | | | — | | | 4,126 | |
Net loss | — | | | — | | | — | | | — | | | (95,076) | | | (95,076) | |
Balance at December 31, 2022 | 106,336 | | | $ | 2 | | | $ | 4,811,780 | | | $ | (6,361) | | | $ | (721,544) | | | $ | 4,083,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2021 |
| Common stock | | Additional paid-in capital | | Accumulated other comprehensive income | | Accumulated deficit | | Total stockholders' deficit |
| Shares | | Amount | | | | |
Balance at June 30, 2021 | 94,504 | | | $ | 2 | | | $ | 2,777,155 | | | $ | (100) | | | $ | (247,467) | | | $ | 2,529,590 | |
Cumulative effect of the accounting change upon the adoption of ASU 2020-06 | — | | | — | | | (245,066) | | | — | | | 29,000 | | | (216,066) | |
Issuance of common stock upon public offering, net of underwriting discounts and other offering costs | 5,074 | | | — | | | 1,341,122 | | | — | | | — | | | 1,341,122 | |
Issuance of common stock as consideration for an acquisition, net of issuance costs | 1,788 | | | — | | | 488,263 | | | — | | | — | | | 488,263 | |
Fair value of replacement awards | — | | | — | | | 26,710 | | | — | | | — | | | 26,710 | |
Issuance of common stock upon exercise of stock options and release of restricted stock units | 1,033 | | | — | | | 8,644 | | | — | | | — | | | 8,644 | |
Issuance of common stock under the employee stock purchase plan | 40 | | | — | | | 5,726 | | | — | | | — | | | 5,726 | |
Purchase of capped calls | — | | | — | | | (37,893) | | | — | | | — | | | (37,893) | |
Stock-based compensation | — | | | — | | | 38,839 | | | — | | | — | | | 38,839 | |
Other comprehensive loss | — | | | — | | | — | | | (39) | | | — | | | (39) | |
Net loss | — | | | — | | | — | | | — | | | (74,259) | | | (74,259) | |
Balance at September 30, 2021 | 102,439 | | | $ | 2 | | | $ | 4,403,500 | | | $ | (139) | | | $ | (292,726) | | | $ | 4,110,637 | |
Issuance of common stock upon exercise of stock options and release of restricted stock units | 1,022 | | | — | | | 14,140 | | | — | | | — | | | 14,140 | |
Stock-based compensation | — | | | — | | | 50,701 | | | — | | | — | | | 50,701 | |
Other comprehensive loss | — | | | — | | | — | | | (1,711) | | | — | | | (1,711) | |
Net loss | — | | | — | | | — | | | — | | | (80,440) | | | (80,440) | |
Balance at December 31, 2021 | 103,461 | | | $ | 2 | | | $ | 4,468,341 | | | $ | (1,850) | | | $ | (373,166) | | | $ | 4,093,327 | |
See accompanying notes to condensed consolidated financial statements.
BILL.COM HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net loss | $ | (176,716) | | | $ | (154,699) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Stock-based compensation | 191,925 | | | 87,571 | |
Amortization of intangible assets | 39,763 | | | 36,440 | |
Depreciation of property and equipment | 5,081 | | | 4,350 | |
Amortization of capitalized internal-use software costs | 1,901 | | | 673 | |
Amortization of debt premium and issuance costs | 3,483 | | | 1,955 | |
Amortization of premium (accretion of discount) on investments in marketable debt securities | (10,401) | | | 6,638 | |
Provision for losses on acquired card receivables | 15,042 | | | 9,535 | |
Non-cash operating lease expense | 4,718 | | | 4,083 | |
Deferred income taxes | (826) | | | (3,822) | |
Other | 516 | | | — | |
Changes in assets and liabilities: | | | |
Accounts receivable | (7,052) | | | (3,420) | |
Prepaid expenses and other current assets | (4,623) | | | (8,547) | |
Other assets | (1,880) | | | (1,099) | |
Accounts payable | 3,511 | | | (2,023) | |
Other accruals and current liabilities | 15,408 | | | (11,430) | |
Operating lease liabilities | (4,794) | | | (2,952) | |
Other long-term liabilities | 35 | | | (1,698) | |
Deferred revenue | (1,709) | | | 4,381 | |
Net cash provided by (used in) operating activities | 73,382 | | | (34,064) | |
Cash flows from investing activities: | | | |
Cash paid for acquisition, net of acquired cash and cash equivalents | (28,902) | | | (144,541) | |
Purchases of corporate and customer fund short-term investments | (1,641,193) | | | (1,452,419) | |
Proceeds from maturities of corporate and customer fund short-term investments | 1,683,413 | | | 667,854 | |
