What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-04 · 125 added, 155 removed, 259 unchanged (52% of the section changed)

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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 filings with the Securities and Exchange Commission (“SEC”), including the audited consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2022, which are included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

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

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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;

• managing our rapid growth;

• attracting new clients and retaining and broadening our existing clients’ use of our solutions;

• maintaining, protecting and enhancing our brand;

• predicting 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;

• integration with and reliance on third-party software, content and services;

• integrating our solutions with other systems used by our clients;

• satisfying our clients and meeting their digital banking needs;

• our dependence on the data centers operated by third parties and third party internet hosting providers;

• defects, errors or performance problems associated with our solutions;

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• providing client support;

• mergers and acquisitions;

• acquiring or investing in other companies or pursuing business partnerships;

• natural or man-made disasters;

• cybersecurity breaches or other compromises of our security measures or those of third parties upon which we rely;

• increased privacy concerns, laws, regulations and standards and our processing and use of the personal information of end users;

• intense competition in the markets we serve;

• our focus and reliance on the financial services industry as the source of our revenue;

• reliance on the financial services industry as the source of our revenue in the event of any downturn, consolidation or decrease in technological spend in such industry;

• 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, including in connection with cybersecurity;

• increased privacy concerns and our processing and use of the personal information of end users;

• the political, economic and competitive conditions in the markets and jurisdictions where we operate;

• regulations and laws applicable to us, our clients and our solutions;

• 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;

• using open-source software in our solutions;

• complying with license or technology agreements with third parties and our ability to enter into additional license or technology agreements on reasonable terms;

• litigation or threats of litigation;

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• 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 agreement;

• stock price volatility and no intention to pay dividends;

• maintaining proper and effective internal controls;

• expenses and administrative burdens as a public company;

• our ability to raise sufficient capital and the resulting dilution and the terms of our Amended Credit Agreement (as defined below);

• our status as an emerging growth company;

• future sales of shares of our common stock, our lack of an intention to pay dividends and significant influence of our principal stockholders;

• anti-takeover provisions in our charter documents and Delaware law.

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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 September 2021, we acquired MK Decisioning Systems, LLC (“MK”), a technology platform for digital account opening, credit card and loan origination solutions.

In April 2022, we acquired Segmint Inc.

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 In April 2022, we acquired Segmint Inc.

(“Segmint”), a leading cloud-based financial data analytics and transaction data cleansing provider.

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• Integrations :

Scalability and extensibility driven by more than 270 real-time integrations to back office systems and third-party fintech solutions as of September 30, 2022 , including core systems, payment cards, mortgages, bill pay, electronic documents, money movement, personal financial management and account opening.

Scalability and extensibility driven by more than 280 real-time integrations to back office systems and third-party fintech solutions as of March 31, 2023 , including core systems, payment cards, mortgages, bill pay, electronic documents, money movement, personal financial management and account opening.

• Deep data capabilities :

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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 September 30, 2022.

Given the long-term nature of our Alkami Platform 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, 2023.

We predominantly employ a per-registered-user pricing model, with incremental fees above certain contractual minimum commitments for each licensed solution.

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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 September 30, 2022 and 2021, our total revenues were $53.4 million and $39.8 million, respectively, representing a 34.3% increase period-over-period.

For the nine months ended September 30, 2022 and 2021, our total revenues were $148.7 million and $109.7 million, respectively, representing a 35.6% increase period-over-period.

SaaS subscription revenues, as further described below, represented 94.9% and 95.0% of total revenues for the three and nine months ended September 30, 2022, respectively and 94.3% and 94.4% of total revenues for the three and nine months ended September 30, 2021, respectively.

We incurred net losses of $20.0 million and $53.7 million for the three and nine months ended September 30, 2022, respectively, and net losses of $11.2 million and $33.5 million for the three and nine months ended September 30, 2021, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities.

For the three months ended March 31, 2023 and 2022, our total revenues were $60.0 million and $44.8 million, respectively, representing a 33.9% increase period-over-period.

SaaS subscription revenues, as further described below, represented 95.9% and 95.6% of total revenues for the three months ended March 31, 2023 and 2022, respectively.

