8-K/A - QTWO - Equibles

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): October 31, 2019

Q2 HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	001-36350	20-2706637
(State or Other Jurisdiction<br><br>of Incorporation)	(Commission<br><br>File Number)	(I.R.S. Employer<br><br>Identification No.)

13785 Research Blvd, Suite 150

Austin, Texas

78750

(Address of Principal Executive Offices, and Zip Code)

(512) 275-0072

Registrant's Telephone Number, Including Area Code

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	QTWO	New York Stock Exchange

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

| ☐ | Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | | --- | --- || ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | | --- | --- || ☐ | Pre-commencement communication pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | | --- | --- || ☐ | Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | | --- | --- |

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Q2 Holdings, Inc. (the "Company") filed a Current Report on Form 8-K (the "Original Form 8-K") with the Securities and Exchange Commission on November 1, 2019 announcing the consummation of its previously announced acquisition of Lender Performance Group, LLC, a Delaware limited liability company, also doing business as PrecisionLender ("PrecisionLender"), Lender Performance Group Blocker, LLC, a Delaware limited liability company ("Blocker A"), LPGB, Inc., a Delaware corporation ("Georgian Blocker"), Insight (Delaware) PL Blocker Corporation, a Delaware corporation ("Insight Blocker A"), Insight (Cayman) PL Blocker Corporation, a Delaware corporation ("Insight Blocker B" and together with Blocker A, Georgian Blocker and Insight Blocker A, each a "Blocker" and collectively the "Blockers"). This Amendment to the Original Form 8-K is being filed solely to amend and supplement the Original Form 8-K to include the historical audited consolidated financial statements of PrecisionLender, the unaudited condensed consolidated financial statements of PrecisionLender, and the unaudited pro forma condensed combined financial information. The disclosures and exhibits included in the Original Form 8-K otherwise remain unchanged.

Item 9.01. Financial Statements and Exhibits.

(a) Financial statements of business acquired. Condensed consolidated audited financial statements of PrecisionLender and its subsidiaries as of and for the years ended December 31, 2018 and 2017, and the related notes thereto, are attached hereto as Exhibit 99.1 and incorporated herein by reference. Unaudited condensed consolidated financial statements of PrecisionLender and its subsidiaries as of and for the nine months ended September 30, 2019 and 2018, and the related notes thereto, are attached hereto as Exhibit 99.2 and incorporated herein by reference.

(b) Pro Forma Financial Information. The unaudited pro forma condensed combined financial information of the Company, for the year ended December 31, 2018, and as of and for the nine months ended September 30, 2019, giving effect to the PrecisonLender acquisition, are attached hereto as Exhibit 99.3 and incorporated herein by reference.

(d) Exhibits

Exhibit No.	Description
23.1	Consent of Grant Thornton LLP, independent auditors for Lender Performance Group, LLC and Subsidiaries, dated January 3, 2020.
99.1	Consolidated audited financial statements of Lender Performance Group, LLC and Subsidiaries, as of and for the years ended December 31, 2018 and 2017, and the related notes thereto
99.2	Unaudited condensed consolidated financial statements of Lender Performance Group, LLC as of and for the nine months ended September 30, 2019 and 2018, and the related notes thereto
99.3	Unaudited pro forma condensed combined financial information

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Q2 HOLDINGS, INC.
January 3, 2020	/s/ Jennifer N. Harris<br><br>Jennifer N. Harris<br><br>Chief Financial Officer

		Exhibit

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated April 29, 2019, with respect to the consolidated financial statements of Lender Performance Group, LLC included in the Current Report on Form 8-K/A of Q2 Holdings, Inc. filed on January 3, 2020. We consent to the incorporation by reference of said report in the Registration Statements of Q2 Holdings, Inc. on Form S-3 (No. 333-231947) and on Forms S-8 (Nos. 333-195981, 333-202062, 333-209522, 333-216156, 333-223087 and 333-229733)

Manual Signature

Charlotte, North Carolina

January 3, 2020

		Exhibit

EXHIBIT 99.1

Lender Performance Group, LLC and Subsidiaries

Consolidated Financial Statements As of and for the Years Ended December 31, 2018 and 2017

Lender Performance Group, LLC and Subsidiaries

Table of Contents

	Page
Report of Independent Certified Public Accountants	3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2018 and 2017	4
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 2017	5
Consolidated Statements of Members' (Deficit) Capital for the years ended December 31, 2018 and 2017	6
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017	7
Notes to Consolidated Financial Statements	8

Independent Auditor's Report

To the Members and Board of Directors of

Lender Performance Group, LLC and Subsidiaries

We have audited the accompanying consolidated financial statements of Lender Performance Group, LLC (a Delaware limited liability company) and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive loss, changes in members' (deficit) capital, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lender Performance Group, LLC and Subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of matter

As discussed in Note 1 to the consolidated financial statements, Lender Performance Group, LLC and subsidiaries has adopted new accounting guidance in the year ended December 31, 2018 that reflects the change related to the accounting for recognizing revenue from contracts with customers retrospectively. Our opinion is not modified with respect to this matter.

/s/ Grant Thornton LLP

Charlotte, North Carolina

April 29, 2019

Lender Performance Group, LLC and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	21,096	$	2,347
Short-term investments	—		249
Available-for-sale investments	—		7,199
Accounts receivable, net	7,485		1,497
Prepaid expenses and other current assets	1,205		813
Total current assets	29,786		12,105
Property and equipment, net	1,152		342
Intangible assets, net	72		77
Deposits and other assets	200		96
Total assets	$	31,210	$	12,620
Liabilities and members' capital (deficit)
Current liabilities:
Accounts payable	$	839	$	319
Accrued expenses	2,685		2,802
Accrued taxes payable	—		151
Deferred revenue	17,449		9,501
Notes payable, current portion	393		—
Total current liabilities	21,366		12,773
Deferred revenue	4,213		4,758
Notes payable	560		—
Total liabilities	26,139		17,531
Commitments and contingencies (Note 13)
Members' capital (deficit)
Members' capital (deficit)	5,071		(4,911		)
Total members' capital (deficit)	5,071		(4,911		)
Total liabilities and members' capital (deficit)	$	31,210	$	12,620

See notes to consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(in thousands)

	Year Ended December 31,
	2018			2017
Revenue	$	16,969		$	10,890
Cost of Revenue	4,627			2,770
Gross profit	12,342			8,120
Costs and expenses
Software and client support	13,999			8,422
Sales and marketing	4,785			2,137
Operations, general and administrative	6,712			3,682
Depreciation and amortization expense	206			125
Total costs and expenses	25,702			14,366
Loss from operations	(13,360		)	(6,246		)
Other expense:
Interest expense, net	(558		)	(260		)
Other expense	(71		)	(25		)
Realized gain/loss on investments	(89		)	(16		)
Total other expense	(718		)	(301		)
Net loss	(14,078		)	(6,547		)
Other comprehensive (loss) income
Unrecognized effect of foreign currency	164			(22		)
Unrealized gain on investments	—			5
Comprehensive loss	$	(13,914	)	$	(6,564	)

See notes to consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Consolidated Statements of Members' (Deficit) Capital

(in thousands)

	Preferred and Class A Member Interests		Additional<br><br>Paid-In<br><br>Capital			Member Distributions			Other Comprehensive Income (Loss)			Accumulated Deficit			Total Members' (Deficit) Capital
Balance at December 31, 2016	$	32,672	$	48		$	(20,842	)	$	(33	)	$	(9,028	)	$	2,817
Member distributions and redemptions	—		—			(76,212		)	—			—			(76,212		)
Capital contributions	75,142		—			—			—			—			75,142
Class B member profits interests compensation expense	—		206			—			—			—			206
Repurchase of Class B member profit interests	—		(300		)	—			—			—			(300		)
Unrealized gains on investments available-for-sale	—		—			—			5			—			5
Foreign currency translation adjustment	—		—			—			(22		)	—			(22		)
Net loss	—		—			—			—			(6,547		)	(6,547		)
Balance at December 31, 2017	$	107,814	$	(46	)	$	(97,054	)	$	(50	)	$	(15,575	)	$	(4,911	)
Member distributions and redemptions	—		—			(240		)	—			—			(240		)
Capital contributions	24,925		—			—			—			—			24,925
Class B member profits interests compensation expense	—		382			—			—			—			382
Repurchase of Class B member profit interests	—		(1,171		)	—			—			—			(1,171		)
Foreign currency translation adjustment	—		—			—			164			—			164
Net loss	—		—			—			—			(14,078		)	(14,078		)
Balance at December 31, 2018	$	132,739	$	(835	)	$	(97,294	)	$	114		$	(29,653	)	$	5,071

