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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022   
 or
     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 001-36350
Q2 Holdings, Inc.
Exact Name of Registrant as Specified in its Charter
Delaware20-2706637
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.
10355 Pecan Park Boulevard
Austin,
Texas78729
Address of Principal Executive OfficesZip Code
(833444-3469
Registrant's Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueQTWONew 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    No 
    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    No 
    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.
Large accelerated filerAccelerated filer
Non-accelerated filer
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 57,516,988 shares of Common Stock, $0.0001 par value per share as of October 31, 2022.



TABLE OF CONTENTS
 
 









2

Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. The statements and information contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. You can identify these statements by words such as "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "intends," "may," "plans," "seeks," "potential," "predicts," "projects," "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 could cause or contribute to such differences include, but are not limited to, the following:
the risk of increased or new competition in our existing markets and as we enter new markets or new sections of existing markets, or as we offer new solutions;
risks associated with the development of and changes to the market for our solutions compared to our expectations;
quarterly fluctuations in our operating results relative to our expectations and guidance and the accuracy of our forecasts;
the risks associated with anticipated higher operating expenses in 2022 and beyond;
the impact that inflation, rising interest rates or a slowdown in the economy, financial markets and credit markets have and may continue to have on account holder or end user, or End User, usage of our solutions and on our customers' prospects and our business sales cycles, our prospects' and customers' spending decisions, including for some of our non-implementation services which are more discretionary in nature, and the timing of customer implementation and purchasing decisions;
the risks and increased costs associated with managing growth and the challenges associated with improving operations and hiring, retaining and motivating employees to support such growth, particularly in light of the macroeconomic impacts of the novel coronavirus disease, or COVID-19, including increased employee turnover, labor shortages, wage inflation and extreme competition for talent;
the risk that the COVID-19 pandemic and the associated efforts to limit its spread continue to negatively impact or disrupt the markets for our solutions and that the markets for our solutions do not return to normal or grow as anticipated;
the risks associated with our transactional business which are typically driven by end-user behavior which can be influenced by external drivers outside of our control;
risks associated with effectively managing costs in light of the challenging macroeconomic environment, including the impacts of wage inflation on our operating costs;
risks associated with the general economic and geopolitical impacts of Russia's invasion of Ukraine, including the heightened risk of cyberattacks on financial services and other critical infrastructure, and continued or increased inflation partially driven by increased energy costs or other unpredictable economic impacts that have and may continue to negatively affect demand for our solutions;
risks associated with managing our business in response to continued challenging macroeconomic conditions and any anticipated or resulting recession;
risks associated with accurately forecasting and managing the impacts of any macroeconomic downturn on our customers and their end users, including in particular the impacts of any downturn on financial technology companies, or FinTechs, and our arrangements with them, which represent a newer market opportunity for us, a more complex revenue model for us and which may be more vulnerable to an economic downturn than our financial institution customers;
the challenges and costs associated with selling, implementing and supporting our solutions, particularly for larger customers with more complex requirements and longer implementation processes, including risks related to the timing and predictability of sales of our solutions and the impact that the timing of bookings may have on our revenue and financial performance in a period;
3

the risk that errors, interruptions or delays in our solutions or Web hosting negatively impacts our business and sales;
risks associated with cyberattacks, data and privacy breaches and breaches of security measures within our products, systems and infrastructure or the products, systems and infrastructure of third parties upon which we rely and the resultant costs and liabilities and harm to our business and reputation and our ability to sell our solutions;
the difficulties and risks associated with developing and selling complex new solutions and enhancements with the technical and regulatory specifications and functionality required by our customers and relevant governmental authorities;
regulatory risks, including risks related to evolving regulation of artificial intelligence, machine learning and the receipt, collection, storage, processing and transfer of data;
risks associated with our sales and marketing capabilities, including partner relationships and the length, cost and unpredictability of our sales cycle;
the risks inherent in third-party technology and implementation partnerships that could cause harm to our business;
the risk that we will not be able to maintain historical contract terms such as pricing and duration;
the general risks associated with the complexity of our customer arrangements and our solutions;
the risks associated with integrating acquired companies and successfully selling and maintaining their solutions;
litigation related to intellectual property and other matters and any related claims, negotiations and settlements;
the risks associated with further consolidation in the financial services industry;
risks associated with selling our solutions internationally and with our international operations;
the risk that our debt repayment obligations may adversely affect our financial condition and cash flows from operations in the future and that we may not be able to obtain capital when desired or needed on favorable terms; and
such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, of the SEC, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 16, 2022.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
4