We incurred net losses of $17.0 million and $13.4 million for the three months ended March 31, 2023 and 2022, 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, the Company consummated its previously announced merger with Segmint, pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated March 25, 2022, with Segmint surviving as 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 was approximately $135.0 million.

A portion of the consideration was placed into escrow to secure certain post-closing indemnification obligations in the Merger Agreement.

Banking and Regulatory Environment Developments.

On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation and the FDIC was appointed as receiver.

On March 12, 2023, the U.S.

Department of the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation (“FDIC”) released a joint statement announcing that the FDIC would complete its resolution of SVB in a manner that fully protected all depositors at SVB and that depositors would have access to all of their money starting March 13, 2023.

On March 26, 2023, the FDIC announced that First-Citizens Bank & Trust Company would assume all of SVB's deposits and loans as of March 27, 2023.

In light of the foregoing, we do not believe that we have exposure to loss as a result of SVB’s receivership.

Additionally, the our overall liquidity and financing has not been impacted.

During the periods presented, we have not experienced any losses on our deposits of cash, cash equivalents or marketable securities.

Factors Affecting our Operating Results

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A key part of our strategy is to grow our FI client base.

As of September 30, 2022, we served 190 FIs through the Alkami Platform and over 330 clients through the ACH Alert, MK and Segmint products, representing 70.1% annual client growth since September 30, 2021.

As of March 31, 2023, we served 206 FIs through the Alkami Platform and over 370 clients through the ACH Alert, MK and Segmint products.

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.

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The depth of our product suite is a function of technology and platform partnerships.

Our platform model with more than 270 integrations as of September 30, 2022 enables us to deliver thousands of configurations aligned with the digital platform strategies adopted by our clients.

Our platform model with more than 280 integrations as of March 31, 2023 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.

Furthermore, expanding our product suite expands our Revenue per Registered User (“RPU”) potential.

For additional information regarding RPU, see “Key Business Metrics.”

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Client renewals are also an important lever in driving our long-term gross margin targets.

We had six and 11 client renewals in the three and nine months ended September 30, 2022, respectively.

We had three client renewals for the three months ended March 31, 2023 and 22 for the year ended December 31, 2022.

We expect client renewals to continue to play a key role in our future success.

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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 34.1% and 32.9% of our revenues for the three and nine months ended September 30, 2022, respectively.

We remain committed to investing in our platform, notably through our research and development spend, which was 34.3% and 31.6% of our revenues for the three months ended March 31, 2023 and 2022, respectively.

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, 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 ongoing 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

Our digital banking client relationships are primarily based on multi-year contracts that have an average contract li fe of 70 mont hs as of September 30, 2022.

Our client relationships are predominantly based on multi-year contracts for the Alkami Platform that have had an average contract life of 70 months as of March 31, 2023.

We derive the majority of our revenues from SaaS subscription services charged for the use of our digital banking solution.

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We recognize revenues at the point in time the services are transferred to the client.

The following disaggregates our revenues for the three and nine months ended September 30, 2022 and 2021 by major source:

Three months ended September 30,

Nine months ended September 30,

2022 2021 2022 2021

The following disaggregates our revenues for the three months ended March 31, 2023 and 2022 by major source:

Three months ended March 31,

(In thousands)

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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, the amortization of capitalized internal use software, and depreciation.

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.

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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 and nine months ended September 30, 2022 was 51.6% and 53.6%, respectively, and 56.3% and 55.3% for the three and nine months ended September 30, 2021, respectively.

The major components of cost of revenues represented the following percentages of revenues for the three months ended September 30, 2022:

third-party hosting services (7.7%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.7%), our implementation team (10.8%), our client success team (5.4%), our development team responsible for maintaining and releasing updates to our platform (4.2%) and amortization of intangible assets (2.5%).

The major components of cost of revenues represented the following percentages of revenues for the three months ended September 30, 2021:

third-party hosting services (7.9%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.0%), our implementation team (9.3%), our client success team (5.4%), our development team responsible for maintaining and releasing updates to our platform (3.8%) and amortization of intangible assets (0.3%).

