ALKAMI TECHNOLOGY, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus (the “Prospectus”) for the Initial Public Offering (“IPO”) of our common stock, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”). Unless the context otherwise requires, all references in this report to the “Company,” “Alkami,” “we,” “us” and “our” refer to Alkami Technology, Inc., a Delaware corporation, and its consolidated subsidiary taken as a whole. Cautionary Note Regarding Forward-Looking Statements Any statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast” and other similar expressions. We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. Forward-looking statements are not guarantees of future performance or results and are subject to and involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. The following important factors, along with the factors discussed in “Risk Factors” in the Prospectus, may materially affect such forward-looking statements: • Our limited operating history and history of operating losses; • Our ability to manage future growth; • Our ability to attract new clients and expand existing clients’ use of our solutions; • Our ability to maintain, protect and enhance our brand; • Our ability to accurately predict the long-term rate of client subscription renewals or adoption of our solutions; • Our reliance on third-party software, content and services; • Our ability to effectively integrate our solutions with other systems used by our clients; • Intense competition in our industry; • Any downturn, consolidation or decrease in technology spend in the financial services industry; • Our ability and the ability of third parties on which we rely to prevent and identify breaches of security measures and resulting disruptions of our systems or operations and unauthorized access to client customer and other data; • Our ability to comply with regulatory and legal requirements and developments; • Our ability to attract and retain key employees; • The political, economic and competitive conditions in the markets and jurisdictions where we operate, including the impact of the COVID-19 pandemic and the various governmental, industry and consumer actions related thereto; • Our ability to maintain, develop and protect our intellectual property; • Our ability to respond to evolving technological requirements to develop or acquire new and enhanced products that achieve market acceptance in a timely manner; and • Our ability to estimate our expenses, future revenues, capital requirements and needs for additional financing and our ability to obtain additional capital. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Overview Alkami is a cloud-based digital banking solutions provider. We inspire and empower community, regional and super-regional financial institutions (“FIs”) to compete with large, technologically advanced and well-resourced banks in the United States. Our solution, the Alkami Platform, allows FIs to onboard and engage new users, accelerate revenues and meaningfully improve operational efficiency, all with the support of a proprietary, true cloud-based, multi-tenant architecture. We cultivate deep relationships with our clients through long-term, subscription-based contractual arrangements, aligning our growth with our clients’ success and generating an attractive unit economic model. Alkami was founded to help level the playing field for FIs. Since then, our vision has been to create a platform that combines premium technology and fintech solutions in one integrated ecosystem, delivered as a software-as-a-service (“SaaS”) solution and providing our clients’ customers with a single point of access to all things digital. We have invested significant resources to build a technology stack that prioritized innovation velocity and speed-to-market given the importance of product depth and functionality in winning and retaining clients. In fiscal 2020, we acquired ACH Alert, LLC (“ACH Alert”) to pursue adjacent product opportunities, such as fraud prevention and to expand our addressable market. 18 Table of Contents Our domain expertise in retail and business banking has enabled us to develop a suite of products tailored to address key challenges faced by FIs. Due to our architecture, adding products through our single code base is fast, simple and cost-effective. The key differentiators of the Alkami Platform include: • User experience : Personalized and seamless digital experience across user interaction points, including mobile, chat and SMS, establishing durable connections between FIs and their customers. • Integrations : Scalability and extensibility driven by 220 real-time integrations to back office systems and third-party fintech solutions as of March 31, 2021 , including core systems, payment cards, mortgages, bill pay, electronic documents, money movement, personal financial management and account opening. • Deep data capabilities : Data synchronized and stored from back office systems and third-party fintech solutions and synthesized into meaningful insights, targeted content and other areas of monetization. The Alkami Platform offers an end-to-end set of software products. Our typical relationship with an FI begins with