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 September 30, 2022December 31, 2021
(unaudited)
Assets  
Current assets:  
Cash and cash equivalents$192,574 $322,848 
Restricted cash2,732 2,973 
Investments203,116 104,878 
Accounts receivable, net52,598 46,979 
Contract assets, current portion, net3,298 1,845 
Prepaid expenses and other current assets13,503 10,531 
Deferred solution and other costs, current portion23,827 25,076 
Deferred implementation costs, current portion7,646 7,320 
Total current assets499,294 522,450 
Property and equipment, net59,130 66,608 
Right of use assets43,451 52,278 
Deferred solution and other costs, net of current portion26,571 26,930 
Deferred implementation costs, net of current portion18,686 17,039 
Intangible assets, net146,197 162,461 
Goodwill512,869 512,869 
Contract assets, net of current portion and allowance25,272 22,103 
Other long-term assets1,928 2,307 
Total assets$1,333,398 $1,385,045 
Liabilities and stockholders' equity  
Current liabilities:  
Accounts payable$11,660 $10,597 
Accrued liabilities15,143 18,343 
Accrued compensation18,038 31,725 
Convertible notes, current portion10,887  
Deferred revenues, current portion101,057 98,692 
Lease liabilities, current portion9,443 9,001 
Total current liabilities166,228 168,358 
Convertible notes, net of current portion657,129 551,598 
Deferred revenues, net of current portion20,831 29,168 
Lease liabilities, net of current portion55,292 61,374 
Other long-term liabilities3,573 4,251 
Total liabilities903,053 814,749 
Commitments and contingencies (Note 6)
Stockholders' equity: 
Preferred stock: $0.0001 par value; 5,000 shares authorized, no shares issued or outstanding as of September 30, 2022 and December 31, 2021
  
Common stock: $0.0001 par value; 150,000 shares authorized, 57,517 issued and outstanding as of September 30, 2022 and 56,928 shares issued and outstanding as of December 31, 2021
6 6 
Additional paid-in capital961,841 1,064,358 
Accumulated other comprehensive loss(3,603)(135)
Accumulated deficit(527,899)(493,933)
Total stockholders' equity430,345 570,296 
Total liabilities and stockholders' equity$1,333,398 $1,385,045 
   
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands, except per share data)
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Revenues$144,751 $126,736 $419,131 $366,829 
Cost of revenues77,895 69,726 228,988 201,278 
Gross profit66,856 57,010 190,143 165,551 
Operating expenses:  
Sales and marketing27,966 22,664 79,709 63,067 
Research and development33,099 30,763 96,062 86,987 
General and administrative22,614 20,352 66,467 57,890 
Acquisition related costs352 476 882 2,514 
Amortization of acquired intangibles4,422 4,483 13,266 13,465 
Lease and other restructuring charges5,494 1,244 6,031 2,056 
Total operating expenses93,947 79,982 262,417 225,979 
Loss from operations(27,091)(22,972)(72,274)(60,428)
Other income (expense):  
Interest and other income1,420 136 2,899 527 
Interest and other expense(1,651)(8,151)(5,024)(25,042)
Loss on extinguishment of debt   (1,513)
Total other income (expense), net(231)(8,015)(2,125)(26,028)
Loss before income taxes(27,322)(30,987)(74,399)(86,456)
Provision for income taxes(469)(596)(2,173)(909)
Net loss$(27,791)$(31,583)$(76,572)$(87,365)
Other comprehensive gain (loss):
Unrealized loss on available-for-sale investments(746)(8)(2,363)(3)
Foreign currency translation adjustment(291)163 (1,105)128 
Comprehensive loss$(28,828)$(31,428)$(80,040)$(87,240)
Net loss per common share, basic and diluted$(0.48)$(0.56)$(1.34)$(1.55)
Weighted average common shares outstanding:  
Basic and diluted57,362 56,559 57,205 56,242 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Q2 HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
 Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Total stockholders' equity, beginning balances$440,939 $597,495 $570,296 $643,364 
Common stock and additional paid-in capital:
Beginning balances943,613 1,034,5261,064,364 1,024,583 
Stock-based compensation expense17,783 14,40451,208 41,796 
Exercise of stock options451 1,258707 5,823 
Issuance of common stock under ESPP  2,547  
Shares acquired to settle the exercise of stock options  (200)
Cumulative effect of the adoption of new accounting standard— — (156,979)— 
Equity component of early extinguishment of convertible notes   (28,454)
Settlement of convertible note hedges   26,295 
Settlement of warrants   (19,655)
Ending balances961,847 1,050,188961,847 1,050,188 
Accumulated deficit:
Beginning balances(500,108)(436,969)(493,933)(381,187)
Cumulative effect of the adoption of new accounting standard— — 42,606 — 
Net loss(27,791)(31,583)(76,572)(87,365)
Ending balances(527,899)(468,552)(527,899)(468,552)
Accumulated other comprehensive income (loss):
Beginning balances(2,566)(62)(135)(32)
Other comprehensive income (loss)(1,037)155(3,468)125 
Ending balances(3,603)93(3,603)93 
Total stockholders' equity, ending balances$430,345 $581,729 $430,345 $581,729 
Common stock (in shares):
Beginning balances57,313 56,46456,928 55,562 
Shares acquired to settle the exercise of stock options   (2)
Exercise of stock options16 8828 297 
Issuance of common stock under ESPP  57  
Shares issued for the vesting of restricted stock awards188 264504 959 
Ending balances57,517 56,816 57,517 56,816 
The accompanying notes are an integral part of these condensed consolidated financial statements.