Proceeds from sale of corporate and customer fund short-term investments | 5,088 | | | 44,744 | |
Increase in acquired card receivables, net and other | (101,353) | | | (77,459) | |
Purchases of property and equipment | (3,161) | | | (2,467) | |
Capitalization of internal-use software costs | (10,510) | | | (5,023) | |
Proceeds from beneficial interest | 2,080 | | | — | |
Net cash used in investing activities | (94,538) | | | (969,311) | |
Cash flows from financing activities: | | | |
Proceeds from issuance of common stock upon public offering, net of underwriting discounts and other offering costs | — | | | 1,341,152 | |
Proceeds from issuance of convertible senior notes, net of discounts and issuance costs | — | | | 560,075 | |
Purchase of capped calls | — | | | (37,893) | |
Increase (decrease) in customer fund deposits liability and other | 332,661 | | | 1,171,446 | |
Proceeds from line of credit borrowings | 37,500 | | | — | |
Proceeds from exercise of stock options | 8,217 | | | 22,784 | |
Proceeds from issuance of common stock under the employee stock purchase plan | 8,494 | | | 5,726 | |
Net cash provided by financing activities | 386,872 | | | 3,063,290 | |
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | 182 | | | (75) | |
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents | 365,898 | | | 2,059,840 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period | 3,542,715 | | | 1,809,692 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | 3,908,613 | | | $ | 3,869,532 | |
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: | | | |
Cash and cash equivalents | $ | 1,616,758 | | | $ | 1,672,166 | |
Restricted cash included in other current assets | 103,809 | | | 16,364 | |
Restricted cash included in other assets | 6,724 | | | 6,724 | |
Restricted cash and restricted cash equivalents included in funds held for customers | 2,181,322 | | | 2,174,278 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period | $ | 3,908,613 | | | $ | 3,869,532 | |
See accompanying notes to condensed consolidated financial statements.
BILL.COM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Bill.com, Inc. was incorporated in the State of Delaware in April 2006. In November 2018, Bill.com, Inc. consummated a reorganization with Bill.com Holdings, Inc., which resulted in the latter becoming the parent entity of Bill.com, Inc. Bill.com, Inc. was subsequently converted into a limited liability company and renamed Bill.com, LLC. Bill.com Holdings, Inc., which was incorporated in the State of Delaware in August 2018, and its subsidiaries are collectively referred to as the “Company”.
The Company is a provider of software-as-a-service, cloud-based payments, spend, and expense management products, which allow users to automate accounts payable and accounts receivable transactions, enable businesses to easily connect with their suppliers and/or customers to do business, eliminate expense reports, manage cash flows, and improve back office efficiency.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and were prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and applicable rules and regulations of the SEC regarding interim financial reporting. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly the Company’s financial position, results of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the periods presented. The results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2023 or for any other future annual or interim period. The unaudited condensed consolidated balance sheet as of June 30, 2022 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis. All intercompany accounts and transactions have been eliminated.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Segment Reporting
The Company operates as one operating segment because its chief operating decision maker, who is the Chief Executive Officer, reviews its financial information on a consolidated basis for purposes of making decisions regarding allocating resources and assessing performance. The Company's long-lived assets are mainly located in the United States (U.S.) and revenue is mainly generated in the U.S. Long-lived assets and revenue generated outside the U.S. are not material.