The major components of cost of revenues represented the following percentages of revenues for the nine months ended September 30, 2022:

third-party hosting services (7.7%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (16.6%), our implementation team (10.7%), our client success team (5.5%), our development team responsible for maintaining and releasing updates to our platform (4.2%) and amortization of intangibles (1.7%).

The major components of cost of revenues represented the following percentages of revenues for the nine months ended September 30, 2021:

third-party hosting services (8.8%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (16.2%), our implementation team (9.6%), our client success team (5.7%), our development team responsible for maintaining and releasing updates to our platform (4.1%) and amortization of intangible assets (0.3%).

Our gross margin for the three months ended March 31, 2023 and 2022 was 53.6% and 55.4%, respectively.

The major components of cost of revenues represented the following percentages of revenues for the three months ended March 31, 2023:

third-party hosting services (7.6%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.5%), our implementation team (9.9%), our client success team (3.6%), our development team responsible for maintaining and releasing updates to our platform (3.2%), amortization (2.6%), stock-based compensation (1.9%), and depreciation (0.1%).

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 (15.7%), our implementation team (9.9%), our client success team (4.8%), our development team responsible for maintaining and releasing updates to our platform (3.7%), stock-based compensation (2.2%), amortization (0.7%), and depreciation (0.1%).

Operating Expenses

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General and administrative expenses consist primarily of personnel-related costs for our executive, finance, legal, human resources, information technology, security and compliance and other administrative employees, including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation.

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.

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.

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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 (Benefit) for Income Taxes

As a result of our valuation allowance, provision (benefit) for income taxes consists primarily of state income taxes and deferred taxes related to the tax amortization of acquired goodwill.

Provision for Income Taxes

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the valuation allowance against our deferred tax assets.

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.

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 consolidated statements of operations data for the three and nine months ended September 30, 2022 and 2021.

Three months ended September 30,

Nine months ended September 30,

The following table presents our selected condensed consolidated statements of operations data for the three months ended March 31, 2023 and 2022.

Three months ended March 31,

($ In thousands, except share and per share amounts) 2023 2022

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Interest expense (1,757) (288)

Loss on financial instruments (59) — (446) (3,035)

Gain (loss) on financial instruments 210 (133)

Loss before income taxes

(16,767) (13,319)

Provision (benefit) for income taxes (163) — 80 —

Provision for income taxes 196 87

$ (16,963) $ (13,406)

(1) Includes amortization of acquired technology of $1.4 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $2.6 million and $0.4 million for the nine months ended September 30, 2022 and 2021, respectively.

(1) Includes amortization of acquired technology of $1.3 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively.

(2) Includes stock-based compensation expenses as follows:

Three months ended September 30,

Nine months ended September 30,

2022 2021 2022 2021

Three months ended March 31,

($ in thousands)

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The following table presents our reconciliation of GAAP net loss to adjusted EBITDA for the periods indicated.

Three months ended September 30,

Nine months ended September 30,

2022 2021 2022 2021

Three months ended March 31,

($ in thousands)

Net loss $ (16,963) $ (13,406)

Provision (benefit) for income taxes (163) — 80 —

Loss on financial instruments 59 — 446 3,035

Provision for income taxes 196 87

(Gain) loss on financial instruments (210) 133

Interest expense, net 31 180

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Acquisition-related expenses, net (1)

737 915 155 2,177

Adjusted EBITDA (2)

$ (2,930) $ (3,592)

(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 acquisitions of MK and Segmint, primarily related to legal, consulting, and professional fees.

In the nine months ended September 30, 2022, these expenses are offset by the $2.7 million gain on contingent consideration related to the purchase of MK.

(1) Acquisition-related expenses, net, for the three months ended March 31, 2023 includes expenses associated with the acquisition of Segmint, primarily related to legal, consulting, and professional fees.

Acquisition-related expenses, net, for the three months ended March 31, 2022 includes the accrual of deferred compensation due to the former owner of ACH Alert, in addition to expenses associated with the acquisition of MK, primarily related to legal, consulting, and professional fees.

These expenses were 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.