7

Q2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Nine Months Ended September 30,
 20222021
Cash flows from operating activities:  
Net loss$(76,572)$(87,365)
Adjustments to reconcile net loss to net cash from operating activities:
Amortization of deferred implementation, solution and other costs17,227 17,394 
Depreciation and amortization45,237 40,580 
Amortization of debt issuance costs2,043 1,550 
Amortization of debt discount 19,398 
Amortization of premiums on investments311 751 
Stock-based compensation expense51,208 41,796 
Realized gain (loss) on sale of marketable securities17  
Deferred income taxes943 52 
Allowance for credit losses56 50 
Allowance for sales credits(58)25 
Loss on disposal of long-lived assets132 386 
Loss on extinguishment of debt 1,513 
Lease and other restructuring charges6,031 2,056 
Changes in operating assets and liabilities:
Accounts receivable, net(5,617)(16,652)
Prepaid expenses and other current assets(3,183)(9,997)
Deferred solution and other costs(7,341)(9,631)
Deferred implementation costs(10,666)(10,260)
Contract assets, net(4,620)(3,185)
Other long-term assets5,677 6,324 
Accounts payable1,622 (3,168)
Accrued liabilities(16,630)(1,029)
Deferred revenues(5,973)8,554 
Deferred rent and other long-term liabilities(8,090)(7,528)
Net cash used in operating activities(8,246)(8,386)
Cash flows from investing activities:  
Purchases of investments(214,084)(88,857)
Maturities of investments113,156 119,650 
Purchases of property and equipment(8,933)(16,059)
Business combinations, net of cash acquired (64,652)
Capitalized software development costs(15,662)(3,908)
Net cash used in investing activities(125,523)(53,826)
Cash flows from financing activities:  
Payments for repurchases of convertible notes (63,692)
Proceeds from bond hedges related to convertible notes 26,295 
Payments for warrants related to convertible notes (19,655)
Proceeds from exercise of stock options and ESPP3,254 5,822 
Net cash provided by (used in) financing activities3,254 (51,230)
Net decrease in cash, cash equivalents, and restricted cash(130,515)(113,442)
Cash, cash equivalents, and restricted cash, beginning of period325,821 411,185 
Cash, cash equivalents, and restricted cash, end of period$195,306 $297,743 
Supplemental disclosures of cash flow information:  
Cash paid for taxes, net of refund$637 $839 
Cash paid for interest$1,486 $1,699 
Supplemental disclosure of non-cash investing and financing activities:
Shares acquired to settle the exercise of stock options$ $(200)
Property and equipment acquired and included in accounts payable and accrued liabilities$30 $2,783 
Property and equipment acquired through tenant improvement allowance $ $9,692 
Data center assets acquired under deferred payment arrangements or financing arrangements$ $449 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
8

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(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 financial institutions, alternative finance companies, and financial technology companies. The Company's solutions enable customers to deliver robust suites of digital banking, lending, 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 interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and SEC, requirements for interim financial statements. The interim unaudited condensed 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.
In the Company's opinion, the accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2021, which are included in the Company's Annual Report on Form 10-K, filed with the SEC on February 16, 2022. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other period.
Use of Estimates
The preparation of the accompanying interim unaudited condensed 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 interim unaudited condensed 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; estimate of credit losses; 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 the conversion features of convertible notes; the impairment assessment of long-lived assets; 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 or bank guarantees issued in place of security deposits for the Company's corporate headquarters and various other leases.
9

