# BILL Holdings, Inc. (BILL) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BILL Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1786352/000178635222000017/bill-20220630.htm
Accession: 0001786352-22-000017
Filing date: 2022-08-22
Report date: 2022-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/BILL/
All MD&A years: /company/BILL/mda/
Previous year: /company/BILL/mda/fy2021/ (FY 2021)
Next year: /company/BILL/mda/fy2023/ (FY 2023)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this Annual Report on Form 10-K includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a provider of cloud-based software that simplifies, digitizes, and automates financial operations for small and midsize businesses (SMBs). Our mission is to make it simple to connect and do business. We partner with leading U.S. financial institutions, accounting firms, and accounting software providers. Our vision is to become the leading one-stop solution that helps millions of businesses around the world manage their financial operations.

Our purpose-built, artificial-intelligence (AI)-enabled financial software platform creates seamless connections between our customers, their suppliers, and their clients. Customers use our platform to generate and process invoices, streamline approvals, make and receive payments, manage employee expenses, sync with their accounting system, and manage their cash. We have built sophisticated integrations with popular accounting software solutions, banks, card issuers and payment processors, enabling our customers to access these mission-critical services quickly and easily.

We efficiently reach SMBs through our proven direct and indirect go-to-market strategies. We acquire customers directly through digital marketing and inside sales, and indirectly through accounting firms and financial institution partnerships. As of June 30, 2022, our partners included some of the most trusted brands in the financial services business, including 85 of the top 100 accounting firms and six of the top ten largest financial institutions in the U.S., including Bank of America, JPMorgan Chase, Wells Fargo Bank and American Express. As we add customers and partners, we expect our network to continue to grow organically.

On September 1, 2021, we completed our acquisition of Invoice2go, Inc. (Invoice2go), a provider of mobile-first accounts receivable software that empowers SMBs and freelancers to grow their client base, manage invoicing and payments, and build their brand, for an aggregate purchase price of $674.3 million. On June 1, 2021, we completed our acquisition of DivvyPay, Inc. (Divvy), a leading provider of cloud-based spend and expense management products and smart charge cards to SMBs in the U.S., for an aggregate purchase price of $2.3 billion. Following the acquisitions, Invoice2go and Divvy became our wholly-owned subsidiaries. Our consolidated results of operations shown below for fiscal 2022 include the operating results of Invoice2go from the date of its acquisition on September 1, 2021, and of Divvy for the full fiscal year, while our consolidated results of operations for fiscal 2021 include the operating results of Divvy from the date of its acquisition on June 1, 2021. See Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional discussion about our acquisitions.

We have grown rapidly and scaled our business operations in recent periods. Our revenue and net loss during fiscal 2022, which include the results of Invoice2go from the acquisition date, were $642.0 million and $326.4 million, respectively. Our revenue and net loss during fiscal 2021, which include the results of Divvy from the acquisition date, were $238.3 million and $98.7 million, respectively. Our revenue and net loss during fiscal 2020 were $157.6 million and $31.1 million, respectively.

Impact of COVID-19

The full impact of the COVID-19 pandemic is inherently uncertain at the time of this report. The COVID-19 pandemic has resulted in various travel restrictions and mandates and greater uncertainty in global financial markets. Our customers, spending businesses and subscribers, and our business and operations, have been and may continue to be affected by the COVID-19 pandemic, variants and responsive government restrictions. For so long as the COVID-19 pandemic persists, restrictions and policies implemented by

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governments and companies may continue to have negative implications on business and consumer spending, the supply chain, production of goods, demand for goods, transportation, the labor market, the global capital markets and the global economy, and could result in inflation, recession and prolonged economic downturn. A negative impact on our customers, spending businesses, and subscribers may cause them to go out of business, request discounts, extend payment terms, or discontinue using our services. Any of these conditions or actions may have a negative impact on our future results of operations, liquidity, and financial condition. We are unable to predict the full impact that the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic, the actions that may be taken by government authorities across the U.S. or other countries, the impact to our customers, partners, and suppliers, and other factors described in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Our Revenue Model

We generate revenue primarily from subscription and transaction fees.

Our subscription revenue is primarily based on a fixed monthly or annual rate per user charged to our customers. Our transaction revenue consists of transaction fees and interchange income on a fixed or variable rate per transaction. Transactions primarily include card payments, check issuances, ACH origination, cross-border payments, and creation of invoices. Much of our revenue comes from repeat transactions, which are an important contributor to our recurring revenue.

Our Receivables Purchases and Servicing Model

We market Divvy charge cards to potential spending businesses and issue business-purpose charge cards through our partnerships with card Issuing Banks. When a business applies for a Divvy card, we utilize, on behalf of the card Issuing Bank, proprietary risk management capabilities to confirm the identity of the business, and perform a credit underwriting process to determine if the business is eligible for a Divvy card pursuant to our credit policies. Once approved for a Divvy card, the spending business is provided a credit limit and can use the Divvy software to request virtual cards or physical cards.

The majority of cards on our platform are issued by Cross River Bank, an FDIC-insured New Jersey state chartered bank, and WEX Bank, an FDIC-insured Utah state chartered bank. Under our arrangements with these banks, we must comply with their respective credit policies and underwriting procedures, and the banks maintain ultimate authority to decide whether to issue a card or approve a transaction. We are responsible for all fraud and unauthorized use of a card and generally are required to hold the bank harmless from such losses unless claims regarding fraud or unauthorized use are due to the sole gross negligence of the bank.

When a spending business completes a purchase transaction, the payment to the merchant is made by the card Issuing Bank. Obligations incurred by the spending business in connection with their purchase transaction are reflected as receivables on the bank’s balance sheet from the Divvy card account for the spending business. The bank then sells a 100% participation interest in the receivable to us. Pursuant to our agreements with the banks, we are obligated to purchase the participation interests in all of the receivables originated through our platform, and our obligations are secured by cash deposits. When we purchase the participation interests, the purchase price is equal to the outstanding principal balance of the receivable.

We act as the servicer for all Divvy card accounts and earn a servicing fee in connection with participation interests we sell to our funding sources. We do not sell the servicing rights on any of the loans, allowing us to control the consumer experience end-to-end.

In order to purchase the participation rights in the receivables, we maintain a variety of funding arrangements, including warehouse facilities and other purchase arrangements with a diverse set of funding sources. We typically fund some portion of these participation interest purchases by borrowing under our credit facilities, although we may also fund purchases using corporate cash. Typically, we immediately sell a portion of the participation interests we have purchased to our warehousing subsidiary which funds the purchases through loans provided by our financing partners, and we may sell a portion of our receivables to a third-party institution pursuant to a purchase arrangement.

