ALKAMI TECHNOLOGY, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”), including the audited consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2022, which are included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023. Unless the context otherwise requires, all references in this report to the “Company,” “Alkami,” “we,” “us” and “our” refer to Alkami Technology, Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole. Cautionary Note Regarding Forward-Looking Statements Any statements made in this Quarterly Report on Form 10-Q that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast” and other similar expressions. We base these forward-looking statements on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances at such time. Forward-looking statements are not guarantees of future performance or results and are subject to and involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. The following important factors, along with the factors discussed in “Risk Factors” in the Annual Report on Form 10-K, may materially affect such forward-looking statements: • managing our rapid growth; • attracting new clients and retaining and broadening our existing clients’ use of our solutions; • maintaining, protecting and enhancing our brand; • predicting the long-term rate of client subscription renewals or adoption of our solutions; • the unpredictable and time-consuming nature of our sales cycles; • integration with and reliance on third-party software, content and services; • integrating our solutions with other systems used by our clients; • satisfying our clients and meeting their digital banking needs; • our dependence on the data centers operated by third parties and third-party internet hosting providers; • defects, errors or performance problems associated with our solutions; • retaining our management team and key employees and recruiting and retaining new employees; • managing the increased complexity of our solutions and a higher volume of implementations; • providing client support; • acquiring or investing in other companies or pursuing business partnerships; • natural or man-made disasters; • cybersecurity breaches or other compromises of our security measures or those of third parties upon which we rely; • increased privacy concerns, laws, regulations and standards and our processing and use of the personal information of end users; • intense competition in the markets we serve; • reliance on the financial services industry as the source of our revenue in the event of any downturn, consolidation or decrease in technological spend in such industry; • evolving technological requirements and changes and additions to our solution offerings; • the political, economic and competitive conditions in the markets and jurisdictions where we operate; • regulations and laws applicable to us, our clients and our solutions; • protecting our intellectual property rights and defending ourselves against claims that we are misappropriating the intellectual property rights of others; • using open-source software in our solutions; • complying with license or technology agreements with third parties and our ability to enter into additional license or technology agreements on reasonable terms; • litigation or threats of litigation; • the fluctuation of our quarterly and annual results of operations relative to our expectations and guidance; • the way we recognize revenue, which has the effect of delaying changes in the subscriptions for our solutions from being reflected in our operating results; • 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 status as an emerging growth company; • future sales of shares of our common stock, our lack of an intention to pay dividends and significant influence of our principal stockholders; and • anti-takeover provisions in our charter documents and Delaware law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Overview Alkami is a cloud-based digital banking solutions provider. We inspire and empower community, regional and super-regional financial institutions (“FIs”) to compete with large, technologically advanced, and well-resourced banks in the United States. Our solution, the Alkami 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. Alkami was founded to help level the playing field for FIs. Since then, our vision has been to create a platform that combines premium technology and fintech solutions in one integrated ecosystem, delivered as a software-as-a-service (“SaaS”) solution and providing our clients’ customers with a single point of access to all things digital. We have invested significant resources to build a technology stack that prioritized innovation velocity and speed-to-market given the importance of product depth and functionality in winning and retaining clients. In fiscal 2020, we acquired ACH Alert, LLC (“ACH Alert”) to pursue adjacent product opportunities, such as fraud prevention and to expand our addressable market. In addition, in September 2021, we acquired MK Decisioning Systems, LLC (“MK”) a technology platform for digital account opening, credit card and loan origination solutions. In April 2022, we acquired Segmint Inc. (“Segmint”), a leading cloud-based financial data analytics and transaction data cleansing provider. Our domain expertise in retail and business banking has enabled us to develop a suite of products tailored to address key challenges faced by FIs. Due to our architecture, adding products through our single code base is fast, simple, and cost-effective. The key differentiators of the Alkami Digital Banking Platform include: • User experience : Personalized and seamless digital experience across user interaction points, including mobile, chat and SMS, establishing durable connections between FIs and their customers. • Integrations : Scalability and extensibility driven by 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 : 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 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 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 September 30, 2023. We predominantly employ a per-registered-user pricing model, with incremental fees above certain contractual minimum commitments for each licensed solution. Our pricing is tiered, with per-registered-user discounts applied as clients achieve higher levels of customer penetration, incentivizing our clients to internally market and promote digital engagement. To support our growth and capitalize on our market opportunity, we have increased our operating expenses across all aspects of our business. In research and development, we continue to focus on innovation and bringing novel capabilities to our platform, extending our product depth. Similarly, we continue to expand our sales and marketing organization focusing on new client wins, cross-selling opportunities, and client renewals. For the three months ended 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 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 Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. On March 12, 2023, the U.S. 