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
Investments
Investments typically include U.S. government securities, corporate bonds, commercial paper, certificates of deposit, money market funds and other equity investments. All debt investments are considered available for sale and are carried at fair value. Equity investments without a readily determinable fair value, where the Company has no influence over the operating and financial policies of the investee, are recorded at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. Adjustments resulting from impairment, fair value, or observable price changes are accounted for in the condensed consolidated statements of comprehensive loss.
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, accounts receivable and contract assets. 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 majority 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 three and nine months ended September 30, 2022 and 2021. No customers accounted for 10% or more of accounts receivable, net, as of September 30, 2022 and a single customer accounted for 14% of accounts receivable, net as of December 31, 2021.
Contract Balances
The timing of revenue recognition, billings and cash collections can result in billed accounts receivable, unbilled receivables, contract assets, and deferred revenues or 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 condensed 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 revenues, net of current portion, on the accompanying condensed consolidated balance sheets at the end of each reporting period.
The Company is exposed to credit losses primarily through sales of products and services. The Company assesses the collectability of outstanding contract assets on an ongoing basis and maintains a reserve which is included in the allowance for credit losses for contract assets deemed uncollectible. The Company analyzes the contract asset portfolio for significant risks by considering historical collection experience and forecasting future collectability to determine the amount of revenues that will ultimately be collected from its customers. Customer type (whether a customer is a financial institution or other digital solution provider) has been identified as the primary specific risk affecting the Company's contract assets, and the estimate for losses is analyzed quarterly and adjusted as necessary. Future collectability is contingent upon current and anticipated macroeconomic conditions that could impact the Company's customers such as unemployment, inflation and regulatory matters. Additionally, specific allowance amounts may be established to record the appropriate provision for customers that have a higher probability of default. The Company has provisioned $0.3 million and $0.1 million in expected losses for the nine months ended September 30, 2022 and 2021, respectively, of which $0.4 million and zero has been written off and charged against the allowance at September 30, 2022 and 2021, respectively. The allowance for credit losses related to contract assets was $0.2 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively.
10

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
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 customers' End Users that are included in the customers' 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 End Users that are in excess of the customers' minimum subscription fees are, generally, billed in the month following the month the revenues were earned, resulting in an unbilled receivable. Unbilled receivables of $5.6 million and $4.8 million were included in the accounts receivable balance as of September 30, 2022 and December 31, 2021, respectively.
The Company assesses the collectability of outstanding accounts receivable on an ongoing basis and maintains an allowance for credit losses for accounts receivable deemed uncollectible. The Company analyzes the accounts receivable portfolio for significant risks and considers prior periods and forecasts future collectability to determine the amount of revenues that will ultimately be collected from its customers. This estimate is analyzed quarterly and adjusted as necessary. Identified risks pertaining to the Company's accounts receivable include the delinquency level and customer type. Future collectability is contingent upon current and anticipated macroeconomic conditions that could impact the Company's customers such as unemployment, inflation and regulation matters. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Historically, the Company's collection experience has not varied significantly, and bad debt expenses have been insignificant. The Company has provisioned $0.4 million and $0.2 million for expected losses for the nine months ended September 30, 2022 and 2021, respectively, and $0.4 million and $0.1 million has been written off and charged against the allowance as of September 30, 2022 and 2021, respectively. The allowance for credit losses related to accounts receivable was $0.6 million and $0.5 million as of September 30, 2022 and December 31, 2021, respectively.
The Company maintains reserves for estimated sales credits issued to customers for billing disputes or other service-related reasons. These allowances are 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 semi-annually and adjusted as necessary. The Company also maintains specific reserves for anticipated contract concessions. The allowance for sales credits and specific reserves was $1.2 million and $1.9 million as of September 30, 2022 and December 31, 2021, respectively.
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. 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 nine months ended September 30, 2022 was primarily driven by the recognition of $332.1 million of revenue recognized from current year invoices and $86.9 million of revenue that was included in the deferred revenue balance as of December 31, 2021, partially offset by cash payments received or due in advance of satisfying the Company's performance obligations of $408.4 million for current year invoices and $4.5 million from the netting of contract assets and liabilities on a contract-by-contract basis. 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 period of time 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 September 30, 2022, the Company had $1.39 billion 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% of its remaining performance obligations as revenue in the next 24 months, an additional 40% in the next 25 to 48 months, and the balance thereafter.
11