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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 (benefit) for income taxes;

loss on financial instruments;

We define adjusted EBITDA as net loss before provision for income taxes;

(gain) loss on financial instruments;

interest expense, net;

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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 $(4.6) million and $(13.6) million for the three and nine months ended September 30, 2022, respectively, and $(6.1) million and $(17.5) million for the three and nine months ended September 30, 2021, respectively.

Adjusted EBITDA was $(2.9) million and $(3.6) million for the three months ended March 31, 2023 and 2022, respectively.

Annual Recurring Revenue (ARR).

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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 $213.6 million as of September 30, 2022 and $154.8 million as of September 30, 2021, an increase of $58.8 million, or 38.0%.

ARR was $240.1 million as of March 31, 2023 and $176.9 million as of March 31, 2022, an increase of $63.2 million, or 35.7%.

Registered Users.

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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 13.7 million registered users as of September 30, 2022 and 11.4 million as of September 30, 2021, an increase of 2.3 million, or 20.3%.

We had 15.1 million registered users as of March 31, 2023 and 12.8 million as of March 31, 2022, an increase of 2.3 million, or 17.9%.

Revenue per Registered User (RPU).

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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 $15.57 as of September 30, 2022 and $13.57 as of September 30, 2021, an increase of $2.00, or 14.7%.

Comparison of Three and Nine Months ended September 30, 2022 and 2021

Three months ended September 30,

Change Nine months ended September 30,

RPU was $15.88 as of March 31, 2023 and $13.80 as of March 31, 2022, an increase of $2.08, or 15.1%.

Comparison of Three Months ended March 31, 2023 and 2022

Three months ended March 31,

2023 2022 $ %

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Revenues $ 59,996 $ 44,790 $ 15,206 33.9 %

September 30,

Annual Recurring Revenue (ARR) $ 240,050 $ 176,897 $ 63,153 35.7 %

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Revenue per Registered User (RPU) $ 15.88 $ 13.80 $ 2.08 15.1 %

Revenues increased $13.7 million, or 34.3%, and $39.0 million, or 35.6% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The increase of $13.7 million in revenues for the three months ended September 30, 2022 was primarily due to registered user growth from new and existing clients, RPU growth, and the acquisition of Segmint completed on April 25, 2022, which contributed $3.3 million for the three months ended September 30, 2022.

The increase of $39.0 million in revenues for the nine months ended September 30, 2022 was primarily due to registered user growth of 2.3 million, or 20.3%, driven by the implementation of 29 new financial institutions supporting 1.2 million digital users and increased digital user adoption from our existing clients of 1.5 million users, or 12%, partially offset by a 0.4 million decrease in users due to client losses.

In addition, increased revenues were due to RPU growth of 14.7%.

RPU growth was primarily driven by cross-sell activity to existing clients, higher average RPU of new clients implemented in the last 12 months on our digital banking platform compared to aggregate RPU and the acquisition of Segmint completed on April 25, 2022, which contributed $5.6 million in the nine months ended September 30, 2022.

The average RPU of users from new clients implemented on our digital platform in the last 12 months of $17.40 as of September 30, 2022, is 11.75% higher than the aggregate RPU as of September 30, 2022.

Revenues increased $15.2 million, or 33.9% for the three months ended March 31, 2023, compared to the same period in 2022.

The increase of $15.2 million in revenues for the three months ended March 31, 2023 was primarily due to registered user growth from new and existing clients, RPU growth, and the acquisition of Segmint completed on April 25, 2022, which contributed $3.5 million for the three months ended March 31, 2023.

Cost of Revenues and Gross Margin

Three months ended September 30,

Change Nine months ended September 30,

Three months ended March 31,

2023 2022 $ %

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Cost of Revenues

Cost of revenues increased $8.5 million, or 48.6%, and $20.0 million, or 40.8%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, generating a gross margin of 51.6% and 53.6% for the three and nine months ended September 30, 2022, respectively, compared to a gross margin of 56.3% and 55.3% for the same periods in 2021.

The increase in cost of revenues for the three months ended September 30, 2022 was primarily driven by a $2.7 million increase in personnel-related costs (which includes stock-based compensation of $0.6 million) resulting from headcount increases supporting our growth in site reliability engineering, client implementation and client support, as well as $2.3 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, a $0.8 million increase in hosting costs, $0.8 million of additional costs related to the acquisition of Segmint (which includes stock-based compensation of $0.1 million) and $1.3 million of amortization of intangibles, $1.1 million of which is related to the acquisition of Segmint.