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Our Business Model

We efficiently reach SMBs through our proven direct and indirect go-to-market strategies. We acquire customers directly through digital marketing and inside sales. We also acquire customers indirectly by partnering with leading companies that are trusted by our current and prospective customers, including accounting firms, financial institutions, and software companies.

Our revenue from our existing customers is visible and predictable. For fiscal 2022, over 82% of our subscription and transaction revenue from Bill.com customers came from customers who were acquired prior to the start of the fiscal year. See "-- Key Business Metrics — Number of Customers" below for the definition of customer. We expand within our existing customer base by adding more users, increasing transactions per customer, launching additional products, and through pricing and packaging our services. We make it easy for SMBs to try our platform through our risk-free trial program. Should an SMB choose to become a customer after the trial period, it can take several months to adapt their financial operations to fully leverage our platform. Even with a transition period, however, we believe our customer retention is strong. Excluding those customers of our financial institution partners, approximately 86% of customers as of June 30, 2021 were still customers as of June 30, 2022.

Net Dollar-Based Retention Rate

Net dollar-based retention rate is an important indicator of customer satisfaction and usage of our platform, as well as potential revenue for future periods. We calculate our net dollar-based retention rate at the end of each fiscal year. We calculate our net dollar-based retention rate by starting with the revenue billed to Bill.com customers in the last quarter of the prior fiscal year (Prior Period Revenue). We then calculate the revenue billed to these same customers in the last quarter of the current fiscal year (Current Period Revenue), excluding interest earned on customer funds held in trust. See "Key Business Metrics — Number of Customers" below for the definition of customer. Current Period Revenue includes any upsells and is net of contraction or attrition, but excludes revenue from new customers and excludes interest earned on funds held on behalf of customers. We then repeat the calculation of Prior Period Revenue and Current Period Revenue with respect to each of the preceding three quarters, and aggregate the four Prior Period Revenues (the Aggregate Prior Period Revenue) and the four Current Period Revenues (the Aggregate Current Period Revenue). Our net dollar-based retention rate equals the Aggregate Current Period Revenue divided by Aggregate Prior Period Revenue.

Our net dollar-based retention rate was 131%, 124% and 121% during fiscal 2022, 2021 and 2020, respectively. These consecutive increases are primarily attributable to increases in the number of users, more transactions per customer, and selling additional products to those customers.

Customer Acquisition Efficiency

Our efficient direct and indirect go-to-market strategy, combined with our recurring revenue model, results in our short payback period. We define “payback period” as the number of quarters it takes for the cumulative non-GAAP gross profit we earn from Bill.com customers acquired during a given quarter to exceed our total sales and marketing spend in that same quarter, excluding customers acquired through financial institutions and the related sales and marketing spend. See "-- Key Business Metrics — Number of Customers" below for the definition of customer. For customers acquired during fiscal 2021, the average payback period was approximately four quarters.

Key Business Metrics

We regularly review several metrics, including the metrics presented in the table below, to measure our performance, identify trends affecting our business, prepare financial projections, and make strategic decisions. We periodically review and revise these metrics to reflect changes in our business. Historically, we have presented the number of customers, TPV and transactions processed of and by the Bill.com business as we believe that these key business metrics provide meaningful supplemental information for management and investors in assessing the historical and future operating performance of the Bill.com business. We have presented these key metrics below with respect to the Bill.com business, together with certain supplemental information related to the businesses of Divvy and Invoice2go. As a result of the Divvy and Invoice2go

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acquisitions, we are considering which metrics best reflect the performance of our consolidated business, and may determine to provide new or revised key business metrics in our future reports. Our key business metrics are defined following the table below. Our key business metrics track our Bill.com products and exclude Divvy and Invoice2go products. Relevant metrics for Divvy and Invoice2go are set forth in the footnotes to the table. The calculation of the key metrics and other measures discussed below may differ from other similarly-titled metrics used by other companies, securities analysts or investors.

[[GREPCENT_TABLE]]
[["","As of June 30,","","% Growthas of June 30,"],["","2022","","2021","","2020","","2022","","2021"],["Number of customers (1)","157,800","","","121,200","","","98,100","","","30","%","","24","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year endedJune 30,","","% GrowthYear ended June 30,"],["","2022","","2021","","2020","","2022","","2021"],["Total Payment Volume (amounts in millions) (2)","$","219,080","","","$","140,304","","","$","96,489","","","56","%","","45","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year endedJune 30,","","% GrowthYear ended June 30,"],["","2022","","2021","","2020","","2022","","2021"],["Transactions processed (3)","38,560,000","","","29,159,400","","","23,852,000","","","32","%","","22","%"]]
[[/GREPCENT_TABLE]]

(1)As of June 30, 2022, the total number of spending businesses that used Divvy's spend and expense management products was approximately 20,700 and the total number of Invoice2go subscribers was approximately 221,600.

(2)The total card payment volume transacted by spending businesses that used Divvy cards was approximately $8.1 billion during fiscal 2022. The total payment volume transacted by Invoice2go subscribers was approximately $932.1 million from the date of acquisition on September 1, 2021 to June 30, 2022.

(3)The total transactions executed by spending businesses that used Divvy cards were approximately 23.2 million during fiscal 2022. The total transactions executed by Invoice2go subscribers were approximately 1.1 million from the date of acquisition on September 1, 2021 to June 30, 2022.

Number of Customers

For the purposes of measuring our key business metrics, we define customers as entities that are either billed directly by us or for which we bill our partners for Bill.com products during a particular period. Customers who are using Bill.com products during a trial period are not counted as new customers during that period. If an organization has multiple entities billed separately for the use of our platform, each entity is counted as a customer. The number of customers in the table above represents the total number of customers at the end of each fiscal year. Spending businesses that use Divvy's spend and expense management products and Invoice2go subscribers, and in each case that do not also use Bill.com products, are not included for purposes of measuring Number of Customers.

Total Payment Volume (TPV)

To grow revenue from customers we must deliver a product experience that helps them automate their back-office financial operations. The more they use the product and rely upon our features to automate their operations, the more transactions they process on our platform. This metric provides an important indication of the value of transactions that customers are completing on the platform and is an indicator of our ability to generate revenue from our customers. We define TPV as the value of Bill.com customer transactions that we process on our platform during a particular period. Our calculation of TPV includes payments that are subsequently reversed. Such payments comprised of less than 2% of TPV during fiscal 2022, 2021, and 2020. The TPV in the table above does not include transactions made by spending businesses using Divvy cards or by our Invoice2go subscribers.