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
Deferred Implementation Costs
The Company capitalizes certain personnel and other costs, such as employee salaries, stock-based compensation, 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 being recoverable through the terms of the associated contract. The Company begins amortizing the deferred implementation costs for an implementation to cost of revenues once the revenue recognition criteria have been met, and the Company amortizes those deferred implementation costs ratably over the expected period of customer benefit. The Company has determined this period to be the estimated life of the technology for new contracts, which is estimated to be five to seven years, and over the term of the agreement for other contracts. 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 monitors deferred implementation costs for impairment and records impairment when customers terminate or allow services to lapse, due to contract modifications, and/or from other assessments as needed. Any impairment losses identified are recognized in the form of an expense acceleration with the applicable amount recorded to deferred implementation costs, current portion and/or deferred implementation costs, net of current portion on the consolidated balance sheet and in cost of revenues in the consolidated statements of comprehensive loss.
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 condensed consolidated balance sheets. The Company capitalized implementation costs in the amount of $3.8 million and $3.4 million during the three months ended September 30, 2022 and 2021, respectively, and recognized $3.0 million and $2.8 million of amortization during the three months ended September 30, 2022 and 2021, respectively. The Company capitalized implementation costs in the amount of $10.7 million and $10.3 million during the nine months ended September 30, 2022 and 2021, respectively, and recognized $8.7 million and $7.9 million of amortization during the nine months ended September 30, 2022 and 2021, respectively. Amortization expense is included in cost of revenues in the accompanying condensed consolidated statements of comprehensive loss.
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 expenses are considered incremental and recoverable costs of obtaining a contract with a customer. The Company capitalizes commissions and bonuses for those involved in the sale, including direct employees and team members which are incremental to the sale and their associated management, as these are incremental to the sale. Substantially all commissions are paid in a single payment once the contract has been executed and the initial deposit has been received from the customer. 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. The Company has determined this period to be the estimated life of the technology for new contracts, which is estimated to be five to seven years, and over the term of the agreement for other contracts. 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 capitalizes solution and other 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 $2.9 million and $1.7 million in deferred commissions costs during the three months ended September 30, 2022 and 2021, respectively, and recognized $3.1 million and $3.0 million of amortization during the three months ended September 30, 2022 and 2021, respectively. The Company capitalized $10.8 million and $8.1 million during the nine months ended September 30, 2022 and 2021, respectively, and recognized $8.5 million and $9.5 million of amortization during the nine months ended September 30, 2022 and 2021, respectively. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive loss.
12

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
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
3 - 5 years
Purchased software and licenses
3 - 5 years
Furniture and fixtures
7 years
Leasehold improvementsLesser 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 determines whether substantially all 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.
In connection with the Company's business combinations, the Company recorded certain intangible assets, including acquired technology, customer relationships, trademarks, and non-compete agreements. Amounts allocated to the acquired intangible assets are 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 as 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, transactional revenue from bill-pay solutions and revenues for customer support and implementation services related to the Company's solutions.
13

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
The following table disaggregates the Company's revenue by major source:
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Subscription$106,644 $91,544 $304,010 $265,765 
Transactional15,930 17,356 50,714 51,349 
Services and Other22,177 17,836 64,407 49,715 
Total Revenues$144,751 $126,736 $419,131 $366,829 
Subscription Revenues
The Company's software solutions are available for use as hosted application arrangements under subscription fee agreements without licensing 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 where appropriate 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 support, upgrades and updates to the software on a when-and-if-available basis. 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. Revenues from term licenses and maintenance agreements were not significant in the periods presented.
Transactional Revenues
The Company generates 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 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 in the month incurred based on actual or estimated transactions.
Services and Other Revenues
Implementation services are required for new digital banking and lending platform and other standalone contracts, and there is a significant level of integration and configuration for each customer. The Company's revenue for implementation services is billed upfront and generally recognized over time on a ratable basis over the customer agreement term for its hosted application agreements. Implementation services for on-premises agreements are recognized at commencement date. Under certain circumstances, the Company has determined that these implementation services qualify as a separate performance obligation in certain markets and geographies, and the implementation services for these agreements are recognized over time as services are performed.
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. Premier Services revenue is generated from select established customer relationships where the Company has engaged with the customer for more tailored, premium professional services, or Premier Services, resulting in a deeper and ongoing level of engagement with them. Other also includes certain debit card related pass-through fees that are not directly tied to card utilization.
Certain out-of-pocket expenses billed to customers are recorded as revenues rather than an offset to the related expense.
14

