What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 111 added, 101 removed, 321 unchanged (40% 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 above);

• 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;

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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 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.

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 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.

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

For the three months ended September 30, 2023 and 2022, our total revenues were $67.7 million and $53.4 million, respectively, representing a 26.8% increase period-over-period.

For the nine months ended September 30, 2023 and 2022, our total revenues were $193.5 million and $148.7 million, respectively, representing an increase of 30.1% period-over-period.

SaaS subscription revenues, as further described below, represented 95.7% and 94.8% of total revenues for the three and nine months ended September 30, 2023, respectively, and 94.9% and 95.0% of total revenues for the three and nine months ended September 30, 2022, respectively.

We incurred net losses of $15.5 million and $50.2 million for the three and nine months ended September 30, 2023, respectively, and net losses of $20.0 million and $53.7 million for the three and nine months ended September 30, 2022, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities.

Recent Developments

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

Amendment to Office Lease.

On September 5, 2023, the Company entered into a Sixth Amendment to the Amended and Restated Office Lease which, among other things, reduces the leased space in Plano, Texas from approximately 125,468 square feet to 83,939 square feet, effective December 31, 2023, and also extends the term for the remaining reduced leased space to August 31, 2033.

Factors Affecting our Operating Results

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

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.

As of September 30, 2023, we served 229 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 June 30, 2023 enables us to deliver thousands of configurations aligned with the digital platform strategies adopted by our clients.

Our platform model with more than 290 integrations as of September 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 two and five client renewals for the three and six months ended June 30, 2023, respectively.

We had six and 11 client renewals for the three and nine months ended September 30, 2023, respectively.

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

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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.

We remain committed to investing in our platform, notably through our research and development spend, which was 32.1% and 32.7% of our revenues for the three and nine months ended September 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 Digital Banking Platform that have had an average contract life of 70 months as of June 30, 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 September 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 and six months ended June 30, 2023 and 2022 by major source:

Three months ended June 30,

Six months ended June 30,

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

Three months ended September 30,

Nine months ended September 30,

2023 2022 2023 2022

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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 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:

Our gross margin for the three and nine months ended September 30, 2023 was 54.0% and 53.8%, respectively, and 51.6% and 53.6% for the three and nine months ended September 30, 2022, respectively.

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

third-party hosting services (7.8%), the direct costs of bill-pay and other third-party intellectual property included in our solutions (17.4%), our implementation team (9.1%), our client success team (3.5%), our development team responsible for maintaining and releasing updates to our platform (3.4%), amortization (2.5%), stock-based compensation (2.2%), and depreciation (0.1%).

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

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 (16.7%), our implementation team (10.6%), our client success team (4.4%), our development team responsible for maintaining and releasing updates to our platform (3.7%), stock-based compensation (2.3%), amortization (2.9%), 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:

The major components of cost of revenues represented the following percentages of revenues for the nine months ended September 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 (9.5%), our client success team (3.5%), our development team responsible for maintaining and releasing updates to our platform (3.3%), amortization (2.5%), 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:

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 (16.0%), our implementation team (10.2%), our client success team (4.6%), our development team responsible for maintaining and releasing updates to our platform (3.6%), stock-based compensation (2.2%), amortization (1.9%), and depreciation (0.1%).

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Non-operating Income (Expense)

Non-operating income (expense) consists primarily of interest income from our cash balances, interest expense from borrowings under our revolving line of credit, amortization of deferred debt costs, unrealized losses on marketable securities, and changes in fair value of warrants and tranche rights.

Provision for Income Taxes

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 (gains) losses on marketable securities, and changes in fair value of warrants and tranche rights.

Provision (benefit) 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.

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.

Results of Operations

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

The following table presents our selected condensed consolidated 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,

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

Three months ended September 30,

Nine months ended September 30,

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

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(15,437) (20,212) (49,877) (53,608)

Provision for income taxes 88 156 284 243

Provision (benefit) for income taxes 39 (163) 323 80

$ (15,476) $ (20,049) $ (50,200) $ (53,688)

(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.

(1) Includes amortization of acquired technology of $1.3 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, and $4.0 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively.

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

2023 2022 2023 2022

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

2023 2022 2023 2022

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Net loss $ (15,476) $ (20,049) $ (50,200) $ (53,688)

Provision for income taxes 88 156 284 243

Provision (benefit) for income taxes 39 (163) 323 80

(Gain) loss on financial instruments (201) 59 (421) 446

Interest expense, net (190) 439 (159) 619

Interest (income) expense, net (149) 334 (308) 953

Depreciation and amortization 2,695 2,550 7,841 5,512

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$ 826 $ (4,618) $ (4,631) $ (13,586)

(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.

(1) Acquisition-related expenses, net, for the nine months ended September 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 nine months ended September 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 nine months ended September 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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Adjusted EBITDA is a non-GAAP financial measure and should not be considered an alternative to GAAP net loss as a measure of operating performance or as a measure of liquidity.

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

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

(gain) loss on financial instruments;

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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 $(2.5) 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.

Adjusted EBITDA was $0.8 million and $(4.6) million for the three and nine months ended September 30, 2023, respectively, and $(4.6) million and $(13.6) million for the three and nine months ended September 30, 2022, respectively.

Annual Recurring Revenue (ARR).

We calculate ARR by aggregating annualized recurring revenue related to SaaS subscription services recognized in the last month of the reporting period as well as the next 12 months of expected implementation services revenues for all clients on the platform in the last month of the reporting period.

We believe ARR provides important information about our future revenue potential, our ability to acquire new clients, and our ability to maintain and expand our relationship with existing clients.

ARR was $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%.

ARR was $275.0 million as of September 30, 2023 and $213.6 million as of September 30, 2022, an increase of $61.3 million, or 28.7%.

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 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%.

We had 16.9 million registered users as of September 30, 2023 and 13.7 million as of September 30, 2022, an increase of 3.2 million, or 23.1%.

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 $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,

RPU was $16.28 as of September 30, 2023 and $15.57 as of September 30, 2022, an increase of $0.71, or 4.6%.

Comparison of Three and Nine Months ended September 30, 2023 and 2022

Three months ended September 30,

Change Nine months ended September 30,

2023 2022 $ % 2023 2022 $ %

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Revenues $ 67,703 $ 53,412 $ 14,291 26.8 % $ 193,462 $ 148,732 $ 44,730 30.1 %

September 30,

Annual Recurring Revenue (ARR) $ 274,976 $ 213,640 $ 61,336 28.7 %

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Revenue per Registered User (RPU) $ 16.28 $ 15.57 $ 0.71 4.6 %

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.

Revenues increased $14.3 million, or 26.8%, and $44.7 million, or 30.1% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

The increase of $14.3 million in revenues for the three months ended September 30, 2023 was primarily due to registered user growth from new and existing clients, and RPU growth.

The increase of $44.7 million in revenues for the nine months ended September 30, 2023 was primarily due to registered user growth of 3.2 million, or 23.1%, driven by the implementation of 39 new financial institutions supporting 1.7 million digital users and increased digital user adoption from our existing clients of 1.4 million users.

In addition, increased revenues were due to RPU growth of 4.6%.

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 $5.4 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.

The average RPU of users from new clients implemented on our digital platform in the last 12 months of $16.92 as of September 30, 2023, is 4% higher than the aggregate RPU as of September 30, 2023.

Cost of Revenues and Gross Margin

Three months ended June 30,

Change Six months ended June 30,

Three months ended September 30,

Change Nine months ended September 30,

2023 2022 $ % 2023 2022 $ %

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Cost of Revenues

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:

Cost of revenues increased $5.3 million, or 20.5%, and $20.2 million, or 29.3%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, generating a gross margin of 54.0% and 53.8% for the three and nine months ended September 30, 2023, respectively, compared to a gross margin of 51.6% and 53.6% for the same periods in 2022, respectively.

The increase in cost of revenues for the three months ended September 30, 2023 was primarily driven by a $1.2 million increase in personnel-related costs (which includes stock-based compensation of $0.3 million), resulting from headcount increases supporting our growth in site reliability engineering, client implementation and client success, as well as $2.9 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, and $0.1 million in higher miscellaneous other costs.

The increase in cost of revenues for the nine months ended September 30, 2023 was primarily driven by a $5.0 million increase in personnel-related costs (which includes stock-based compensation of $0.9 million) resulting from headcount increases supporting our growth in the following teams:

site reliability engineering, client implementation and client success, as well as $9.9 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform, a $3.5 million increase in hosting costs incurred from an increase in revenues derived from existing and new client growth, $1.4 million of amortization of intangibles, primarily related to the acquisition of Segmint in April 2022, and $0.4 million in higher miscellaneous other costs.

Operating Expenses

Three months ended June 30,

Change Six months ended June 30,

Three months ended September 30,

Change Nine months ended September 30,

2023 2022 $ % 2023 2022 $ %

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Research and Development

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.

Research and development expenses increased $3.5 million, or 19.4%, and $14.2 million, or 29.0%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended September 30, 2023, the increase was primarily due to a $3.4 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.

In addition, we incurred $0.4 higher costs for hosting and $0.2 higher costs for consulting.

These increases are partially offset by an increase of $0.7 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.

For the nine months ended September 30, 2023, the increase was primarily due to a $14.6 million increase in personnel-related costs (which includes stock-based compensation of $4.4 million), resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation, and $1.5 million higher hosting costs.

These expenses were partially offset by an increase of $1.0 million in capitalized development costs and a decrease of $1.0 million in consulting costs.

Sales and Marketing

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.

Sales and marketing expenses increased $2.2 million, or 22.8%, and $8.9 million, or 31.9%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended September 30, 2023, the increase was primarily due to a $2.4 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 $0.1 million in higher travel costs for the sales team.

These expenses are partially offset by $0.4 million of lower consulting costs.

For the nine months ended September 30, 2023, the increase was primarily due to a $7.8 million increase in personnel-related costs (which includes stock-based compensation of $2.5 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, and $0.4 million in higher travel costs for the sales team.

These expenses are partially offset by $0.2 million lower consulting costs.

General and Administrative

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.

General and administrative expenses decreased by less than $0.1 million, or 0.3%, and $0.5 million, or 0.9%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended September 30, 2023, the decrease was primarily due to a gain on lease modification of $0.4 million, $0.2 million of lower insurance costs, $0.1 million reduction in stock-based compensation, and $0.1 million of lower miscellaneous other costs, partially offset by an increase of $0.8 million in personnel-related costs (exclusive of stock-based compensation).

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.

For the nine months ended September 30, 2023, the decrease was primarily due to a $2.7 million reduction in stock-based compensation, gain on lease modification of $0.4 million, $0.3 million of lower insurance costs, $0.1 million of lower audit and consulting fees, and $0.4 million of lower miscellaneous other costs, partially offset by an increase of $2.8 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, 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.

Acquisition-related expenses, net, decreased $0.7 million and increased $0.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended September 30, 2023, we incurred no acquisition-related expenses.

For the three months ended September 30, 2022, we recorded $0.7 million of expenses related to legal, consulting, professional fees, and deferred compensation related to acquisitions.

For the nine months ended September 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 nine months ended September 30, 2022, we recorded $2.9 million of expenses related to legal, consulting, professional fees, and deferred compensation related to acquisitions, partially offset by a $2.7 million gain on contingent consideration related to the acquisition of MK.

Amortization of Acquired Intangibles

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.

Amortization of acquired intangibles decreased by less than $0.1 million and increased by $0.3 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily due the acquisition of Segmint in April 2022.

Non-Operating Income (Expense), Net

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 $0.1 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.

Non-operating income increased $0.7 million and $2.1 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022.

For the three months ended September 30, 2023, the increase was primarily due to an increase in net interest income of $0.5 million, as well as a $0.3 million change in unrealized gain on financial instruments related to marketable securities.

For the nine months ended September 30, 2023, the increase was primarily due to an increase in net interest income of $1.3 million, as well as a $0.9 million change in unrealized gain on financial instruments related to marketable securities.