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Transactions Processed

We define transactions processed as the number of Bill.com customer payments initiated and processed through our platform during a particular period. Payment transactions include checks, ACH items, real-time payments, wire transfers and card payments. The transactions processed in the table above do not include transactions made by spending businesses using Divvy cards or by Invoice2go subscribers.

Components of Results of Operations

Revenue

We generate revenue primarily from subscription and transaction fees.

Subscription fees are fixed monthly or annually and charged to our customers for the use of our platform to process transactions. Subscription fees are generally charged either on a per user or per customer account per period basis, normally monthly or annually. Transaction fees are fees collected for each transaction processed, on either a fixed or variable fee basis. Transaction fees primarily include processing of payments in the form of checks, ACH, cross-border payments, and the creation of invoices. Transaction fees also include interchange fees paid by suppliers accepting card payments.

Our contracts with SMB and accounting firm customers provide them with access to the functionality of our cloud-based payments platform to process transactions. These contracts are either monthly contracts paid in arrears or upfront, or annual arrangements paid up front. We charge our SMB and accounting firm customers subscription fees to access our platform either based on the number of users or per customer account and the level of service. We generally also charge these customers transaction fees based on transaction volume and the category of transaction. The contractual price for subscription and transaction services is based on either negotiated fees or the rates published on our website. Revenue recognized excludes amounts collected on behalf of third parties, such as sales taxes collected and remitted to governmental authorities.

We facilitate the extension of credit to spending businesses through our Divvy product in the form of Divvy cards, which are originated through our agreements with our Issuing Banks. The agreements with the Issuing Banks allow for card transactions on the Mastercard and Visa networks. The spending businesses utilize the credit on the Divvy cards as a means of payment for goods and services provided by their suppliers. For each transaction, the suppliers are required to pay interchange fees to the issuer of the credit. Based on our agreements with the Issuing Banks, we recognize the interchange fees as revenue gross or net of rebates received from the Issuing Bank based on our determination of whether we are the principal or the agent under the agreements.

We also enter into multi-year contracts with financial institution customers to provide them with access to our cloud-based payments platform. These contracts typically include fees for initial implementation services that are paid during the period the implementation services are provided as well as fees for subscription and transaction processing services, which are subject to guaranteed monthly minimum fees that are paid monthly over the contract term. These contracts enable the financial institutions to provide their customers with access to online bill pay services through the financial institutions’ online platforms. Implementation services are required up-front to establish an infrastructure that allows the financial institutions’ online platforms to communicate with our online platform. A financial institution’s customers cannot access online bill pay services until implementation is complete. The total consideration in these contracts varies based on the number of users and transactions to be processed.

Service Costs and Expenses

Service costs – Service costs consists primarily of personnel-related costs, including stock-based compensation expenses, for our customer success and payment operations teams, outsourced support services for our customer success team, costs that are directly attributed to processing customers’ and spending businesses' transactions (such as the cost of printing checks, postage for mailing checks, fees associated with the issuance and processing of card transactions, fees for processing payments, such as ACH, check, and cross-border wires), direct and amortized costs for implementing and integrating our cloud-based platform into our customers’ systems, costs for maintaining, optimizing, and securing our cloud payments

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infrastructure, amortization of capitalized internal-use developed software, fees on the investment of customer funds, and allocation of overhead costs. We expect that service costs will increase in absolute dollars, but may fluctuate as a percentage of revenue from period to period, as we continue to invest in growing our business.

Research and development – Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, for our research and development teams, incurred in developing new products or enhancing existing products, and allocated overhead costs. We expense a substantial portion of research and development expenses as incurred. We believe that delivering new and enhanced functionality is critical to attract new customers and expand our relationship with existing customers. We expect to continue to make investments in and expand our offerings to enhance our customers’ experience and satisfaction, and to attract new customers. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our research and development team to develop new products and product enhancements. We capitalize certain software development costs that are attributable to developing new products and adding incremental functionality to our platform and amortize such costs over the estimated life of the new product or incremental functionality, which is generally three years.

Sales and marketing – Sales and marketing expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, for our sales and marketing teams, rewards expense in connection with our card rewards programs, sales commissions, marketing program expenses, travel-related expenses, and costs to market and promote our platform through advertisements, marketing events, partnership arrangements, direct customer acquisition, and allocated overhead costs. Sales commissions that are incremental to obtaining new customer contracts are deferred and amortized ratably over the estimated period of our relationship with new customers.

We focus our sales and marketing efforts on generating awareness of our company, platform, and products, creating sales leads, and establishing and promoting our brand. We plan to continue investing in sales and marketing efforts by driving our go-to-market strategies, building our brand awareness, and sponsoring additional marketing events; however, we will adjust our sales and marketing spend level as needed, as the spend may fluctuate from period to period, in response to changes in the economic environment.

General and administrative – General and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, for finance, corporate business operations, risk management, legal and compliance, human resources, information technology, costs incurred for external professional services, provision for credit losses, losses from fraud, and allocated overhead costs. We expect to incur additional general and administrative expenses as we explore various growth initiatives, which include incurring higher costs for professional services. We also expect to increase the size of our general and administrative functions to support the growth in our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of revenue from period to period.

Depreciation and amortization of intangible assets - Depreciation and amortization of intangible assets expenses consist of depreciation of property and equipment, and amortization of developed technology, customer relationship, and trade names.

Other expenses, net – Other expenses, net consist primarily of the lower of cost or market adjustment on card receivables sold and held for sale, and interest expense on our borrowings (including amortization of debt discount and issuance costs in connection with our Notes), partially offset by interest income on our corporate funds.

Benefit from income taxes – Benefit from income taxes consists primarily of the tax benefit of the net loss incurred during the period, reduction of valuation allowance in connection with the acquisitions of Invoice2go and Divvy, and change in deferred tax liability relating to our 2025 Notes.