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
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. 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 separately identifiable 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 across the majority of its markets and product offerings 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 for some of its products in certain markets the implementation services included in contracts with multiple performance obligations are distinct and, as a result, the Company recognizes implementation fees on such arrangements over time as services are performed.
The majority of the Company's revenue recognized at a particular point in time is for usage revenue, on-premise software licenses and certain professional services. These services are recognized as the customer obtains control of the asset or the point the customer obtained control of the software.
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 the Company's 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 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 generally result in reductions to 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 September 30, 2022.
15

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
Other Considerations
The Company evaluates whether it is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports 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 insignificant.
Cost of Revenues
Cost of revenues are 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. This includes the costs of the Company's personnel performing implementation, customer support, data center and customer training activities. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in the Company's solutions, the amortization of deferred solution and services costs, the amortization of capitalized software development costs, co-location facility costs and depreciation of the Company's data center assets, debit card related pass-through fees, 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 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 recoverable from future revenues. The Company amortizes the costs for an implementation once revenue recognition commences, and the Company amortizes those implementation costs to cost of revenues over the expected period of customer benefit, which has been determined to be the estimated life of the technology. Other costs not directly recoverable from future revenues are expensed in the period incurred.
Software Development Costs
During the application development stage, the Company capitalizes certain development costs associated with internal use software and the Company's SaaS platform. Software development costs include salaries and other personnel-related costs for those employees who are directly associated with and who devote time to developing the Company's software solutions, including employee benefits, stock-based compensation and bonuses attributed to programmers, software engineers, quality control teams and third-party development costs. Capitalized software development costs are computed on an individual product basis. The Company also capitalizes certain costs related to specific enhancements when it is probable the expenditures will result in additional features and functionality. Capitalization ceases for products and enhancements when released or made available. Internal-use software is amortized to cost of revenues over the products' estimated economic lives, which are expected to be three to five years. The costs related to software development are included in intangible assets, net on the condensed consolidated balance sheets. Costs incurred in the preliminary stages of development and maintenance costs are expensed as incurred.
The Company capitalized software development costs in the amount of $6.2 million and $1.6 million during the three months ended September 30, 2022 and 2021, respectively, and $15.7 million and $3.9 million during the nine months ended September 30, 2022 and 2021, respectively. The Company recognized $0.9 million and $0.4 million of amortization for the three months ended September 30, 2022 and 2021, respectively, and $1.9 million and $0.8 million of amortization for the nine months ended September 30, 2022 and 2021, respectively.
16

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
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, third-party consultants, 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.
Certain research and development costs that are related to the Company's software development, which include salaries and other personnel-related costs, including employee benefits, stock-based compensation expense and bonuses attributed to programmers, software engineers and quality control teams working on the Company's software solutions, are capitalized and are included in intangible assets, net on the condensed consolidated balance sheets.
Advertising
Advertising costs of the Company are generally expensed the first time the advertising takes place. Advertising costs were $1.0 million for each of the three months ended September 30, 2022 and 2021, and $3.3 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively. The Company entered into a long-term stadium sponsorship agreement in 2020, and beginning in the second quarter of 2021, payments under this arrangement are deferred and expensed as advertising costs on a straight-line basis over the term of the arrangement.
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, and consultants are measured at fair value at each grant date. The Company does not use a forfeiture rate to recognize compensation expense. 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 vest based on the Company's stockholder return relative to the total stockholder return of the Russell 2000 Index, or Index. Market stock units granted prior to fiscal 2021 vest over a three-year period on the anniversary of the date of grant, generally with anywhere from zero to up to one-third of the target shares of the Company's common stock subject to each market stock unit award eligible to be earned after the first and second years and anywhere from zero to up to 200% of the full target number of shares subject to each market stock unit award 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. Beginning in March 2021, newly granted market stock units vest over a two-year and three-year period, each running from approximately the date of grant, with anywhere from zero to up to one-third of the target shares of the Company's common stock subject to each market stock unit award eligible to be earned after completion of the two-year performance period and anywhere from zero to up to 200% of the full target number of shares subject to each market stock unit award eligible to be earned after the completion of the three-year performance period (less any shares earned for the two-year performance period) based on the average price of the Company's common stock relative to the Index during the performance period. From time to time, the Company may make grants of restricted stock units or market stock units with vesting formulas that vary from those described above.
17

