Q2 Holdings Inc

11. Commitments and Contingencies

The Company has non-cancelable contractual commitments related to the 2026 Notes and the 2025 Notes (each as defined below) as well as the related interest. The interest on the 2026 Notes is payable semi-annually on June 1 and December 1 of each year. The interest on the 2025 Notes is payable semi-annually on May 15 and November 15 of each year. The Company also has non-cancelable contractual commitments for certain third-party products, stadium sponsorship costs, commitment fees associated with the Company's Revolving Credit Agreement, co-location and third-party public cloud service provider fees and other product costs. Several of these purchase commitments for third-party products contain both a contractual minimum obligation and a variable obligation based upon usage or other factors which can change on a monthly basis. The estimated amounts for usage and other factors are not included within the table below.

Future minimum contractual commitments that have initial non-cancelable terms in excess of one year at December 31, 2024 were as follows:

Legal Proceedings

From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that it believes, if determined adversely to the Company, would have a material adverse effect on the Company.

Gain Contingencies

From time to time the Company may realize a gain contingency, however, recognition will not occur until cash is received. The Company received a favorable settlement of an ordinary course dispute and recognized a gain of $0.7 million during the year ended December 31, 2022. This gain was included in interest and other income in the consolidated statements of comprehensive loss.

Loss Contingencies

In the ordinary course of business, the Company is subject to loss contingencies that cover a range of matters. An estimated loss from a loss contingency, such as a legal proceeding or claim, is accrued if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Severance and Other Related Costs

During the third quarter of 2024, the Company incurred contractual severance-related expenses for the departure of an executive officer. Additionally, during the second half of 2024, the Company incurred contractual severance-related charges for organizational changes intended to enable the Company to scale the business more efficiently that are included within lease and other restructuring charges on the consolidated statements of comprehensive loss. The severance charges relating to the executive departure are anticipated to be paid out over the 18 months following the executive's departure, consistent with previously disclosed employment arrangements. The remaining severance-related charges associated with organizational changes were substantially paid out in fiscal year 2024. During 2024 cash payments of $1.0 million were made for the incurred costs. The remaining liability related to these charges is included in accrued compensation on the consolidated balance sheets in the amount of $0.9 million as of December 31, 2024.

12. Debt

The following table presents details of the Company's convertible senior notes outstanding as of December 31, 2024, which are further discussed below (principal in thousands):

(1)Unless earlier converted or repurchased in accordance with their terms prior to such date

(2)Subject to adjustment upon the occurrence of certain specified events

As further defined and described below, the 2026 Notes and the 2025 Notes are collectively referred to as the Notes.

In June 2019, the Company issued $316.3 million principal amount of convertible senior notes due in June 2026, or the 2026 Notes. Interest is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2019.

In November 2020, the Company issued $350.0 million principal amount of convertible senior notes due in November 2025, or the 2025 Notes. Interest is payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2021.

In March 2023, the Company repurchased $12.3 million in aggregate principal amount of the 2026 Notes for $10.7 million in cash and repurchased $159.0 million in aggregate principal amount of the 2025 Notes for $138.4 million in cash. The partial repurchase of the 2026 Notes and 2025 Notes resulted in a $19.9 million gain on early debt extinguishment, of which $1.8 million consisted of unamortized debt issuance costs. This gain was recorded within other income (expense) on the consolidated statements of comprehensive loss. The Company may repurchase additional 2025 Notes and/or 2026 Notes from time to time through open market purchases, block trades, and/or privately negotiated transactions, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by the Company based on the capital needs of the business, market conditions, applicable legal requirements, and other factors.

The Notes are the Company's senior unsecured obligations and rank senior in right of payment to any of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with any of the Company's indebtedness that is not so subordinated, are effectively junior in right of payment to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally junior to all indebtedness and other liabilities (including trade payables) of the Company's current and future subsidiaries.

On or after June 5, 2023 or November 20, 2023 for the 2026 Notes and 2025 Notes, respectively, the Company may redeem for cash all or any portion of the Notes, at the Company's option, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price in effect for at least 20 trading days (whether or not consecutive) during any 30-consecutive trading-day period. If the Company calls any or all of the Notes for redemption, holders may convert all or any portion of their Notes at any time prior to the close of business on the scheduled trading day prior to the redemption date, even if the Notes are not otherwise convertible at such time. After that time, the right to convert such Notes will expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the Notes may convert all or any portion of its Notes until the redemption price has been paid or duly provided for.