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Results of Operations

The following table sets forth our results of operations together with the dollar and percentage change for the periods presented (amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year ended June 30,","","Change (2022 compared to 2021)","","Change (2021 compared to 2020)"],["","2022 (1)","","2021 (2)","","2020","","Amount","","%","","Amount","","%"],["Revenue","$","641,959","","","$","238,265","","","$","157,600","","","$","403,694","","","169","%","","$","80,665","","","51","%"],["Cost of revenue"],["Service costs (3)","105,496","","","56,576","","","37,049","","","48,920","","","86","%","","19,527","","","53","%"],["Depreciation and amortization of intangible assets (4)","39,508","","","5,230","","","2,095","","","34,278","","","655","%","","3,135","","","150","%"],["Total cost of revenue","145,004","","","61,806","","","39,144","","","83,198","","","135","%","","22,662","","","58","%"],["Gross profit","496,955","","","176,459","","","118,456","","","320,496","","","182","%","","58,003","","","49","%"],["Operating expenses"],["Research and development (3)","219,818","","","89,503","","","52,996","","","130,315","","","146","%","","36,507","","","69","%"],["Sales and marketing (3)","307,151","","","67,935","","","45,070","","","239,216","","","352","%","","22,865","","","51","%"],["General and administrative (3)","241,174","","","128,116","","","53,450","","","113,058","","","88","%","","74,666","","","140","%"],["Depreciation and amortization of intangible assets (4)","45,630","","","4,872","","","1,138","","","40,758","","","837","%","","3,734","","","328","%"],["Total operating expenses","813,773","","","290,426","","","152,654","","","523,347","","","180","%","","137,772","","","90","%"],["Loss from operations","(316,818)","","","(113,967)","","","(34,198)","","","(202,851)","","","178","%","","(79,769)","","","233","%"],["Other income (expense), net","(13,861)","","","(25,370)","","","3,160","","","11,509","","","(45)","%","","(28,530)","","","(903)","%"],["Loss before (benefit from) provision for income taxes","(330,679)","","","(139,337)","","","(31,038)","","","(191,342)","","","137","%","","(108,299)","","","349","%"],["(Benefit from) provision for income taxes","(4,318)","","","(40,617)","","","53","","","36,299","","","(89)","%","","(40,670)","","","(76736)","%"],["Net loss","$","(326,361)","","","$","(98,720)","","","$","(31,091)","","","$","(227,641)","","","231","%","","$","(67,629)","","","218","%"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

(3) Includes stock-based compensation expense as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended June 30,","","Change (2022 compared to 2021)","","Change (2021 compared to 2020)"],["","2022","","2021","","2020","","Amount","","%","","Amount","","%"],["Cost of revenue - service costs","$","5,144","","","$","2,938","","","$","1,257","","","$","2,206","","","75","%","","$","1,681","","","134","%"],["Research and development","54,907","","","16,091","","","5,495","","","38,816","","","241","%","","10,596","","","193","%"],["Sales and marketing","60,237","","","8,547","","","2,777","","","51,690","","","605","%","","5,770","","","208","%"],["General and administrative","76,869","","","44,411","","","8,535","","","32,458","","","73","%","","35,876","","","420","%"],["Total","$","197,157","","","$","71,987","","","$","18,064","","","$","125,170","","","174","%","","$","53,923","","","299","%"]]
[[/GREPCENT_TABLE]]

(4) Depreciation expense does not include amortization of capitalized internal-use software costs.

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The following table presents the components of our consolidated statements of operations for the periods presented as a percentage of revenue:

[[GREPCENT_TABLE]]
[["","Year ended June 30,"],["","2022 (1)","","2021 (2)","","2020"],["Revenue","100","%","","100","%","","100","%"],["Cost of revenue"],["Service costs","16","%","","24","%","","24","%"],["Depreciation and amortization of intangible assets","7","%","","2","%","","1","%"],["Total cost of revenue","23","%","","26","%","","25","%"],["Gross profit","77","%","","74","%","","75","%"],["Operating expenses"],["Research and development","34","%","","38","%","","34","%"],["Sales and marketing","48","%","","29","%","","29","%"],["General and administrative","38","%","","54","%","","34","%"],["Depreciation and amortization of intangible assets","7","%","","1","%","","\u2014","%"],["Total operating expenses","127","%","","122","%","","97","%"],["Loss from operations","(50)","%","","(48)","%","","(22)","%"],["Other income (expense), net","(2)","%","","(11)","%","","2","%"],["Loss before (benefit from) provision for income taxes","(52)","%","","(59)","%","","(20)","%"],["(Benefit from) provision for income taxes","(1)","%","","(17)","%","","\u2014","%"],["Net loss","(51)","%","","(42)","%","","(20)","%"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

Comparison of Fiscal 2022 and 2021

Revenue

Revenue consisted mainly of subscription and transactions fees. Subscription revenue increased by $81.9 million, or 73%, during fiscal 2022 as compared to fiscal 2021, primarily due to the increase in customers and average subscription revenue per customer due to an increase in the number of users. Transaction fee revenue increased by $319.2 million, or 265%, during fiscal 2022 as compared to fiscal 2021, primarily due to increased adoption of new product offerings and the mix of transaction revenues shifting to variable-priced products.

Our revenue could be impacted by fluctuations in foreign currency rates in the future, especially if our revenue through our international operations grows as a percentage of our revenue or our international operations increase.

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Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue, gross profit, and gross margin were as follows (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","Year ended June 30,","","Change"],["","","2022 (1)","","2021 (2)","","Amount","","%"],["Cost of revenue:"],["Service costs","","$","105,496","","","$","56,576","","","$","48,920","","","86","%"],["Depreciation and amortization of intangible assets (3)","","39,508","","","5,230","","","34,278","","","655","%"],["Total cost of revenue","","$","145,004","","","$","61,806","","","$","83,198","","","135","%"],["Gross profit","","$","496,955","","","$","176,459","","","$","320,496","","","182","%"],["Gross margin","","77","%","","74","%"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

(3) Consists of depreciation of property and equipment and amortization of developed technology, excluding amortization of capitalized internal-use software costs.

Service costs increased by $48.9 million during fiscal 2022 as compared to fiscal 2021, primarily due to:

•a $23.2 million increase in direct costs associated with the processing of our customers’ payment transactions, use of software applications and equipment, bank fees for funds held for customers, and data hosting services, which were driven by the increase in the number of customers, increased adoption of new product offerings, and an increase in the volume of transactions;

•a $17.8 million increase in personnel-related costs, including stock-based compensation expense and amortization of increased deferred service costs, due to the hiring of additional personnel and added headcount from our acquisitions of Divvy and Invoice2go, who were directly engaged in providing implementation and support services to our customers; and

•a $7.9 million increase in costs for consultants, temporary contractors, shared overhead, and other costs.

Gross margin increased to 77% during fiscal 2022 from 74% during fiscal 2021, primarily due to a higher mix of variable-priced transaction revenue.

Research and Development Expenses

Research and development expenses increased by $130.3 million during fiscal 2022 as compared to fiscal 2021, primarily due to the following:

•a $111.3 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional personnel and added headcount from our acquisitions of Divvy and Invoice2Go, who were directly engaged in developing new product offerings;

•a $13.2 million increase in costs for engaging consultants and temporary contractors who provided product development services, and increase in computer-related expenses and software costs; and

•a $5.8 million increase in shared overhead and other costs.