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
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 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. 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 assumes 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 assumes 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.
Effective January 3, 2022, the Company implemented its Employee Stock Purchase Plan, or ESPP, previously approved by the Company's board of directors and stockholders in March 2014. The ESPP generally permits domestic employees who meet certain criteria to purchase the Company's common stock through payroll deductions during six month offering periods. As is permitted under the ESPP, the initial offering period in fiscal 2022 extended for four months from February 1, 2022 through May 31, 2022, with the subsequent offering period extending from June 1, 2022 through November 30, 2022. For the remainder of fiscal 2022 and for all subsequent years, unless otherwise determined by the compensation committee of the board of directors, there will be additional six-month offering periods commencing on each of June 1 and December 1. The ability to purchase shares of the Company's common stock for 85% of the lower of the price on the first day of the offering period or the last day of the offering period represents an option and, therefore, the ESPP is a compensatory plan. Accordingly, stock-based compensation expense is determined based on the grant date fair value as estimated by applying the Black-Scholes option-pricing model and is recognized straight-line over the withholding period. The Company recognizes compensation expense ratably over the requisite service period.
Convertible Senior Notes
In February 2018, the Company issued $230.0 million principal amount of convertible senior notes due in February 2023, or the 2023 Notes. In June 2019, the Company issued $316.3 million principal amount of convertible senior notes due in June 2026, or the 2026 Notes. In November 2020, the Company issued $350.0 million principal amount of convertible senior notes due in November 2025, or the 2025 Notes. This was achieved by exchanging $181.9 million principal amount of the 2023 Notes for $210.7 million principal amount of the 2025 Notes and issuing an additional $139.3 million of new notes. In May 2021, the Company repurchased $37.1 million principal amount of the 2023 Notes. As of September 30, 2022, the aggregate principal amount outstanding related to the 2023 Notes was $10.9 million.
18

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
When accounting for the issuance of convertible notes, prior to the adoption of ASU 2020-06, 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 feature. The carrying amount of the equity component representing the conversion feature 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 represented debt discounts that were amortized to interest expense over the respective terms of the convertible notes at effective interest rates of 5.88%, 5.38% and 5.00% for the 2023 Notes, 2026 Notes and 2025 Notes, respectively. The equity components were not remeasured as long as they continued to meet the conditions for equity classification. In accounting for the issuance costs related to its 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 were 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.
Upon adoption of ASU 2020-06 on January 1, 2022, the Company reversed the separation of the liability and equity components and accounted for the Notes wholly as debt. The Company also reversed the amortization of the debt discount with the cumulative adjustment to retained earnings on the adoption date. As such, the debt is no longer recorded at a discount and issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method. Refer to the "Recent Accounting Pronouncements" section below for more detail on the adoption impacts.
Leases
The Company determines if a contract contains a lease for accounting purposes at the inception of the arrangement. The Company has elected to apply the practical expedient which allows the Company to account for lease and non-lease components of a contract as a single leasing arrangement. In addition, the Company has elected the practical expedients related to lease classification and the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed generally on a straight-line basis over the lease term. The Company is primarily a lessee with a lease portfolio comprised mainly of real estate and equipment leases. As of September 30, 2022, the Company had no finance leases.
Operating lease assets are included on the Company's condensed consolidated balance sheets in non-current assets as a right of use asset and represent the Company's right to use an underlying asset for the lease term. Operating lease liabilities are included on the Company's condensed consolidated balance sheets in lease liabilities, current portion, for the portion that is due within 12 months and in lease liabilities, net of current portion, for the portion that is due beyond 12 months of the financial statement date and represent the Company's obligation to make lease payments.
Right of use assets and lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term using an appropriate discount rate. If an implicit rate is not readily determined by the Company's leases, the Company utilizes the incremental borrowing rate based on the available information at the commencement date to determine the lease payments. The depreciable lives of the underlying leased assets are generally limited to the expected lease term inclusive of any optional lease renewals where the Company concludes at the inception of the lease that the Company is reasonably certain of exercising those options. The right of use asset calculation may also include any initial direct costs paid and is reduced by any lease incentives provided by the lessor. Lease expense for operating lease payments is recognized over the lease term.
Impairment of Long-Lived Assets
Impairment of long-lived assets such as property and equipment, acquired intangible assets, capitalized software development costs and right of use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company evaluates the recoverability of its long-lived assets by comparing the carrying amount of the asset group to the estimated undiscounted future cash flows. If the carrying value is not recoverable, an impairment is recognized to the extent that the carrying value of the asset group exceeds its fair value.
19