On or after March 1, 2026 or August 15, 2025 for the 2026 Notes and 2025 Notes, respectively, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the succeeding conditions described herein. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, as described in the indentures governing the Notes.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2026 or August 15, 2025 for the 2026 Notes and 2025 Notes, respectively, only under the following circumstances:

•during any calendar quarter commencing after the calendar quarter ending on September 30, 2019 or March 30, 2021 (and only during such calendar quarter), for the 2026 Notes and 2025 Notes, respectively, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•during thefive consecutive business day period after anyfive consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

•upon the occurrence of specified corporate events.

If a fundamental change (as defined in the relevant indenture governing each of the Notes) occurs prior to the maturity date, holders of each of the Notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Notes consist of the following:

As of December 31, 2024, the if-converted value of the 2026 Notes exceeded the principal amount by $39.2 million, and the if-converted value of the 2025 Notes did not exceed the principal amount. The if-converted value was determined based on the closing price of the Company's stock on December 31, 2024.

Capped Call Transactions

In connection with the issuance of the Notes, the Company entered intotwo separate capped call transactions, or the Capped Calls, with one or more counterparties. The Capped Calls associated with the 2026 Notes have an initial strike price of $88.6124 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. The Capped Calls associated with the 2025 Notes have an initial strike price of $140.1443 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2025 Notes. The Capped Calls associated with the 2026 Notes have an initial cap price of $139.00 per share. The Capped Calls associated with the 2025 Notes have an initial cap price of $211.54 per share. The Capped Calls are expected to offset the potential dilution to the common stock upon any conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the Notes in the event the market price per share of common stock is greater than the strike price of the Capped Call, with such offset subject to a cap. If, however, the market price per share of the common stock exceeds the cap price of the Capped Calls, there would be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that the then-market price per share of the common stock exceeds the cap price. As the Capped Calls are considered indexed to the Company's stock and are considered equity classified, they are recorded in stockholders' equity on the consolidated balance sheet and are not accounted for as derivatives. The cost of $40.8 million incurred in connection with the Capped Calls associated with the 2026 Notes was recorded as a reduction to additional paid-in capital. The cost of $39.8 million incurred in connection with the Capped Calls associated with the 2025 Notes was recorded as a reduction to additional paid-in capital.

In March 2023, in connection with the partial repurchase of the Notes, the Company terminated the Capped Calls in a notional amount corresponding to the aggregate principal amount of the Notes that were repurchased. As a result of the termination of the related Capped Calls, the Company received cash payments of $0.1 million. The proceeds were recorded as an increase to additional paid-in capital on the consolidated balance sheets.

Revolving Credit Agreement

On July 29, 2024, the Company entered into afive-year secured Revolving Credit Agreement with Wells Fargo Bank, National Association, Wells Fargo Securities, LLC and Texas Capital Bank. The Revolving Credit Agreement provides for a revolving line of credit of up to $125.0 million, which may be drawn upon as revolving loans, swingline loans or letter of credit issuances, with sublimits (i) in the case of swingline loans, in an amount up to $20.0 million and (ii) in the case of letters of credit, in an amount up to $10.0 million. Borrowings under the Revolving Credit Agreement may, at the Company's election, bear interest quarterly at either (a) the base rate plus the applicable margin ("Base Rate Loans") or (b) the adjusted term secured overnight financing rate (the "SOFR"), plus the applicable margin (the "Adjusted Term SOFR Loans"). The applicable margin ranges from 0.75% to 1.50% per annum for Base Rate Loans and 1.75% to 2.50% per annum for Adjusted Term SOFR loans. A commitment fee accrues at a rate ranging from 0.15% to 0.30% per annum, based on the Company's consolidated total net leverage ratio, of the average daily unused portion of the commitment of the lenders.

The Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including covenants which restrict the ability of the Company, or any of its subsidiaries to, among other things, create liens, incur additional indebtedness and engage in certain other transactions, in each case subject to certain exclusions. In addition, the Revolving Credit Agreement contains certain financial covenants which become effective in the event the Company's liquidity (as defined in the Revolving Credit Agreement) falls below specified levels. The Revolving Credit Agreement contains customary events of default relating to, among other things, payment defaults, breach of covenants, cross-default acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in the termination of the Revolving Credit Agreement and acceleration of repayment obligations with respect to any outstanding principal amounts. As of December 31, 2024, the Company was in compliance with all financial covenants in the Revolving Credit Agreement.

As of December 31, 2024, $0.9 million of unamortized debt issuance cost related to the Revolving Credit Agreement is included in prepaid expense and other current assets and other long-term assets in the consolidated balance sheets. As of December 31, 2024, the Company hadno outstanding borrowings under the Revolving Credit Agreement.