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, 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. 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 Growing our FI Client Base. A key part of our strategy is to grow our FI client base. 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. Our future success will significantly depend on our ability to continue to grow our FI client base through competitive wins. Deepening Client Customer Penetration. We primarily generate revenues through a per-registered-user pricing model. Once we onboard a client, our ability to help drive incremental client customer digital adoption translates to additional revenues with very limited additional spend. Our FI clients are incentivized to market and encourage digital account sign-up based on identifiable improvement in customer engagement as well as discounts received based on certain levels of customer penetration. We expect to continue to support digital adoption by client customers through continued investments in new products and platform enhancements. Our future success will depend on our ability to continue to deepen client customer penetration. Expanding our Product Suite. Product depth is a key determinant in winning new clients. In a replacement market, we win based on our ability to bring a product suite to market that is superior to the incumbent, as well as to our broader competition. Of equal importance is the ability to cohesively deliver a deep product suite with as little friction as possible to the client customer. The depth of our product suite is a function of technology and platform partnerships. Our platform model with 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. Furthermore, expanding our product suite expands our Revenue per Registered User (“RPU”) potential. For additional information regarding RPU, see “Key Business Metrics.” Client Renewals. Our model and the stability of our revenue base is, in part, driven by our ability to renew our clients. In addition to extending existing relationships, renewals provide an opportunity to grow minimum contract value, as over the course of a contract term our clients often grow, or their needs evolve. Client renewals are also an important lever in driving our long-term gross margin targets. We had 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. Continued Leadership in Innovation. Our ability to maintain a differentiated platform and offering is dependent upon our pace of innovation. 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 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 Revenues 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. For each client, we invoice monthly a contractual minimum fee for each licensed solution. In addition, we invoice monthly an additional subscription fee for the number of registered users using each solution and the number of bill-pay and certain other transactions those registered users conduct through our digital banking platform in excess of their contractual minimum commitments. Our pricing is tiered, with per-registered-user discounts applied as clients achieve higher levels of customer penetration, incentivizing our clients to internally market our products and promote digital engagement. Variable consideration earned for subscription fees in excess of contractual minimums is recognized as revenues in the month of actual usage. SaaS subscription services also include annual and monthly charges for maintenance and support services which are recognized on a straight-line basis over the contract term. We receive implementation and other upfront fees for the implementation, configuration, and integration of our digital banking platform. We typically invoice these services as a fixed price per contract. These fees are not distinct from the underlying licensed SaaS subscription services. As a result, we recognize the resulting revenues on a straight-line basis over the client’s initial agreement term for our licensed SaaS solutions, commencing upon launch. Occasionally, our clients request custom development and other professional services, which we provide. These are generally one-time requests and involve unique, non-standard features, functions or integrations that are intended to enhance or modify their licensed SaaS solutions. We recognize revenues at the point in time the services are transferred to the client. The following disaggregates our revenues for the three 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 (in thousands) SaaS subscription services $ 64,758 $ 50,697 $ 183,446 $ 141,287 Implementation services 2,077 1,922 6,961 5,503 Other services 868 793 3,055 1,942 Total revenues $ 67,703 $ 53,412 $ 193,462 $ 148,732 See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail. Cost of Revenues and Gross Margin Cost of revenues is comprised primarily of salaries and other personnel-related costs, including employee benefits, bonuses, stock-based compensation, travel, and related costs for employees supporting our SaaS subscription, implementation and other services. This includes the costs of our implementation, client support and client success teams, development personnel responsible for maintaining and releasing updates to our platform, as well as third-party cloud-based hosting services. Cost of revenues also includes the direct costs of bill-pay services and other third-party intellectual property included in our solutions, the amortization of acquired technology and depreciation. We capitalize certain personnel costs directly related to the implementation of our solutions to the extent those costs are recoverable from future revenues. We amortize the costs for