Our research and development expenses decreased to 34% as a percentage of revenue during fiscal 2022 from 38% during fiscal 2021, primarily due to a higher revenue growth rate but a relatively lower increase

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in personnel-related expenses and consulting services as a percentage of revenue during fiscal 2022 compared to fiscal 2021.

We expect research and development expenses to be affected by fluctuations in foreign currency rates in the future, especially if our international operations increase.

Sales and Marketing Expenses

Sales and marketing expenses increased by $239.2 million during fiscal 2022 as compared to fiscal 2021, primarily due to the following:

•a $103.2 million increase in personnel-related costs, including stock-based compensation expense, due to the hiring of additional personnel and added headcount from our acquisitions of Divvy and Invoice2go, who were directly engaged in acquiring new customers and in marketing our products and services;

•a $90.7 million increase in rewards expense in connection with our rewards programs mainly due to recording a full-year reward expense during fiscal 2022, compared to one month of reward expense recorded during fiscal 2021. We offer promotion programs whereby spending businesses that use our spend and expense management products can earn rewards based on transaction volume on the cards issued to them. Rewards can be redeemed by spending businesses through cash back, statement credit, gift cards and travel. Rewards expense is driven by transaction volume and an estimate of the cost of earned rewards that are expected to be redeemed;

•a $36.0 million increase in advertising spend and various marketing initiatives and activities, such as engaging consultants and attending marketing events, as we increased our efforts in promoting our products and services and in increasing brand awareness; and

•a $9.3 million increase in software subscription and computer-related expenses, shared overhead, and other costs.

Our sales and marketing expenses increased to 48% as a percentage of revenue during fiscal 2022 from 29% during fiscal 2021, primarily due to the increase in rewards expense and a higher stock-based compensation expense recognized during fiscal 2022.

General and Administrative Expenses

General and administrative expenses increased by $113.1 million during fiscal 2022 as compared to fiscal 2021, primarily due to the following:

•a $73.9 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional general and administrative personnel, and added headcount from our acquisitions of Divvy and Invoice2go;

•a $24.3 million increase in provision for card and fraud losses mainly due to recording a full-year of credit card and fraud losses from card receivables related to our spending businesses that used Divvy cards during fiscal 2022, compared to one month of losses recorded during fiscal 2021; and

•a $14.9 million increase in software subscription and computer-related expenses, temporary contractors, shared overhead and other costs.

Our general and administrative expenses decreased to 38% as a percentage of revenue during fiscal 2022 from 54% during fiscal 2021, primarily due to a higher revenue growth rate but a relatively lower increase in stock-based compensation expense and consulting costs as a percentage of revenue.

Depreciation and Amortization of Intangible Assets

Depreciation and amortization of intangible assets increased by $75.0 million during fiscal 2022 as compared to fiscal 2021, primarily due to a full-year amortization of intangible assets associated with the

64

acquisition of Divvy in June 2021 and due to amortization of intangible assets associated with the acquisition of Invoice2go in September 2021.

Other Expenses, Net

Other expenses, net decreased by $11.5 million during fiscal 2022 as compared to fiscal 2021, primarily due to the following:

•an $18.7 million decrease in interest expense from the amortization of debt discount and issuance costs associated with our 2025 Notes due to the adoption of ASU 2020-06; and

•a $3.7 million increase in interest income; and partially offset by

•a $10.9 million increase in discount associated with the measurement of cards receivable sold and held for sale at a lower of cost or market.

Benefit from Income Taxes

Benefit from income taxes during fiscal 2022 pertained mainly to the tax benefit of the net loss incurred during the period, and a reduction of valuation allowance in connection with the acquisition of Invoice2go. Benefit from income taxes during fiscal 2021 pertained mainly to a partial reversal of net deferred income tax liability, a majority of which was established in connection with our issuance of the 2025 Notes.

Comparison of Fiscal 2021 and 2020

Revenue

Revenue consists mainly of subscription and transactions fees. Subscription fees increased by $27.8 million or 33% during fiscal 2021 as compared to fiscal 2020, driven primarily by the increase in customers and average subscription revenue per customer. Transaction fees increased by $68.1 million or 129% during fiscal 2021 as compared to fiscal 2020 due mainly to increased adoption of new product offerings, the mix of transaction revenues shifting to variable-priced products, and Divvy’s transaction revenue from the acquisition date.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue, gross profit, and gross margin during fiscal 2022 were as follows (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","Year ended June 30,","","Change"],["","","2021 (1)","","2020","","Amount","","%"],["Cost of revenue"],["Service costs","","$","56,576","","","$","37,049","","","$","19,527","","","53","%"],["Depreciation and amortization of intangible assets (2)","","5,230","","","2,095","","","3,135","","","150","%"],["Total cost of revenue","","$","61,806","","","$","39,144","","","$","22,662","","","58","%"],["Gross profit","","$","176,459","","","$","118,456","","","$","58,003","","","49","%"],["Gross margin","","74","%","","75","%"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Divvy from the acquisition date on June 1, 2021.

65

(2) Consists of depreciation of property and equipment and amortization of developed technology, excluding amortization of capitalized internal-use software costs.

Service costs increased by $19.5 million during fiscal 2021 compared to fiscal 2020, primarily due to the following:

•a $9.2 million increase in direct costs associated with the processing of our customers’ payment transactions, use of software applications and equipment, bank fees for funds held for customers, and data hosting services, which were driven by the increase in the number of customers, increased adoption of new product offerings, and an increase in the volume of transactions;

•a $7.5 million increase in personnel-related costs, including stock-based compensation expense and amortization of increased deferred service costs, due to the hiring of additional personnel who were directly engaged in providing implementation and support services to our customers; and

•a $2.9 million increase in costs for consultants, temporary contractors, and shared overhead and other costs.

Gross margin decreased to 74% during fiscal 2021 from 75% during fiscal 2020, a decrease of 1% due primarily to the amortization of acquired developed technologies.

Research and Development Expenses

Research and development expenses increased $36.5 million, primarily due to the following:

•a $27.1 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional personnel, who were directly engaged in developing new product offerings, and the acquisition of Divvy;

•a $4.9 million increase in costs for engaging consultants and temporary contractors who provided product development services; and

•a $4.5 million increase in shared overhead and other costs.

As a percentage of revenue, research and development expenses increased to 38% during fiscal 2021 from 34% during fiscal 2020, primarily due to the increase in stock-based compensation expense.

