What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 143 added, 105 removed, 279 unchanged (47% of the section changed)

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• 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 Amended Credit Agreement (as defined below);

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

• our status as an emerging growth company;

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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.

Our solution, the Alkami Digital Banking 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.

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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:

The key differentiators of the Alkami Digital Banking Platform include:

• User experience :

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• Integrations :

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.

Scalability and extensibility driven by more than 290 real-time integrations to back-office systems and third-party fintech solutions as of June 30, 2023 , 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.

The Alkami Digital Banking 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 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.

Given the long-term nature of our Alkami Digital Banking 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 Digital Banking Platform revenues almost entirely from multi-year contracts that are based on an average contract life of approximately 70 months as of June 30, 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 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.

For the three months ended June 30, 2023 and 2022, our total revenues were $65.8 million and $50.5 million, respectively, representing a 30.1% increase period-over-period.

For the six months ended June 30, 2023 and 2022, our total revenues were $125.8 million and $95.3 million, respectively, representing an increase of 31.9% period-over-period.

SaaS subscription revenues, as further described below, represented 93.0% and 94.4% of total revenues for the three and six months ended June 30, 2023, respectively, and 94.6% and 95.0% of total revenues for the three and six months ended June 30, 2022, respectively.

We incurred net losses of $17.8 million and $34.7 million for the three and six months ended June 30, 2023, respectively, and net losses of $20.2 million and $33.6 million for the three and six months ended June 30, 2022, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities.

Recent Developments

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 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (“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.

Department of the Treasury, Federal Reserve Board, and 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 their money starting March 13, 2023.

On March 26, 2023, the FDIC announced that First-Citizens Bank & Trust Company would assume all 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.

Additionally, 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.

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

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.

As of June 30, 2023, we served 218 FIs through the Alkami Digital Banking Platform and over 600 clients when including unique clients only subscribing to one or a combination of ACH Alert, MK or 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 280 integrations as of March 31, 2023 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 June 30, 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.

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

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

We had two and five client renewals for the three and six months ended June 30, 2023, respectively.

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 sets.

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 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 sets.

We remain committed to investing in our platform, notably through our research and development spend, which was 31.7% and 32.9% of our revenues for the three and six months ended June 30, 2023, respectively.

Our future success will depend on our continued leadership in innovation.

Components of Results of Operations

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.

Our client relationships are predominantly based on multi-year contracts for the Alkami Digital Banking Platform that have had an average contract life of 70 months as of June 30, 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 months ended March 31, 2023 and 2022 by major source:

Three months ended March 31,

The following disaggregates our revenues for the three and six months ended June 30, 2023 and 2022 by major source:

Three months ended June 30,

Six months ended June 30,

2023 2022 2023 2022

(in thousands)

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Total revenues $ 65,763 $ 50,530 $ 125,759 $ 95,320

See Note 5 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional detail.

See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail.

Cost of Revenues and Gross Margin

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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 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:

Our gross margin for the three and six months ended June 30, 2023 was 53.9% and 53.8%, respectively, and 54.0% and 54.6% for the three and six months ended June 30, 2022, respectively.

The major components of cost of revenues represented the following percentages of revenues for the three months ended June 30, 2023:

third-party hosting services (7.8%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.3%), our implementation team (9.6%), our client success team (3.4%), our development team responsible for maintaining and releasing updates to our platform (3.1%), amortization (2.5%), stock-based compensation (2.3%), 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:

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

third-party hosting services (7.8%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (15.6%), our implementation team (10.2%), our client success team (4.7%), our development team responsible for maintaining and releasing updates to our platform (3.5%), stock-based compensation (2.1%), amortization (2.0%), and depreciation (0.1%).

The major components of cost of revenues represented the following percentages of revenues for the six months ended June 30, 2023:

third-party hosting services (7.7%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.4%), our implementation team (9.7%), our client success team (3.5%), our development team responsible for maintaining and releasing updates to our platform (3.1%), amortization (2.6%), stock-based compensation (2.1%), and depreciation (0.1%).

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

third-party hosting services (7.7%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (15.7%), our implementation team (10.0%), our client success team (4.7%), our development team responsible for maintaining and releasing updates to our platform (3.7%), stock-based compensation (2.1%), amortization (1.4%), and depreciation (0.1%).

Operating Expenses

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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.

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 Digital Banking Platform.

Sales and Marketing.

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The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this filing.