The increase in cost of revenues for the nine months ended September 30, 2022 was primarily driven by an $7.0 million increase in personnel-related costs (which includes stock-based compensation of $1.8 million) resulting from headcount increases supporting our growth in the following teams:

site reliability engineering, client implementation and client support, as well as $6.6 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, $1.4 million in incremental hosting costs incurred from an increase in revenues derived from existing and new client growth, $0.4 million in higher consulting costs, $0.3 million in higher travel costs and $0.3 million in higher computer hardware and software costs.

In addition, we incurred $1.5 million of additional costs related to the acquisition of Segmint (which includes stock-based compensation of $0.2 million) and $2.2 million of amortization of intangibles, $1.7 million of which is related to the acquisition of Segmint.

We expect the cost of revenues will continue to increase as SaaS subscription services and the associated implementation services increase over time.

Cost of revenues increased $7.9 million, or 39.4%, for the three months ended March 31, 2023, compared to the same period in 2022, generating a gross margin of 53.6% for the three months ended March 31, 2023, compared to a gross margin of 55.4% for the same period in 2022.

The increase in cost of revenues for the three months ended March 31, 2023 was primarily driven by a $1.4 million increase in personnel-related costs (which includes stock-based compensation of $0.1 million) resulting from headcount increases supporting our growth in site reliability engineering, client implementation and client success, as well as $3.4 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, a $1.1 million increase in hosting costs, $0.8 million of additional costs related to the acquisition of Segmint (which includes stock-based compensation of $0.1 million) and $1.0 million of amortization of intangibles primarily related to the acquisition of Segmint.

Operating Expenses

Three months ended September 30,

Change Nine months ended September 30,

Three months ended March 31,

2023 2022 $ %

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Research and Development

Research and development expenses increased $5.3 million, or 41.5%, and $13.1 million, or 36.4%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

For the three months ended September 30, 2022, the increase was primarily due to a $3.8 million increase in personnel-related costs (which includes stock-based compensation of $1.5 million) resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation.

Research and development expenses increased $6.4 million, or 45.2%, for the three months ended March 31, 2023 compared to the same period in 2022.

For the three months ended March 31, 2023, the increase was primarily due to a $4.6 million increase in personnel-related costs (which includes stock-based compensation of $1.1 million), resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation, as well as $0.4 million higher costs for hosting.

In addition, we incurred $2.1 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.8 million).

These increases are partially offset by $0.6 million in lower consulting costs.

For the nine months ended September 30, 2022, the increase was primarily due to a $8.8 million increase in personnel-related costs (which includes stock-based compensation of $4.5 million) resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation, as well as $0.5 million in higher consulting costs, $0.4 million in higher hosting costs, and $3.0 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $1.2 million).

Sales and Marketing

Sales and marketing expenses increased $2.5 million, or 34.7%, and $10.0 million, or 55.8%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

For the three months ended September 30, 2022, the increase was primarily due to a $1.9 million increase in personnel-related costs (which includes stock-based compensation of $0.7 million) resulting from headcount growth in our sales and marketing teams.

In addition, we incurred $1.0 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.2 million), $0.4 million in higher consulting costs, and $0.4 million in higher travel costs for the sales team, partially offset by $1.1 million in lower costs related to timing of our annual client conference.

For the nine months ended September 30, 2022, the increase was primarily due to a $6.2 million increase in personnel-related costs (which includes stock-based compensation of $2.0 million) resulting from headcount growth in our sales and marketing teams.

In addition, we incurred $1.8 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.3 million), $0.6 million in higher consulting costs, $0.6 million in higher travel costs for the sales team and $0.8 million in higher costs related to industry conferences and trade shows as we return to pre-COVID-19 pandemic sales activities such as our in-person client conference, Co:Lab.

Sales and marketing expenses increased $3.0 million, or 37.7%, for the three months ended March 31, 2023, compared to the same period in 2022.

