BILL Holdings, Inc. (BILL) FY 2023 MD&A

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. Our fiscal year end is June 30, and our fiscal quarters end on September 30, December 31, and March 31.

Overview

We are a leader in financial automation software for small and midsize businesses (SMBs). As a champion of SMBs, we are automating the future of finance so businesses can thrive. Hundreds of thousands of businesses rely on BILL to more efficiently control their payables, receivables, and spend and expense management. Our network connects millions of members so they can pay or get paid faster. Headquartered in San Jose, California, we are a trusted partner of leading U.S. financial institutions, accounting firms, and accounting software providers.

Our purpose-built, AI-enabled financial software platform creates seamless connections between our customers, their suppliers, and their clients. Businesses on our platform generate and process invoices, streamline approvals, make and receive payments, manage employee expenses, sync with their accounting system, foster collaboration, 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 new businesses to use our solutions directly through digital marketing and inside sales, and indirectly through accounting firms and financial institution partnerships. As of June 30, 2023, our partners included some of the most trusted brands in the financial services business, including more than 85 of the top 100 accounting firms and seven of the top ten largest financial institutions for SMBs in the United States (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.

We have grown rapidly and scaled our business operations in recent periods. Our revenue was $1.1 billion and $642.0 million during fiscal 2023 and 2022, respectively, an increase of $416.5 million. We generated net losses of $223.7 million and $326.4 million during fiscal 2023 and 2022, respectively.

Macroeconomic and Other Factors

Ongoing interest rate increases and persistent inflation in the U.S. and other markets globally have increased the risk of an economic recession and volatility and dislocation in the capital and credit markets in the U.S. and globally. The SMBs we serve may be particularly susceptible to changes in overall economic and financial conditions, and certain SMBs may cease operations in the event of a recession or inability to access financing. The macroeconomic environment has caused our BILL standalone customers and Divvy spending businesses to moderate their expenditures, which has resulted in lower payment volume growth through our solutions than historical trends, which in turn has led to lower transaction fee growth than historical trends. Moreover, net customer adds on our BILL standalone solution were slightly lower than recent trends, caused in part by businesses taking longer to make decisions about whether or not to implement new software solutions in light of the current macro environment. In addition, increased interest rates have led to an increase in interest on funds held for customers. We have not observed any other material impacts on our business or the demand for our products as a result of these factors, but we anticipate volatile conditions and there can be no assurance that, in the event of a recession, demand for our products would not be adversely affected. We intend to continue to monitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions to the extent our business begins to be adversely impacted.

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In March 2023, instability in the U.S. banking system resulted in the closure of several U.S. banks, including Silicon Valley Bank (SVB), where we held significant company and customer funds. However, all of our and our customers' funds were preserved, and were able to re-route pending transactions involving SVB through other banking partners. Going forward, we will continue to assess the potential advantages in diversifying our banking relationships, including with both multinational financial institutions and, as appropriate, U.S. national and regional banks. Nonetheless, continued actual or perceived instability in the U.S. banking system that adversely effects any of the financial institutions with which we do business may adversely impact our ability to access our corporate cash and cash equivalents and cash held in trust on behalf of customers or process customer payments.

In addition, for so long as the impacts of the COVID-19 pandemic, including variants thereof, persist, restrictions and policies implemented by governments and companies may continue to impact our business and the businesses of the SMBs we serve. In response to the COVID-19 pandemic, we instituted several programs and precautionary measures in support of employee well-being and to protect the health and safety of our workforce, our customers, and the communities in which we participate. Such measures included closure of our corporate headquarters in California and our office in Texas, implementing full-time work from home, and eliminating non-essential travel. We continue to monitor federal, state, and local regulatory pronouncements and COVID-19 infection statistics and have reopened our offices with our return to office plan, which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company.

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 macroeconomic factors, banking sector dynamics or the ongoing impacts of 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, changes in central bank policies and interest rates, rates of inflation, the impact to our customers, spending businesses, subscribers, 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, real-time payments, check payments, ACH payments, cross-border payments, and creation of invoices. Much of our revenue comes from repeat transactions, which are an important contributor to our recurring revenue.