a set of core functional components, which can extend over time to include a rounded suite of products across account opening, card experience, client service, extensibility, financial wellness, security and fraud protection, marketing and analytics and money movement. We go to market through an internal sales force. Given the long-term nature of our contracts, a typical sales cycle can range from approximately three to 12 months, with the subsequent implementation timeframe generally ranging from six to 12 months depending on the depth of integration. We derive our revenues almost entirely from multi-year contracts that had an average contract life of approximately 70 months as of March 31, 2021. We predominantly employ a per-registered-user pricing model, with incremental fees above certain contractual minimum commitments for each licensed solution. Our pricing is tiered, with per-registered-user discounts applied as clients achieve higher levels of customer penetration, incentivizing our clients to internally market and promote digital engagement. To support our growth and capitalize on our market opportunity, we have increased our operating expenses across all aspects of our business. In research and development, we continue to focus on innovation and bringing novel capabilities to our platform, extending our product depth. Similarly, we continue to expand our sales and marketing organization focusing on new client wins, cross-selling opportunities and client renewals. For the three months ended March 31, 2021 and 2020, our total revenues were $33.3 million and $23.2 million, respectively, representing a 43.3% increase. SaaS subscription revenues, as further described below, represented 94.9% and 92.7% of total revenues for the three months ended March 31, 2021 and 2020, respectively. We incurred net losses of $10.9 million and $10.3 million for the three months ended March 31, 2021 and 2020, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities. Recent Development Initial Public Offering. On April 13, 2021, the Company's registration statement relating to the IPO of its common stock was declared effective by the SEC. In connection with the IPO, the Company issued and sold 6,900,000 shares of common stock (including 900,000 shares issued pursuant to the exercise in full of the underwriters' option to purchase additional shares) at a public offering price of $30.00 per share for net proceeds of $192.8 million, after deducting underwriters' discounts and commissions (excluding other IPO costs as of April 13, 2021). Factors Affecting our Operating Results Growing our FI Client Base. A key part of our strategy is to grow our FI client base. As of March 31, 2021, we served 156 FIs through the Alkami Platform and an additional 87 clients through the ACH Alert suite of solutions, representing 88.4% annual client growth since March 31, 2020. Each of our new client wins is a competitive takeaway, and as such, our historical ability to grow our client base has been a function of product depth, technological excellence and a sales and marketing function able to match our solutions with the strategic objectives of our clients. Our future success will significantly depend on our ability to continue to grow our FI client base through competitive wins. Deepening Client Customer Penetration. We primarily generate revenues through a per-registered-user pricing model. Once we onboard a client, our ability to help drive incremental client customer digital adoption translates to additional revenues with very limited additional spend. Our FI clients are incentivized to market and encourage digital account sign-up based on identifiable improvement in customer engagement as well as discounts received based on certain levels of customer penetration. We expect to continue to support digital adoption by client customers through continued investments in new products and platform enhancements. Our future success will depend on our ability to continue to deepen client customer penetration. Expanding our Product Suite. Product depth is a key determinant in winning new clients. In a replacement market, we win based on our ability to bring a product suite to market that is superior to the incumbent, as well as to our broader competition. Of equal importance is the ability to cohesively deliver a deep product suite with as little friction as possible to the client customer. The depth of our product suite is a function of technology and platform partnerships. Our platform model with 220 integrations as of March 31, 2021 enables us to deliver thousands of configurations aligned with the digital platform strategies adopted by our clients. We expect our future success in winning new clients to be partially driven by our ability to continue to develop and deliver new, innovative products to FI clients in a timely manner. Furthermore, expanding our product suite expands our RPU potential. For additional information regarding RPU, see “Key Business Metrics.” 