For the three months ended March 31, 2023, the increase was primarily due to a $2.4 million increase in personnel-related costs (which includes stock-based compensation of $0.7 million) resulting from headcount growth in our sales and marketing teams.

In addition, we incurred $0.5 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.2 million), and $0.1 million in higher consulting costs.

General and Administrative

General and administrative expenses increased $5.9 million, or 47.7%, and $19.8 million, or 57.5%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

For the three months ended September 30, 2022, the increase was primarily due to a $4.9 million increase in personnel-related and other costs (which includes stock-based compensation of $4.6 million).

In addition, we incurred $0.6 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.2 million), $0.2 million in higher audit and consulting costs, and $0.3 million in higher software costs.

For the nine months ended September 30, 2022, the increase in general and administrative expenses was primarily due to a $16.1 million increase in personnel-related and other costs (which includes stock-based compensation of $14.9 million).

In addition, we incurred $0.9 million of additional costs related to the Segmint acquisition (which includes stock-based compensation of $0.3 million), $1.5 million of increased insurance costs for public company director and officer coverage and $1.0 million in higher software costs.

General and administrative expenses increased $0.1 million, or 0.4%, for the three months ended March 31, 2023 compared to the same period in 2022.

For the three months ended March 31, 2023, the increase was primarily due to a $1.2 million increase in personnel-related costs, higher software costs of $0.3 million, $0.1 million of additional costs related to the Segmint acquisition, partially offset by a reduction in stock-based compensation of $1.4 million.

During 2022, we incurred higher stock-based compensation driven by the modification of a former employee’s stock options and RSUs.

Acquisition-Related Expenses, Net

Acquisition-related expenses, net decreased $0.2 million and $2.0 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

For the three months ended September 30, 2022, the decrease was primarily due to expenses incurred for the MK acquisition that closed in the three months ended September 30, 2021.

For the nine months ended September 30, 2022, the decrease was primarily due to the $2.7 million gain on contingent consideration related to the purchase of MK, partially offset by $0.8 million of increased acquisition expenses related to legal, consulting, and professional fees for the acquisition of Segmint.

Acquisition-related expenses, net, increased $1.6 million for the three months ended March 31, 2023 compared to the same period in 2022.

For the three months ended March 31, 2023, we incurred $0.2 million of acquisition related expenses related to legal, consulting, and professional fees for the acquisition of Segmint.

For the three months ended March 31, 2022, we recorded $2.7 million gain on contingent consideration related to the acquisition of MK, partially offset by $0.6 million of acquisition related expenses.

Amortization of Acquired Intangibles

Amortization of acquired intangibles increased $0.3 million and $0.5 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to additional amortization of intangible assets related to the acquisitions of MK in September 2021 and Segmint in April 2022.

Amortization of acquired intangibles increased $0.3 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to additional amortization of intangible assets related to the acquisition of Segmint in April 2022.

Non-Operating Income (Expense), Net

Non-operating expense increased $0.3 million for the three months ended September 30, 2022, compared to same period in 2021, the increase was primarily due to $0.3 million in higher net interest expense.

Non-operating expense decreased $2.2 million for the nine months ended September 30, 2022, compared to same period in 2021, primarily due $3.0 million in non-operating loss related to the increase in fair value of our warrant liabilities for the nine months ended September 30, 2021, partially offset by higher net interest expense of $0.4 million and $0.4 million of unrealized losses on marketable securities for the nine months ended September 30, 2022.

Provision (Benefit) for Income Taxes

The Company recorded an income tax benefit of $0.2 million and an income tax expense of $0.1 million for the three and nine months ended September 30, 2022, respectively, resulting in an effective tax rate of 0.8% and (0.2)%, respectively, compared to no income tax expense for the three and nine months ended September 30, 2021.

The difference in the effective tax rate for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 is primarily due to state income taxes and deferred taxes related to the tax amortization of acquired goodwill.

This was partially offset by a $0.3 million deferred tax benefit attributable to the partial release of the Company’s pre-existing valuation allowance related to the Segmint business combination, recorded in the three months ended September 30, 2022.

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.

Non-operating expense increased $0.5 million for the three months ended March 31, 2023, compared to same period in 2022.