Interest Expense on Debt

The following table sets forth expenses related to the Notes and Revolving Credit Agreement:

Debt issuance costs are amortized on a straight-line basis over the expected life of the Notes and the Revolving Credit Agreement, respectively. For the Notes, the straight-line basis approximates the effective interest method. As of December 31, 2024, the remaining period over which the debt issuance costs will be amortized for the 2026 Notes and 2025 Notes was 1.4 years and 0.9 years, respectively.

13. Stock-Based Compensation

In March 2014, the Company's board of directors approved the 2014 Equity Incentive Plan, or 2014 Plan. The 2014 Plan terminated on June 1, 2023, except with respect to the outstanding awards previously granted thereunder. As of June 1, 2023, there were 7,606 shares of common stock that were reserved for issuance pursuant to outstanding awards, assuming maximum performance for any performance-based awards, under the 2014 Plan.

In May 2023, the Company's stockholders approved the 2023 Equity Incentive Plan, or 2023 Plan, with an effective date of June 1, 2023, under which stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other cash-based or stock-based awards may be granted to employees, consultants and directors. At time of approval, up to 14,045 shares of common stock were reserved for issuance under the 2023 Plan, all of which consisted of shares previously reserved for issuance under the 2014 Plan and any shares that would otherwise be returned to the 2014 Plan as a result of the forfeiture, repurchase or termination of awards issued under that plan. The 2023 Plan is a successor to and continuation of the Company's 2014 Plan. As of December 31, 2024,6,164 shares remain authorized and available for future issuance under the 2023 Plan, assuming attainment of maximum performance for any market stock units or performance stock units.

In March 2014, the Company adopted its ESPP. The plan was implemented starting January 3, 2022, pursuant to which certain participating domestic employees are able to purchase shares of the Company's common stock at a 15% discount of the lower of the market price at the beginning or end of the applicable offering period. Offering periods commence on each June 1 and December 1. The Board provided for a share reserve with respect to the ESPP of 800 shares. The ESPP contains a provision that automatically increases the shares available for issuance under the plan on January 1 of each year through 2024, by an amount equal to the lesser of (a)500 shares, (b)1% of the number of shares issued and outstanding on the immediately preceding December 31, or (c) such other amount as may be determined by the Company's board of directors. As of December 31, 2024,1,224 shares remain authorized and available for future issuance under the ESPP.

Stock-based compensation expense was recorded in the following cost and expense categories on the Company's consolidated statements of comprehensive loss:

Stock-based compensation capitalized as an asset was $5.1 million, $5.3 million and $3.9 million in the years ended December 31, 2024, 2023 and 2022, respectively.

Stock Options

There wereno stock options granted during the years ended December 31, 2024, 2023 or 2022.

Stock option activity was as follows:

The summary of stock options outstanding as of December 31, 2024 is as follows:

The aggregate intrinsic value of stock options exercised during each of the years ended December 31, 2024, 2023 and 2022 was $1.5 million, $0.4 million and $0.6 million, respectively. The total fair value of stock options vested during each of the years ended December 31, 2024, 2023 and 2022 waszero, zero and $0.01 million, respectively.

As of December 31, 2024, the aggregate intrinsic value of options outstanding was $0.6 million. As of December 31, 2024, all options are vested, therefore the unrecognized stock-based compensation expense related to stock options iszero.

Restricted Stock Units

Restricted stock unit activity was as follows:

The total fair value of restricted stock units vested during each of the years ended December 31, 2024, 2023 and 2022 was $75.7 million, $32.5 million and $29.1 million, respectively. Total unrecognized stock-based compensation expense related to restricted stock units was $113.1 million, which the Company expects to recognize over a weighted average period of 2.4 years.

Market Stock Units and Performance Stock Units

MSU and PSU activity was as follows:

(1)Represents the change in the number of MSUs earned based on performance achievement for the performance period.

Significant assumptions used in the Monte Carlo simulation model for the TSR PSUs and MSUs granted during the year ended December 31, 2024, 2023, and 2022 are as follows:

The total fair value of MSUs and PSUs vested during each of the years ended December 31, 2024, 2023 and 2022 was $5.6 million, $0.1 million andzero, respectively. Total unrecognized stock-based compensation expense related to MSUs and PSUs was $30.4 million, which the Company expects to recognize over a weighted average period of 1.7 years.

Employee Stock Purchase Plan

The following summarizes the assumptions used for estimating the fair value of ESPP purchase rights:

During the year ended December 31, 2024, the Company's employees purchased 150 shares under the ESPP at a weighted-average price of $39.04 per share, resulting in cash proceeds of $5.9 million. Total unrecognized stock-based compensation expense related to the ESPP was $1.0 million, which the Company expects to recognize over a weighted average period of 0.4 years.