Sales and Marketing Expenses

Sales and marketing expenses increased by $22.9 million, primarily due to the following:

•an $11.4 million increase in personnel-related costs, including stock-based compensation expense, due to the hiring of additional personnel, who were directly engaged in acquiring new customers and in marketing our products and services, and the acquisition of Divvy;

•a $5.2 million increase in advertising spend and various marketing initiatives and activities, such as engaging consultants and attending marketing events, as we increased our effort in promoting our products and services and in increasing brand awareness;

•a $4.5 million increase in rewards expense in connection with our rewards programs, whereby spending businesses earn rewards when they spend using cards issued to them; and

•a $1.8 million increase in shared overhead and other costs.

As a percentage of revenue, sales and marketing expenses during fiscal 2021 was consistent with fiscal 2020.

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General and Administrative Expenses

General and administrative expenses increased by $74.7 million, primarily due to the following:

•a $44.9 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional executive employees and administrative personnel and the acquisition of Divvy;

•a $25.4 million increase in professional and consulting fees as we obtained additional external assistance to support certain corporate initiatives, including the acquisition of Divvy;

•a $4.3 million increase in provision for credit losses, money transfer license fees, shared overhead and other costs; and

•a $2.6 million increase in corporate insurance costs (mainly pertaining to costs associated with insurance policies for our directors and officers); partially offset by,

•a $2.5 million decrease in sales and use tax reserves.

As a percentage of revenue, general and administrative expenses increased to 54% during fiscal 2021 from 34% during fiscal 2020, primarily due to the increase in stock-based compensation expense and professional and consulting fees.

Depreciation and Amortization of Intangible Assets

Depreciation and amortization of intangible assets increased by $6.9 million during fiscal 2021 as compared to fiscal 2020, primarily due to the amortization of intangible assets associated with the acquisition of Divvy.

Other (Expense) Income, Net

The change in other (expense) income, net during fiscal 2021 compared to fiscal 2020 was primarily due to the following:

•a $27.9 million increase in interest expense mainly due to the amortization of debt discount and issuance costs of our 2025 Notes;

•a $1.1 million decrease in interest income due to the decrease in interest rates; and

•a $0.7 million loss on revaluation of redeemable convertible preferred stock warrant liabilities that was reported during fiscal 2020, but none during fiscal 2021.

(Benefit from) Provision for Income Taxes

Benefit from income taxes during fiscal 2021 primarily resulted from the release of our valuation allowance for deferred tax assets following the recording of a deferred income tax liability as part of our accounting for the acquisition of Divvy. In addition, during fiscal 2021 we partially reversed the deferred tax liability established in connection with our issuance of the 2025 Notes.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly-titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important metrics used by our management for financial and operational

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decision-making. We are presenting these non-GAAP metrics to assist investors in seeing our financial performance using a management view. We believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit as gross profit minus depreciation and amortization of intangible assets, and stock-based compensation and related payroll taxes recognized in cost of revenue. Non-GAAP gross margin is defined as non-GAAP gross profit, divided by revenue. We believe non-GAAP gross profit and non-GAAP gross margin provide our management and investors' consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations. The following table presents a reconciliation of our non-GAAP gross profit and non-GAAP gross margin to our gross profit and gross margin for the periods presented (amounts in thousands):

[[GREPCENT_TABLE]]
[["","Year ended June 30,"],["","2022 (1)","","2021 (2)","","2020"],["Revenue","$","641,959","","","$","238,265","","","$","157,600"],["Gross profit","$","496,955","","","$","176,459","","","$","118,456"],["Add:"],["Depreciation and amortization of intangible assets (3)","39,508","","","5,230","","","2,095"],["Stock-based compensation and related payroll taxes","5,599","","","3,309","","","1,296"],["Non-GAAP gross profit","$","542,062","","","$","184,998","","","$","121,847"],["Gross margin","77.4","%","","74.1","%","","75.2","%"],["Non-GAAP gross margin","84.4","%","","77.6","%","","77.3","%"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

(3) Consists of depreciation of property and equipment and amortization of developed technology, excluding amortization of capitalized internal-use software cost.

Free Cash Flow

Free cash flow is defined as net cash used in operating activities, adjusted by purchases of property and equipment and capitalization of internal-use software costs. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment and capitalization of internal-use software costs, for operational expenses and investment in our business. Free cash flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. The following table presents a reconciliation of our free cash flow to net cash provided by (used in) operating activities for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended June 30,"],["","2022 (1)","","2021 (2)","","2020"],["Net cash (used in) provided by operating activities","$","(18,093)","","","$","4,623","","","$","(4,430)"],["Purchases of property and equipment","(5,377)","","","(18,902)","","","(11,437)"],["Capitalization of internal-use software costs","(10,259)","","","(2,304)","","","(639)"],["Free cash flow","$","(33,729)","","","$","(16,583)","","","$","(16,506)"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

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Liquidity and Capital Resources

As of June 30, 2022, our principal sources of liquidity were our cash and cash equivalents of $1.6 billion, our available-for-sale short-term investments of $1.1 billion, and our lines of credit, of which we borrowed the maximum amount of $75.0 million. Our cash equivalents are comprised primarily of money market funds and investments in debt securities with original maturities of three months or less at the time of purchase. Our short-term investments are comprised primarily of available-for-sale investments in corporate bonds, certificates of deposit, asset-backed securities, municipal bonds, and U.S. treasury securities with original maturities of more than three months. We have a total borrowing commitment of $75.0 million from our line of credit and have drawn the maximum amount as of June 30, 2022. Our principal uses of cash are funding our operations and other working capital requirements, including the contractual and other obligations discussed below.

A significant portion of our cash, cash equivalents, and short-term investments as of June 30, 2022 were derived from the public offering of our common stock and issuance of 2027 Notes in a private offering on September 24, 2021, in which we received combined aggregate net proceeds of approximately $1.9 billion, after deducting discounts, commissions and other offering costs.

We believe that our cash, cash equivalents, and available-for sale short-term investments will be sufficient to meet our working capital requirements for at least the next 12 months. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements to fund future operations or obligations, including the repayment of the principal amount of the Notes in the event that the Notes become convertible and the noteholders opt to exercise their right to convert. We may also seek to raise additional capital from these offerings or financings on an opportunistic basis when we believe there are suitable opportunities for doing so. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by incurring additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may have terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives.