See notes to consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)		Year Ended December 31,
	2018			2017
Cash flows from operating activities:
Net loss	$	(14,078	)	$	(6,547	)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	206			125
Net realized loss on available-for-sale and short-term investments	89			(16		)
Profit interest compensation expense	382			206
Loss on asset disposition	15			12
Net (increase) / decrease in assets:
Accounts receivable	(5,988		)	(912		)
Prepaid expenses and other current assets	(364		)	(471		)
Deposits and other assets	(105		)	(6		)
Net (decrease) / increase in liabilities:
Accounts payable	442			139
Accrued taxes payable	(181		)	151
Other accrued liabilities	529			855
Deferred revenue	7,424			6,555
Net cash (used in) provided by operating activities	(11,629		)	91
Cash flows from investing activities:
Purchases of fixed assets	(1,028		)	(245		)
Purchases of intangible assets	—			(80		)
Proceeds from sale of short-term investments	249			3,093
Proceeds from sale of available-for-sale investments	7,721			1,916
Purchase of short-term investments	—			(1,339		)
Purchase of available-for-sale investments	(617		)	(2,277		)
Dividends received	6			178
Net cash provided by investing activities	6,331			1,246
Cash flows from financing activities:
Repurchase of Class B profit interests	(219		)	(300		)
Member contributions	24,925			75,143
Member distributions and redemptions	(800		)	(76,212		)
Borrowings under line of credit	2,600			—
Repayments under line of credit	(2,600		)	—
Net cash provided by (used in) financing activities	23,906			(1,369		)
Effect of exchange rate changes on cash and cash equivalents	141			(22		)
Net increase (decrease) in cash and cash equivalents	18,749			(54		)
Cash and cash equivalents, beginning of year	2,347			2,401
Cash and cash equivalents, end of year	$	21,096		$	2,347
Supplemental disclosure of cash flow information:
Cash paid for interest	$	71		$	—
Noncash financing and investing activities:
Unrealized gain on available-for-sale investments	$	—		$	(5	)
Member distributions accrued	$	240		$	800
Notes payable accrued	$	952		$	—

See notes to consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

Lender Performance Group, LLC, which operates under the name PrecisionLender (the Company), was formed as a Delaware limited liability company on May 15, 2009. The Company, headquartered in North Carolina, conducts business globally including South America, Europe and Asia-Pacific.

The Company provides a best-in-class loan pricing and profitability management solution to financial institutions via a Software as a Service (SaaS) delivered platform. The PrecisionLender pricing and profitability platform empowers commercial bank relationship managers to make smart, real-time pricing decisions and deliver superior customer service. Andi®, PrecisionLender's virtual coach and pricing analyst, uses artificial intelligence to glean and deliver actionable insights from the thousands of deals priced daily on the platform.

Basis of Consolidation

The consolidated financial statements include the accounts of Lender Performance Group, LLC and its wholly owned subsidiaries. In 2017, the Company established a subsidiary of which a small portion is owned by a charitable remainder annuity trust. Noncontrolling interest is included as a component of total members' (deficit) capital in the consolidated balance sheet. Net earnings attributable to noncontrolling interests for the years ended December 31, 2018 and 2017 were de minimus.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Sales Tax

The Company presents sales taxes and other taxes collected from customers and being remitted to the government authorities on a net basis and, as such, excludes them from revenues.

Cash and Cash Equivalents

The Company defines cash and cash equivalents as cash and short-term investments with original maturities of three months or less. Short-term investments with maturities longer than three months are included in short-term investments on the balance sheets. The Company maintains amounts on deposit with various financial institutions, which generally exceed federally insured limits. However, management evaluates those institutions and the Company has not experienced any losses on such deposits.

Short-term Investments

Short-term investments consist primarily of certificate of deposits with maturities longer than three months. The Company recognizes interest income on the certificate of deposits and is included in interest expense, net on the consolidated statements of comprehensive loss.

Available-For-Sale Investments

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt and equity securities available for sale are carried at fair market value, with the unrealized gains and losses reported as other comprehensive income and reported in the consolidated statements of changes in members' (deficit) capital.

Accounts Receivable

The Company provides for an allowance for doubtful accounts based on management's best estimate of probable losses determined principally on the basis of historical experience and specific allowances for known troubled accounts. All accounts or portions thereof that are deemed to be uncollectible are written off to the allowance for doubtful accounts when it is probable that the receivable is worthless. The Company recorded an allowance for doubtful accounts of zero as of December 31, 2018 and 2017. In the opinion of management, the allowance for doubtful accounts is reasonable. Actual results could differ from the estimates that were used.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the lease or the useful life of the improvement. Estimated useful lives of the assets are as follows:

	Years
Computer equipment	3
Software	3
Furniture and fixtures	5
Leasehold improvements	1-7

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

Intangible Assets

In 2017, the Company incurred patents costs, legal fees as well as third-party purchasing fees to acquire a domain name and a trade name. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which has been determined to be 30 years for both the domain name and trade names. Finite-lived intangible assets are assessed for impairment whenever triggering events or indicators of potential impairment occur. There was no impairment of finite-lived intangible assets during 2018 or 2017.

Impairment of Long-lived Assets

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for an amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company concluded no impairment existed as of December 31, 2018 and 2017.

Revenue Recognition and Deferred Revenue

The Company derives its revenue from three sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company's cloud-based loan pricing and profitability management platform, (2) related fees charged for the setup and implementation of the services and (3) consulting revenues.

With the adoption of Topic 606, the Company determines the amount of revenue to be recognized through application of the following steps:

•	Identification of the contract, or contracts with a customer
•	Identification of the performance obligations in the contract
---	---
•	Determination of the transaction price
---	---
•	Allocation of the transaction price to the performance obligations in the contract
---	---
•	Recognition of revenue when or as the Company satisfies the performance obligations.
---	---

Recurring

Recurring revenue represents stand-ready performance obligations in which the Company is making the solutions or services available to the customers continuously over time or the value of the contract renews. Therefore, recurring revenue is generally recognized over time on a ratable basis over the contract term, beginning on the date that the solution or service is made available to the customer.

Recurring revenue is comprised of fees for the use of our subscription-based software solution, which includes providing access to cloud-based solutions, hosting services, as applicable, and support and maintenance.

One-time services and other

Fees paid for expedited implementation services is recognized only once the service has been completed, at the point of time the customer receives the benefit. Full revenue recognition will occur after the two-week training session.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Specific consultation revenues are recognized ratably over an agreed-upon consultation period, which is considered the time over which the consultation is earned.

Contracts with multiple performance obligations

Some of the Company's contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of our solutions and services are typically estimated based on observable transactions when the solutions or services are sold on a standalone basis. Subscription fees are distinct as such offerings are often sold separately. In determining whether consulting services are distinct, the Company considers the following factors for each consulting services agreement: availability of the services from other vendors, the nature of the consulting services and the contractual dependence and described expectation of the service on the contract. To date, the Company has concluded that all the consulting services included in contracts with multiple performance obligations are distinct.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue, until, as stated above, revenue recognition conditions have been met. Financing costs associated with contracts greater than one year are included as interest revenue over the contract term as these are considered significant financing arrangements. Travel reimbursements are billed and recognized as revenue as incurred.

Deferred Revenue

Deferred revenue primarily consists of cash received and billings in advance of revenue recognition from subscription services described above and is recognized as revenue recognition conditions are met. Initial contract terms range from one to five years in length. The Company often invoices customers at the beginning of the contract for the entire amount. The current portion of deferred revenue represents cash received and billings in advance that are expected to be recognized as revenue within the next 12 months. At December 31, 2018 and 2017, deferred revenue included $7.5 million and $1.5 million, respectively, of billings in advance for which cash has not been received.

Foreign Currency

Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated using an average of monthly exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other expense. For the years ended December 31, 2018 and 2017, the Company recorded a net foreign currency gain of $0.2 million and a net foreign currency loss of $22, respectively, primarily related to one deferred revenue arrangement in Australia.

Research and Development

Research and development costs are expensed as incurred. These costs include human resource costs, third-party contractor expenses, software development tools and certain other expenses related to researching and developing new solutions, and allocated depreciation, facilities and IT support costs.

Software Development Costs

Software development costs of the Company's product incurred in the preliminary stages of development are expensed as incurred and primarily consist of personnel costs.

Advertising Costs

The Company expenses advertising costs as incurred. These costs consist primarily of online ads, sponsorships and costs to participate in industry trade shows and associations. The Company incurred $1.3 million and $0.6 million in advertising costs during the years ended December 31, 2018 and 2017, respectively, and are recorded in sales and marketing on the consolidated statements of comprehensive loss.

Fair Value of Financial Instruments

The authoritative guidance requires disclosure of a fair value hierarchy of inputs that the Company uses to value an asset or a liability. Under the authoritative guidance, there is a common definition of fair value to be used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.

Level 1 Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Level 2 Inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-driven valuations in which all significant inputs are observable for substantially the full term of the asset or liability.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.

The Company estimates the fair values of financial instruments using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value for nontraded financial instruments. Accordingly, such estimates are not necessarily indicative of the amounts that the Company would realize in a current market exchange. The fair value of the mutual funds was determined based on Level 1 inputs. The fair value of corporate bonds were determined based on Level 2 inputs. The valuation techniques used to measure fair value of the Level 2 instruments were valued based on quoted market prices or based on similar types of securities that are traded in the market.

Risks and Uncertainties

In 2017, the Company entered into a long-term relationship with a large global bank. During the years ended December 31, 2018 and 2017, this customer accounted for 25% and 9% of the Company's sales, respectively. This customer also accounted for approximately 80% of accounts receivable at year-end.

Revenue

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014‑09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09), which provides for a single five‑step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. In April 2016, the FASB issued ASU 2016-08 to clarify the implementation of ASU 2014-09. This guidance is effective for private companies for fiscal years and interim periods within those years beginning after December 15, 2018.

The Company early adopted ASU 2014-09 as of January 1, 2018 utilizing the full retrospective method of transition, which requires that the standard be applied to all periods presented. The impact of adopting ASU 2014-09 on the Company's total revenues for 2017 and 2016 was material. The primary impacts of adopting ASU 2014-09 relate to the adjustment for the transaction price in our contracts when a significant financing component exists. Previously, the Company deferred only the purchase price including discounts of a contract and recognized those amounts over the contract term, generally ranging from one to five years, as the revenue was recognized. Under the new standard, when the payment is received greater than one year in advance, the revenue recognized exceeds the cash received and an interest expense will be recorded to reflect the increased revenue.