14. Provision for Income Taxes

The U.S. and non-U.S. components of loss before income taxes consisted of the following:

The components of the Company's provision for income taxes consisted of the following:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In the current year, the Company reclassified certain prior period items in the deferred tax footnote to adjust the current year presentation in various components of its deferred tax assets. Significant components of the Company's deferred taxes consisted of the following:

The Company had federal net operating loss carryforwards of approximately $438.4 million and $504.0 million at December 31, 2024 and 2023, respectively, of which $4.6 million will expire at various dates beginning in 2027, if not utilized, and $433.8 million have an indefinite carryforward period. Federal net operating losses generated during and after the year ended December 31, 2018 will have an indefinite carryforward period. The Company also held federal R&D tax credits of $8.9 million and state tax credits of $0.2 million for the year ended December 31, 2024, and federal R&D tax credits of $8.9 million and state tax credits of $0.3 million for the year ended December 31, 2023. The federal and state tax credit carry overs will begin to expire in 2033, if not utilized.

The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings history. During 2024, the valuation allowance increased by approximately $4.4 million due to continuing operations.

At December 31, 2024, the Company did not provide any U.S. income or foreign withholding taxes on approximately $14.5 million of foreign subsidiaries' undistributed earnings, as such earnings have been retained and are intended to be indefinitely reinvested. It is not practicable to estimate the amount of any taxes that would be payable upon remittance of these earnings, because such tax, if any, is dependent upon circumstances existing if and when remittance occurs.

The Company's provision for income taxes attributable to continuing operations differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of 21% to income before taxes for each of the years ended December 31, 2024, 2023, and 2022, respectively, primarily as a result of the following:

The total amount of uncertain tax positions as of December 31, 2024 and 2023 was $1.1 million and $0.7 million, respectively. The reconciliation of uncertain tax positions at the beginning and end of the year is as follows:

At December 31, 2024, approximately $1.1 million would reduce the Company's annual effective tax rate, if recognized. As of December 31, 2024, the Company hadno accrued interest. The Company does not believe it is reasonably possible that any of its unrecognized tax positions will be resolved within the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, several state jurisdictions, and in each foreign jurisdiction in which we have operations. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2021. Operating losses and credits generated in years prior to 2021 remain open to adjustment until the statute of limitations closes for the tax year in which the net operating losses and credits are utilized. The tax years 2021 through 2024 remain open to examination by all the major taxing jurisdictions to which the Company is subject.

15. Employee Benefit Plan

In January 2009, the Company adopted a 401(k) retirement savings plan, or 401(k) Plan, covering substantially all employees. The 401(k) Plan also provides for employer contributions to be made at the Company's discretion.

The Company makes matching contributions equal to 50% of employee contributions, up to 6% of each participant's compensation. Employees are eligible to participate upon date of hire and are immediately vested in all matching contributions. The Company's policy prohibits participants from direct investment in shares of its common stock within the plan. The Company's contributions charged to expense were $7.8 million, $7.8 million and $7.2 million for the years ended December 31, 2024, 2023 and 2022, respectively.

16. Segments and Geographic Information

All revenue-generating activities are directly related to the sale, implementation and support of the Company's solutions in a single operating segment. The Company is a leading provider of digital solutions to financial institutions, FinTechs and Alt-FIs, seeking to incorporate banking into their customer engagement and servicing strategies. The Company derives the majority of its revenues from subscription fees for the use of its solutions hosted in either the Company's third-party data centers or with third-party public cloud service providers, transactional revenue from bill-pay solutions and remote deposit products, revenues for professional services and implementation services related to its solutions and certain third-party related pass-through fees. Additionally, see Note 3 - Revenue for additional information about disaggregated revenue.

The Company's chief operating decision maker, or CODM, is the Chief Executive Officer, and the financial information reviewed by the CODM is presented on a consolidated basis for the single operating segment for purposes of allocating resources, evaluating financial performance and monitoring budget versus actual results based on net income (loss) that is also reported on the consolidated statements of comprehensive loss as net loss. The significant expenses within net income (loss) on which the CODM relies include those that are reported on the consolidated statements of comprehensive loss. The measure of the Company's single operating segment assets is reported on the consolidated balance sheets as total assets. Substantially all of the Company's principal operations, assets and decision-making functions are located in the United States.

17. Related Parties

The Company hadno material related party transactions for the years ended December 31, 2024, 2023 and 2022.