19 Table of Contents Client Renewals. Our model and the stability of our revenue base is, in part, driven by our ability to renew our clients. In addition to extending existing relationships, renewals provide an opportunity to grow minimum contract value, as over the course of a contract term our clients often grow or their needs evolve. Client renewals are also an important lever in driving our long-term gross margin targets, as we generally achieve approximately 70% gross margin upon renewal. We had two client renewals in the three months ended March 31, 2021. We expect client renewals to continue to play a key role in our future success. Continued Leadership in Innovation. Our ability to maintain a differentiated platform and offering is dependent upon our pace of innovation. In particular, our single code base, built on a multi-tenant infrastructure and combined with continuous software delivery enables us to bring new, innovative products to market quickly and positions us with what we believe is market-leading breadth in terms of product offerings and feature set. We remain committed to investing in our platform, notably through our research and development spend, which was 32.8% of our revenues for the three months ended March 31, 2021. Our future success will depend on our continued leadership in innovation. COVID-19 Impact. The temporary closures of many businesses, shelter in place orders, travel restrictions, social distancing guidelines and other governmental, business and individual actions taken or restrictions implemented in response to the COVID-19 pandemic have impacted our business. We transitioned our employee base to work-from-home in March 2020, creating challenges in executing sales and implementations that have resurfaced due to the renewal of certain actions and restrictions in response to the COVID-19 pandemic and which may be exacerbated if such actions or restrictions are prolonged. In terms of demand, while general economic headwinds have adversely impacted the technology budgets of certain clients, we believe actions and restrictions in response to the COVID-19 pandemic have served to highlight the criticality of our products, which we expect to drive increased demand over time. The full extent to which the ongoing COVID-19 pandemic affects our financial performance will depend on future developments, many of which are outside of our control, are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. The COVID-19 pandemic could also result in additional governmental restrictions and regulations, which could adversely affect our business and financial results. In addition, a recession, depression or other sustained adverse market impact resulting from the COVID-19 pandemic could materially and adversely affect our business and our access to needed capital and liquidity. Even after the COVID-19 pandemic has lessened or subsided, we may continue to experience adverse impacts on our business and financial performance as a result of its global economic impact. Components of Results of Operations Revenues Our client relationships are primarily based on multi-year contracts that have an average contract life of 70 months as of March 31, 2021. We derive the majority of our revenues from SaaS subscription services charged for the use of our digital banking solution. For each client, we invoice monthly a contractual minimum fee for each licensed solution. In addition, we invoice monthly an additional subscription fee for the number of registered users using each solution and the number of bill-pay and certain other transactions those registered users conduct through our digital banking platform in excess of their contractual minimum commitments. Our pricing is tiered, with per-registered-user discounts applied as clients achieve higher levels of customer penetration, incentivizing our clients to internally market our products and promote digital engagement. Variable consideration earned for subscription fees in excess of contractual minimums is recognized as revenues in the month of actual usage. SaaS subscription services also include annual and monthly charges for maintenance and support services which are recognized on a straight-line basis over the contract term. We receive implementation and other upfront fees for the implementation, configuration and integration of our digital banking platform. We typically invoice these services as a fixed price per contract. These fees are not distinct from the underlying licensed SaaS subscription services. As a result, we recognize the resulting revenues on a straight-line basis over the client’s initial agreement term for its licensed SaaS solutions, commencing upon launch. Occasionally, our clients request custom development and other professional services, which we provide. These are generally one-time in nature and involve unique, non-standard features, functions or integrations that are intended to enhance or modify their licensed SaaS solutions. We recognize revenues at the point in time the services are transferred to the client. The following disaggregates our revenues for the three months ended March 31, 2021 and 2020 by major source. Three months ended March 31, 2021 2020 (In thousands) SaaS subscription services $ 31,569 $ 21,514 Implementation services $ 1,300 $ 1,277 Other services $ 393 $ 419 Total revenues $ 33,262 $ 23,210 See Note 5 to our Condensed Consolidated Financial Statements for disaggregation of our revenues by major source. 