Selected adjusted financial statement information, which reflects our adoption of ASU 2014-09 is set forth below.

As of December 31, 2017	As Reported			Adjustments			As Adjusted
Deferred revenue, current portion	$	9,451		$	50		$	9,501
Beginning members' capital	2,865			(48		)	2,817
Ending members' deficit	$	(4,861	)	$	(50	)	$	(4,911	)	For the year ended December 31, 2017	As Reported	Adjustments	As Adjusted
---	---	---	---	---	---	---	---	---	---
Revenue	$	10,453		$	437		$	10,890
Interest expense, net	(178		)	438			260
Net loss	$	(6,545	)	$	(2	)	$	(6,547	)

The adoption of ASU 2014-09 had no impact on the Company's net cash provided by or used in operating, investing or financing activities for any of the periods reported.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Disaggregation of Revenues

Revenues consist of the following by type:

	2018		2017
Subscription and support fees	$	16,169	$	10,690
Consulting fees	800		200
	$	16,969	$	10,890

Contract Balances

Contract Asset

As noted in Note 1, subscription and support revenue is recognized ratable over the contract term at the commencement date of the contract. Consulting fees are recorded at the point in time when earned. The timing and amount of revenue earned has not been affected under Topic 606 compared to previous guidance. However, under Topic 606, the Company will record a contract asset if the revenue recognized on a contract exceeds the billings and deferred revenue when the billings on a contract exceed the revenue recognized. The Company's standard billing terms are for the contract term, in advance. No contract assets have been recorded for billings or revenues to date. To the extent that customers are billed for solutions and services in advance of the Company satisfying the related performance obligations, the Company will record such amounts in deferred revenue.

Deferred Revenue

The concept of unearned revenue under Topic 606 is substantially similar to the deferred revenue under previous guidance. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription and support services and interest received from significant financing considerations for billings greater than one year in advance.

The changes in deferred revenue were as follows:

December 31	2018			2017
Deferred revenue, beginning of period	$	14,259		$	7,751
Billings and other*	24,373			17,398
Subscription revenue recognized ratably over time	(16,170		)	(10,690		)
Other revenue recognized	(800		)	(200		)
Deferred revenue, end of period	$	21,662		$	14,259

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, "Leases," which introduces a lessee model that brings substantially all leases onto the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The new standard will also distinguish leases as either finance leases or operating leases. This distinction will affect how leases are measured and presented in the income statement and statement of cash flows. ASU No. 2016-02 is effective for annual and interim periods beginning after December 15, 2019. The Company is still assessing the potential impact the standard will have on its consolidated financial statements and disclosures.

ASC 2016-02 will have a material impact on the Company's consolidated balance sheet. Leases currently designated as operating leases, will be reported on the consolidated balance sheet upon adoption at their net present value, which will increase total assets and liabilities. ASU 2016-02 is not expected to have a material impact to the Company's consolidated statements of comprehensive loss or net cash provided by operating activities. In preparation for adoption of the standard, the Company is in the process of implementing key systems, processes and internal controls to enable the preparation of financial information.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) Targeted Improvements" (ASU 2018-11), which allows for the adoption of ASU 2016-02 to be applied at the beginning of the year of adoption, as opposed to at the beginning of the earliest year presented in the financial statements. The Company expects to adopt the transitional provisions allowed under ASU 2018-11 and, as such, the consolidated balance sheets and statements of comprehensive loss for prior periods will not be comparable in the year of adoption of ASU 2016-02.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

In August 2018, the FASB issued ASU 2018-15, "Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. ASU 2018-15 is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2020, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is evaluating the impact of the adoption of ASU 2018-15 on its consolidated financial statements.

Available-for-Sale Securities

In 2018, all prior available-for-sale securities were sold leaving the balance as of December 31, 2018 to be zero for available-for-sale securities.

			Unrealized
			December 31, 2017
			Fair Value Measurements Using:
	Amortized Cost		Gain in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income			Estimated Fair Value
Corporate bonds	$	5,074	$	—	$	(26	)	$	5,048
Mutual Funds	2,153		—		(2		)	2,151
Total available-for-sale securities	$	7,227	$	—	$	(28	)	$	7,199

During the years ended December 31, 2018 and 2017, available-for-sale securities were sold for total proceeds of approximately $7.7 million and $1.9 million respectively. The gross realized (losses) / gains on these sales totaled $(89) and $16 in 2018 and 2017, respectively. For purposes of determining gross realized gains, the cost of securities sold is based on specific identification. Net unrealized holding gains on available-for-sale securities in the amount of zero for the years ended December 31, 2018 and December 31, 2017, respectively, have been included in accumulated other comprehensive income. Total other-than-temporary impairment recognized in accumulated other comprehensive income amounted to zero at December 31, 2018 and 2017.

Property and Equipment

Property and equipment consists of the following as of December 31, 2018 and 2017:

December 31	2018		2017
Furniture and fixtures	$	292	$	183
Computer equipment	589		306
Leasehold improvements	90		52
Construction in progress	588		—
Total property and equipment	$	1,559	$	541
Less: Accumulated depreciation	407		199
Property and equipment, net	$	1,152	$	342

Depreciation expense was $0.2 million and $0.1 million for the years ended December 31, 2018 and 2017, respectively. Construction in progress relates to leasehold improvements committed but not yet complete for a lease that is to commence in 2019.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Intangible Assets

Intangible assets consists of the following as of December 31, 2018 and 2017.

December 31	2018		2017
Trademarks	$	37	$	37
Domain names	43		43
Total intangible assets	80		80
Less: Accumulated amortization	8		3
Intangibles, net	$	72	$	77

Amortization expense was $5 and $3 for the years ended December 31, 2018 and 2017, respectively.

Accrued Expenses

Accrued expenses are comprised of the following as of December 31, 2018 and 2017:

	2018		2017
Accrued personnel costs	$	1,979	$	1,424
Accrued professional fees	53		62
Deferred rent	152		167
Accrued member distributions	240		800
Accrued Azure	211		335
Other accrued expenses	50		14
Total accrued expenses	$	2,685	$	2,802

Debt

In February 2018, the Company entered into an agreement with a commercial bank for a revolving line of credit in the amount of $10.0 million, which matures in February 2020. Interest under this facility accrues at PRIME plus 1.0% and is paid monthly when the revolver is acted upon. The line of credit is secured by all the assets of the Company. Available advances under this facility are determined based on an advance rate multiplied by the historical four-month average recurring revenue. Borrowings under this credit facility in 2018 were $2.6 million, which were all repaid in December 2018, and there is no outstanding balance as of December 31, 2018. In 2018, loan origination costs were incurred associated with the line of credit which are amortized over the life of the facility; 2 years.

December 31	2018
Loan origination costs	$	16
Loan origination amortization	(6		)
Net asset	$	10

In 2018, the Company issued notes payables for approximately $1.2 million related to the repurchase of certain Class B Member Interests. The notes payable include monthly installments of principal and interest, which fully amortizes over a three-year period, net of discounts. Total outstanding balance under these notes payable as of December 31, 2018 is approximately $1.0 million.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Members' Capital

Capital Structure

On May 15, 2009, the members entered into a limited liability company agreement (the Agreement) as part of the establishment of the Company, which was most recently amended (the Amended Agreement) on November 14, 2018 as part of a minority investments made by certain strategic investors. As part of the Amended Agreement, the Company is authorized to issue two separate classes of member units (Preferred Member Interests and Class A Member Interests). Preferred Member Interests and Class A Member Interests share equal voting rights; however, Preferred Member Interests have certain liquidation preferences over the Class A Member Interests under certain circumstances. As of December 31, 2018 and 2017, the Company has 168.4800 and 158.3489 Preferred Member Interests and Class A Member Interests issued and outstanding, respectively. The Amended Agreement, among other things, established the ownership of certain Capital Member Interests in the Company and defines the distribution rights and allocations of profits and losses associated with those Capital Member Interests, corporate governance and Board of Director representation.

Member Interests

In 2012, the Company adopted a Profit Participation Plan (the Plan). The Plan provides incentives to eligible employees, officers and directors in the form of incentive nonvoting Class B Member Interests, which allows for the eligible person to share in the profits of the Company over certain thresholds defined in the agreement upon change in control of the Company. As of December 31, 2018 and 2017, the Company had reserved a total of 24.9530 Class B Member Interests. Of these Class B Member Interests, 1.1930 and 4.0630 were available for future grants at each year-end, respectively.

The Board of Directors has the authority to administer the Plan and determine, among other things, the interpretation of any provisions of the Plan, the eligible employees who are granted Member Interests, the number of Member Interests that may be granted, vesting schedules and exercise prices. Class B Member Interests generally vest on the first anniversary of the grant date and annually thereafter over three years from the date of grant and expire, if not exercised, within ten years from the date of issuance. As of December 31, 2018 and 2017, the Company recognized $0.4 million and $0.2 million for Class B Member Interests in the accompanying consolidated financial statements, respectively.

