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 in our other SEC filings, including the audited consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2021, which are included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022. 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 Annual Report on Form 10-K, may materially affect such forward-looking statements: • our ability to manage our rapid growth; • our ability to attract new clients and retain and broaden our existing clients’ use of our solutions; • our ability to maintain, protect and enhance our brand; • our ability to predict the long-term rate of client subscription renewals or adoption of our solutions; • the unpredictable and time-consuming nature of our sales cycles; • our integration with and reliance on third-party software, content and services; • defects, errors or performance problems associated with our solutions; • retaining our management team and key employees and recruiting and retaining new employees; • managing the increased complexity of our solutions and a higher volume of implementations; • providing client support; • mergers and acquisitions; • intense competition in the markets we serve; • our focus and reliance on the financial services industry as the source of our revenue; • evolving technological requirements and changes and additions to our solution offerings; • regulations applicable to us, our clients and our solutions; • security breaches or other compromises of our security measures or those of third parties upon which we rely; • increased privacy concerns and our processing and use of the personal information of end users; • protecting our intellectual property rights and defending ourselves against claims that we are misappropriating the intellectual property rights of others; • open-source software in our solutions; • litigation or threats of litigation; • the fluctuation of our quarterly and annual results of operations relative to our expectations and guidance; • the way we recognize revenue, which has the effect of delaying changes in the subscriptions for our solutions from being reflected in our operating results; • changes in financial accounting standards or practices; • our limited operating history, our history of operating losses and our ability to use our net operating loss (“NOL”) carryforwards; • our ability to raise sufficient capital and the resulting dilution and the terms of our credit agreements; • stock price volatility and no intention to pay dividends; • maintaining proper and effective internal controls; • expenses and administrative burdens as a public company; and • anti-takeover provisions in our charter documents and Delaware law. 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. 14 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. In addition, in September 2021, we acquired MK Decisioning Systems, LLC (“MK”), a technology platform for digital account opening, credit card and loan origination solutions. 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 230 real-time integrations to back office systems and third-party fintech solutions as of March 31, 2022 , 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 primarily 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 Alkami Platform revenues almost entirely from multi-year contracts that are based on an average contract life of approximately 70 months as of March 31, 2022. 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, 2022 and 2021, our total revenues were $44.8 million and $33.3 million, respectively, representing a 34.7% increase period-over-period. SaaS subscription revenues, as further described below, represented 95.6% and 94.9% of total revenues for the three months ended March 31, 2022 and 2021, respectively. We incurred net losses of $13.4 million and $10.9 million for the three months ended March 31, 2022 and 2021, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities. Recent Developments Merger with Segmint. On April 25, 2022, subsequent to the condensed consolidated balance sheet date, the Company completed its previously announced merger with Segmint Inc. ("Segmint"). Pursuant to the Merger Agreement, Segmint merged with and into a wholly owned subsidiary of the Company. Segmint operates a marketing analytics and messaging delivery platform with patented software that enables financial institutions and merchants to understand and leverage data, interact with customers, and measure results. The aggregate consideration paid in exchange for all of the outstanding equity interests of Segmint at closing was approximately $135.5 million. A portion of the consideration was placed into escrow to secure certain post-closing indemnification obligations in the Merger Agreement. Amended Credit Agreement. On April 29, 2022, subsequent to the condensed consolidated balance sheet date, the Company entered into an amended and restated credit agreement with Silicon Valley Bank, Comerica Bank, and Canadian Imperial Bank of Commerce (the “Amended Credit Agreement”). The Amended Credit Agreement amends and restates the prior credit facility provided by Silicon Valley Bank and KeyBank National Association. The Amended Credit Agreement matures on April 29, 2025. The Amended Credit Agreement includes the following among other features: 15 • Revolving Facility: The Amended Credit Agreement provides $40.0 million