20 Table of Contents Cost of Revenues and Gross Margin Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses, stock-based compensation, travel and related costs for employees supporting our SaaS subscription, implementation and other services. This includes the costs of our implementation, client support and client success teams, development personnel responsible for maintaining and releasing updates to our platform, as well as third-party cloud-based hosting services. Cost of revenues also includes the direct costs of bill-pay and other third-party intellectual property included in our solutions, the amortization of acquired technology and depreciation. We capitalize certain personnel costs directly related to the implementation of our solutions to the extent those costs are recoverable from future revenues. We amortize the costs for an implementation once revenue recognition commences. The amortization period is typically five to seven years which represents the expected period of client benefit. Other costs not directly recoverable from future revenues are expensed in the period incurred. We intend to continue to increase our investments in our implementation, client support and client success teams and technology infrastructure to serve our clients and support our growth. We expect cost of revenues to continue to grow in absolute dollars as we grow our business but to vary as a percentage of revenues from period to period as a function of the utilization of implementation and support personnel and the extent to which we recognize fees from bill-pay services and other third-party functionality integrated into our solutions. Our gross margin for the three months ended March 31, 2021 and 2020 was 53.4% and 48.7%, respectively. The major components of cost of revenues represented the following percentages of revenues for the three months ended March 31, 2021: third-party hosting services (10.3%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (16.2%), our implementation team (9.5%), our client success team (5.9%), our development team responsible for maintaining and releasing updates to our platform (4.3%) and amortization of intangibles (0.4%). The major components of cost of revenues represented the following percentages of revenues for the three months ended March 31, 2020: third-party hosting services (9.5%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (16.3%), our implementation team (12.1%), our client success team (7.4%) and our development team responsible for maintaining and releasing updates to our platform (6.0%). Operating Expenses Research and Development. Research and development costs consist primarily of personnel-related costs for our engineering, information technology and product, including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation. In addition, we also include third-party contractor expenses, software development and testing tools, allocated corporate expenses, and other expenses related to developing new solutions and upgrading and enhancing existing solutions. We expect research and development costs to increase as we expand our platform with new features and functionality as well as enhance the existing Alkami Platform. Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs of our sales, marketing and a portion of account management employees, including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation. Sales and marketing expenses also include travel and related costs, outside consulting fees and marketing programs, including lead generation, costs of our annual client conference, advertising, trade shows, other event expenses and amortization of acquired client relationships. We expect sales and marketing expenses will continue to increase as we expand our direct sales teams to pursue our market opportunity. General and Administrative. General and administrative expenses consist primarily of personnel-related costs for our general and administrative teams including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation associated with our executive, finance, legal, human resources, information technology, security and compliance as well as other administrative personnel. General and administrative expenses also include accounting, auditing and legal professional services fees, travel and other unallocated corporate-related expenses such as the cost of our facilities, employee relations, corporate telecommunication and software. We expect that general and administrative expenses will continue to increase as we scale our business and as we incur costs associated with being a publicly traded company, including legal, audit, business insurance and consulting fees. Non-operating Income (Expense) Non-operating income (expense) consists primarily of interest income from our cash balances, interest expense from borrowings under our revolving line of credit, amortization of deferred debt costs and changes in fair value of warrant and tranche rights. Provision for Income Taxes Our effective tax rate differs from the statutory tax rate primarily due to the impact of the full valuation allowance against our deferred tax assets. 