an implementation once revenue recognition commences. The amortization period is typically five to seven years, which represents the expected period of client benefit. Other costs not directly recoverable from future revenues are expensed in the period incurred. We intend to continue to increase our investments in our implementation, client support and client success teams and technology infrastructure to serve our clients and support our growth. We expect cost of revenues to continue to grow in absolute dollars as we grow our business, but to vary as a percentage of revenues from period to period as a function of the utilization of implementation and support personnel and the extent to which we recognize fees from bill-pay services and other third-party functionality integrated into our solutions. Our gross margin for the three 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 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 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 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%). Operating Expenses Research and Development. Research and development costs consist primarily of personnel-related costs for our engineering, information technology and product employees, including salaries, bonuses, other incentive-related compensation, employee benefits and stock-based compensation. In addition, we also include third-party contractor expenses, software development and testing tools, allocated corporate expenses, and other expenses related to developing new solutions and upgrading and enhancing existing solutions. We expect research and development costs to increase as we expand our platform with new features and functionality as well as enhance the existing Alkami Digital Banking Platform. Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs of our sales, marketing, and a portion of account management employees, including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation. Sales and marketing expenses also include travel and related costs, outside consulting fees and marketing programs, including lead generation, costs of our annual client conference, advertising, trade shows and other event expenses. We expect sales and marketing expenses will continue to increase as we expand our direct sales teams to pursue our market opportunity. General and Administrative . General and administrative expenses consist primarily of personnel-related costs for our executive, finance, legal, human resources, information technology, security and compliance and other administrative employees, including salaries, bonuses, commissions, other incentive-related compensation, employee benefits and stock-based compensation. General and administrative expenses also include accounting, auditing and legal professional services fees, travel, and other unallocated corporate-related expenses such as the cost of our facilities, employee relations, corporate telecommunication and software. We expect that general and administrative expenses will continue to increase as we scale our business and as we incur costs associated with being a publicly traded company, including legal, audit, business insurance and consulting fees. Acquisition-Related Expenses, net. Acquisition-related expenses, net, include the accrual of deferred compensation due to the former owner of ACH Alert, in addition to acquisition-related expenses associated with the acquisitions of MK and Segmint, primarily related to legal, consulting, and professional fees. In addition, these expenses are inclusive of any (gain) loss on revaluation of contingent consideration. Amortization of Acquired Intangibles. Amortization of acquired intangibles represents the amortization of intangibles recorded in connection with our business acquisitions, which are amortized on a straight-line basis over the estimated useful lives of the related assets. 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 (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 (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 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 Revenues $ 67,703 $ 53,412 $ 193,462 $ 148,732 Cost of revenues (1) (2) 31,153 25,844 89,300 69,081 Gross profit 36,550 27,568 104,162 79,651 Operating expenses (2) : Research and development 21,755 18,222 63,170 48,973 Sales and marketing 11,933 9,721 36,694 27,822 General and administrative 18,290 18,337 53,608 54,114 Acquisition-related expenses, net — 737 220 155 Amortization of acquired intangibles 359 370 1,076 796 Total operating expenses 52,337 47,387 154,768 131,860 Loss from operations (15,787) (19,819) (50,606) (52,209) Non-operating income (expense): Interest income 2,080 851 5,822 1,383 Interest expense (1,931) (1,185) (5,514) (2,336) Gain (loss) on financial instruments 201 (59) 421 (446) Loss before income taxes (15,437) (20,212) (49,877) (53,608) Provision (benefit) for income taxes 39 (163) 323 80 Net loss $ (15,476) $ (20,049) $ (50,200) $ (53,688) (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 $2.6 million for the nine months ended September 30, 2023 and 2022, respectively. (2) Includes stock-based compensation expenses as follows: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 ($ in thousands) Cost of revenues $ 1,507 $ 1,244 $ 4,140 $ 3,278 Research and development 4,116 3,023 11,854 7,487 Sales and marketing 1,906 1,112 5,309 2,859 General and administrative 6,389 6,535 16,611 19,332 Total stock-based compensation expenses $ 13,918 $ 11,914 $ 37,914 $ 32,956 The following table presents our reconciliation of GAAP net loss to adjusted EBITDA for the periods indicated. Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 ($ in thousands) Net loss $ (15,476) $ (20,049) $ (50,200) $ (53,688) Provision (benefit) for income taxes 39 (163) 323 80 (Gain) loss on financial instruments (201) 59 (421) 446 Interest (income) expense, net (149) 334 (308) 953 Depreciation and amortization 2,695 2,550 7,841 5,512 Stock-based compensation expense 13,918 11,914 37,914 32,956 Acquisition-related expenses, net (1) — 737 220 155 Adjusted EBITDA (2) $ 826 $ (4,618) $ (4,631) $ (13,586) (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. For additional information regarding adjusted EBITDA, see “Key Business Metrics.” Key Business Metrics Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial measure and should not be considered an alternative to GAAP net loss as a measure of operating performance or as a measure of liquidity. We define adjusted EBITDA as net loss before provision (benefit) for income taxes; (gain) loss on financial instruments; interest expense, net; depreciation and amortization; stock-based compensation expense; and acquisition-related expenses, net. 