in aggregate commitments for secured revolving loans (“Amended Revolving Facility”). • Term Loan: A term loan of $85.0 million (the “Amended Term Loan”) was borrowed on the closing date of the Amended Credit Agreement. The additional proceeds received from the Amended Term Loan were used to replenish cash used to fund the acquisition of Segmint. • Accordion Feature: The Amended Credit Agreement also allows the Company, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $50.0 million. Amended Revolving Facility loans under the Amended Credit Agreement may be voluntarily prepaid and re-borrowed. Principal payments on the Amended Term Loan are due in quarterly installments equal to an initial amount of approximately $1.1 million, beginning on June 30, 2023 and continuing through March 31, 2024 and increasing to approximately $2.1 million beginning on June 30, 2024 through the Amended Credit Agreement maturity date. Once repaid or prepaid, the Amended Term Loan may not be re-borrowed. Borrowings under the Amended Credit Agreement bear interest at a variable rate based upon the Secured Overnight Financing Rate (“SOFR”) plus a margin of 3.00% to 3.50% per annum depending on the applicable recurring revenue leverage ratio. If the SOFR rate is ever less than 0%, then the SOFR rate shall be deemed to be 0%. The Amended Credit Agreement is subject to certain liquidity and operating covenants and includes customary representations and warranties, affirmative and negative covenants and events of default. Obligations under the Amended Credit Agreement are guaranteed by the Company’s subsidiaries and secured by all or substantially all of the assets of the Company and its subsidiaries pursuant to an Amended and Restated Guarantee and Collateral Agreement executed contemporaneously with the Amended Credit Agreement. 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, 2022, we served 179 FIs through the Alkami Platform and over 150 clients through the ACH Alert and MK suites of solutions, representing 38.3% annual client growth since March 31, 2021. Each of our digital banking 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 230 integrations as of March 31, 2022 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.” 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. We had four client renewals in the three months ended March 31, 2022. 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 31.6% of our revenues for the three months ended March 31, 2022. Our future success will depend on our continued leadership in innovation. COVID-19 Impact. The continued global impact of COVID-19 has resulted in various measures to combat the spread of the virus. With the development of variants and increased vaccinations rates, the status of ongoing measures varies widely. 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. We continue to face significant uncertainty concerning the duration of the COVID-19 pandemic as well as the severity of any future infection surges. 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, 2022. We derive the majority of our revenues from SaaS subscription services charged for the use of our digital banking solution. For each client, we 16 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 our licensed SaaS solutions, commencing upon launch. Occasionally, our clients request custom development and other professional services, which we provide. These are generally one-time requests 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, 2022 and 2021 by major source: Three months ended March 31, 2022 2021 (In thousands) SaaS subscription services $ 42,809 $ 31,569 Implementation services 1,577 1,300 Other services 404 393 Total revenues $ 44,790 $ 33,262 See Note 5 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional detail. 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 services 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, 2022 and 2021 was 55.4% and 53.4%, respectively. The major components of cost of revenues represented the following percentages of revenues for the three months ended March 31, 2022: third-party hosting services (7.5%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (16.1%), our implementation team (10.4%), our client success team (5.7%), our development team responsible for maintaining and releasing updates to our platform (4.2%) and amortization of intangible assets (0.7%). 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%). Operating Expenses Research and Development. Research and development costs consist primarily of personnel-related costs for our engineering, information technology and products, 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. 17 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. In addition, these expenses are inclusive of any (gain) loss on revaluation of contingent consideration. 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, unrealized losses on marketable securities, and changes in fair value of warrants, and tranche rights. Provision for Income Taxes As a result of our valuation allowance, provision for income taxes consists primarily of state income taxes and deferred taxes related to the tax amortization of acquired goodwill. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the valuation allowance against our deferred tax assets. 