Our principal commitments to settle our contractual obligations consist of our 2027 Notes, 2025 Notes, and outstanding borrowings from our line of credit as further discussed below. For additional discussion about our senior convertible notes and line of credit borrowings, refer to Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In addition, we have minimum commitments under our noncancellable operating lease agreements and agreements with certain vendors. For additional discussion about our operating leases and other commitments, refer to Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Cash Flows

Below is a summary of our consolidated cash flows for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended June 30,"],["","2022 (1)","","2021 (2)","","2020"],["Net cash provided by (used in):"],["Operating activities","$","(18,093)","","","$","4,623","","","$","(4,430)"],["Investing activities","(1,127,302)","","","(1,426,890)","","","(249,487)"],["Financing activities","2,878,566","","","1,639,583","","","863,126"]]
[[/GREPCENT_TABLE]]

(1) Includes the results of Invoice2go from the acquisition date on September 1, 2021.

(2) Includes the results of Divvy from the acquisition date on June 1, 2021.

Net Cash Provided by (Used in) Operating Activities

Our primary source of cash provided by our operating activities is our revenue from subscription and transaction fees. Our subscription revenue is primarily based on a fixed monthly or annual rate per user charged to our customers. Our transaction revenue is comprised of transaction fees on a fixed or variable rate per type of transaction. Our primary uses of cash in our operating activities include payments for employee salary and related costs, payments to third parties to fulfill our payment transactions, payments to sales and marketing partners, payments for card rewards expenses, and other general corporate expenditures.

Net cash used in operating activities was $18.1 million during fiscal 2022 compared to a net cash provided of $4.6 million during fiscal 2021. The net cash used during fiscal 2022 was due mainly to the timing of the payments for costs of our services and operating expenses, partially offset by the increase in our revenue.

Net cash provided in operating activities increased to $4.6 million during fiscal 2021 from a net cash used of $4.4 million during fiscal 2020 due mainly to the increase in subscription and transaction fees revenue; partially offset by the increase in payments for costs of services and operating expenses. In addition, the net increase was partially due to the timing of usage of funds to pay our corporate expenditures.

Net Cash Used in Investing Activities

Our cash proceeds from our investing activities consist primarily of proceeds from the maturities and sale of corporate and customer fund available-for-sale investments. Our cash usage for our investing activities consists primarily of purchases of corporate and customer fund available for-sale investments, business acquisitions, capitalization of internal-use software, and purchases of property and equipment. Additionally, the increase or decrease in our net cash from investing activities is impacted by the net change in acquired participation interests in card receivable balances.

Our net cash used in investing activities decreased to $1.1 billion during fiscal 2022 from $1.4 billion during fiscal 2021 due primarily to the increase in proceeds from maturities of corporate and customer short-term investments, partially offset by the increase in purchases of corporate and customer fund short-term investments, and increase in acquired participation interests in card receivables. Additionally, our payment to acquire Invoice2go during fiscal 2022 was lower compared to our payment to acquire Divvy during fiscal 2021.

Our net cash used in investing activities increased to $1.4 billion during fiscal 2021 from $249.5 million during fiscal 2020 due primarily to the increase in purchases of corporate and customer fund short-term investments, payment made to acquire Divvy, increase in acquired participation interests in card receivables, and increase in purchases of property and equipment; partially offset by the increase in proceeds from the maturities and sale of corporate and customer short-term investments.

Net Cash Provided by Financing Activities

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Our cash proceeds from our financing activities consist primarily of proceeds from public offerings of our common stock, issuance of convertible notes, exercises of stock options, and employee purchases of our common stock under our Employee Stock Purchase Plan (ESPP). In addition, our cash proceeds from our financing activities during fiscal 2020 included net proceeds from our IPO and follow-on offering. Our cash usage for our financing activities consists primarily of payments of costs related to public offerings of our common stock and issuance of debt. Additionally, the increase or decrease in our net cash from financing activities is impacted by the change in customer fund deposits liability.

Our net cash provided by financing activities increased to $2.9 billion during fiscal 2022 from $1.6 billion during fiscal 2021 due primarily to the proceeds from the public offering of our common stock and increase in customer funds liability.

Our net cash provided by financing activities increased to $1.6 billion during fiscal 2021 from $863.1 million during fiscal 2020 due primarily to the proceeds from the issuance of the 2025 Notes, increase in exercises of stock options, increase in employee purchases of common stock under our ESPP, and an increase in customer funds liability; offset by the purchase of Capped Calls in connection with the issuance of the 2025 Notes and repayment of our line of credit borrowings. Additionally, our cash from financing activities during fiscal 2020 included the net proceeds from our IPO and follow-on offering.

2027 Notes

On September 24, 2021, we issued $575.0 million in aggregate principal amount of our 0% convertible senior notes due on April 1, 2027. The 2027 Notes are senior, unsecured obligations, will not accrue interest unless we determine to pay special interest, and are convertible on or after January 1, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date on April 1, 2027. The 2027 Notes are convertible by the holders at their option during any calendar quarter after December 31, 2021 under certain circumstances, including if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the $414.80 per share initial conversion price. If the note holders exercise their right to convert, our current intent is to settle such conversion through a combination settlement involving a repayment of the principal portion in cash and the balance in shares of common stock. For additional discussion about our 2027 Notes and the capped call transactions, refer to Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

2025 Notes

On November 30, 2020, we issued $1.15 billion in aggregate principal amount of our 0% convertible senior notes due on December 1, 2025. The 2025 Notes are senior, unsecured obligations, will not accrue interest unless we determine to pay special interest, and are convertible on or after September 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date on December 1, 2025. The 2025 Notes are convertible by the holders at their option during any calendar quarter after March 31, 2021 under certain circumstances, including if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the $160.88 per share initial conversion price. If the note holders exercise their right to convert, our current intent is to settle such conversion through a combination settlement involving a repayment of the principal portion in cash and the balance in shares of common stock. For additional discussion about our 2025 Notes and the capped call transactions, refer to Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

2021 Revolving Credit Agreement

We have a total borrowing commitment of $75.0 million under the Class A facility of the 2021 Revolving Credit Agreement, of which we borrowed the maximum amount of $75.0 million as of June 30, 2022. Our 2021 Revolving Credit Agreement matures in June 2023 or earlier pursuant to such agreement and the outstanding borrowings are payable on or before the maturity date. For additional discussion about our Credit Agreements,

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refer to Note 10 to our consolidated financial statements included elsewhere in this Annual Report on

Form10-K.

Off-Balance Sheet Arrangements

We are contractually obligated to purchase participation interests in all card receivables from U.S. based card Issuing Banks (Issuing Banks) including authorized transactions that have not cleared. The transactions that have been authorized but not cleared totaled $55.2 million as of June 30, 2022 and have not been recorded on our consolidated balance sheets. We have off-balance sheet credit exposures with these authorized but not cleared transactions; however, our expected credit losses with respect to these transactions was not material as of June 30, 2022.

Other than our expected credit loss exposure on the card transactions that have not cleared, we had no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources as of June 30, 2022.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated, and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following critical accounting estimates are most important to understanding and evaluating our reported financial results.

Revenue recognition

Our contracts with our customers require us to provide multiple services comprising subscription, transaction and implementation services. We identify performance obligations in these contracts by evaluating whether individual services are distinct. Services that are not distinct are combined into a single performance obligation. The evaluation of whether a service is distinct involves judgment and could impact the timing of revenue recognition. We determine the transaction price in these contracts based on the amount of consideration we expect to be entitled to, which are typically variable. The transaction price is then allocated to each separate performance obligation on a relative standalone selling price basis. Each performance obligation is analyzed to determine if it is satisfied over time or at a point in time. Our performance obligations are generally recognized as revenue over the period each performance obligation is satisfied using an attribution method that best reflects the measure of progress in satisfying the performance obligation. The attribution method used involves judgment and impacts the timing of revenue recognition.

Our implementation services, included in certain contracts with our financial institution customers, consist of the development of interfaces between our online platform and the financial institutions’ online platform. The financial institution’s customers cannot access online bill pay services until implementation is complete. As a result, initial implementation services are not capable of being distinct from subscription and transaction processing services, and are combined into a single performance obligation. We also evaluate the ability of financial institution customers to renew contracts without having to pay up-front implementation fees again to determine if it provides them a material right. Material rights, which have not been significant to date, are treated as separate performance obligations and are recognized over the expected period of benefit. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price.

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Business Combinations

We account for acquisitions using the acquisition method of accounting, which requires assigning the fair value of purchase consideration to the assets acquired and liabilities assumed by the acquiree at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed in the acquiree is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed in the acquiree, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

Leases

The Company determines if an arrangement is a lease, or contains a lease, by evaluating whether there is an identified asset and whether the Company controls the use of the identified asset throughout the period of use. The Company determines the classification of the lease, whether operating or financing, at the lease commencement date, which is the date the leased assets are made available for use.

The Company uses the non-cancelable lease term when recognizing the right-of-use (ROU) assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. The Company accounts for lease components and non-lease components as a single lease component. Modifications are assessed to determine whether incremental differences result in new contract terms and accounted for as a new lease or whether the additional right of use should be included in the original lease and continue to be accounted with the remaining ROU asset.

Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Lease payments consist of the fixed payments under the arrangement, less any lease incentives. Variable costs, such as common area maintenance costs, are not included in the measurement of the ROU assets and lease liabilities, but are expensed as incurred. As the implicit rate of the leases is not determinable, the Company uses an incremental borrowing rate in determining the present value of the lease payments. Lease expenses are recognized on a straight-line basis over the lease term.

The Company does not recognize ROU assets on lease arrangements with a term of 12 months or less. Lease expense for such arrangements is recognized on a straight-line basis over the term of the lease.

Credit Losses on Acquired Card Receivables

We acquire card receivables pursuant to our contracts with certain Issuing Banks. The acquired card receivable portfolio consists of a large group of smaller balances from spending businesses across a wide range of industries. We establish an allowance for credit losses based on an estimate of uncollectible balances resulting from credit losses and such allowance could fluctuate depending on certain factors. An estimate of lifetime expected credit losses is performed by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period beyond the balance sheet date. In estimating expected credit losses, we use models that entail a significant amount of judgment. The primary areas of judgment used in measuring the quantitative components of our reserves relate to the attributes used to segment the portfolio, the determination of the historical loss experience look-back period, and the weighting of historical loss experience by monthly cohort. We use these models and assumptions to determine the reserve rates applicable to the outstanding acquired card receivable balances to estimate reserves for expected credit losses. Based on historical loss experience, the probability of default decreases over time, therefore the attribute used to segment the portfolio is the length of time since an account’s credit limit origination. Our models use past loss experience to estimate the probability of default and exposure at default by aged balances. We also estimate the likelihood and magnitude of recovery of previously written off card receivables based on historical recovery experience. Additionally, we evaluate whether to include qualitative reserves to cover losses that are expected but may not be adequately represented in the quantitative methods or the

73

economic assumptions. The qualitative reserves address possible limitations within the models or factors not included within the models, such as external conditions, changes in underwriting strategies, the nature and volume of the portfolio, and the volume and severity of past due accounts.

We review our assumptions periodically and the amount of allowance that we recorded may be impacted by actual performance of the acquired card receivables and changes in any of the assumptions used. In general, we write-off card receivables after the balance substantially becomes 120 days delinquent.

Customer Rewards

We offer a promotion program whereby users of our spend and expense management products can earn rewards based on the volume of their card transactions. Users can redeem those rewards for cash, travel, and gift cards, among other things. We establish a rewards liability that represents management’s estimate of the cost for earned rewards. The portion of our liability related to points earned is determined based on an estimate of the redemption cost and an estimate of expected redemption (net of breakage). Our estimated liability could fluctuate based on the changes on the input used to make our estimate.

Stock-based Compensation

Stock-based compensation expense related to stock option awards and purchase rights issued under our Employee Stock Purchase Plan (ESPP) is measured at fair value on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation expense related to market-based RSU awards is measured at fair value on the date of grant using the Monte Carlo simulation model. Stock-based compensation expense for performance-based awards is measured at fair value on the date of grant using the Black-Scholes valuation option-pricing model or other valuation technique depending on the nature of the award. Awards that are classified as liabilities are remeasured at fair value at the end of each reporting period. These valuation methods require inputs that are based on estimates, which are highly subjective.

Estimates used in the Black-Scholes option-pricing model include:

Expected term – represents the period that stock option awards are expected to be outstanding. The expected term for stock option awards is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the stock-based awards.

Expected volatility – represents the historical volatility of our common stock. The expected volatility that we used for stock option awards assumed in an acquisition was estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the lifecycle or area of specialty.

Risk-free interest rate – The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of stock option awards for periods corresponding with the expected term of the option.

Expected dividend yield – We have never paid dividends on our common stock and have no plans to pay dividends on our common stock.

Estimates used in the Monte Carlo simulation model include (i) expected volatility, (ii) risk-free interest rate, and (iii) performance period of the market-based RSU award.:

We recognize the compensation costs for stock option awards, purchase rights issued under our ESPP, market-based RSUs over the requisite service period of the awards, which is generally the vesting term, reduced for estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate the forfeiture rate based on the historical experience. We recognize compensation costs for performance-based awards over the vesting period if it is probable that the performance condition will be achieved.

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Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of June 30, 2022.