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

Three months ended March 31,

The following table presents our selected condensed consolidated statements of operations data for the three and six months ended June 30, 2023 and 2022.

Three months ended June 30,

Six months ended June 30,

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

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$ (17,761) $ (20,233) $ (34,724) $ (33,639)

(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.

(1) Includes amortization of acquired technology of $1.4 million and $0.9 million for the three months ended June 30, 2023 and 2022, respectively, and $2.7 million and $1.2 million for the six months ended June 30, 2023 and 2022, respectively.

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

2023 2022 2023 2022

($ 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 March 31,

Three months ended June 30,

Six months ended June 30,

2023 2022 2023 2022

($ in thousands)

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Acquisition-related expenses, net (1)

34 796 220 (582)

Adjusted EBITDA (2)

$ (2,527) $ (5,376) $ (5,457) $ (8,968)

(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.

(1) Acquisition-related expenses, net, for the three and six months ended June 30, 2023 includes expenses associated with the acquisition of Segmint, primarily related to legal, consulting, and professional fees.

Acquisition-related expenses, net, for the three and six months ended June 30, 2022 includes the accrual of deferred compensation due to the former owner of ACH Alert, in addition to expenses associated with the acquisitions of MK and Segmint, primarily related to legal, consulting, and professional fees.

During the six months ended June 30, 2022, 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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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 $(2.9) million and $(3.6) million for the three months ended March 31, 2023 and 2022, respectively.

Adjusted EBITDA was $(2.5) million and $(5.5) million for the three and six months ended June 30, 2023, respectively, and $(5.4) million and $(9.0) million for the three and six months ended June 30, 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 $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%.

ARR was $256.8 million as of June 30, 2023 and $204.5 million as of June 30, 2022, an increase of $52.3 million, or 25.6%.

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 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%.

We had 15.8 million registered users as of June 30, 2023 and 13.3 million as of June 30, 2022, an increase of 2.5 million, or 18.8%.

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 $15.88 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,

RPU was $16.20 as of June 30, 2023 and $15.33 as of June 30, 2022, an increase of $0.87, or 5.7%.

Comparison of Three and Six Months ended June 30, 2023 and 2022

Three months ended June 30,

Change Six months ended June 30,

2023 2022 $ % 2023 2022 $ %

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Revenue per Registered User (RPU) $ 16.20 $ 15.33 $ 0.87 5.7 %

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.

Revenues increased $15.2 million, or 30.1%, and $30.4 million, or 31.9% for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The increase of $15.2 million in revenues for the three months ended June 30, 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.

The increase of $30.4 million in revenues for the six months ended June 30, 2023 was primarily due to registered user growth of 2.5 million, or 18.8%, driven by the implementation of 38 new financial institutions supporting 1.5 million digital users and increased digital user adoption from our existing clients of 1.3 million users, partially offset by a 0.3 million decrease in users due to client losses.

In addition, increased revenues were due to RPU growth of 5.7%.

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 $4.7 million to the increase over the prior period.

The average RPU of users from new clients implemented on our digital platform in the last 12 months of $17.27 as of June 30, 2023, is 7% higher than the aggregate RPU as of June 30, 2023.

Cost of Revenues and Gross Margin

Three months ended March 31,

Three months ended June 30,

Change Six months ended June 30,

2023 2022 $ % 2023 2022 $ %

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Cost of Revenues

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.

Cost of revenues increased $7.0 million, or 30.2%, and $14.9 million, or 34.5%, for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, generating a gross margin of 53.9% and 53.8% for the three and six months ended June 30, 2023, respectively, compared to a gross margin of 54.0% and 54.6% for the same periods in 2022, respectively.

The increase in cost of revenues for the three months ended June 30, 2023 was primarily driven by a $1.8 million increase in personnel-related costs (which includes stock-based compensation of $0.4 million), resulting from headcount increases supporting our growth in site reliability engineering, client implementation and client success, as well as $3.6 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, a $1.2 million increase in hosting costs, and $0.4 million of amortization of intangibles, primarily related to the acquisition of Segmint in April 2022.

The increase in cost of revenues for the six months ended June 30, 2023 was primarily driven by a $3.8 million increase in personnel-related costs (which includes stock-based compensation of $0.6 million) resulting from headcount increases supporting our growth in the following teams:

site reliability engineering, client implementation and client success, as well as $7.0 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, a $2.3 million increase in hosting costs incurred from an increase in revenues derived from existing and new client growth, $1.5 million of amortization of intangibles primarily related to the acquisition of Segmint in April 2022, and $0.3 million in higher miscellaneous other costs.

Operating Expenses

Three months ended March 31,

Three months ended June 30,

Change Six months ended June 30,

2023 2022 $ % 2023 2022 $ %

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Research and Development

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.

Research and development expenses increased $4.3 million, or 25.7%, and $10.7 million, or 34.7%, for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended June 30, 2023, the increase was primarily due to a $4.4 million increase in personnel-related costs (which includes stock-based compensation of $1.4 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 higher costs for hosting.

These increases are partially offset by an increase of $0.4 million in capitalized development costs.

For the six months ended June 30, 2023, the increase was primarily due to a $10.9 million increase in personnel-related costs (which includes stock-based compensation of $3.3 million), resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation, and $1.1 million higher hosting costs.

These expenses were partially offset by an increase of $0.3 million in capitalized development costs.

Sales and Marketing

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.

Sales and marketing expenses increased $3.7 million, or 36.1%, and $6.7 million, or 36.8%, for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended June 30, 2023, the increase was primarily due to a $2.6 million increase in personnel-related costs (which includes stock-based compensation of $0.8 million), resulting from headcount growth in our sales and marketing teams.

In addition, we incurred $0.7 million in higher costs related to industry conferences and trade shows, including enhanced client experiences at our in-person client conference, Co:lab, $0.2 million higher travel costs, and $0.1 million in higher consulting costs.

For the six months ended June 30, 2023, the increase was primarily due to a $5.5 million increase in personnel-related costs (which includes stock-based compensation of $1.7 million), resulting from headcount growth in our sales and marketing teams.

In addition, we incurred $0.6 million in higher costs related to industry conferences and trade shows, including enhanced client experiences at our in-person client conference, Co:lab, $0.3 million in higher travel costs for the sales team, and $0.2 million in higher consulting costs.

General and Administrative

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.

General and administrative expenses decreased $0.5 million, or 2.8%, and $0.5 million, or 1.3%, for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended June 30, 2023, the decrease was primarily due to a $1.1 million reduction in stock-based compensation, $0.2 million lower insurance costs, and $0.2 million lower miscellaneous other costs, partially offset by an increase of $0.8 million in personnel-related costs (exclusive of stock-based compensation) and higher software costs of $0.3 million.

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

For the six months ended June 30, 2023, the decrease was primarily due to a $2.6 million reduction in stock-based compensation, $0.1 million lower insurance costs, $0.1 million lower audit and consulting fees, and $0.3 million lower miscellaneous other costs, partially offset by an increase of $2.0 million in personnel-related costs (exclusive of stock-based compensation) and higher software costs of $0.6 million.

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

Acquisition-Related Expenses, Net

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.

Acquisition-related expenses, net, decreased $0.8 million and increased $0.8 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended June 30, 2023, we incurred less than $0.1 million of acquisition-related expenses related to legal, consulting, and professional fees for the acquisition of Segmint.

For the three months ended June 30, 2022, we recorded $0.8 million of expenses related to legal, consulting, professional fees, and deferred compensation related to acquisitions.

For the six months ended June 30, 2023, we incurred $0.2 million of acquisition-related expenses related to legal, consulting, and professional fees for the acquisition of Segmint.

For the six months ended June 30, 2022, we recorded a $2.7 million gain on contingent consideration related to the acquisition of MK, partially offset by $2.1 million of expenses related to legal, consulting, professional fees, and deferred compensation related to acquisitions.

Amortization of Acquired Intangibles

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.

Amortization of acquired intangibles increased less than $0.1 million and $0.3 million for the three and six months ended June 30, 2023, respectively, compared to the same periods 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 $0.5 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.

Non-operating income increased $0.9 million and $1.4 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended June 30, 2023, the increase was primarily due to an increase in net interest income of $0.6 million, as well as a $0.3 million change in unrealized gain on financial instruments related to marketable securities.

For the six months ended June 30, 2023, the increase was primarily due to an increase in net interest income of $0.8 million, as well as a $0.6 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.

The Company recorded income tax expense of $0.1 million and $0.3 million for the three and six months ended June 30, 2023, respectively, resulting in an effective tax rate of (0.5)% and (0.8)%, respectively, compared to income tax expense of $0.2 million and $0.2 million for the three and six months ended June 30, 2022, respectively, resulting in an effective tax rate of (0.8)% and (0.7)%, respectively.

Our effective tax rate for the three and six months ended June 30, 2023 and June 30, 2022 differs from the statutory tax rate primarily due to the impact of the valuation allowance against its deferred tax assets and state tax expense.

Liquidity and Capital Resources

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.

As of June 30, 2023, we had $176.3 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $407.2 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.

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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 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.

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.

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

This resulted in no impact to the 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:

Three months ended March 31,

Six months ended June 30,

(in thousands) 2023 2022

Net cash used in operating activities $ (15,325) $ (19,474)

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

Net cash used in investing activities (96) (259,471)

Net cash (used in) provided by financing activities (4,020) 62,584

Net Cash Used in Operating Activities

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.

During the six months ended June 30, 2023, net cash used in operating activities was $15.3 million, which consisted of a net loss of $34.7 million, adjusted by non-cash charges of $28.4 million and net cash outflows from the change in net operating assets and liabilities of $9.0 million.

The non-cash charges were primarily comprised of depreciation and amortization expense of $5.1 million and stock-based compensation expense of $24.4 million, partially offset by net other changes in non-cash charges of $1.1 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.

The net cash outflows from the change in our net operating assets and liabilities were primarily due to a $1.9 million increase in accounts receivable, a $1.9 million increase in prepaid expenses and other current assets, a $2.1 million decrease in accounts payable and accrued liabilities, driven by the reduction of accounts payable in the current period, a $2.9 million increase in deferred implementation costs, and a $0.2 million decrease in deferred revenues.

During the six months ended June 30, 2022, net cash used in operating activities was $19.5 million, which consisted of a net loss of $33.6 million, adjusted by non-cash charges of $22.2 million and net cash outflows from the change in net operating assets and liabilities of $8.1 million.

The non-cash charges were primarily comprised of a non-operating loss related to depreciation and amortization expense of $3.0 million, and stock-based compensation expense of $21.3 million and net other changes in non-cash charges of $0.6 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 $5.1 million increase in accounts receivable, a $3.5 million increase in prepaid expenses and other current assets and a $1.4 million increase in deferred implementation costs, partially offset by a $1.7 million increase in accounts payable and accrued liabilities and a $0.2 million increase in deferred revenues.

Net Cash Used in Investing Activities

During the six months ended June 30, 2023, net cash used in investing activities was $0.1 million, primarily consisting of $62.6 million for the purchase of marketable securities, $2.7 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.4 million, partially offset by $65.6 million in proceeds from maturities and redemptions of marketable securities.

During the six months ended June 30, 2022, net cash used in investing activities was $259.5 million, primarily consisting of $143.6 million for the purchase of marketable securities, $132.0 million related to our acquisition of Segmint, $2.4 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.5 million, partially offset by $19.0 million in proceeds from maturities and redemptions of marketable securities.

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.

For the six months ended June 30, 2023, net cash used in financing activities was $4.0 million, which was primarily due to payments for taxes related to net settlement of equity awards of $6.8 million, principal payments on debt of $1.1 million, debt issuance costs paid of $0.4 million and payments of holdback funds for acquisitions of $1.0 million, partially offset by proceeds of $2.8 million from the exercise of stock options to purchase 0.8 million shares of our common stock and proceeds from issuance of under the Employee Stock Purchase Plan (“ESPP”) of $2.4 million.

For the six months ended June 30, 2022, net cash provided by financing activities was $62.6 million, which was primarily due to proceeds of $85.0 million from issuance of long-term debt, $1.3 million from the exercise of stock options to purchase 0.6 million shares of our common stock, and proceeds from issuances under the ESPP of $1.8 million, partially offset by $24.7 million of principal payments on debt and debt issuance costs paid of $0.9 million.

Amended Credit Agreement

On April 29, 2022, we 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:

On June 27, 2023, the Company entered into a First Amendment (the “First Amendment”) to the Company’s Amended and Restated Credit Agreement dated as of April 29, 2022 (as amended by the First Amendment, the “Amended Credit Agreement”), with SVB, Comerica Bank, and Canadian Imperial Bank of Commerce.

The First Amendment provided for Citibank, N.A.

to join as a new lender, increased the amount of the Revolving Facility (as defined below) commitment by $20.0 million and extended the maturity date of the Amended Credit Agreement to April 29, 2026, as well as other changes discussed below.

The Amended Credit Agreement, inclusive of changes established by the First Amendment, includes the following, among other features:

• 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.

The additional proceeds received from the Amended Term Loan were used to replenish cash used to fund the acquisition of Segmint, which closed on April 25, 2022.

The Amended Credit Agreement provides $60.0 million in aggregate commitments for secured revolving loans (“Revolving Facility”), of which there were no outstanding borrowings as of June 30, 2023.

A term loan of $85.0 million (the “Term Loan”) was borrowed on April 29, 2022, the proceeds of which were used to replenish cash used to fund the acquisition of Segmint, which closed on April 25, 2022.

• 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, 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.

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.

The Amended Credit Agreement also permits the Company, subject to certain conditions, to request additional revolving loan commitments in an aggregate principal amount of up to $50.0 million, of which there were no outstanding borrowing as of June 30, 2023.

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

Principal payments on the Term Loan are due in quarterly installments equal to an initial amount of approximately $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%.

Debt issuance costs paid for the execution of the Amended Credit Facility were $0.9 million, of which $0.1 million was included in prepaid expenses and other current assets and $0.2 million was included in other assets on the condensed consolidated balance sheets.

Debt issuance costs paid for the execution of the First Amendment were $0.3 million, of which $0.1 million was included in prepaid expenses and other current assets and $0.1 million was included in other assets on the condensed consolidated balance sheets.

The First Amendment added additional covenants that begin each fiscal quarter ending on or after April 29, 2025 (the “Financial Covenant Trigger Date”).

Before the Financial Covenant Trigger Date, 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.

After the Financial Covenant Trigger Date, borrowings under the Amended Credit Agreement bear interest at a variable rate based upon the SOFR plus a margin of 1.50%, 2.00%, 2.50% or 3.00% per annum depending on the applicable consolidated total leverage ratio.

If the SOFR is ever less than 0%, then the SOFR 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 our subsidiaries and secured by all or substantially all of our assets and our subsidiaries’ assets pursuant to an Amended and Restated Guarantee and Collateral Agreement executed contemporaneously with the Amended Credit Agreement.

The Amended Credit Agreement contains 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 $15.0 million or more.

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.

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 $0.6 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.

The Company is required to pay a commitment fee of 0.25% per annum on the undrawn portion available under the Revolving Facility and variable fees on outstanding letters of credit.

The Company has a standby letter of credit in the amount of $0.3 million, which serves as security under the lease relating to the Company’s office space that expires in 2028.

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.

The Amended Credit Agreement contains customary affirmative and negative covenants.

Before the Financial Covenant Trigger Date, the following covenants are applicable:

(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 $20.0 million or more.

After the Financial Covenant Trigger Date, the existing annual recurring revenue growth and liquidity financial covenants are no longer applicable and the following covenants take effect:

(i) a consolidated total leverage ratio requiring the ratio, as calculated at the last day of such fiscal quarter for the period of 12 consecutive months then ending, to be less than 3.50:1.00;

(ii) a consolidated fixed charge ratio requiring the ratio, for any fiscal quarter ending as calculated at the last day of such fiscal quarter for the period of 12 consecutive months then ending, to be more than 1.25:1.00.

The First Amendment also added, applicable beginning June 30, 2023, a free cash flow covenant requiring, as calculated at the last day of such fiscal quarter for the period of 12 consecutive months then ending, free cash flow to be not less than $(75.0) million for the fiscal quarters ended June 30, 2023 and September 30, 2023, respectively, and $(50.0) million for the fiscal quarter ended December 31, 2023 and each fiscal quarter ending thereafter.

Total interest expense, including commitment fees and unused line fees, for the three and six months ended June 30, 2023 was $1.8 million and $3.6 million, respectively, and $0.8 million and $1.1 million for the three and six months ended June 30, 2022, respectively.

In conjunction with closing the Amended Credit Agreement in 2022 and the First Amendment in 2023, we incurred issuance costs of $0.8 million and $0.3 million, respectively, which were deferred and were scheduled to be amortized over the remaining term of the agreement.

Unamortized debt issuance costs totaled $0.9 million and $0.7 million as of June 30, 2023 and December 31, 2022, respectively.

Amortization expense was $0.1 million and less than $0.2 million for the three and six months ended June 30, 2023, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2022, respectively.

Contractual Obligations and Commitments

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.

Other than with respect to the Amended Credit Agreement, there were no material changes to our contractual obligations and commitments as of June 30, 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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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.

See Note 2 of the Notes to the 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

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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