18 Results of Operations The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this filing. The following table presents our selected consolidated statements of operations data for the three months ended March 31, 2022 and 2021. Three months ended March 31, 2022 2021 ($ In thousands, except share and per share amounts) Revenues $ 44,790 $ 33,262 Cost of revenues (1) 19,980 15,497 Gross profit 24,810 17,765 Operating expenses (1) : Research and development 14,156 10,913 Sales and marketing 7,992 5,406 General and administrative 15,668 10,385 Total operating expenses 37,816 26,704 Loss from operations (13,006) (8,939) Non-operating income (expense): Interest income 108 14 Interest expense (288) (310) Loss on financial instruments (133) (1,644) Loss before income taxes (13,319) (10,879) Provision for income taxes 87 — Net loss $ (13,406) $ (10,879) (1) Includes stock-based compensation expenses as follows: Three months ended March 31, 2022 2021 ($ in thousands) Cost of revenues $ 978 $ 233 Research and development 1,884 299 Sales and marketing 750 103 General and administrative 6,162 783 Total stock-based compensation expenses $ 9,774 $ 1,418 19 The following table presents our reconciliation of GAAP net loss to adjusted EBITDA for the periods indicated. Three months ended March 31, 2022 2021 ($ in thousands) Net loss $ (13,406) $ (10,879) Provision for income taxes 87 — Loss on financial instruments 133 1,644 Interest expense, net 180 296 Amortization of intangible assets 402 209 Depreciation 616 577 Stock-based compensation expense 9,774 1,418 Acquisition-related expenses, net (1) (1,378) 638 Adjusted EBITDA (2) $ (3,592) $ (6,097) (1) Acquisition-related expenses, net include the accrual of deferred compensation due to the former owner of ACH Alert, in addition to acquisition related-expenses associated with the purchase of MK and Segmint, primarily related to legal, consulting, and professional fees. These expenses are offset by the $2.7 million gain on contingent consideration related to the purchase of MK. (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; and acquisition-related expenses. 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 $(3.6) million for the three months ended March 31, 2022 and $(6.1) million for the three months ended March 31, 2021. 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 $176.9 million as of March 31, 2022 and $133.8 million as of March 31, 2021, an increase of $43.1 million, or 32.2%. 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 12.8 million registered users as of March 31, 2022 and 10.0 million as of March 31, 2021, an increase of 2.8 million, or 28.3%. 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 $13.80 as of March 31, 2022 and $13.40 as of March 31, 2021, an increase of $0.40, or 3.0%. 20 Comparison of Three Months ended March 31, 2022 and 2021 Revenues Three months ended March 31, Change 2022 2021 $ % ($ in thousands) Revenues $ 44,790 $ 33,262 $ 11,528 34.7 % Annual Recurring Revenue (ARR) $ 176,897 $ 133,807 $ 43,090 32.2% Registered Users 12,819 9,989 2,830 28.3% Revenue per Registered User (RPU) $ 13.80 $ 13.40 $ 0.40 3.0% Revenues increased $11.5 million, or 34.7%, for the three months ended March 31, 2022, compared to the same period in 2021. The increase of $11.5 million in revenues for the three months ended March 31, 2022 was primarily due to registered user growth of 2.8 million, comprised of 1.5 million in registered user growth from existing clients (net of attrition) and 1.3 million in registered users from new clients implemented through our digital banking platform (contractual minimums). In addition, increased revenues were due to RPU growth of 3.0%. RPU growth was primarily driven by cross-sell activity to existing clients and higher average RPU of new clients implemented in the last 12 months on our digital banking platform compared to aggregate RPU. The average RPU of users from new clients implemented on our digital platform in the last 12 months of $14.55 as of March 31, 2022, is 5.5% higher than the aggregate RPU as of March 31, 2022. Cost of Revenues and Gross Margin Three months ended March 31, Change 2022 2021 $ % ($ in thousands) Cost of revenues 19,980 15,497 $ 4,483 28.9 % Percentage of revenues 44.6 % 46.6 % (2.0) % (4.3) % Cost of Revenues Cost of revenues increased $4.5 million, or 28.9%, for the three months ended March 31, 2022 compared to the same period in 2021, generating a gross margin of 55.4% for the three months ended March 31, 2022, compared to a gross margin of 53.4% for the same period in 2021. The increase in cost of revenues for the three months ended March 31, 2022 was primarily driven by a $2.1 million increase in personnel-related costs (which includes stock-based compensation) resulting from headcount increases supporting our growth in site reliability engineering, client implementation and client support, $1.9 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, and $0.5 million in miscellaneous other costs. Operating Expenses Three months ended March 31, Change 2022 2021 $ % ($ in thousands) Research and development 14,156 10,913 $ 3,243 29.7 % Sales and marketing 7,992 5,406 2,586 47.8 % General and administrative 15,668 10,385 5,283 50.9 % Total operating expenses $ 37,816 $ 26,704 $ 11,112 41.6 % Percentage of revenues 84.4 % 80.3 % Research and Development Research and development expenses increased $3.2 million, or 29.7%, for the three months ended March 31, 2022, compared to the same period in 2021. For the three months ended March 31, 2022, the increase was primarily due to a $3.3 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. In addition, we incurred $0.6 million in higher consulting costs, and $0.3 of higher hosting costs associated with internal usage. These expenses were partially offset by an increase of $1.0 million in capitalized development costs related to new strategic projects. 