Reclassification
Certain accounts in the prior period condensed consolidated statements of operation were reclassified to conform with the current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make various estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and the accompanying notes. Management regularly assesses these estimates, including, but not limited to useful lives of long-lived assets; capitalization of internal-use software costs; incremental borrowing rates for right-of-use operating lease assets and operating lease liabilities; the estimate of credit losses on accounts receivable, acquired card receivables, and other financial assets; accrual for rewards; variable consideration used in revenue recognition for certain contracts; benefit periods used to amortize deferred commissions; reserve for losses on funds held for customers; inputs used to
value certain stock-based compensation awards; and valuation of income taxes. The Company evaluates these estimates and assumptions and adjusts them accordingly. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash and cash equivalents consist of cash in banks, highly liquid investments with maturities of three months or less at the time of purchase, and securities purchased under overnight reverse repurchase agreements.
Restricted cash consists of (i) amounts restricted under deposit account control agreements, (ii) minimum cash balances that are required to be maintained by certain banks, (iii) cash collateral required by the Company’s lessors to satisfy letter of credit requirements under its lease agreements, (iv) cash collateral required by a bank in connection with the Company’s money transmission activities, and (v) cash in bank and cash deposits held by payment processing companies included in funds held for customers.
Restricted cash equivalents consist of highly liquid investments with maturities of three months or less at the time of purchase that are included in funds held for customers.
Except for the restricted cash included in funds held for customers, the current and non-current portion of the restricted cash is included in prepaid expenses and other current assets and in other assets, respectively, in the accompanying condensed consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash, restricted cash equivalents, short-term investments, accounts receivable, and acquired card receivables (collectively referred to as Financial Assets). The Company maintains its cash, cash equivalents, restricted cash, restricted cash equivalents, and short-term investments with major financial institutions that may at times exceed federally insured limits. Management believes that these financial institutions are financially sound with minimal credit risk.
The Company performs credit evaluations to verify the credit quality of its financial assets and determine any at-risk receivables. An allowance for potential credit losses on Financial Assets is recognized, if material. As of December 31, 2022 and June 30, 2022, the allowance for potential credit losses related to accounts receivable and acquired card receivables totaled approximately $12.3 million and $5.8 million, respectively. These amounts do not include the immaterial allowance for potential credit losses on purchase of card receivables that have been authorized but not cleared at the end of the periods (see Note 12).
There were no customers that exceeded 10% of the Company’s total revenue during the three and six months ended December 31, 2022 and 2021.
Foreign Currency
The Company has two foreign subsidiaries whose functional currency is the U.S. dollar, which is the Company's reporting currency. Gains and losses from the remeasurement of transactions denominated in foreign currencies other than the functional currency of the foreign subsidiary are included in other income (expense), net in the accompanying condensed consolidated statements of operations.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the fiscal year ended June 30, 2022, other than those new accounting policies that were implemented as a result of the adoption of new accounting standards as described below.
Recently Adopted Accounting Pronouncements
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for Troubled Debt Restructurings (TDRs) by creditors
in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, this ASU requires a company to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The Company early adopted this ASU on a prospective basis beginning July 1, 2022. See Note 6 for additional disclosures resulting from the adoption of this ASU.
NOTE 2 – REVENUE
The Company generates revenue primarily from subscription and transaction fees. The Company serves small and midsize businesses (SMB), accounting firms, and financial institutions. The table below shows the Company’s revenue from subscription and transaction fees, which are disaggregated by sales channel, and revenue from interest on funds held for customers (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Small-to-midsize businesses, accounting firms and other | $ | 220,406 | | | $ | 147,530 | | | $ | 425,227 | | | $ | 261,132 | |
Financial institutions | 10,689 | | | 7,989 | | | 20,479 | | | 11,945 | |
Total subscription and transaction fees | 231,095 | | | 155,519 | | | 445,706 | | | 273,077 | |
Interest on funds held for customers | 28,911 | | | 959 | | | 44,224 | | | 1,750 | |
Total revenue | $ | 260,006 | | | $ | 156,478 | | | $ | 489,930 | | | $ | 274,827 | |
Deferred revenue
Fees from customers with which the Company has annual or multi-year contracts are generally billed in advance. These fees are initially recorded as deferred revenue and subsequently recognized as revenue as the performance obligation is satisfied.
During the three and six months ended December 31, 2022, the Company recognized $11.4 million and $25.7 million of revenue, respectively, that was included in the deferred revenue balance as of June 30, 2022.