In addition, we generate revenue from interest on funds held for customers. When we process payment transactions, the funds flow through our bank accounts, resulting in a balance of funds held for customers. This balance is determined by volume and the type of payments processed. Interest is earned from interest-bearing deposit accounts, certificates of deposit, money market funds, corporate bonds, asset-backed securities, municipal bonds, commercial paper, U.S. treasury securities and U.S. agency securities. We hold these funds from the day they are withdrawn from a payer’s account to the day the funds are credited to the receiver. This revenue can fluctuate depending on the amount of customer funds held, as well as our yield on customer funds invested, which is influenced by market interest rates and our investments.

Our Receivables Purchases and Servicing Model

We market Divvy charge cards to potential spending businesses and issue business-purpose charge cards through our card issuing partner banks (Issuing Banks). When a business applies for a Divvy card, we utilize, on behalf of the 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.

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The majority of cards on our platform are issued by Cross River Bank, a Federal Deposit Insurance Corporation (FDIC)-insured New Jersey state chartered bank, and WEX Bank, an FDIC-insured Utah state chartered bank. Under our arrangements with our Issuing Banks, we must comply with their respective credit policies and underwriting procedures, and the Issuing 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 Issuing Bank harmless from such losses unless claims regarding fraud or unauthorized use are due to the sole gross negligence of the Issuing Bank.

When a spending business completes a purchase transaction, the payment to the supplier is made by the cards' Issuing Bank. Obligations incurred by the spending business in connection with their purchase transaction are reflected as receivables on the Issuing Bank’s balance sheet from the Divvy card account for the spending business. The Issuing Bank then sells a 100% participation interest in the receivable to us. Pursuant to our agreements with the Issuing 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.

In order to purchase the participation rights in the receivables, we maintain a variety of funding arrangements, including warehouse facilities and, from time-to-time, 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.

Our Business Model

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

Our revenue from existing businesses using our solutions is visible and predictable. For fiscal 2023, over 87% of our subscription and transaction revenue from BILL standalone customers came from customers who were acquired prior to the start of the fiscal year. See "—Key Business Metrics—Businesses Using Our Solutions" below for the definition of BILL standalone customers. 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 BILL standalone customers as of June 30, 2022 were still customers as of June 30, 2023.

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 standalone 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). See "—Key Business Metrics—Businesses Using Our Solutions" below for the definition of BILL standalone 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 111%, 131%, and 124% during fiscal 2023, 2022, and 2021, respectively. The decrease in fiscal 2023 when compared to fiscal 2022 was primarily due to the change in spending patterns per customer, driven by the challenging macroeconomic environment. The increase in fiscal 2022 was primarily attributable to increase in the number of users, more transactions per customer, and sales of additional products to those customers.

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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 (as defined below) gross profit we earn from BILL standalone 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—Businesses Using Our Solutions" below for the definition of BILL standalone customer. For BILL standalone customers acquired during fiscal 2022, the average payback period was approximately five quarters.

Key Business Metrics

We regularly review several metrics, including the key business metrics presented in the table below (as well as the additional metrics described in "Our Business Model"), 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. We present our key business metrics on a consolidated basis, which we believe better reflects the performance of our consolidated business overall. Our key business metrics are defined following the table below and track our BILL standalone, Divvy, and Invoice2go solutions combined. The relevant metrics for each of BILL standalone, Divvy, and Invoice2go, respectively, are set forth in the footnotes to the table. The calculation of the key business metrics and other measures discussed below may differ from other similarly-titled metrics used by other companies, securities analysts, or investors.

(1)As of June 30, 2023, the total number of BILL standalone customers was approximately 201,000; the total number of spending businesses that used Divvy's spend and expense management products was approximately 29,200, and the total number of Invoice2go subscribers was approximately 230,800.

(2)During fiscal 2023, the total payment volume transacted by BILL standalone customers was approximately $251.5 billion; the total card payment volume transacted by spending businesses that used Divvy cards was approximately $13.4 billion; and the total payment volume transacted by Invoice2go subscribers was approximately $1.1 billion.

(3)During fiscal 2023, the total number of transactions executed by BILL standalone customers was approximately 44.3 million; the total number of transactions executed by spending businesses that used Divvy cards was approximately 39.5 million; and the total number of transactions executed by Invoice2go subscribers was approximately 1.3 million.

(4)Includes Invoice2go metrics from the acquisition date on September 1, 2021.

(5)Includes Divvy metrics from the acquisition date on June 1, 2021.

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Businesses Using Our Solutions

For the purposes of measuring our key business metrics, we define businesses using our solutions as the summation of: (A) customers that are either billed directly by us or for which we bill our partners for our BILL standalone products during a particular period, (B) spending businesses that use Divvy's spend and expense management products during the period, and (C) Invoice2go subscribers during the period. We define BILL standalone products as those offered on our core accounts payable and receivable platform (excluding Divvy and Invoice2go), and we define BILL standalone customers as customers using our core BILL accounts payable and accounts receivable offering. In prior fiscal years, we counted and reported only BILL standalone customers in our "Number of Customers", which excluded spending businesses using our Divvy solution and our Invoice2go subscribers. In light of the growth of our company in recent periods, we consider the businesses using our solutions metric to better represent the performance and scale of our business as it currently exists. Businesses using more than one of our solutions are included separately in the total for each solution utilized; as of June 30, 2023, this included approximately 7,200 businesses. Businesses using our solutions during a trial period are not counted as new businesses using our solutions during that period. If an organization has multiple entities billed separately for the use of our solutions, each entity is counted as a business using our solutions. The number of businesses using our solutions in the table above represents the total number of businesses using our solutions at the end of each fiscal year.

Total Payment Volume

To grow revenue from businesses using our solutions, we must deliver a product experience that helps them automate their back-office financial operations. The more they use and rely upon our product offerings to automate their operations, the more transactions they process on our platform. This metric provides an important indication of the aggregate value of transactions that businesses using our solutions are completing on our platform and is an indicator of our ability to generate revenue from businesses using our solutions. We define TPV as the total value of transactions that we process on our platform during a particular period, including transactions from BILL standalone customers, Divvy card transactions, and transactions executed by Invoice2go subscribers. Our calculation of TPV includes payments that are subsequently reversed. Such payments comprised less than 2% of TPV during each of fiscal 2023, 2022, and 2021.

Transactions Processed

We define transactions processed as the total number of payments initiated and processed through our platform during a particular period. Payment transactions include checks, ACH payments, card payments, Invoice2go subscriber transactions, real-time payments, and cross-border payments.

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 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, card payments, real-time payments, and 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.

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We enable our SMB and accounting firm customers to make virtual card payments to their suppliers. We also facilitate the extension of credit to spending businesses in the form of Divvy cards. The spending businesses utilize the credit on Divvy cards as a means of payment for goods and services provided by their suppliers. Virtual card payments and Divvy cards are originated through agreements with our Issuing Banks. Our agreements with the Issuing Banks allow for card transactions on the Mastercard and Visa networks. For each virtual card and Divvy card transaction, suppliers are required to pay interchange fees to the issuer of the card. Based on our agreements with the Issuing Banks, we recognize the interchange fees as revenue gross or net of rebates received from the Issuing Banks 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.

In addition, we generate revenue from interest on funds held for customers. Interest on funds held for customers consists of the interest that we earn from customer funds while payment transactions are clearing. Interest is earned from interest-bearing deposit accounts, certificates of deposit, corporate bonds, asset-backed securities, municipal bonds, money market funds, commercial paper, and U.S. Treasury securities, until those payments are cleared and credited to the intended recipient.

Service Costs and Expenses

Service costs – Service costs consist 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, checks, 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 infrastructure, amortization of capitalized internal-use developed software related to our platform, 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 (R&D) – R&D expenses consist primarily of personnel-related expenses, including stock-based compensation expenses, for our R&D teams, incurred in developing new products or enhancing existing products, and allocated overhead costs. We expense a substantial portion of R&D 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 R&D expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our R&D 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 into service 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

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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 consist of depreciation of property and equipment, and amortization of acquired intangibles, such as developed technology, customer relationship, and trade names. Amortization of capitalized internal-use software costs are excluded.