Provision (Benefit) for Income Taxes

The Company recorded income tax expense of less than $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively.

This resulted in an effective tax rate of (0.3)% and (0.6)%, respectively.

As compared to an income tax benefit of $0.2 million and income tax expense of $0.1 million for the three and nine months ended September 30, 2022, respectively.

This resulted in an effective tax rate of 0.8% and (0.2)%, respectively.

Our effective tax rate for the three and nine months ended September 30, 2023 and September 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 June 30, 2023, we had $176.3 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $407.2 million.

As of September 30, 2023, we had $178.2 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $422.7 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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The following table summarizes our cash flows for the periods indicated:

Six months ended June 30,

Nine months ended September 30,

(in thousands) 2023 2022

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Net Cash Used in Operating Activities

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 $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.

During the nine months ended September 30, 2023, net cash used in operating activities was $12.2 million, which consisted of a net loss of $50.2 million, adjusted by non-cash charges of $43.1 million and net cash outflows from the change in net operating assets and liabilities of $5.1 million.

The non-cash charges were primarily comprised of depreciation and amortization expense of $7.8 million and stock-based compensation expense of $37.9 million, partially offset by accrued interest on marketable securities, net of $2.1 million and 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 $5.0 million increase in accounts receivable, a $2.6 million increase in prepaid expenses and other current assets, and a $4.0 million increase in deferred implementation costs, partially offset by an increase in accounts payable and accrued liabilities of $5.2 million and a $1.3 million increase in deferred revenues.

During the nine months ended September 30, 2022, net cash used in operating activities was $24.2 million, which consisted of a net loss of $53.7 million, adjusted by non-cash charges of $36.2 million and net cash outflows from the change in net operating assets and liabilities of $6.7 million.

The non-cash charges were primarily comprised of depreciation and amortization expense of $5.5 million, stock-based compensation expense of $33.0 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 $4.1 million increase in accounts receivable, a $2.8 million increase in prepaid expenses and other current assets, and a $3.3 million increase in deferred implementation costs, partially offset by a $3.5 million increase in accounts payable and accrued liabilities and a $0.1 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.

During the nine months ended September 30, 2023, net cash used in investing activities was $16.4 million, primarily consisting of $109.6 million for the purchase of marketable securities, $3.8 million related to capitalized software development costs, and capital expenditures related to updates for computer and other equipment of $0.8 million, partially offset by $97.9 million in proceeds from maturities and redemptions of marketable securities.

During the nine months ended September 30, 2022, net cash used in investing activities was $247.5 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 $0.8 million, partially offset by $51.5 million in proceeds from maturities and redemptions of marketable securities.

Net Cash (Used in) Provided by Financing Activities

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.

For the nine months ended September 30, 2023, net cash used in financing activities was $4.8 million, which was primarily due to payments for taxes related to net settlement of equity awards of $11.0 million, principal payments on debt of $2.1 million, payments of holdback funds for acquisitions of $1.0 million and debt issuance costs paid of $0.3 million, partially offset by proceeds of $7.3 million from the exercise of stock options to purchase 1.5 million shares of our common stock and proceeds from issuances under the Employee Stock Purchase Plan (“ESPP”) of $2.4 million.

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 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.

Amended Credit Agreement

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• Revolving Facility:

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.

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 September 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 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.

Once repaid or prepaid, the Term Loan may not be re-borrowed.

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.

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(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.

and (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.

Total interest expense, including commitment fees and unused line fees, for the three and nine months ended September 30, 2023 was $1.9 million and $5.5 million, respectively, and $1.2 million and $2.3 million for the three and nine months ended September 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.

Unamortized debt issuance costs totaled $0.8 million and $0.7 million as of September 30, 2023 and December 31, 2022, respectively.

Amortization expense was $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, and $0.7 million and $0.9 million for the three and nine months ended September 30, 2022, respectively.

Contractual Obligations and Commitments

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.

Other than with respect to the Amended Credit Agreement and the Sixth Amendment to the Amended and Restated Office Lease, there were no material changes to our contractual obligations and commitments as of September 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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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