Remaining performance obligations
The Company has performance obligations associated with commitments in customer contracts for future services that have not yet been recognized as revenue. As of December 31, 2022, the aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied), including deferred revenue, was approximately $133.5 million. Of the total remaining performance obligations, the Company expects to recognize approximately 75% within two years and 25% over the next three to five years thereafter. The Company determines remaining performance obligations at a point of time. Actual amounts and timing of revenue recognized may differ due to subsequent contract modifications, renewals and/or terminations.
Unbilled revenue
Unbilled revenue consists of revenue recognized that has not been billed to the customers yet. The unbilled revenue amounted to $12.4 million and $11.4 million as of December 31, 2022 and June 30, 2022, respectively.
NOTE 3 – FAIR VALUE MEASUREMENT
The Company measures and reports its cash equivalents, short-term investments, funds held for customers that are invested in money market funds and marketable debt securities, and contingent consideration at fair value. 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 fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than quoted prices included within Level 1 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 for substantially the full term of the related assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity for the related assets or liabilities and typically reflect management’s estimate of assumptions that market participants would use in pricing the assets or liabilities.
In determining fair value, the Company utilizes quoted market prices, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value.
The following tables set forth the fair value of assets and liabilities that were measured at fair value on a recurring basis based on the three-tier fair value hierarchy as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 1,227,764 | | | $ | — | | | $ | — | | | $ | 1,227,764 | |
Corporate bonds | — | | | 19,121 | | | — | | | 19,121 | |
U.S. treasury securities | 19,950 | | | — | | | — | | | 19,950 | |
| 1,247,714 | | | 19,121 | | | — | | | 1,266,835 | |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 641,267 | | | — | | | 641,267 | |
U.S. treasury securities | 313,704 | | | — | | | — | | | 313,704 | |
U.S. agency securities | — | | | 26,119 | | | — | | | 26,119 | |
Asset-backed securities | — | | | 31,270 | | | — | | | 31,270 | |
Certificates of deposit | — | | | 54,178 | | | — | | | 54,178 | |
| 313,704 | | | 752,834 | | | — | | | 1,066,538 | |
Funds held for customers: | | | | | | | |
Restricted cash equivalents: | | | | | | | |
Money market funds | 29,061 | | | — | | | — | | | 29,061 | |
Corporate bonds | — | | | 237,682 | | | — | | | 237,682 | |
| 29,061 | | | 237,682 | | | — | | | 266,743 | |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 734,878 | | | — | | | 734,878 | |
Certificates of deposit | — | | | 426,189 | | | — | | | 426,189 | |
Municipal bonds | — | | | 635 | | | — | | | 635 | |
Asset-backed securities | — | | | 81,680 | | | — | | | 81,680 | |
U.S. treasury securities | 53,221 | | | — | | | — | | | 53,221 | |
| 53,221 | | | 1,243,382 | | | — | | | 1,296,603 | |
Total assets measured at fair value | $ | 1,643,700 | | | $ | 2,253,019 | | | $ | — | | | $ | 3,896,719 | |
| | | | | | | |
Liabilities | | | | | | | |
Contingent consideration(1) | $ | — | | | $ | — | | | $ | 10,794 | | | $ | 10,794 | |
Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 10,794 | | | $ | 10,794 | |
(1) The Company used the probability-weighted discounted cash flow method to estimate the contingent consideration. The significant inputs used in the fair value measurement of the contingent consideration are the probability of payout and discount rate. As these inputs are not based on observable market data, the liability represents a Level 3 measurement within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 1,435,111 | | | $ | — | | | $ | — | | | $ | 1,435,111 | |
Corporate bonds | — | | | 11,430 | | | — | | | 11,430 | |
| 1,435,111 | | | 11,430 | | | — | | | 1,446,541 | |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 597,204 | | | — | | | 597,204 | |
U.S. treasury securities | 421,728 | | | — | | | — | | | 421,728 | |
Asset-backed securities | — | | | 51,406 | | | — | | | 51,406 | |
Certificates of deposit | — | | | 38,155 | | | — | | | 38,155 | |
| 421,728 | | | 686,765 | | | — | | | 1,108,493 | |
Funds held for customers: | | | | | | | |
Restricted cash equivalents: | | | | | | | |
Money market funds | 34,703 | | | — | | | — | | | 34,703 | |
Corporate bonds | — | | | 133,557 | | | — | | | 133,557 | |
| 34,703 | | | 133,557 | | | — | | | 168,260 | |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 807,685 | | | — | | | 807,685 | |
Certificates of deposit | — | | | 397,533 | | | — | | | 397,533 | |
Municipal bonds | — | | | 6,516 | | | — | | | 6,516 | |
Asset-backed securities | — | | | 69,912 | | | — | | | 69,912 | |
U.S. treasury securities | 3,072 | | | — | | | — | | | 3,072 | |
| 3,072 | | | 1,281,646 | | | — | | | 1,284,718 | |
Beneficial interest derivative on card receivables sold | — | | | — | | | 398 | | | 398 | |
Total assets measured at fair value | $ | 1,894,614 | | | $ | 2,113,398 | | | $ | 398 | | | $ | 4,008,410 | |
There were no transfers of financial instruments between Level 1, Level 2, and Level 3 during the periods presented.