Other income (expenses), net – Other income (expenses), net consists primarily of interest income on our corporate funds, interest expense on our borrowings (including amortization issuance costs) and the lower of cost or market adjustment on card receivables sold and held for sale.

Provision for (benefit from) income taxes – Income tax expense consists of U.S. federal, state and foreign income taxes. We maintain a full valuation allowance against our U.S. federal, state and Australian net deferred tax assets as we have concluded that it is not more likely than not that we will realize our net deferred tax assets.

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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):

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

(4) Includes stock-based compensation cost charged to revenue and expenses as follows (in thousands):

(5) Fiscal 2023 includes $52.2 million of stock-based compensation expense related to separation and advisory agreements with our former Chief Revenue Officer.

(6) Consists of acquisition related equity awards (Acquisition Related Awards), including equity awards assumed and retention equity awards granted to certain employees of acquired companies in connection with acquisitions, and non-acquisition related equity awards (Non-Acquisition Related Awards), which include all other equity awards granted to existing employees and non-employees in the

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ordinary course of business. The following table presents stock-based compensation recorded for the periods presented and as a percentage of total revenue:

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

(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 2023 and 2022

A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 can be found under Item 7 of Part II in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the SEC on August 22, 2022, which is available free of charge on the SEC’s website at www.sec.gov and on the Investor Relations section of our corporate website at investor.bill.com.

Revenue

Revenue consisted mainly of subscription and transactions fees. Subscription revenue increased by $59.8 million, or 31%, during fiscal 2023 as compared to fiscal 2022, primarily due to the increase in customers and average subscription revenue per customer due to an increase in the number of users. Transaction fee

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revenue increased by $251.5 million, or 57%, during fiscal 2023 as compared to fiscal 2022, primarily due to increased total payment volume and the mix of transaction revenue shifting to variable-priced products. In addition, interest on funds held for customers increased by $105.2 million, or 1224%, during fiscal 2023 as compared to fiscal 2022, primarily due to an increase in yield earned from investing customer funds as interest rates increased during fiscal 2023.

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

Cost of Revenue, Gross Profit, and Gross Margin

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

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

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

Service costs increased by $45.5 million during fiscal 2023 as compared to fiscal 2022, primarily due to:

•a $22.4 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 $16.2 million increase in personnel-related costs, including stock-based compensation expense and increased deferred service costs amortization, due to the hiring of additional personnel, who were directly engaged in providing implementation and support services to our customers; and

•a $6.9 million increase in costs for consultants, temporary contractors, shared overhead, and other costs.

Gross margin increased to 82% during fiscal 2023 from 77% during fiscal 2022, primarily due to the increase in interest on funds held for customers and a higher mix of variable-priced transaction revenue.

Research and Development Expenses

Research and development expenses increased by $94.8 million during fiscal 2023 as compared to fiscal 2022, primarily due to the following:

•a $95.4 million increase in personnel-related costs, including stock-based compensation expense, resulting from the hiring of additional personnel and added headcount from our acquisition of Invoice2Go, who were directly engaged in developing new product offerings;

•a $5.8 million increase in computer-related expenses and software costs and increase in shared overhead and other costs; and partially offset by

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•a $6.4 million decrease in costs for engaging consultants and temporary contractors who provided product development services, which have now been replaced by full-time employees.

Our research and development expenses decreased to 30% as a percentage of revenue during fiscal 2023 from 34% during fiscal 2022, primarily due to a higher revenue growth rate but a relatively lower increase in personnel-related expenses as a percentage of revenue and decrease in consulting costs during fiscal 2023 compared to fiscal 2022.

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 $208.7 million during fiscal 2023 as compared to fiscal 2022, primarily due to the following:

•a $106.3 million increase in personnel-related costs, including stock-based compensation expense of $52.2 million recognized during the year related to the separation and advisory agreements with our former Chief Revenue Officer, and due to the hiring of additional personnel, who were directly engaged in acquiring new customers and in marketing our products and services;

•a $78.7 million increase in rewards expense in connection with the rewards program through our Divvy cards as a result of increased transaction volume and higher rewards rates;

•a $21.1 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 $2.6 million increase in software subscription and computer-related expenses, shared overhead, and other costs.

Our sales and marketing expenses increased to 49% as a percentage of revenue during fiscal 2023 from 48% during fiscal 2022, primarily due to higher rewards expense and stock-based compensation expense recognized during fiscal 2023.

General and Administrative Expenses

General and administrative expenses increased by $40.1 million during fiscal 2023 as compared to fiscal 2022, primarily due to the following:

•a $30.7 million increase in personnel-related expense, including stock-based compensation expense, resulting from the hiring of additional general and administrative personnel;

•a $15.2 million increase in provision for expected credit losses and fraud losses mainly due to increase in acquired card receivables during the year;

•a $3.7 million increase in software subscription and computer-related expenses, temporary contractors, shared overhead and other costs; and partially offset by

•a $9.6 million decrease in professional and consulting fees, primarily resulting from the reduction of integration costs of acquired businesses.

Our general and administrative expenses decreased to 26% as a percentage of revenue during fiscal 2023 from 38% during fiscal 2022, primarily due to a higher revenue growth rate but a relatively lower increase in personnel-related expense and provision for expected credit losses and fraud losses as a percentage of revenue.

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Depreciation and Amortization of Intangible Assets

Depreciation and amortization of intangible assets increased by $6.3 million during fiscal 2023 as compared to fiscal 2022, primarily due to a full-year amortization of intangible assets associated with the acquisition of Invoice2go in September 2021, as well as higher spend on capital expenditures.

Other Income, Net

Other income, net increased by $86.7 million during fiscal 2023 as compared to fiscal 2022, primarily due to the following:

•a $84.6 million increase in interest income due to higher interest rates earned on corporate funds;

•a $9.9 million decrease in discount associated with the measurement of cards receivable sold and held for sale at a lower of cost or market as we ceased selling acquired card receivables in August 2022; and partially offset by

•a $7.8 million increase in other expenses mainly due to interest expense primarily as the result of higher interest rates and increased borrowings under the Revolving Credit Facility.

Provision for Income Taxes

Provision for income taxes during fiscal year ended June 30, 2023, consists of the reduction to the net deferred tax liability, offset by an estimated cash tax liability as a result of the mandatory R&D capitalization by the Tax Cuts and Jobs Act of 2017, which was effective beginning fiscal 2023. R&D expenses are capitalized and amortized over five years for domestic R&D and fifteen years for international R&D. The requirement increases our current year cash tax liabilities, however, the cash flow impact is expected to decrease over time as capitalized research and development expenses continue to amortize.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (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 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):

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(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 provided by (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):

(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.

Liquidity and Capital Resources

As of June 30, 2023, our principal sources of liquidity were our cash and cash equivalents of $1.6 billion, our available-for-sale short-term investments of $1.0 billion, and our available undrawn Revolving Credit Facility (as defined below) of $90.0 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, U.S. agency securities, and U.S. treasury securities with original maturities of more than three months. Our corporate deposits held at large multinational financial institutions and U.S. national or regional banks, may at times exceed federally insured limits. We monitor the financial strength of the financial institutions with which we do business to ensure they are financially sound and present minimal credit risk. We further believe the associated risk of concentration for our investments is mitigated by holding a diversified portfolio of highly rated investments consisting of the money market funds and short-term debt securities described above. We have a total borrowing commitment of $225.0 million from our Revolving Credit Facility and have drawn $135.0 million as of June 30, 2023. Our principal uses

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of cash are funding our operations and other working capital requirements, including the contractual and other obligations discussed below.