The Company authorized new Class C Member Interests in 2017. The Class C Member Interests are designed as an incentive class for management, which allow management to share in the proceeds of a future liquidity event once the Preferred Members achieve certain return metrics. In September of 2018, all Class C Member Interests were issued. Class C Member Interests generally vest on the first anniversary of the grant date and annually thereafter over three years from the date of grant and expire, if not exercised, within ten years from the date of issuance. As of December 31, 2018 and 2017, the Company recognized $19 and zero for Class C Member Interests in the accompanying consolidated financial statements, respectively.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

The following summarizes the Plan activity for the years ended December 31, 2018 and 2017:

	Class B Member Interests		Class C Member Interests
Outstanding, December 31, 2016	17		—
Granted	6		—
Exercised	—		—
Repurchased	(2	)	—
Forfeited/Canceled	—		—
Outstanding, December 31, 2017	21		—
Granted	5		100
Exercised	—		—
Repurchased	(2	)	—
Forfeited/Canceled	—		—
Outstanding, December 31, 2018	24		100

Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each Class B and Class C Member Interest grants are estimated using a Black-Scholes option-pricing model on the date of grant as follows:

Member Interests	2018		2017
Estimated divided yield	—	%	—	%
Expected stock price volatility	30.00	%	30.00	%
Weighted-average risk-free interest rate	2.49% to 2.93 %		1.67% to 2.04%
Expected life of options (years)	4		4

Due to limited historical data, the Company estimates expected share price volatility based on the actual volatility of comparable publicly traded companies over the expected life of the option. The expected term represents the average time that Class B Member Interests, which vested, are expected to be outstanding. The Company does not have sufficient history of the exercise of Class B and Class C Member Interests to estimate the expected term of employee Class B and Class C Member Interests and, thus, continues to calculate expected life based on the mid-point between the vesting date and the contractual term, which is in accordance with the simplified method. The risk-free rate is based on the U.S. Treasury yield curve at the grant date of the Class B Member Interests.

The Company has the ability to repurchase vested Class B and Class C Member Interests from willing members. In February 2018 and August 2018, the Company issued notes payable to repurchase 1.2488 and 0.6300 Class B Member Interests from former members in accordance with the terms of the grant agreement, respectively. The repurchase was completed at fair value using the methods described above and the notes payable are to be paid monthly over three years. The balance at December 31, 2018 is included in notes payable on the consolidated balance sheet.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Income Taxes

The parent Company is a U.S. limited liability company treated as a partnership for federal and state income tax purposes with limited income tax liabilities and/or benefits of the Company being passed through to the members. Certain foreign subsidiaries held by the parent may be subject to foreign taxation on operating income or losses. Foreign taxes due, if any, are recorded based on the tax laws in the applicable foreign jurisdictions and are shown net of foreign income taxes withheld.

Deferred Income Tax Asset	2018	2017
Australian deferred tax asset	272	85
UK deferred tax asset	97	—
Allowance for deferred tax asset	(369	(85
Deferred tax asset, net	—	—

All values are in US Dollars.

Foreign operations as of December 31, 2018 and 2017 incurred operating net losses of approximately $2.1 million and $0.3 million, which resulted in a deferred tax asset of approximately $0.4 million and $0.1 million, respectively. Based on both international subsidiary forecasts, carry-back allowances per foreign regulations, and known expenses, the Company does not believe at this time that the deferred tax asset will be used. As such, an allowance has been created to offset the asset.

Leases

The Company leases office space and equipment under noncancelable operating leases, some of which contain escalating payment clauses, rent free periods or lease incentives. The Company records rent expense on a straight-line basis. The difference between rent expense recorded and the amount paid is credited to deferred rent expense, which is included as a liability in the accompanying balance sheet.

As of December 31, 2018, the approximate future minimum lease payments are as follows for the years ending December 31:

	Operating Leases
2019	$	1,236
2020	1,763
2021	1,677
2022	1,728
2023	1,779
Total minimum lease payments	$	8,183

Total rent expense incurred under operating leases during 2018 and 2017 was $0.9 million and $0.7 million respectively.

Commitments and Contingencies

Third-party Hosting Agreements

The Company has an agreement with a third-party vendor to provide a cloud computing platform, hosting infrastructure and related services. This agreement is an annual agreement which is billed monthly based on usage.

Legal Proceedings

From time to time, the Company may be involved in litigation that it believes is of the type common to companies engaged in the Company's line of business, including commercial and employment disputes. As of December 31, 2018, the Company is not involved in any pending legal proceedings whose outcome the Company expects to have a material adverse effect on its financial position, results of operations or cash flows.

Retirement Plan

The Company adopted the Lender Performance Group, LLC 401(k) & Profit Sharing Plan (the 401(k) Plan) in 2012. The 401(k) Plan allows for a discretionary employer contribution and covers all employees who are at least 21 years of age. Participants vest in the employer contribution portion of their account immediately. The employer contribution is 3% of eligible compensation. Any profit sharing contributions have a four-year vesting, based on years of completed service.

The Company's total expense under the 401(k) Plan was approximately $0.4 million and $0.3 million during 2018 and 2017, respectively.

Lender Performance Group, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Subsequent Events

The Company evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through April 29, 2019, the date the consolidated financial statements were available to be issued.

All subsequent events requiring recognition and disclosure have been incorporated into these consolidated financial statements.

		Exhibit

EXHIBIT 99.2

Lender Performance Group, LLC and Subsidiaries

Contents

	Page
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (Unaudited)	2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	3
Condensed Consolidated Statements of Members' (Deficit) Capital for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Lender Performance Group, LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	12,422		$	21,096
Accounts receivable, net	4,421			7,485
Prepaid expenses and other current assets	1,312			1,205
Total current assets	18,155			29,786
Property and equipment, net	1,580			1,152
Intangible assets, net	68			72
Deposits and other assets	259			200
Total assets	$	20,062		$	31,210
Liabilities and members' capital (deficit)
Current liabilities:
Accounts payable	$	483		$	839
Accrued expenses	5,169			2,685
Current portion of deferred revenue	11,900			17,449
Current portion of notes payable	403			393
Total current liabilities	17,955			21,366
Long-term deferred revenue	8,853			4,213
Notes payable	263			560
Total liabilities	27,071			26,139
Commitments and contingencies (Note 13)
Members' capital (deficit):
Members' equity	(7,009		)	5,071
Total members' capital (deficit)	(7,009		)	5,071
Total liabilities and members' capital (deficit)	$	20,062		$	31,210

See notes to condensed consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited, in thousands)

	Nine Months Ended September 30,
	2019			2018
Revenue	$	16,487		$	12,311
Cost of revenue	4,402			3,381
Gross profit	12,085			8,930
Costs and expenses:
Software and client support	12,953			10,407
Sales and marketing	4,130			3,603
Operations, general and administrative	6,629			4,776
Depreciation and amortization expenses	296			135
Total costs and expenses	24,008			18,921
Loss from operations	(11,923		)	(9,991		)
Other income (expense):
Interest expense, net	(268		)	(357		)
Other expense	(150		)	(17		)
Realized loss on investments	—			(89		)
Total other expense	(418		)	(463		)
Net loss	(12,341		)	(10,454		)
Other comprehensive income (loss)
Unrealized effect of foreign currency	(129		)	158
Comprehensive loss	$	(12,470	)	$	(10,296	)

See notes to condensed consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Consolidated Statements of Members' (Deficit) Capital

(Unaudited, in thousands)

	Preferred and Class A Member Interests		Additional<br><br>Paid-In<br><br>Capital			Member Distributions			Other Comprehensive Income (Loss)			Accumulated Deficit			Total Members' (Deficit) Capital
Balance at December 31, 2017	$	107,814	$	(46	)	$	(97,054	)	$	(50	)	$	(15,575	)	$	(4,911	)
Class B member profits interests compensation expense	—		232			—			—			—			232
Repurchase of Class B member profit interests	—		(781		)	—			—			—			(781		)
Foreign currency translation adjustment	—		—			—			158			—			158
Net loss	—		—			—			—			(10,454		)	(10,454		)
Balance at September 30, 2018	$	107,814	$	(595	)	$	(97,054	)	$	108		$	(26,029	)	$	(15,756	)
	Preferred and Class A Member Interests		Additional<br><br>Paid-In<br><br>Capital			Member Distributions			Other Comprehensive Income (Loss)			Accumulated Deficit			Total Members' (Deficit) Capital
Balance at December 31, 2018	$	132,739	$	(835	)	$	(97,294	)	$	114		$	(29,653	)	$	5,071
Class B and C member profits interests compensation expense	—		390			—			—			—			390
Foreign currency translation adjustment	—		—			—			(129		)	—			(129		)
Net loss	—		—			—			—			(12,341		)	(12,341		)
Balance at September 30, 2019	$	132,739	$	(445	)	$	(97,294	)	$	(15	)	$	(41,994	)	$	(7,009	)

See notes to condensed consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)		Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(12,341	)	$	(10,454	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	296			135
Stock based compensation expense	390			232
Net realized loss on available-for-sale and short-term investments	—			89
Net (increase) / decrease in assets:
Accounts receivable	3,064			452
Prepaid expenses and other current assets	(170		)	(334		)
Deposits and other assets	—			(95		)
Net (decrease) / increase in liabilities:
Accounts payable	(355		)	55
Other accrued liabilities	2,723			534
Deferred revenue	(908		)	2,828
Net cash used in operating activities	(7,301		)	(6,558		)
Cash flows from investing activities:
Purchases of fixed assets	(720		)	(379		)
Proceeds from sale of short-term investments	—			249
Proceeds from sale of available-for-sale investments	—			7,721
Purchase of available-for-sale investments	—			(617		)
Dividends received	—			6
Net cash provided by (used in) investing activities	(720		)	6,980
Cash flows from financing activities:
Member distributions and redemptions	(240		)	(800		)
Borrowings under line of credit	—			2,600
Payment of notes payable	(286		)	(127		)
Net cash provided by (used in) financing activities	(526		)	1,673
Effect of exchange rate changes on cash and cash equivalents	(127		)	107
Net increase (decrease) in cash and cash equivalents	(8,674		)	2,202
Cash and cash equivalents, beginning balance	21,096			2,347
Cash and cash equivalents, ending balance	$	12,422		$	4,549
Supplemental disclosure of cash flow information:
Cash paid for interest	$	29		$	26
Noncash financing and investing activities:
Notes payable accrued	$	667		$	3,257

See notes to condensed consolidated financial statements.