The fair values of the Company’s Level 1 instruments were derived from quoted market prices and active markets for these specific instruments.
The valuation techniques used to measure the fair values of Level 2 instruments were derived from non-binding market consensus prices that were corroborated with observable market data, quoted market prices for similar instruments, or pricing models.
The Company has $575.0 million and $1.15 billion in aggregate principal amount of its 0% convertible senior notes due in 2027 (2027 Notes) and in 2025 (2025 Notes, together with the 2027 Notes, the Notes), respectively, outstanding as of December 31, 2022. The Company carries the Notes at par value, less the unamortized debt discount and issuance costs in the accompanying condensed consolidated balance sheets. As of December 31, 2022, the estimated fair value of the 2027 Notes and 2025 Notes, which is presented for disclosure purposes only, was approximately $451.1 million and $1.18 billion, respectively. The fair value was based on a market approach, which represents a Level 2 valuation estimate. The market approach was determined based on the actual bids and offers of the Notes in an over-the-counter market as of the last day of trading prior to the end of the period.
NOTE 4 – SHORT-TERM INVESTMENTS
Short-term investments consisted of the following as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Corporate bonds | $ | 644,658 | | | $ | 70 | | | $ | (3,461) | | | $ | 641,267 | |
U.S. treasury securities | 315,325 | | | 21 | | | (1,641) | | | 313,705 | |
Asset-backed securities | 31,368 | | | 10 | | | (108) | | | 31,270 | |
Certificates of deposit | 54,178 | | | — | | | — | | | 54,178 | |
U.S. agency securities | 26,079 | | | 51 | | | (11) | | | 26,119 | |
Total | $ | 1,071,607 | | | $ | 152 | | | $ | (5,221) | | | $ | 1,066,538 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
Corporate bonds | $ | 601,987 | | | $ | 3 | | | $ | (4,786) | | | $ | 597,204 | |
U.S. treasury securities | 424,644 | | | 1 | | | (2,917) | | | 421,728 | |
Asset-backed securities | 51,622 | | | — | | | (216) | | | 51,406 | |
Certificates of deposit | 38,155 | | | — | | | — | | | 38,155 | |
Total | $ | 1,116,408 | | | $ | 4 | | | $ | (7,919) | | | $ | 1,108,493 | |
The amortized cost and fair value amounts include accrued interest receivable of $3.4 million and $3.0 million as of December 31, 2022 and June 30, 2022, respectively.
As of December 31, 2022, the fair value of the Company’s short-term investments that mature within one year and thereafter was $915.9 million and $150.7 million, respectively, or 86% and 14%, respectively, of the Company’s total short-term investments. As of June 30, 2022, the fair value of the Company’s short-term investments that mature within one year and thereafter was $961.8 million and $146.7 million, respectively, or 87% and 13%, respectively, of the Company’s total short-term investments.
As of December 31, 2022, approximately 210 out of approximately 350 investment positions were in an unrealized loss position. The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of the dates presented (in thousands):
| | | | | | | | | | | |
| December 31, 2022 |
| Fair value | | Unrealized losses |
Corporate bonds | $ | 354,715 | | | $ | (3,461) | |
U.S. treasury securities | |