We believe that our cash, cash equivalents, and 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 note holders 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 Revolving Credit Facility as further discussed below. For additional discussion about our Notes and Revolving Credit Facility, 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 commitments, including operating leases, refer to Note 15 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In January 2023, our board of directors authorized the repurchase of up to $300.0 million of our outstanding shares of common stock (the Share Repurchase Program). We may repurchase shares of common stock from time to time through open market purchases, in privately negotiated transactions, or by other means, including through the use of trading plans, intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and total amount of share repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, and other considerations. The Share Repurchase Program has a term of 12 months, may be suspended or discontinued at any time, and does not obligate us to acquire any amount of common stock. During the year ended June 30, 2023, we repurchased and subsequently retired 1,077,445 shares for $87.6 million under the Share Repurchase Program. The total price of the shares repurchased and related transaction costs are reflected as a reduction of common stock and accumulated deficit on the our consolidated balance sheets. As of June 30, 2023, $212.4 million remained available for future share repurchases under the Share Repurchase Program.

Cash Flows

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

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(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. We also generate cash from the interest earned on both corporate funds and funds held in trust on behalf of customers. Our primary uses of cash in our operating activities include payments for employees' salaries 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 provided by operating activities was $187.8 million during fiscal 2023 compared to a net cash used of $18.1 million during fiscal 2022. The net cash provided during fiscal 2023 was due mainly to the increase in our revenue during the year.

Net cash used in operating activities decreased to $18.1 million during fiscal 2022 from 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 by (Used in) Investing Activities

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

Our net cash provided by investing activities was $259.3 million during fiscal 2023 compared to net cash used of $1.1 billion during fiscal 2022 due primarily to the increase in proceeds from maturities of corporate and customer short-term investments, partially offset by the increase in acquired card receivables. Additionally, our cash paid for acquisitions during fiscal 2023 was lower compared to our payment to acquire Invoice2go during fiscal 2022.

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.

Net Cash Provided by Financing Activities

Our cash proceeds from our financing activities consist primarily of proceeds from line of credit borrowings, exercises of stock options, increase in prepaid card deposits, employee purchases of our common stock under our Employee Stock Purchase Plan (ESPP) and proceeds from public offerings of our common stock and issuance of convertible notes. Our cash usage for our financing activities consists primarily of repurchases of shares, and payments on line of credit and bank borrowings. 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 decreased to $235.1 million during fiscal 2023 from $2.9 billion during fiscal 2022 due primarily to the absence of the proceeds from the public offering of our common stock and the issuance of our 2027 Notes in the prior year, as well as a decrease in customer funds liability, partially offset by proceeds from our Revolving Credit Facility.

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.

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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.

Revolving Credit Facility

We have a total borrowing commitment of $225.0 million pursuant to our Revolving Credit and Security Agreement, by and between our subsidiary, Divvy Peach, LLC, Goldman Sachs Bank USA, and the lenders party thereto (the Revolving Credit Facility), of which we borrowed $135.0 million as of June 30, 2023. In August 2022, we amended the Revolving Credit Facility to increase the borrowing capacity from $75.0 million to $225.0 million. Revolving loans under the Revolving Credit Facility bear interest at a rate per annum determined by reference to either the SOFR Rate or an adjusted benchmark rate plus an applicable margin ranging from 2.65% to 2.75%, based on the outstanding principal amount and the date that principal amounts are outstanding. Obligations under the Revolving Credit Facility are secured by receivables generated by our Divvy charge card and certain related collateral. Our Revolving Credit Facility matures in June 2024 and the outstanding borrowings are payable on or before the maturity date. For additional discussion about our Revolving Credit Facility, refer to Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We are contractually obligated to purchase all card receivables from U.S.-based Issuing Banks including authorized transactions that have not cleared. The transactions that have been authorized but not cleared totaled $68.6 million as of June 30, 2023 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 were not material as of June 30, 2023.

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, 2023.

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Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with 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.

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.

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

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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 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.

Spending Businesses 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 statement credits or 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 ESPP is measured at fair value on the date of grant using the Black-Scholes option-pricing 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 – The expected volatility was estimated based on the historical volatility of the Company’s common stock.

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.

We recognize the compensation costs for stock option awards, purchase rights issued under our ESPP, and 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.

Recent Accounting Pronouncements

See “The Company and its Significant Accounting Policies” 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, 2023.

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