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Organization and Summary of Significant Accounting Policies

Description of Business and Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial statements and reflect all adjustments, which only include normal recurring adjustments, which are in the opinion of management necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim period and are not necessarily indicative of results to be expected for the full fiscal year or for any other future annual or interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Lender Performance Group, LLC and its wholly owned subsidiaries. In 2017, the Company established a subsidiary of which a small portion is owned by a charitable remainder annuity trust. Noncontrolling interest is included as a component of total members' (deficit) capital in the condensed consolidated balance sheet. Net earnings attributable to noncontrolling interests for the nine months ended September 30, 2019 and the year ended December 31, 2018 were de minimus. All intercompany transactions and balances have been eliminated through consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Sales Tax

The Company presents sales taxes and other taxes collected from customers and being remitted to the government authorities on a net basis and, as such, excludes them from revenues.

Cash and Cash Equivalents

Short-term Investments

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Available-For-Sale Investments

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt and equity securities available for sale are carried at fair market value, with the unrealized gains and losses reported as other comprehensive income and reported in the condensed consolidated statements of changes in members' (deficit) capital.

Accounts Receivable

The Company provides for an allowance for doubtful accounts based on management's best estimate of probable losses determined principally on the basis of historical experience and specific allowances for known troubled accounts. All accounts or portions thereof that are deemed to be uncollectible are written off to the allowance for doubtful accounts when it is probable that the receivable is worthless. The Company recorded an allowance for doubtful accounts of zero as of September 30, 2019 and December 31, 2018. In the opinion of management, the allowance for doubtful accounts is reasonable. Actual results could differ from the estimates that were used.

Property and Equipment

	Years
Computer equipment	3
Software	3
Furniture and fixtures	5
Leasehold improvements	1-7

Intangible Assets

In 2017, the Company incurred patents costs, legal fees as well as third-party purchasing fees to acquire a domain name and a trade name. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which has been determined to be 30 years for both the domain name and trade names. Finite-lived intangible assets are assessed for impairment on an annual basis and whenever triggering events or indicators of potential impairment occur. There was no impairment of finite-lived intangible assets during the nine months ended September 30, 2019 or 2018.

Impairment of Long-lived Assets

Revenue Recognition and Deferred Revenue

With the adoption of Topic 606, the Company determines the amount of revenue to be recognized through application of the following steps:

•	Identification of the contract, or contracts with a customer

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

•	Identification of the performance obligations in the contract
•	Determination of the transaction price
---	---
•	Allocation of the transaction price to the performance obligations in the contract
---	---
•	Recognition of revenue when or as the Company satisfies the performance obligations.
---	---

Recurring

One-time services and other

Specific consultation revenues are recognized ratably over an agreed-upon consultation period, which is considered the time over which the consultation is earned.

Contracts with multiple performance obligations

Deferred Revenue

Deferred revenue primarily consists of cash received and billings in advance of revenue recognition from subscription services described above and is recognized as revenue recognition conditions are met. Initial contract terms range from one to five years in length. The Company often invoices customers at the beginning of the contract for the entire amount. The current portion of deferred revenue represents cash received and billings in advance that are expected to be recognized as revenue within the next 12 months. At September 30, 2019 and December 31, 2018, deferred revenue included $3.3 million and $0.9 million, respectively, of billings in advance for which cash has not been received.

Foreign Currency

Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated using an average of monthly exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive loss. Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other expense. For the nine months ended September 30, 2019 and 2018, the Company recorded a net foreign currency loss of $0.1 million and a net foreign currency gain of $0.2 million, respectively, primarily related to one deferred revenue arrangement in Australia.

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Research and Development

Software Development Costs

Software development costs of the Company's product incurred in the preliminary stages of development are expensed as incurred and primarily consist of personnel costs.

Advertising Costs

The Company expenses advertising costs as incurred. These costs consist primarily of online ads, sponsorships and costs to participate in industry trade shows and associations. The Company incurred $0.8 million and $1.0 million in advertising costs during the nine months ended September 30, 2019 and 2018, respectively, and are recorded in sales and marketing on the condensed consolidated statements of comprehensive loss.

Fair Value of Financial Instruments

Level 1 Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.

Risks and Uncertainties

In 2017, the Company entered into a long-term relationship with a large global bank. During the nine months ended September 30, 2019 and 2018, this customer accounted for 33% and 23% of the Company's sales, respectively. There are three customers that comprise 69% of the total accounts receivable balance at September 30, 2019 and one customer that accounted for approximately 80% of accounts receivable at December 31, 2018.

Revenue

Disaggregation of Revenues

Revenues consist of the following by type:

	Nine months ended September 30,
	2019		2018
Subscription and support fees	$	15,870	$	11,707
Consulting fees	617		604
	$	16,487	$	12,311

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Contract Balances

Contract Asset

Deferred Revenue

The changes in deferred revenue were as follows:

	Nine months ended September 30,
	2019			2018
Deferred revenue, beginning of period	$	21,662		$	14,259
Billings and other*	15,580			15,139
Subscription revenue recognized ratably over time	(15,870		)	(11,707		)
Other revenue recognized	(619		)	(604		)
Deferred revenue, end of period	$	20,753		$	17,087

*Other includes the impact of foreign currency translation adjustments

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" which modifies the measurement of expected credit losses of certain financial instruments. Credit losses on trade and other receivables, available-for-sale debt securities, and other instruments will reflect the Company's current estimate of the expected credit losses and will generally result in the earlier recognition of allowance for losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of and approach to adopting this new accounting guidance and does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements.

ASC 2016-02 will have a material impact on the Company's condensed consolidated balance sheet. Leases currently designated as operating leases, will be reported on the condensed consolidated balance sheet upon adoption at their net present value, which will increase total assets and liabilities. ASU 2016-02 is not expected to have a material impact to the Company's condensed consolidated statements of comprehensive loss or net cash provided by operating activities. In preparation for adoption of the standard, the Company is in the process of implementing key systems, processes and internal controls to enable the preparation of financial information.

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

earliest year presented in the financial statements. The Company expects to adopt the transitional provisions allowed under ASU 2018-11 and, as such, the condensed consolidated balance sheets and statements of comprehensive loss for prior periods will not be comparable in the year of adoption of ASU 2016-02.

Available-for-Sale Securities

In 2018, all prior available-for-sale securities were sold leaving the balance as of September 30, 2018 to be zero for available-for-sale securities.

During the nine months ended September 30, 2019 and 2018, available-for-sale securities were sold for total proceeds of approximately zero and $7.7 million, respectively. The gross realized loss on these sales totaled zero and $0.1 million in the nine months ended September 30, 2019 and 2018, respectively. For purposes of determining gross realized gains, the cost of securities sold is based on specific identification. Net unrealized holding gains on available-for-sale securities amounted to zero for each of the nine months ended September 30, 2019 and 2018. Total other-than-temporary impairment recognized in accumulated other comprehensive income amounted to zero at September 30, 2019 and December 31, 2018.

Property and Equipment

Property and equipment consists of the following as of September 30, 2019 and December 31, 2018:		September 30, 2019		December 31, 2018
Furniture and fixtures	$	403	$	292
Computer equipment	654		589
Leasehold improvements	1,176		90
Construction in progress	—		588
Total property and equipment	$	2,233	$	1,559
Less: Accumulated depreciation	653		407
Property and equipment, net	$	1,580	$	1,152

Depreciation expense was $0.3 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. Construction in progress relates to leasehold improvements committed but not yet complete for a lease that commenced in February 2019. During the nine months ended September 30, 2019, the improvements were completed and transferred into leasehold improvements.

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Intangible Assets

Intangible assets consists of the following as of September 30, 2019 and December 31, 2018.		September 30, 2019		December 31, 2018
Trademarks	$	37	$	37
Domain names	43		43
Total intangible assets	$	80	$	80
Less: Accumulated amortization	12		8
Intangibles, net	$	68	$	72

Amortization expense was less than $0.01 million for each of the nine months ended September 30, 2019 and 2018, respectively.

Accrued Expenses

Accrued expenses are comprised of the following as of September 30, 2019 and December 31, 2018:		September 30, 2019		December 31, 2018
Accrued personnel costs	$	3,446	$	1,979
Accrued professional fees	55		53
Deferred rent	1,300		152
Accrued member distributions	—		240
Accrued Azure	206		211
Other accrued expenses	162		50
Total accrued expenses	$	5,169	$	2,685

Debt

In February 2018, the Company entered into an agreement with a commercial bank for a revolving line of credit in the amount of $10 million, which matures in February 2020. Interest under this facility accrues at PRIME plus 1.0% and is paid monthly when the revolver is acted upon. The line of credit is secured by all the assets of the Company. Available advances under this facility are determined based on an advance rate multiplied by the historical four-month average recurring revenue. Borrowings under this credit facility in 2018 were $2.6 million, which were all repaid in December 2018, and there is no outstanding balance as of September 30, 2019. In 2018, loan origination costs were incurred in relation to the line of credit and are amortized over the life of the facility which is 2 years. The loan origination costs of $0.02 million was included in prepaid and other current assets at September 30, 2019 and at December 31, 2018. The loan origination amortization of $0.01 million was included in general and operating expenses for each of the nine months ended September 30, 2019 and twelve months ended December 31, 2018.

	September 30, 2019			December 31, 2018
Loan origination costs	$	16		$	16
Loan origination amortization	(12		)	(6		)
Net asset	$	4		$	10

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

Members' Capital

Capital Structure

On May 15, 2009, the members entered into a limited liability company agreement (the Agreement) as part of the establishment of the Company, which was most recently amended (the Amended Agreement) on November 14, 2018 as part of a minority investments made by certain strategic investors. As part of the Amended Agreement, the Company is authorized to issue two separate classes of member units (Preferred Member Interests and Class A Member Interests). Preferred Member Interests and Class A Member Interests share equ al voting rights; however, Preferred Member Interests have certain liquidation preferences over the Class A Member Interests under certain circumstances. As of September 30, 2019 and December 31, 2018, the Company has 168.48 and 158.3489 Preferred Member Interests and Class A Member Interests issued and outstanding, respectively. The Amended Agreement, among other things, established the ownership of certain Capital Member Interests in the Company and defines the distribution rights and allocations of profits and losses associated with those Capital Member Interests, corporate governance and Board of Director representation.

Member Interests

In 2012, the Company adopted a Profit Participation Plan (the Plan). The Plan provides incentives to eligible employees, officers and directors in the form of incentive nonvoting Class B Member Interests, which allows for the eligible person to share in the profits of the Company over certain thresholds defined in the agreement upon change in control of the Company. As of September 30, 2019 and December 31, 2018, the Company had reserved a total of 24.9530 Class B Member Interests. Of these Class B Member Interests, 0.4013 and 1.1930 were available for future grants at each year-end, respectively.

The Board of Directors has the authority to administer the Plan and determine, among other things, the interpretation of any provisions of the Plan, the eligible employees who are granted Member Interests, the number of Member Interests that may be granted, vesting schedules and exercise prices. Class B Member Interests generally vest on the first anniversary of the grant date and annually thereafter over three years from the date of grant and expire, if not exercised, within ten years from the date of issuance. During the nine months ended September 30, 2019 and 2018, the Company recognized $0.4 million and $0.2 million for Class B Member Interests in the accompanying condensed consolidated financial statements, respectively.

The Company authorized new Class C Member Interests in 2017. The Class C Member Interests are designed as an incentive class for management, which allow management to share in the proceeds of a future liquidity event once the Preferred Members achieve certain return metrics. In September of 2018, all Class C Member Interests were issued. Class C Member Interests generally vest on the first anniversary of the grant date and annually thereafter over three years from the date of grant and expire, if not exercised, within ten years from the date of issuance. As of September 30, 2019 and December 31, 2018, the Company recognized zero for Class C Member Interests in the accompanying condensed consolidated financial statements, respectively.

The following summarizes the Plan activity for the nine months ended September 30, 2019:		Class B Member Interests
Outstanding, December 31, 2018	24		100
Granted	2		—
Exercised	—		—
Repurchased	—		—
Forfeited/Canceled	(1	)	—
Outstanding, September 30, 2019	25		100

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

The Company has the ability to repurchase vested Class B and Class C Member Interests from willing members. In February 2018 and August 2018, the Company issued notes payable to repurchase 1.2488 and 0.6300 Class B Member Interests from former members in accordance with the terms of the grant agreement, respectively. The repurchase was completed at fair value using the methods described above and the notes payable are to be paid monthly over three years. The balance at September 30, 2019 is included in notes payable on the condensed consolidated balance sheet.

Income Taxes

Foreign operations incurred operating net losses of approximately $2.0 million for each of the nine months ended September 30, 2019 and 2018, which resulted in a deferred tax asset of approximately $0.4 million and $0.3 million, respectively. Based on both international subsidiary forecasts, carry-back allowances per foreign regulations, and known expenses, the Company does not believe at this time that the deferred tax asset will be used. As such, an allowance has been created to offset the asset.

Leases

As of September 30, 2019, the approximate future minimum lease payments are as follows for the year ending December 31:

	Operating Leases
2019 (from October 1 to December 31)	$	471
2020	1,763
2021	1,677
2022	1,727
2023	1,779
Total minimum lease payments	$	7,417

Total rent expense incurred under operating leases during the nine months ended September 30, 2019 and 2018 was $1.2 million and $0.7 million respectively.

Commitments and Contingencies

Third-party Hosting Agreements

Legal Proceedings

From time to time, the Company may be involved in litigation that it believes is of the type common to companies engaged in the Company's line of business, including commercial and employment disputes. As of September 30, 2019, the Company is not involved in any pending legal proceedings whose outcome the Company expects to have a material adverse effect on its financial position, results of operations or cash flows.

Retirement Plan

Lender Performance Group, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts and unless otherwise indicated)

Unaudited

The Company's total expense under the 401(k) Plan was approximately $0.4 million and $0.3 million during the nine months ended September 30, 2019 and 2018, respectively.

Subsequent Events

In September 2019, Q2 Software Inc. ("Q2 Software"), a wholly owned subsidiary of Q2 Holdings, Inc., and the Company entered into an Agreement and Plan of Merger pursuant to which Q2 Software agreed to acquire the Company for approximately $510 million cash consideration. On October 31, 2019, Q2 Software consummated the acquisition of the Company.

On October 31, 2019, as part of the acquisition of the Company, the notes payable were paid off in an aggregate amount of $0.7 million. In addition, the Company's $10 million revolving line of credit was cancelled on October 31, 2019 in connection with the acquisition of the Company.

The Company's management has evaluated subsequent events through January 2, 2020, the date these condensed consolidated financial statements were available for issuance.

		Exhibit

EXHIBIT 99.3

Unaudited Pro Forma Combined Financial Information

The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of the acquisition of Lender Performance Group, LLC, a Delaware limited liability company, ("PrecisionLender"), Lender Performance Group Blocker, LLC, a Delaware limited liability company ("Blocker A"), LPGB, Inc., a Delaware corporation ("Georgian Blocker"), Insight (Delaware) PL Blocker Corporation, a Delaware corporation ("Insight Blocker A"), Insight (Cayman) PL Blocker Corporation, a Delaware corporation ("Insight Blocker B" and together with Blocker A, Georgian Blocker and Insight Blocker A, each a "Blocker" and collectively the "Blockers") pursuant to the Agreement and Plan of Merger, dated September 30, 2019 (the "Merger Agreement"), by and among Q2 Software Inc., a Delaware corporation and a wholly-owned subsidiary of Q2 Holdings, Inc. ("Q2" or the "Company"), PrecisionLender, the Blockers, and the other parties thereto. Pursuant to the Agreement and Plan of Merger, the Company agreed to pay approximately $510.0 million (the "Merger Consideration") in cash upon closing for all of the outstanding equity interests of PrecisionLender and the Blockers.

The unaudited pro forma combined financial information primarily gives effect to the following adjustments:

•	Application of the acquisition method of accounting in connection with the business combination to reflect the fair value of the purchase consideration;
•	Stock compensation granted to PrecisionLender's management team in connection with the business combination;
---	---
•	Amortization of intangible assets acquired in connection with the business combination; and
---	---
•	Conforming PrecisionLender's accounting policies with the Company's through adoption of ASC 842 as of January 1, 2019.
---	---

The unaudited pro forma combined balance sheet as of September 30, 2019, and the unaudited pro forma combined statements of operations for the nine months ended September 30, 2019 and the year ended December 31, 2018 are presented herein. The unaudited pro forma combined balance sheet combines the unaudited balance sheets of the Company and PrecisionLender as of September 30, 2019, and gives effect to the PrecisionLender acquisition as if it occurred on September 30, 2019. The unaudited pro forma combined statements of operations combine the historical results of the Company and PrecisionLender for the nine months ended September 30, 2019 and the year ended December 31, 2018, and give effect to the business combination as if it occurred on January 1, 2018. The historical financial information has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the PrecisionLender acquisition, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined entity's results.

The unaudited pro forma combined financial information presented is based on the assumptions and adjustments described in the accompanying notes. The unaudited pro forma combined financial information is presented for illustrative purposes and does not purport to represent what the financial position or results of operations would actually have been if the business combination occurred as of the dates indicated or what the financial position or results would be for any future periods.

The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X. The PrecisionLender acquisition has been reflected in the unaudited pro forma combined financial information as a business combination using the acquisition method of accounting, in accordance with Accounting Standards Codification, or ASC, Topic 805, "Business Combinations," under accounting principles generally accepted in the United States ("GAAP"). Under these accounting standards, the total estimated purchase consideration was calculated as described in Note 2 to the unaudited pro forma combined financial information, and the assets acquired and the liabilities assumed have been presented at their preliminary estimated fair value at the date of acquisition. For the purpose of measuring the preliminary estimated fair value of the assets acquired and liabilities assumed, management has applied the accounting guidance under GAAP for fair value measurements, using established valuation techniques. This guidance establishes the framework for measuring fair value for any asset acquired or liability assumed under GAAP. Fair value measurements can be highly subjective and it is possible the application of reasonable judgment could develop different assumptions resulting in a range of alternative estimates using the same facts and circumstances. The purchase price allocation including the identification of tangible and intangible assets acquired and liabilities assumed, and the determination of the fair value of those assets acquired and liabilities assumed, as well as the assignment of goodwill to reporting units were not finalized as of the filing date of this Current Report on Form 8-K/A and are subject to change.