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 $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 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 $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. We define a registered user as an individual or business related to an account holder of an FI client on our digital banking platform who has registered to use one or more of our solutions and has current access to use those solutions as of the last day of the reporting period presented. We price our digital banking platform based on the number of registered users, so as the number of registered users of our digital banking platform increases, our ARR grows. We believe growth in the number of registered users provides important information about our ability to expand market adoption of our digital banking platform and its associated software products, and therefore to grow revenues over time. We had 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). We calculate RPU by dividing ARR as of the last day of the reporting period by the number of registered users as of the last day of the reporting period. We believe RPU provides important information about our ability to grow the number of software products adopted by new clients over time, as well as our ability to expand the number of software products that our existing clients add to their contracts with us over time. RPU was $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 Revenues Three months ended September 30, Change Nine months ended September 30, Change 2023 2022 $ % 2023 2022 $ % ($ in thousands) Revenues $ 67,703 $ 53,412 $ 14,291 26.8 % $ 193,462 $ 148,732 $ 44,730 30.1 % September 30, 2023 2022 Annual Recurring Revenue (ARR) $ 274,976 $ 213,640 $ 61,336 28.7 % Registered Users 16,891 13,726 3,165 23.1 % Revenue per Registered User (RPU) $ 16.28 $ 15.57 $ 0.71 4.6 % 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 $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 September 30, Change Nine months ended September 30, Change 2023 2022 $ % 2023 2022 $ % ($ in thousands) Cost of revenues $ 31,153 $ 25,844 $ 5,309 20.5 % $ 89,300 $ 69,081 $ 20,219 29.3 % Percentage of revenues 46.0 % 48.4 % (2.4) % (5.0) % 46.2 % 46.4 % (0.2) % (0.4) % Cost of Revenues 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 September 30, Change Nine months ended September 30, Change 2023 2022 $ % 2023 2022 $ % ($ in thousands) Research and development $ 21,755 $ 18,222 $ 3,533 19.4 % $ 63,170 $ 48,973 $ 14,197 29.0 % Sales and marketing 11,933 9,721 2,212 22.8 % 36,694 27,822 8,872 31.9 % General and administrative 18,290 18,337 (47) (0.3) % 53,608 54,114 (506) (0.9) % Acquisition-related expenses, net — 737 (737) (100.0) % 220 155 65 41.9 % Amortization of acquired intangibles 359 370 (11) (3.0) % 1,076 796 280 35.2 % Total operating expenses $ 52,337 $ 47,387 $ 4,950 10.4 % $ 154,768 $ 131,860 $ 22,908 17.4 % Percentage of revenues 77.3 % 88.7 % 80.0 % 88.7 % Research and Development 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 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 $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 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 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 $0.7 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 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 $0.7 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 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. We have financed our operations primarily through the net proceeds we have received from the sales of our redeemable convertible preferred stock and common stock, cash generated from the sale of SaaS subscription services and borrowings under our Amended Credit Agreement (as defined below). 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 (beyond the next 12 months). We may, from time to time, seek to raise additional capital to support our growth. Any equity financing we may undertake could be dilutive to our existing stockholders, and any additional debt financing we may undertake could require debt service and financial and operational requirements that could adversely affect our business. 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. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine months ended September 30, (in thousands) 2023 2022 Net cash used in operating activities $ (12,197) $ (24,220) Net cash used in investing activities $ (16,358) $ (247,499) Net cash (used in) provided by financing activities $ (4,801) $ 62,893 Net Cash Used in Operating Activities 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 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 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 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 $60.0 million in aggregate commitments for secured revolving loans (“Revolving Facility”), of which there were no outstanding borrowings as of September 30, 2023. • Term Loan: 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 borrowings as of September 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 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. 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. 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 2033. 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; 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 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 $0.8 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 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 We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Significant Judgments and Estimates In preparing our unaudited condensed consolidated financial statements in conformity with GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the condensed consolidated financial statements are prepared. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023. Recently Issued Accounting Pronouncements 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 We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.