21 Sales and Marketing Sales and marketing expenses increased $2.6 million, or 47.8%, for the three months ended March 31, 2022, compared to the same period in 2021. For the three months ended March 31, 2022, the increase was primarily due to a $2.1 million increase in personnel-related costs (which includes stock-based compensation) resulting from headcount growth in our sales and marketing teams. In addition, we incurred $0.4 million in higher tradeshow costs, and $0.2 million in higher consulting costs, partially offset by $0.1 million in lower travel costs. General and Administrative General and administrative expenses increased $5.3 million, or 50.9%, for the three months ended March 31, 2022, compared to the same period in 2021. For the three months ended March 31, 2022, the increase was primarily due to a $5.4 million increase in stock-based compensation and $0.7 million increase from acquisition-related expenses, net due to transaction expenses from the acquisition of Segmint. In addition, we incurred a $1.1 million increase in insurance costs for public company director and officer coverage, $0.3 million higher software costs, $0.5 million in higher miscellaneous other costs, partially offset by a gain on revaluation of contingent consideration of $2.7 million related to MK. Non-Operating Income (Expense), Net Non-operating expense decreased $1.6 million for the three months ended March 31, 2022, compared to same period in 2021. For the three months ended March 31, 2022, the decrease was primarily due to $1.6 million in non-operating loss related to the increase in fair value of our warrant liabilities for the three months ended March 31, 2021, partially offset by $0.3 million in non-operating loss related to an unrealized loss on marketable securities for the three months ended March 31, 2022. Provision for Income Taxes The Company recorded $0.1 million of income tax expense for the three months ended March 31, 2022, resulting in an effective tax rate of (0.7%), compared to no income tax expense for the three months ended March 31, 2021. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the full valuation allowance against the Company’s deferred tax assets. Liquidity and Capital Resources As of March 31, 2022, we had $299.3 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $327.3 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 (as defined below). On April 15, 2021, we completed our initial public offering (“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. Our IPO resulted in net proceeds of $192.8 million after deducting underwriting discounts, commissions and other offering costs. With the proceeds from our 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, including our Amended and Restated Credit Agreement, 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 the short term (at least the next 12 months) and longer term. 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. 22 Cash Flows The following table summarizes our cash flows for the periods indicated: Three months ended March 31, (in thousands) 2022 2021 Net cash used in operating activities $ (8,291) $ (1,952) Net cash used in investing activities (113,621) (750) Net cash provided by (used in) financing activities 623 (2,013) Net Cash Used in Operating Activities During the three months ended March 31, 2022, net cash used in operating activities was $8.3 million, which consisted of a net loss of $13.4 million, adjusted by non-cash charges of $8.4 million and net cash outflows from the change in net operating assets and liabilities of $3.3 million. The non-cash charges were primarily comprised of a non-operating loss related to depreciation and amortization expense of $1.0 million, and stock-based compensation expense of $10.0 million, partially offset by a gain on revaluation of contingent consideration of $2.7 million. The net cash outflows from the change in our net operating assets and liabilities were primarily due to a $2.5 million increase in accounts receivable, a $0.4 million decrease in deferred revenues, and a net $0.4 million in other balance sheet changes. 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, partially 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. Net Cash Used in Investing Activities During the three months ended March 31, 2022, net cash used in investing activities was $113.6 million, primarily consisting of $112.1 million for the purchase of marketable securities, $1.3 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.3 million. 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. Net Cash Provided by (Used in) Financing Activities For the three months ended March 31, 2022, net cash provided by financing activities was $0.6 million, which was primarily due to proceeds of $0.9 million from the exercise of stock options to purchase 0.4 million shares of our common stock, partially offset by a principal payment on debt of $0.3 million. 