The pro forma adjustments are preliminary and are based upon available information and certain assumptions which management believes are reasonable under the circumstances and which are described in the accompanying notes herein. The

final determination of the fair value of PrecisionLender's assets and liabilities could result in amounts preliminarily allocated to goodwill and intangible assets changing materially from those used in the unaudited pro forma combined financial information and could also result in a material change in the amortization of acquired intangible assets.

The unaudited pro forma combined financial information is derived from the historical financial statements of the Company and PrecisionLender, and should be read in conjunction with (1) the accompanying notes to the unaudited pro forma combined financial information, (2) the unaudited financial statements and related footnotes included in the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019, (3) the audited financial statements and related footnotes for the fiscal year ended December 31, 2018 included in the Company's Annual Report on Form 10-K, (4) the audited financial statements for the fiscal years ended December 31, 2018 and December 31, 2017, and notes thereto of PrecisionLender, and (5) the financial statements for the nine months ended September 30, 2019 and 2018, and notes thereto of PrecisionLender, which are included as exhibits to this Current Report on Form 8-K/A.

The unaudited pro forma adjustments are not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been completed as of the dates indicated or that may be achieved in the future. The actual results reported by the combined company in periods following the acquisition may differ significantly from those that are reflected in the unaudited pro forma condensed combined financial information due to many factors, including the effects of applying final purchase accounting and the incremental costs incurred to integrate the two companies. The unaudited pro forma condensed combined financial information does not reflect any cost savings, or associated costs to achieve such savings, from operating efficiencies, synergies, or other restructuring that may result from the acquisition.

Q2 HOLDINGS, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

(in thousands, except per share data)		Historical
	As of September 30, 2019
	Q2			PrecisionLender			Pro Forma Adjustments (Note 3)				Pro Forma Combined
Assets
Current assets:
Cash and cash equivalents	$	601,156		$	12,422		$	(518,437	)	(a)	$	95,141
Restricted cash	2,152			—			—				2,152
Investments	35,696			—			—				35,696
Accounts receivable, net	24,349			4,421			—				28,770
Contract assets, current portion	826			—			—				826
Prepaid expenses and other current assets	6,114			1,312			—				7,426
Deferred solution and other costs, current portion	13,902			—			—				13,902
Deferred implementation costs, current portion	4,638			—			—				4,638
Total current assets	688,833			18,155			(518,437		)		188,551
Property and equipment, net	39,917			1,580			—				41,497
Right of use assets	29,159			—			8,282			(f)	37,441
Deferred solution and other costs, net of current portion	25,384			—			—				25,384
Deferred implementation costs, net of current portion	14,884			—			—				14,884
Intangible assets, net	54,167			68			216,830			(b)	271,065
Goodwill	107,857			—			315,086			(c)	422,943
Contract assets, net of current portion	13,981			—			—				13,981
Other long-term assets	3,502			259			—				3,761
Total assets	$	977,684		$	20,062		$	21,761			$	1,019,507
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	8,612		$	483		$	—			$	9,095
Accrued liabilities	12,358			5,169			(1,022		)	(f)	16,505
Accrued compensation	35,689			—			—				35,689
Current portion of notes payable	—			403			(403		)	(d)	—
Deferred revenues, current portion	52,047			11,900			(3,741		)	(e)	60,206
Lease liabilities, current portion	7,472			—			1,977			(f)	9,449
Total current liabilities	116,178			17,955			(3,189		)		130,944
Convertible notes, net of current portion	419,326			—			—				419,326
Deferred revenues, net of current portion	25,391			8,853			(2,784		)	(e)	31,460
Notes payable, net of current portion	—			263			(263		)	(d)	—
Lease liabilities, net of current portion	30,309			—			7,327			(f)	37,636
Other long-term liabilities	4,639			—			1,349			(g)	5,988
Total liabilities	595,843			27,071			2,440				625,354
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock: $0.0001 par value; 150,000 shares authorized; 48,110 issued and outstanding as of September 30, 2019 and 43,535 shares issued and outstanding as of December 31, 2018	5			—			—				5
Members' deficit	—			(7,009		)	7,009			(h)	—
Additional paid-in capital	609,327			—			—				609,327
Accumulated other comprehensive loss	142			—			—				142
Accumulated deficit	(227,633		)	—			12,312			(h)	(215,321		)
Total stockholders' equity	381,841			(7,009		)	19,321				394,153
Total liabilities and stockholders' equity	$	977,684		$	20,062		$	21,761			$	1,019,507

See accompanying Notes to unaudited pro forma combined financial information

Q2 HOLDINGS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(in thousands, except per share data)

	Historical
	Year ended December 31,
	2018			2018
	Q2			PrecisionLender			Pro Forma Adjustments (Note 4)				Pro Forma Combined
Revenues	$	241,100		$	16,969		$	(2,955	)	(a)	$	255,114
Cost of revenues	121,855			4,627			22,812			(b), (c), (e)	149,294
Gross profit	119,245			12,342			(25,767		)		105,820
Operating expenses:
Sales and marketing	48,124			4,785			282			(c), (e)	53,191
Research and development	51,334			—			8,206			(c), (e)	59,540
General and administrative	44,990			—			9,051			(c), (e)	54,041
Software and client support	—			13,999			(13,999		)	(e)	—
Operations, general and administrative	—			6,712			(6,712		)	(e)	—
Depreciation and amortization expense	—			206			(206		)	(e)	—
Acquisition related costs	4,145			—			—				4,145
Amortization of acquired intangibles	1,844			—			14,892			(b)	16,736
Unoccupied lease charges	658			—			—				658
Total operating expenses	151,095			25,702			11,514				188,311
Loss from operations	(31,850		)	(13,360		)	(37,281		)		(82,491		)
Other income (expense):
Interest and other income	2,811			—			—				2,811
Interest and other expense	(10,161		)	(718		)	71			(f)	(10,808		)
Total other income (expense), net	(7,350		)	(718		)	71				(7,997		)
Loss before income taxes	(39,200		)	(14,078		)	(37,210		)		(90,488		)
Benefit from (provision for) income taxes	3,803			—			(771		)	(g)	3,032
Net loss	$	(35,397	)	$	(14,078	)	$	(37,981	)		$	(87,456	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments	24			—			—				24
Foreign currency translation adjustment	78			164			—				242
Comprehensive loss	$	(35,295	)	$	(13,914	)	$	(37,981	)		$	(87,190	)
Net loss per common share, basic and diluted	$	(0.83	)								$	(2.04	)
Weighted average common shares outstanding:
Basic and diluted	42,797										42,797

See accompanying Notes to unaudited pro forma combined financial information

Q2 HOLDINGS, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(in thousands, except per share data)

	Historical
	Nine Months Ended September 30,
	2019			2019
	Q2			PrecisionLender			Pro Forma Adjustments (Note 4)				Pro Forma Combined
Revenues	$	228,644		$	16,487		$	(4,070	)	(a)	$	241,061
Cost of revenues	117,683			4,402			21,516			(b), (c), (e), (h)	143,601
Gross profit	110,961			12,085			(25,586		)		97,460
Operating expenses:
Sales and marketing	47,371			4,130			588			(c), (e), (h)	52,089
Research and development	56,392			—			7,854			(c), (e), (h)	64,246
General and administrative	41,357			—			8,442			(c), (e), (h)	49,799
Software and client support	—			12,953			(12,953		)	(e)	—
Operations, general and administrative	—			6,629			(6,629		)	(e)	—
Depreciation and amortization expenses	—			296			(296		)	(e)	—
Acquisition related costs	7,453			—			(4,598		)	(d)	2,855
Amortization of acquired intangibles	3,032			—			11,169			(b)	14,201
Unoccupied lease charges	244			—			—				244
Total operating expenses	155,849			24,008			3,577				183,434
Loss from operations	(44,888		)	(11,923		)	(29,163		)		(85,974		)
Other income (expense):
Interest and other income	2,978			—			—				2,978
Interest and other expense	(13,608		)	(418		)	29			(f)	(13,997		)
Total other income (expense), net	(10,630		)	(418		)	29				(11,019		)
Loss before income taxes	(55,518		)	(12,341		)	(29,134		)		(96,993		)
Benefit from (provision for) income taxes	307			—			(578		)	(g)	(271		)
Net loss	$	(55,211	)	$	(12,341	)	$	(29,712	)		$	(97,264	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments	247			—			—				247
Foreign currency translation adjustment	(68		)	(129		)	—				(197		)
Comprehensive loss	$	(55,032	)	$	(12,470	)	$	(29,712	)		$	(97,214	)
Net loss per common share, basic and diluted	$	(1.21	)								$	(2.14	)
Weighted average common shares outstanding:
Basic and diluted	45,519										45,519

See accompanying Notes to unaudited pro forma combined financial information

Note 1 - Basis of Pro Forma Presentation

The historical consolidated financial statements have been adjusted to give effect to pro forma events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma adjustments are preliminary and based on estimates of the fair values and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the merger. The final determination of the purchase price allocation will be based on the final valuation of the fair values of assets acquired and liabilities assumed.

The unaudited pro forma condensed combined financial information included herein was derived from the Company's and PrecisionLender's historical consolidated financial statements, which were both prepared in accordance with U.S. GAAP. In order to conform the PrecisionLender historical consolidated financial statements to our financial statement presentation, the Company has reclassified certain line items within the PrecisionLender historical consolidated financial statements. Reclassifications mainly relate to conforming the names of the financial statement line items from PrecisionLender's to the Company's presentation.

The unaudited pro forma condensed combined financial information has been prepared using the Company's significant accounting policies as set forth in the audited consolidated financial statements for the fiscal year ended December 31, 2018, as updated in the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019. Based on the procedures performed to date, the accounting policies of PrecisionLender are similar in most material respects to the Company's accounting policies. PrecisionLender adopted ASC Topic 606, "Revenue from Contracts with Customers" and Subtopic 340-40, "Other Assets and Deferred Costs - Contracts with Customers," as of January 1, 2018, the same date as the Company's adoption of these standards, and accordingly no pro forma adjustments were required to conform PrecisionLender's accounting policies with the Company's. The primary impacts of adopting Topic 606 relate to the adjustment for the transaction price in PrecisionLender's contracts when a significant financing component exists. Previously, PrecionLender deferred only the purchase price including discounts of a contract and recognized those amounts over the contract term, generally ranging from one to five years, as the revenue was recognized. Under the new standard, when the payment is received greater than one year in advance, the revenue recognized exceeds the cash received and an interest expense will be recorded to reflect the increased revenue.

PrecisionLender had not adopted ASU 2016-02, "Leases (Topic 842)" whereas such standard was adopted by the Company as of January 1, 2019, and accordingly pro forma adjustments were required to conform PrecisionLender's accounting policies with the Company's. The primary impacts of adopting Topic 842 relate to the consolidated balance sheets as most of the operating lease commitments will be subject to the standard and recognized as right-of-use assets and corresponding operating lease liabilities upon the adoption of Topic 842, which will increase the total assets and total liabilities that the Company reports relative to such amounts prior to adoption.

As more information becomes available, the Company will complete a more detailed review of PrecisionLender's accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements.

Note 2 — Preliminary Purchase Consideration and Purchase Price Allocation

The total preliminary purchase price is as follows (in thousands):

	Preliminary Purchase Consideration
Estimated cash purchase price	$	510,000
Estimated working capital and other adjustments	8,437
Total preliminary purchase price	$	518,437

At closing, the Company deposited into an escrow account approximately $4.8 million of the initial consideration, or Escrow Amount, to secure certain post-closing indemnification obligations in the Merger Agreement during a period of 18 months following the acquisition date. To the extent not utilized, the Escrow Amount shall be paid to the former shareholders of PrecisionLender at the end of the 18 month period unless there are any unresolved claims remaining at that time.

For the purpose of preparing the accompanying unaudited pro forma combined consolidated balance sheet as of September 30, 2019, the preliminary estimate of the purchase price allocation to the acquired assets and liabilities is as follows (in thousands):

Tangible assets acquired:
Net working capital, excluding deferred revenue	$	261
Property and equipment, net	1,580
Total tangible assets acquired	1,841
Other assets (liabilities):
Other assets	259
Deferred revenue	(14,230		)
Deferred tax liability	(1,349		)
Total other assets (liabilities)	(15,320		)
Intangible assets	216,830
Net assets acquired, excluding goodwill	203,351
Estimated goodwill	315,086
Total preliminary purchase consideration	$	518,437

The goodwill recognized is attributable primarily to synergies expected from the integration of the acquired product offering into the Company's integrated solutions, the expanded service capabilities that are expected to become available from planned investments in the acquired products, and the value of the assembled work force in accordance with generally accepted accounting principles.

The acquisition resulted in the identification of intangible assets, including customer relationships, non-compete agreements, trademarks, and acquired technology. The fair value of the intangible assets was based on the income approach using various methods such as with and without, relief from royalty, and multi-period excess earnings. Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from five to ten years.

Note 3 — Unaudited Pro Forma Combined Consolidated Balance Sheet Adjustments

Purchase Accounting Pro Forma Adjustments:

a)	Reflects the cash portion of the purchase price paid.
b)	Reflects the adjustments to record the preliminary estimate of fair value of PrecisionLender's amortizable intangible assets acquired. Refer to Note 2 for the intangible assets recognized and the associated useful lives.
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c)	Reflects the preliminary estimate of goodwill which represents excess of purchase price consideration over the estimated fair value of the net tangible and amortizable intangible assets acquired.
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d)	Reflects debt repaid on behalf of PrecisionLender that includes settlement of the outstanding notes payable balance, of which $0.4 million was classified as short-term debt and $0.3 million was classified as long-term debt.
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e)	Reflects the adjustment to record the fair value of PrecisionLender's deferred revenue based upon the value the Company would offer a third party to assume the liability.
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f)	Reflects the adjustments to record right-of-use assets and corresponding lease liabilities to conform PrecisionLender's accounting policies with the Company's adoption of Topic 842. Adoption of the new standard resulted in the recording of lease assets and lease liabilities of approximately $6.9 million and $7.1 million, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities is the reclassification of deferred rent on the PrecisionLender balance sheet at the date of adoption.
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g)	Reflects the adjustment to record a deferred tax liability associated with the amortization of tax deductible goodwill. The Company anticipates recording a $19.8 million deferred tax liability related to the recording of intangible assets and deferred revenue associated with the acquisition of PrecisionLender. Because PrecisionLender will be included in the Company's consolidated tax return following the acquisition, the Company has determined that the deferred tax liabilities related to the acquisition provide sufficient taxable income to realize an equal amount of the Company's deferred tax assets resulting in a reduction in the valuation allowance and no net increase to the Company's deferred tax liabilities beyond the amount related to amortization of tax deductible goodwill. However, the reduction in the Company's valuation allowance is not reflected in the pro forma statement of operations because it will not have a continuing impact. The
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adjustment is an estimate, preliminary and subject to change once the 2019 annual tax provision is completed.

h)	Reflects adjustments to eliminate PrecisionLender's historical members' deficit, which represent the historical book value of PrecisionLender's net assets, as a result of application of purchase accounting.

Note 4 — Unaudited Pro Forma Combined Consolidated Statements of Operations Adjustments

Purchase Accounting Pro Forma Adjustments:

a)	Reflects a reduction in revenue of $3.0 million and $4.1 million related to the estimated fair value of the acquired deferred revenue during the fiscal year ended December 31, 2018, and the nine months ended September 30, 2019, respectively.

b) Reflects an adjustment for the year ended December 31, 2018 and the nine months ended September 30, 2019, for amortization expense related to the fair value of identified intangible assets with definite lives. Amortization of the intangible assets has been included in the historic results starting on the acquisition date. Since the pro forma results of operations require the transaction to be reflected as if it occurred on January 1, 2018, a pro forma adjustment has been recorded to account for the incremental amortization. The intangible assets are amortized on a straight-line basis over the useful lives of the assets. The preliminary amount of amortization expense included in cost of revenues in the pro forma condensed consolidated statement of comprehensive loss was $15.4 million for the year ended December 31, 2018 and $11.6 million for the nine months ended September 30, 2019. The preliminary amount of amortization expense included in operating expenses in the pro forma condensed consolidated statement of comprehensive loss was $14.9 million for the year ended December 31, 2018 and $11.2 million for the nine months ended September 30, 2019.

c) Reflects an adjustment to record total stock compensation charges, related to restricted stock units granted by the Company to PrecisionLender employees and officers, of $1.5 million and $1.1 million, for the year ended December 31, 2018 and the nine months ended September 30, 2019, respectively, for awards granted to PrecisionLender employees subject to future service requirements subsequent to the closing. The compensation expense is expected to be recorded as follows within the respective expense lines:

	Year ended December 31, 2018
	Cost of revenues			Sales and marketing			Research and development			General and administrative
Reversal of PrecisionLender's historical stock-based compensation expense	$	(68	)	$	(83	)	$	(164	)	$	(68	)
Post-combination stock-based compensation expense	262			321			631			262
Net stock-based compensation expense adjustment	$	194		$	238		$	467		$	194		Nine months ended September 30, 2019
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	Cost of revenues			Sales and marketing			Research and development			General and administrative
Reversal of PrecisionLender's historical stock-based compensation expense	$	(74	)	$	(66	)	$	(187	)	$	(63	)
Post-combination stock-based compensation expense	210			187			531			180
Net stock-based compensation expense adjustment	$	136		$	121		$	344		$	117

d) Reflects an adjustment to remove the impact of transaction expenses for the nine months ended September 30, 2019, incurred related to the PrecisionLender acquisition.

e)	Reflects reallocation of PrecisionLender's financial statement classification to the Company's.
f)	Reflects the elimination of less than $0.1 million of historical interest expense for each of the years ended December 31, 2018 and the nine months ended September 30, 2019 associated with PrecisionLender's debt repaid by the Company in connection with the acquisition.
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g)	Reflects an adjustment to record an increase in deferred tax liability associated with amortization of acquired tax deductible goodwill that is not treated as a source of future taxable income to support the realizability of the Company's gross deferred tax assets. The adjustment is an estimate, preliminary and subject to change once the 2019 annual tax provision is completed.
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h)	Reflects the amortization and interest expense related to the right-of-use assets and corresponding lease liabilities to conform PrecisionLender's accounting policies with the Company's adoption of Topic 842.
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