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
Income Taxes
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 their respective tax bases 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 most of 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. 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.
The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit or expense taken by the Company in its tax filings or positions is more likely than not to be realized. The Company believes it has accrued adequate reserves related to its uncertain tax positions; however, ultimate determination of the Company's liability is subject to audit by taxing authorities in the ordinary course of business. The Company records interest and penalties associated with any uncertain tax positions as a component of income tax expense.
Basic and Diluted Net Loss per Common Share
The following table sets forth the computations of net loss per share for the periods listed:
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Numerator:  
Net loss $(27,791)$(31,583)$(76,572)$(87,365)
Denominator:  
Weighted-average common shares outstanding, basic and diluted57,362 56,559 57,205 56,242 
Net loss per common share, basic and diluted$(0.48)$(0.56)$(1.34)$(1.55)
Due to net losses for the three and nine months ended September 30, 2022 and 2021, 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:
 As of September 30,
 20222021
Stock options, restricted stock units, and market stock units3,2332,296
Shares issuable pursuant to the ESPP81
Shares related to convertible notes6,256645
Shares subject to warrants related to the issuance of the 2023 Notes 48
9,570 2,989 
Under the modified retrospective method of adoption of ASU 2020-06, the dilutive impact of the convertible senior notes was calculated using the if-converted method for the nine months ended September 30, 2022. The Company's convertible senior notes were calculated using the treasury stock method for the nine months ended September 30, 2021. Refer to discussion within "Recent Accounting Pronouncements" below for further details. The exercise rights of the Warrants issued in connection with the 2023 Notes will have a dilutive impact on net income per share of common stock under the treasury-stock method when the average market price per share of the Company's common stock for a given period exceeds the conversion price of $78.75 per share. However, since the Company is in a net loss position, there was no dilutive effect on net loss per share of the Company's common stock during any period presented.
20

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in thousands, except per share amounts and unless otherwise indicated)
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" which simplifies the accounting for convertible debt instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. In addition, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The Company adopted the new guidance effective January 1, 2022, using the modified retrospective approach. The impact resulted in an increase to the convertible notes balance of $114.4 million to reflect the full principal amount of the convertible notes outstanding net of issuance costs, a reduction to the additional paid in capital balance of $157.0 million to remove the equity component separately recorded for the conversion features associated with the convertible notes, and an increase to the beginning balance of accumulated deficit of $42.6 million. As a result of the adoption, non-cash interest expense was lower for the three and nine months ended September 30, 2022 and will be lower for the remaining term of the outstanding convertible notes. The adoption had no impact on the Company's condensed consolidated statement of cash flows. Additionally, ASU 2020-06 eliminates the treasury stock method and instead requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share when instruments may be settled in cash or shares. The required use of the if-converted method did not impact the diluted net loss per share as the Company was in a net loss position. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.
In May 2021, the FASB issued ASU No. 2021-04, "Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)" which clarifies and reduces diversity in the accounting for modifications or exchanges of freestanding equity classified written call options that remain equity classified after modification or exchange. The ASU provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The Company has adopted the provisions of the new standard effective January 1, 2022. There was no impact on the Company's condensed consolidated financial statements as of the adoption date.
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" which clarifies and reduces diversity in the accounting related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The Company has early adopted the provisions of the new standard effective January 1, 2022. There was no impact on the Company's condensed consolidated financial statements as of the adoption date.
3. 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:
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.
21

Q2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(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 September 30, 2022:
Fair Value Measurements Using:
Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level I)
Significant Other Observable Inputs
(Level II)
Significant Unobservable Inputs
(Level III)
Assets
Cash Equivalents:
Money market funds$52,032 $52,032 $ $ 
Certificates of deposit25,238  25,238  
$77,270 $52,032 $25,238 $ 
Investments:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level I)
Significant Other Observable Inputs
(Level II)
Significant Unobservable Inputs
(Level III)
Corporate bonds and commercial paper$55,532 $ $55,532 $ 
Certificates of deposit3,581  3,581  
U.S. government securities143,779  143,779  
$202,892 $ $202,892 $ 
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, 2021:
Fair Value Measurements Using:
Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level I)
Significant Other Observable Inputs
(Level II)
Significant Unobservable Inputs
(Level III)
Assets
Cash Equivalents:
Money market funds$170,907 $170,907 $ $ 
Certificates of deposit25,090  25,090  
$195,997 $170,907 $25,090 $ 
Investments:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level I)
Significant Other Observable Inputs
(Level II)
Significant Unobservable Inputs
(Level III)
Corporate bonds and commercial paper$44,219 $ $44,219 $ 
Certificates of deposit12,161  12,161  
U.S. government securities48,498  48,498  
$104,878 $ $