For the three months ended March 31, 2023, the increase was primarily due to a decrease in net interest expense of $0.2 million, as well as a $0.3 million change in unrealized gain on financial instruments related to marketable securities.

Provision for Income Taxes

The Company recorded income tax expense of $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, resulting in an effective tax rate of (1.2)% and (0.7)%, respectively

As a result of our valuation allowance, provision for income taxes consists primarily of current state income taxes and deferred taxes related to the tax amortization of acquired goodwill.

The slight increase in the effective tax rate for the three months ended March 31, 2023 as compared to 2022 is primarily the result of a lower valuation allowance recorded in the current year.

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the full valuation allowance against its deferred tax assets.

Liquidity and Capital Resources

As of September 30, 2022, we had $208.9 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $367.5 million.

As of March 31, 2023, we had $185.4 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $389.4 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 Amended 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.

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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.

On March 26, 2023, it was announced that First-Citizens Bank & Trust Company would assume all of SVB's deposits and loans as of March 27, 2023.

This resulted in no impact to the our condensed consolidated financial statements or changes to the terms of the Amended Credit Agreement.

The following table summarizes our cash flows for the periods indicated:

Nine months ended September 30,

Three months ended March 31,

(in thousands) 2023 2022

Net cash used in operating activities $ (9,615) $ (8,345)

Net cash used in investing activities (247,674) (20,471)

Net cash provided by financing activities 62,893 186,886

Net cash provided by (used in) investing activities 15,765 (113,567)

Net cash (used in) provided by financing activities (568) 623

Net Cash Used in Operating Activities

During the nine months ended September 30, 2022, net cash used in operating activities was $24.0 million, which consisted of a net loss of $53.7 million, adjusted by non-cash charges of $36.8 million and net cash outflows from the change in net operating assets and liabilities of $7.2 million.

The non-cash charges were primarily comprised of depreciation and amortization expense of $5.5 million, stock-based compensation expense of $33.6 million, and net other changes in non-cash charges of $0.4 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 $3.7 million increase in accounts receivable, a $2.8 million increase in prepaid expenses and other current assets, a $3.8 million increase in deferred implementation costs, and a net $0.5 million in other balance sheet changes, partially offset by a $3.6 million increase in accounts payable and accrued liabilities.

During the nine months ended September 30, 2021, net cash used in operating activities was $16.8 million, which consisted of a net loss of $33.5 million, adjusted by non-cash charges of $13.3 million and net cash inflows from the change in net operating assets and liabilities of $3.4 million.

The non-cash charges were primarily comprised of a non-operating loss related to the increase in fair value of warrant liabilities of $3.0 million, depreciation and amortization expense of $2.4 million, and stock-based compensation expense of $7.8 million.

The net cash inflows from the change in our net operating assets and liabilities were primarily due to a $12.8 million increase in accounts payable and accrued liabilities, partially offset by a $5.7 million increase in accounts receivable, a $0.7 million increase in prepaid expenses and other current assets, and a net $3.0 million in other balance sheet changes.

Net Cash Used in Investing Activities

During the nine months ended September 30, 2022, net cash used in investing activities was $247.7 million, primarily consisting of $164.1 million for the purchase of marketable securities, $131.3 million related to our acquisition of Segmint, $2.8 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $1.0 million, partially offset by $51.5 million in proceeds from maturities and redemptions of marketable securities.

During the nine months ended September 30, 2021, net cash used in investing activities was $20.5 million, primarily consisting of $18 million for the purchase of MK, $0.3 million related to the finalization of working capital adjustments on our acquisition of ACH Alert, $1.3 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.9 million.

Net Cash Provided by Financing Activities

For the nine months ended September 30, 2022, net cash provided by financing activities was $62.9 million, which was primarily due to proceeds of $85.0 million from issuance of long-term debt, $2.1 million from the exercise of stock options to purchase 0.9 million shares of our common stock, and proceeds from issuances under the Employee Stock Purchase Plan (“ESPP”) of $1.8 million, partially offset by $24.7 million of principal payments on debt, payments for taxes related to net settlement of equity awards of $0.6 million, and debt issuance costs paid of $0.8 million.