21 Table of Contents Results of Operations The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this filing. The following table presents our selected condensed consolidated statement of operations data for the three months ended March 31, 2021 and 2020. Three months ended March 31, 2021 2020 ($ In thousands, except share and per share amounts) Revenues $ 33,262 $ 23,210 Cost of revenues (1) 15,497 11,902 Gross profit 17,765 11,308 Operating expenses (1) : Research and development 10,913 9,689 Sales and marketing 5,406 4,640 General and administrative 10,385 7,158 Total operating expenses 26,704 21,487 Loss from operations (8,939) (10,179) Non-operating income (expense): Interest income 14 29 Interest expense (310) (104) Loss on financial instruments (1,644) (1) Loss before income taxes (10,879) (10,255) Provision for income taxes — — Net loss $ (10,879) $ (10,255) (1) Includes stock-based compensation expenses as follows: Three months ended March 31, 2021 2020 ($ in thousands) Cost of revenues $ 233 $ 92 Research and development 299 105 Sales and marketing 103 33 General and administrative 783 229 Total stock-based compensation expenses $ 1,418 $ 459 22 Table of Contents The following table presents our reconciliation of GAAP net loss to adjusted EBITDA for the periods indicated. Three months ended March 31, 2021 2020 ($ in thousands) Net loss $ (10,879) $ (10,255) Provision for income taxes — — Loss on financial instruments 1,644 1 Interest expense, net 296 75 Amortization of intangible assets 209 — Depreciation 577 652 Stock-based compensation expense 1,418 459 Acquisition-related expenses (1) 638 — Adjusted EBITDA (2) $ (6,097) $ (9,068) (1) Acquisition-related expenses are associated with the accrual of deferred compensation due to the former owner of the acquired business ACH Alert. (2) Adjusted EBITDA is a non-GAAP financial measure and should not be considered an alternative to GAAP net loss as a measure of operating performance or as a measure of liquidity. For additional information regarding adjusted EBITDA, see “Key Business Metrics.” Key Business Metrics Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure and should not be considered an alternative to GAAP net loss as a measure of operating performance or as a measure of liquidity. We define adjusted EBITDA as net loss before provision for income taxes; (gain) loss on financial instruments; interest (income) expense, net; amortization of intangible assets; depreciation; stock-based compensation expense; tender offer-related costs; and acquisition-related costs. We believe adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $(6.1) million for the three months ended March 31, 2021, and $(9.1) million for the three months ended March 31, 2020. For additional information regarding adjusted EBITDA, including the reconciliation to net loss, the most directly comparable GAAP financial measure, see “Results of Operations.” Annual Recurring Revenue (ARR). We calculate ARR by aggregating annualized recurring revenue related to SaaS subscription services recognized in the last month of the reporting period as well as the next 12 months of expected implementation services revenues for all clients on the platform in the last month of the reporting period. We believe ARR provides important information about our future revenue potential, our ability to acquire new clients, and our ability to maintain and expand our relationship with existing clients. ARR was $133.8 million as of March 31, 2021 and $95.9 million as of March 31, 2020, an increase of 39.5%. Registered Users. We define a registered user as an individual or business related to an account holder of an FI client on our digital banking platform who has registered to use one or more of our solutions and has current access to use those solutions as of the last day of the reporting period presented. We price our digital banking platform based on the number of registered users, so as the number of registered users of our digital banking platform increases, our ARR grows. We believe growth in the number of registered users provides important information about our ability to expand market adoption of our digital banking platform and its associated software products, and therefore to grow revenues over time. We had 10.0 million registered users as of March 31, 2021 and 7.8 million as of March 31, 2020, an increase of 27.8%. Revenue per Registered User (RPU). We calculate RPU by dividing ARR as of the last day of the reporting period by the number of registered users as of the last day of the reporting period. We believe RPU provides important information about our ability to grow the number of software products adopted by new clients over time, as well as our ability to expand the number of software products that our existing clients add to their contracts with us over time. RPU was $13.40 as of March 31, 2021 and $12.27 as of March 31, 2020, an increase of 9.2%. 23 Table of Contents Comparison of Three months ended March 31, 2021 and 2020 Revenues Three months ended March 31, Change 2021 2020 $ % ($ in thousands) Revenues $ 33,262 $ 23,210 $ 10,052 43.3 % Annual recurring revenue (ARR) $ 133,807 $ 95,944 $ 37,863 39.5 % Registered users 9,989 7,817 2,172 27.8 % Revenue per registered user (RPU) $ 13.40 $ 12.27 $ 1.13 9.2 % Revenues increased $10.1 million, or 43.3%, for the three months ended March 31, 2021 compared to the same period in 2020. The increase in revenues primarily was due to registered user growth of 2.2 million, primarily driven by 1.2 million in registered user growth from existing clients (net of attrition) and 1.0 million in registered users from new client wins. In addition, increased revenues were due to RPU growth of 9.2%. RPU growth primarily was driven by cross-sell activity to existing clients and new client average RPU of $18.00 for the 12 months ended March 31, 2021, which is 34.4% higher than the aggregate RPU. An additional contributing factor to the increase in revenues is the acquisition of ACH Alert completed on October 4, 2020, which contributed $1.1 million in the three months ended March 31, 2021. Cost of Revenues and Gross Margin Three months ended March 31, Change 2021 2020 $ % ($ in thousands) Cost of revenues $ 15,497 $ 11,902 $ 3,595 30.2 % Percentage of revenues 46.6 % 51.3 % (4.7) % (9.2) % Cost of Revenues Cost of revenues increased $3.6 million, or 30.2%, for the three months ended March 31, 2021 compared to the same period in 2020, generating a gross margin of 53.4% for the three months ended March 31, 2021 compared to a gross margin of 48.7% for the same period in 2020. The increase in cost of revenues primarily was driven by a $0.9 million increase in personnel-related costs (which includes stock-based compensation) resulting from headcount increases supporting our growth in the following teams: site reliability engineering, client implementation and client support, $1.5 million in higher third-party costs and $1.3 million in incremental hosting costs, both incurred from an increase in revenues derived from existing and new client growth. We expect the cost of revenues will continue to increase as SaaS subscription services and the associated implementation services increase over time. However, we expect gross margin to continue to improve due to operational scaling. Operating Expenses Three months ended March 31, Change 2021 2020 $ % ($ in thousands) Research and development $ 10,913 $ 9,689 $ 1,224 12.6 % Sales and marketing 5,406 4,640 766 16.5 % General and administrative 10,385 7,158 3,227 45.1 % Total operating expenses $ 26,704 $ 21,487 $ 5,217 24.3 % Percentage of revenues 80.3 % 92.6 % Research and Development Research and development expenses increased $1.2 million, or 12.6%, for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $1.4 million increase in personnel-related costs (which includes stock-based compensation) resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation. This was offset by a $0.2 million decrease in other miscellaneous costs. Sales and Marketing Sales and marketing expenses increased $0.8 million, or 16.5%, for the three months ended March 31, 2021 compared to the same period in 24 Table of Contents 2020, primarily due to a $1.1 million increase in personnel-related costs (which includes stock-based compensation) resulting from headcount growth in our sales and marketing teams and higher new sales productivity as well as higher customer success engagement costs. In addition, we incurred $0.1 million in higher consulting costs. These costs were partially offset by $0.2 million in lower travel costs for the sales team as well as $0.3 million in lower costs related to industry conferences and trade shows, all primarily due to the work-from-home business environment during the COVID-19 pandemic. General and Administrative General and administrative expenses increased $3.2 million, or 45.1%, for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $2.1 million increase in personnel-related and other costs (which includes stock-based compensation) from increased headcount including the acquisition of ACH Alert, and a $0.6 million increase in non-personnel related costs from the acquisition of ACH Alert. In addition, we incurred a $0.5 million increase in accounting, audit and consulting expenses primarily in support of the IPO, and a $0.3 million increase in software costs. These costs were partially offset by $0.3 million less travel, employee related, and other costs, all primarily due to the work-from-home business environment during the COVID-19 pandemic. Other Non-operating expense, net increased $1.9 million for the three months ended March 31, 2021 compared to the same period in 2020, primarily due to $1.6 million in non-operating loss related to the increase in fair value of our warrant liabilities and a $0.2 million increase in net interest expense. Provision for Income Taxes We had no provision for income taxes for the three months ended March 31, 2021 and 2020. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the full valuation allowance against our deferred tax assets. Liquidity and Capital Resources As of March 31, 2021, we had $162.1 million in cash and cash equivalents, and an accumulated deficit of $277.9 million. Our net losses have been driven by our investments in developing our digital banking platform, expanding our sales, marketing and implementation organizations and scaling our administrative functions to support our rapid growth. We have financed our operations primarily through the net proceeds we have received from the sales of our redeemable convertible preferred stock and common stock, cash generated from the sale of SaaS subscription services and borrowings under our Credit Agreement. On April 15, 2021, we completed our IPO, in which we issued and sold 6,900,000 shares of our common stock, including 900,000 shares of common stock that were sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of common stock at $30.00 per share. The IPO resulted in net proceeds of $192.8 million after deducting underwriting discounts, commissions and other offering costs. With the proceeds of the IPO, the Company paid in full accumulated dividends on our previously outstanding shares of Series B redeemable convertible preferred stock, which totaled approximately $5.0 million. Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support client usage and growth in our client base, increased research and development expenses to support the growth of our business and related infrastructure, increased general and administrative expenses associated with being a publicly traded company, investments in office facilities and other capital expenditure requirements and any potential future acquisitions or other strategic transactions. We believe that our existing cash resources will be sufficient to finance our continued operations, growth strategy, planned capital expenditures and the additional expenses we expect to incur as a public company for at least the next 12 months. We may from time to time seek to raise additional capital to support our growth. Any equity financing we may undertake could be dilutive to our existing stockholders, and any additional debt financing we may undertake could require debt service and financial and operational requirements that could adversely affect our business. Cash Flows The following table summarizes our cash flows for the periods indicated: Three months ended March 31, (in thousands) 2021 2020 Net cash used in operating activities $ (1,952) $ (14,790) Net cash used in investing activities (750) (1,195) Net cash (used in) provided by financing activities (2,013) 13,041 25 Table of Contents Net Cash Used in Operating Activities During the three months ended March 31, 2021, net cash used in operating activities was $2.0 million, which consisted of a net loss of $10.9 million, adjusted by non-cash charges of $3.9 million and net cash inflows from the change in net operating assets and liabilities of $5.1 million. The non-cash charges primarily were comprised of a non-operating loss related to the increase in fair value of warrant liabilities of $1.6 million, depreciation and amortization expense of $0.8 million, and stock-based compensation expense of $1.4 million. The net cash inflows from the change in our net operating assets and liabilities primarily were due to a $7.4 million increase in accounts payable and accrued liabilities, offset by a $1.2 million increase in prepaid expenses and other current assets and a net $1.1 million in other balance sheet changes. During the three months ended March 31, 2020, net cash used in operating activities was $14.8 million, which consisted of a net loss of $10.3 million, adjusted by non-cash charges of $1.1 million and net cash outflows from the change in net operating assets and liabilities of $5.6 million. Non-cash charges primarily were comprised of depreciation expense of $0.7 million and stock-based compensation expense of $0.4 million. The net cash outflows from the change in our net operating assets and liabilities primarily were due to a $2.4 million decrease in accounts payable and accrued liabilities, a $1.7 million increase in prepaid expenses and other current assets, a $1.2 million increase in accounts receivable, and a net $0.3 million in other balance sheet changes. Net Cash Used in Investing Activities During the three months ended March 31, 2021, cash used in investing activities was $0.8 million, primarily consisting of $0.3 million related to the finalization of working capital adjustments on our acquisition of ACH Alert, capital expenditures related to updates for computer and other equipment of $0.2 million and capitalized software development costs of $0.2 million. During the three months ended March 31, 2020, net cash used in investing activities was $1.2 million, primarily consisting of capital expenditures related to the expansion and updates to our corporate facilities of $1.0 million and purchases of computer and other equipment of $0.2 million. Net Cash (Used in) Provided by Financing Activities For the three months ended March 31, 2021, net cash used in financing activities was $2.0 million, which primarily was due to the repurchase of common stock in the amount of $3.5 million and $1.3 million of deferred IPO issuance costs paid, partially offset by cash proceeds of $2.8 million from the exercise of options to purchase 2.1 million shares of our common stock. During the three months ended March 31, 2020, cash provided by financing activities was $13.0 million, consisting of proceeds from borrowings on a line of credit. Credit Agreement On October 16, 2020, we entered into our credit agreement with Silicon Valley Bank and KeyBank National Association (“Credit Agreement”). The Credit Agreement replaced our prior credit facility provided by Comerica Bank. The Credit Agreement matures on October 16, 2023, and is secured by a first priority lien on substantially all of our tangible and intangible personal property and the tangible and intangible personal property of our subsidiaries that are guarantors. In addition, the Credit Agreement includes the following: • Revolving Facility: The Credit Agreement provides $25.0 million in aggregate commitments for secured revolving loans, with sub-limits of $10.0 million for the issuance of letters of credit and $7.5 million for swingline loans (“Revolving Facility”). • Term Loan: A term loan of $25.0 million (“Term Loan”) was borrowed on October 16, 2020. The proceeds of the Term Loan were used to partially fund the acquisition of ACH Alert. • Accordion Feature: The Credit Agreement also allows us, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $30.0 million. Revolving Facility loans under the Credit Agreement may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan are due in quarterly installments equal to an initial amount of approximately $0.3 million, which begin December 31, 2021 and continue through September 30, 2022 and increase to approximately $0.6 million beginning on December 31, 2022 through the Credit Agreement maturity date. Once repaid or prepaid, the Term Loan may not be re-borrowed. Borrowings under the Credit Agreement bear interest at a variable rate based upon, at our option, either the LIBOR rate or the base rate (in each case, as customarily defined) plus an applicable margin. The minimum LIBOR rate to be applied is 1.00%. The applicable margin for LIBOR rate loans ranges, based on an applicable recurring revenue leverage ratio, from 3.00% to 3.50% per annum, and the applicable margin for base rate loans ranges from 2.00 to 2.50% per annum. Our minimum interest rate applied to term debt was 4.00% as of March 31, 2021. We are required to pay a commitment fee of 0.30% per annum on the undrawn portion available under the Revolving Facility, and variable fees on outstanding letters of credit. All outstanding principal and accrued but unpaid interest is due, and the commitments for the Revolving Facility terminate, on the maturity date. The loans are subject to mandatory prepayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. We may prepay the Term Loan in whole or in part at any time without premium or penalty. The Credit Agreement contains customary affirmative and negative covenants, as well as (i) an annual recurring revenue growth covenant 26 Table of Contents requiring the loan parties to have recurring revenues in any four consecutive fiscal quarter period in an amount that is 10% greater than the recurring revenues for the corresponding four consecutive quarter period in the previous year and (ii) a liquidity (defined as the aggregate amount of cash in bank accounts subject to a control agreement plus availability under the Revolving Facility) covenant, requiring the loan parties to have liquidity, tested on the last day of each calendar month, of $10.0 million or more. The Credit Agreement also contains customary events of default, which if they occur, could result in the termination of commitments under the Credit Agreement, the declaration that all outstanding loans are immediately due and payable in whole or in part, and the requirement to maintain cash collateral deposits in respect of outstanding letters of credit. Total interest expense, including commitment fees and unused line fees, for the three months ended March 31, 2021 and 2020 was $0.3 million and $0.1 million, respectively. In conjunction with closing the Credit Agreement in 2020, we incurred issuance costs of $0.1 million which were deferred and will be amortized over the three-year term. Unamortized debt issuance costs totaled $0.1 million and $0.1 million as of March 31, 2021 and December 31, 2020, respectively. Amortization expense totaled $0.2 million for the three months ended March 31, 2021. The Company recognized no amortization expense for the three months ended March 31, 2020. Contractual Obligations and Commitments There were no material changes to our contractual obligations and commitments as of March 31, 2021 compared to those discussed as of December 31, 2020 in the Prospectus filed with the SEC on April 15, 2021 pursuant to Rule 424(b)(4) under the Securities Act. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Significant Judgments and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be significant. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Prospectus filed with the SEC on April 15, 2021 pursuant to Rule 424(b)(4) under the Securities Act. Recently Issued Accounting Pronouncements See Note 2 of the Notes to our Condensed Consolidated Financial Statements (Unaudited) included elsewhere in this report for a discussion of recent accounting pronouncements and future application of accounting standards. Emerging Growth Company Status We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.