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. 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 was scheduled to mature on October 16, 2023 and was 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 included the following: • Revolving Facility: The Credit Agreement provided $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 (the “Term Loan”) was borrowed on October 16, 2020. The proceeds from the Term Loan were used to partially fund the acquisition of ACH Alert. • Accordion Feature: The Credit Agreement also allowed 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 were permitted to be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan were due in quarterly installments equal to an initial amount of approximately $0.3 million, which began on December 31, 2021 and were scheduled to increase to approximately $0.6 million beginning on December 31, 2022 through the Credit Agreement maturity date. Once repaid or prepaid, the Term Loan were not permitted to be re-borrowed. Borrowings under the Credit Agreement bore 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 was 1.00%. The applicable margin for LIBOR 23 rate loans ranged, based on an applicable recurring revenue leverage ratio, from 3.00% to 3.50% per annum, and the applicable margin for base rate loans ranged from 2.00 to 2.50% per annum. Our minimum interest rate applied to the Term Loan was 4.00% as of March 31, 2022. We were 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 was due, and the commitments for the Revolving Facility were scheduled to terminate, on the maturity date. The Term Loan was subject to mandatory prepayment requirements in the event of certain asset sales or if certain insurance or condemnation events occurred, subject to customary reinvestment provisions. We were permitted to prepay the Term Loan in whole or in part at any time without premium or penalty. The Credit Agreement contained customary affirmative and negative covenants, as well as (i) an annual recurring revenue growth covenant 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 contained customary events of default, which if they occurred, could have resulted in the termination of commitments under the Credit Agreement, the declaration that all outstanding loans were 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, 2022 and 2021 was $0.3 million and $0.3 million, respectively. In conjunction with closing the Credit Agreement in 2020, we incurred issuance costs of $0.1 million which were deferred and were scheduled to be amortized over the three-year term. Unamortized debt issuance costs totaled $0.1 million and $0.1 million as of March 31, 2022 and December 31, 2021, respectively. Amortization expense was less than $0.1 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. Amended Credit Agreement On April 29, 2022, we entered into the Amended Credit Agreement with Silicon Valley Bank, Comerica Bank, and Canadian Imperial Bank of Commerce. The Amended Credit Agreement amends and restates the prior credit facility provided by Silicon Valley Bank and KeyBank National Association. The Amended Credit Agreement matures on April 29, 2025. The Amended Credit Agreement includes the following, among other features: • Revolving Facility: The Amended Credit Agreement provides $40.0 million in aggregate commitments for the Revolving Facility. • Term Loan: The Amended Term Loan of $85.0 million was borrowed on the closing date of the Amended Credit Agreement. The additional proceeds received from the Amended Term Loan were used to replenish cash used to fund the acquisition of Segmint Inc., which closed on April 25, 2022. • Accordion Feature: The Amended Credit Agreement also allows the Company, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $50.0 million. Amended Revolving Facility loans under the Amended Credit Agreement may be voluntarily prepaid and re-borrowed. Principal payments on the Amended Term Loan are due in quarterly installments equal to an initial amount of approximately $1.1 million, beginning on June 30, 2023 and continuing through March 31, 2024 and increasing to approximately $2.1 million beginning on June 30, 2024 through the Amended Credit Agreement maturity date. Once repaid or prepaid, the Amended Term Loan may not be re-borrowed. Borrowings under the Amended Credit Agreement bear interest at a variable rate based upon SOFR plus a margin of 3.00% to 3.50% per annum depending on the applicable recurring revenue leverage ratio. If the SOFR rate is ever less than 0%, then the SOFR rate shall be deemed to be 0%. Contractual Obligations and Commitments There were no material changes to our contractual obligations and commitments as of March 31, 2022 compared to those discussed as of December 31, 2021 in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022. 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 In preparing our unaudited consolidated financial statements in conformity with GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and 24 estimates described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022. Recently Issued Accounting Pronouncements See Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements 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 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 consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.