For the nine months ended September 30, 2021, net cash provided by financing activities was $186.9 million, which was primarily due to the receipt of proceeds from our IPO of $192.8 million and proceeds of $6.4 million from the exercise of stock options to purchase 4.1 million shares of our common stock, partially offset by the cash payment of our Series B dividend of $5.0 million upon the consummation of our IPO, the $4.5 million payment of deferred IPO issuance costs, and the repurchase of shares of our common stock in the amount of $3.5 million.

During the three months ended March 31, 2023, net cash used in operating activities was $9.6 million, which consisted of a net loss of $17.0 million, adjusted by non-cash charges of $13.5 million and net cash outflows from the change in net operating assets and liabilities of $6.2 million.

The non-cash charges were primarily comprised of depreciation and amortization expense of $2.6 million and stock-based compensation expense of $11.4 million, partially offset by net other changes in non-cash charges of $0.5 million.

The net cash outflows from the change in our net operating assets and liabilities were primarily due to a $2.2 million increase in accounts receivable, a $2.7 million increase in prepaid expenses and other current assets, a $1.3 million decrease in accounts payable and accrued liabilities and a $0.9 million increase in deferred implementation costs, partially offset by a $0.8 million increase in deferred revenues.

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 $9.9 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 $2.9 million increase in accounts receivable and a $0.4 million decrease in deferred revenues.

Net Cash Provided by (Used in) Investing Activities

During the three months ended March 31, 2023, net cash provided by investing activities was $15.8 million, primarily consisting of $38.1 million in proceeds from maturities and redemptions of marketable securities, partially offset by $21.0 million for the purchase of marketable securities, $1.1 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.2 million.

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, $1.2 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.3 million.

Net Cash (Used in) Provided by Financing Activities

For the three months ended March 31, 2023, net cash used in financing activities was $0.6 million, which was primarily due to payments for taxes related to net settlement of equity awards of $2.0 million partially offset by proceeds of $1.4 million from the exercise of stock options to purchase 0.5 million shares of our common stock.

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.

Amended Credit Agreement

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• Revolving Facility:

The Amended Credit Agreement provides $40.0 million in aggregate commitments for secured revolving loans (“Amended Revolving Facility”).

The Amended Credit Agreement provides $40.0 million in aggregate commitments for secured revolving loans (“Amended Revolving Facility”), and there were no outstanding borrowing as of March 31, 2023.

A term loan of $85.0 million (the “Amended Term Loan”) was borrowed on the closing date of the Amended Credit Agreement.

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• Accordion Feature:

The Amended Credit Agreement also permits us, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $50.0 million.

The Amended Credit Agreement also permits us, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $50.0 million, and there were no outstanding borrowing as of March 31, 2023.

Amended Revolving Facility loans under the Amended Credit Agreement may be voluntarily prepaid and re-borrowed.

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The Amended Credit Agreement also contains customary events of default, which if they occur, could result in the termination of commitments under the Amended 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 and nine months ended September 30, 2022 was $1.2 million and $2.3 million, respectively, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2021, respectively.

The Company was in compliance with all covenants as of March 31, 2023.

Total interest expense, including commitment fees and unused line fees, for the three months ended March 31, 2023 and 2022 was $1.8 million and $0.3 million, respectively.

In conjunction with closing the Amended Credit Agreement in 2022, we incurred issuance costs of $0.8 million, which were deferred and were scheduled to be amortized over the three-year term.

Unamortized debt issuance costs totaled $0.5 million and $0.1 million as of September 30, 2022 and December 31, 2021, respectively.

Amortization expense was less than $0.7 million and $0.9 million for the three and nine months ended September 30, 2022, respectively.

Amortization expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively.

Unamortized debt issuance costs totaled $0.6 million and $0.7 million as of March 31, 2023 and December 31, 2022, respectively.

Amortization expense was $0.1 million and less than $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

Contractual Obligations and Commitments

There were no material changes to our contractual obligations and commitments as of September 30, 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.

There were no material changes to our contractual obligations and commitments as of March 31, 2023, compared to those discussed as of December 31, 2022 in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.

Off-Balance Sheet Arrangements

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Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis