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, 2023, which are included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 29, 2024. 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 “anticipates,” “expects,” “suggests,” “plans,” “believes,” “intends,” “estimates,” “targets,” “projects,” “seeks,” “should,” “can,” “could,” “would,” “may,” “will,” “forecasts” “strategy,” “future,” “likely” or the negative of these terms or 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 clients’ integration and functionality requirements; • shifts in the number of account holders and registered users of our solutions, their use of our solutions and our clients’ implementation and client support needs; • 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; • privacy and data security concerns, laws, regulations and standards and our processing and use of the PI 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 or risks resulting in the disclosure our proprietary source code to our clients; • 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 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 and exclusive forum provisions in our governing documents. 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 desktop, mobile, chat and SMS, establishing durable connections between FIs and their customers. • Integrations : Scalability and extensibility driven by more than 300 real-time integrations to back-office systems and third-party fintech solutions as of September 30, 2024 , 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, marketing, data insights, card experience, money movement, customer service, commercial banking, financial wellness, security and fraud protection and extensibility. 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, 2024. We predominantly employ a per-registered-user pricing model, with incremental fees above certain contractual client minimum commitments for each licensed solution. In these cases, 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, 2024 and 2023, our total revenues were $85.9 million and $67.7 million, respectively, representing a 26.9% increase period-over-period. For the nine months ended September 30, 2024 and 2023, our total revenues were $244.2 million and $193.5 million, respectively, representing an increase of 26.2% period-over-period. SaaS subscription revenues, as further described below, represented 95.5% and 95.6% of total revenues for the three and nine months ended September 30, 2024, respectively, and 95.7% and 94.8% of total revenues for the three and nine months ended September 30, 2023, respectively. We incurred net losses of $9.4 million and $33.2 million for the three and nine months ended September 30, 2024, respectively, and net losses of $15.5 million and $50.2 million for the three and nine months ended September 30, 2023, respectively, largely on the basis of significant continued investment in sales, marketing, product development and post-sales client activities. Recent Developments Second Amendment to Amended and Restated Credit Agreement: On July 1, 2024, the Company entered into a Second Amendment to its Amended and Restated Credit Agreement dated as of April 29, 2022, which, among other things, extended the maturity date of the revolving commitment, increased the amount of the revolving loan commitment, increased the according feature, and modified certain existing covenants. See Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional details. Secondary Offering of Common Stock: On August 8, 2024, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with J.P. Morgan Securities LLC and entities affiliated with General Atlantic, L.P., S3 Ventures Fund III, L.P., George B. Kaiser and Brian R. Smith (collectively, the “Selling Stockholders”), relating to an underwritten secondary offering (the “Offering”) of an aggregate of 5 million shares (the “Shares”) of the Company’s common stock. Pursuant to the Underwriting Agreement, the Selling Stockholders sold all 5 million Shares. The Offering closed on August 12, 2024, and the Company did not receive any of the proceeds from the sale of the Shares by the Selling Stockholders. 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, 2024, we served 266 FIs through the Alkami Digital Banking Platform and over 700 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 300 integrations as of September 30, 2024 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, as we generally achieve approximately 70% gross margin upon renewal. We had 14 and 26 client renewals for the three and nine months ended September 30, 2024, 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 28.1% and 29.0% of our revenues for the three and nine months ended September 30, 2024, 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 approximately 70 months as of September 30, 2024. We derive the majority of our revenues from SaaS subscription services charged for the use of our digital banking solution. Subscription services are recognized over time on a ratable basis over the client agreement term beginning on the date our solution is made available to our client. The promised consideration may include fixed or variable amounts. For our clients with enterprise license contracts, they are invoiced on an agreed upon monthly rate throughout the contract term, which may include fixed monthly or annual rate escalations. Fixed dollar or percentage escalations that are not based on registered users are considered part of the fixed transaction price and recognized on a straight-line basis over the SaaS subscription period evenly. The majority of our client contracts are based on registered users, which 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 client 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 table disaggregates our revenues for the three and nine months ended September 30, 2024 and 2023 by major source: Three months ended September 30, Nine months ended September 30, (in thousands) 2024 2023 2024 2023 SaaS subscription services $ 82,054 $ 64,758 $ 233,437 $ 183,446 Implementation services 1,832 2,077 5,790 6,961 Other services 2,020 868 4,966 3,055 Total revenues $ 85,906 $ 67,703 $ 244,193 $ 193,462 See Note 4 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 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, depreciation, and the amortization of acquired technology. 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 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, 2024 was 58.9% and 58.7%, respectively, and 54.0% and 53.8% for the three and nine months ended September 30, 2023, respectively. The major components of cost of revenues are represented in the following table as percentages of revenues for the three and nine months ended September 30, 2024 and 2023, respectively: Three months ended September 30, Nine months ended September 30, (Cost component as a % of revenue) 2024 2023 2024 2023 Third-party hosting services 5.7 % 7.8 % 6.0 % 7.7 % Direct costs of bill-pay and other third-party intellectual property 18.6 % 17.4 % 18.2 % 17.4 % Implementation and client support teams 9.4 % 12.6 % 9.5 % 13.0 % Development team (maintenance and updates) 3.5 % 3.4 % 3.7 % 3.3 % Amortization 2.3 % 2.5 % 2.3 % 2.6 % Stock-based compensation 1.6 % 2.2 % 1.6 % 2.1 % Depreciation — % 0.1 % — % 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 our client success 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, secondary offering costs, 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. Acquisition-related expenses are primarily related to legal, consulting and professional fees. Amortization of Acquired Intangibles. Amortization of acquired intangibles represents the amortization of intangible assets 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 or losses on marketable securities and realized gains on sales of marketable securities. Provision for Income Taxes Our effective tax rate differs from the statutory tax rate primarily due to the impact of the valuation allowance against our deferred tax assets and state tax expense. As a result of our valuation allowance, provision for income taxes consists primarily of state income taxes and deferred taxes related to the tax amortization of acquired goodwill. Results of Operations The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and notes included elsewhere in this filing. The following table presents our selected condensed consolidated statements of operations data for the three and nine months ended September 30, 2024 and 2023. Three months ended September 30, Nine months ended September 30, (in thousands) 2024 2023 2024 2023 Revenues $ 85,906 $ 67,703 $ 244,193 $ 193,462 Cost of revenues (1) (2) 35,289 31,153 100,773 89,300 Gross profit 50,617 36,550 143,420 104,162 Operating expenses (2) : Research and development 24,133 21,755 70,862 63,170 Sales and marketing 14,406 11,933 45,213 36,694 General and administrative 22,147 18,290 62,074 53,608 Acquisition-related expenses — — 195 220 Amortization of acquired intangibles 359 359 1,076 1,076 Total operating expenses 61,045 52,337 179,420 154,768 Loss from operations (10,428) (15,787) (36,000) (50,606) Non-operating income (expense): Interest income 1,147 2,080 3,490 5,822 Interest expense (180) (1,931) (327) (5,514) Gain on financial instruments — 201 — 421 Loss before income taxes (9,461) (15,437) (32,837) (49,877) Provision (benefit) for income taxes (19) 39 355 323 Net loss $ (9,442) $ (15,476) $ (33,192) $ (50,200) (1) Includes amortization of acquired technology of $1.3 million for both the three months ended September 30, 2024 and 2023, and $4.0 million for both the nine months ended September 30, 2024 and 2023. (2) Includes stock-based compensation expenses as follows: Three months ended September 30, Nine months ended September 30, (in thousands) 2024 2023 2024 2023 Cost of revenues $ 1,407 $ 1,507 $ 3,932 $ 4,140 Research and development 4,492 4,116 12,746 11,854 Sales and marketing 2,327 1,906 6,649 5,309 General and administrative 7,031 6,389 20,495 16,611 Total stock-based compensation expenses $ 15,257 $ 13,918 $ 43,822 $ 37,914 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, (in thousands) 2024 2023 2024 2023 Net loss $ (9,442) $ (15,476) $ (33,192) $ (50,200) Provision (benefit) for income taxes (19) 39 355 323 Gain on financial instruments — (201) — (421) Interest income, net (967) (149) (3,163) (308) Depreciation and amortization 2,679 2,695 7,854 7,841 Stock-based compensation expense 15,257 13,918 43,822 37,914 Secondary offering costs (1) 810 — 810 — Acquisition-related expenses — — 195 220 Adjusted EBITDA (2) $ 8,318 $ 826 $ 16,681 $ (4,631) (1) Pursuant to the requirements of the Fourth Amended and Restated Investors’ Rights Agreement, dated as of September 24, 2020, by and among the Company and the investors listed therein, the Company incurred secondary offering costs on behalf of the Selling Stockholders related to the Offering. (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 on financial instruments; interest income, net; depreciation and amortization; stock-based compensation expense; secondary offering costs; and acquisition-related expenses. We believe adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $8.3 million and $16.7 million for the three and nine months ended September 30, 2024, respectively, and $0.8 million and $(4.6) million for the three and nine months ended September 30, 2023, 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 $342.1 million as of September 30, 2024 and $275.0 million as of September 30, 2023, an increase of $67.1 million, or 24.4%. 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 19.5 million registered users as of September 30, 2024 and 16.9 million as of September 30, 2023, an increase of 2.6 million, or 15.4%. 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 $17.54 as of September 30, 2024 and $16.28 as of September 30, 2023, an increase of $1.26, or 7.7%. Comparison of Three and Nine Months ended September 30, 2024 and 2023 Revenues Three months ended September 30, Change Nine months ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Revenues $ 85,906 $ 67,703 $ 18,203 26.9 % $ 244,193 $ 193,462 $ 50,731 26.2 % September 30, 2024 2023 Annual Recurring Revenue (ARR) $ 342,101 $ 274,976 $ 67,125 24.4 % Registered Users 19,499 16,891 2,608 15.4 % Revenue per Registered User (RPU) $ 17.54 $ 16.28 $ 1.26 7.7 % Revenues increased $18.2 million, or 26.9%, and $50.7 million, or 26.2%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. The increase of $18.2 million in revenues for the three months ended September 30, 2024 was primarily due to registered user growth from new and existing clients, and RPU growth. The increase of $50.7 million for the nine months ended September 30, 2024 was primarily due to registered user growth of 2.6 million when compared to September 30, 2023, comprised of 1.4 million in registered user growth from existing clients and 1.2 million in registered users from new clients implemented through our digital banking platform (contractual minimums). In addition, increased revenues were due to RPU growth of 7.7% when compared to September 30, 2023. RPU growth was primarily driven by cross-sell activity to existing clients and higher average RPU of new clients implemented on our digital banking platform compared to aggregate RPU. The average RPU of users from new clients implemented on our digital platform in the last 12 months of $19.12 as of September 30, 2024, is 9.0% higher than the aggregate RPU as of September 30, 2024. Cost of Revenues and Gross Margin Three months ended September 30, Change Nine months ended September 30, Change (in thousands) 2024 2023 $ % 2024 2023 $ % Cost of revenues $ 35,289 $ 31,153 $ 4,136 13.3% $ 100,773 $ 89,300 $ 11,473 12.8% Percentage of revenues 41.1 % 46.0 % (4.9)% (10.7)% 41.3 % 46.2 % (4.9)% (10.6)% Cost of Revenues Cost of revenues increased $4.1 million, or 13.3%, and $11.5 million, or 12.8%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. Our revenue growth outpaced our cost of revenues growth, leading to an improved gross margin of 58.9% and 58.7% for the three and nine months ended September 30, 2024, respectively, compared to a gross margin of 54.0% and 53.8% for the same periods in 2023, respectively. The increase in cost of revenues for the three months ended September 30, 2024 was primarily driven by $4.2 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform and $0.3 million in higher various other costs. These expenses were partially offset by lower hosting costs of $0.4 million. The increase in cost of revenues for the nine months ended September 30, 2024 was primarily driven by $10.7 million in higher costs of our third-party partners where we resell their solutions as part of the digital platform and $1.1 million in higher various other costs. These expenses were partially offset by lower hosting costs of $0.3 million. Operating Expenses Three months ended September 30, Change Nine months ended September 30, Change 2024 2023 $ % 2024 2023 $ % ($ in thousands) Research and development $ 24,133 $ 21,755 $ 2,378 10.9 % $ 70,862 $ 63,170 $ 7,692 12.2 % Sales and marketing 14,406 11,933 2,473 20.7 % 45,213 36,694 8,519 23.2 % General and administrative 22,147 18,290 3,857 21.1 % 62,074 53,608 8,466 15.8 % Acquisition-related expenses — — — — % 195 220 (25) (11.4) % Amortization of acquired intangibles 359 359 — — % 1,076 1,076 — — % Total operating expenses $ 61,045 $ 52,337 $ 8,708 16.6 % $ 179,420 $ 154,768 $ 24,652 15.9 % Percentage of revenues 71.1 % 77.3 % 73.5 % 80.0 % Research and Development Research and development expenses increased $2.4 million, or 10.9%, and $7.7 million, or 12.2%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. For the three months ended September 30, 2024, the increase was primarily due to $1.4 million in higher costs for consulting and a $1.4 million increase in personnel-related costs (which includes stock-based compensation of $0.4 million), resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation. In addition, we incurred $0.3 million in higher hosting costs. These expenses were partially offset by lower various other net costs of $0.7 million. For the nine months ended September 30, 2024, the increase was primarily due to $3.9 million in higher costs for consulting, a $3.8 million increase in personnel-related costs (which includes stock-based compensation of $0.9 million), resulting from headcount growth in our engineering, information technology and product teams dedicated to platform enhancements and innovation and $0.7 million in higher hosting costs. These expenses were partially offset by lower various other net costs of $0.6 million. Sales and Marketing Sales and marketing expenses increased $2.5 million, or 20.7%, and $8.5 million, or 23.2%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. For the three months ended September 30, 2024, the increase was primarily due to a $2.1 million increase in personnel-related costs (which includes stock-based compensation of $0.4 million), resulting from headcount growth in our sales and marketing teams. In addition, we incurred $0.5 million in higher consulting costs. These expenses were partially offset by lower various other net costs of $0.1 million. For the nine months ended September 30, 2024, the increase was primarily due to a $6.1 million increase in personnel-related costs (which includes stock-based compensation of $1.3 million), resulting from headcount growth in our sales and marketing teams. In addition, we incurred $1.4 million in higher consulting costs, $0.9 million in higher travel costs for the sales team, and $0.4 million in higher costs related to industry conferences and trade shows, including enhanced client experiences at our in-person client conference, Co:lab. These expenses were partially offset by lower various other net costs of $0.3 million. General and Administrative General and administrative expenses increased by $3.9 million, or 21.1%, and $8.5 million, or 15.8%, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. For the three months ended September 30, 2024, the increase was primarily due to a $1.4 million increase in personnel-related costs (which includes stock-based compensation of $0.6 million), $0.8 million of higher software costs, $0.8 million of secondary offering costs, $0.7 million in higher audit and consulting costs, and $0.2 million in higher various other net costs. For the nine months ended September 30, 2024, the increase was primarily due to a $5.1 million increase in personnel-related costs (which includes stock-based compensation of $3.9 million), $1.6 million in higher audit and consulting costs, $1.4 million in higher software costs, and $0.8 million of secondary offering costs. These expenses were partially offset by lower various other net costs of $0.4 million. Acquisition-Related Expenses Acquisition-related expenses was $0.2 million for both the nine months ended September 30, 2024 and 2023. Amortization of Acquired Intangibles Amortization of acquired intangibles was $0.4 million for both the three months ended September 30, 2024 and 2023 and $1.1 million for both the nine months ended September 30, 2024 and 2023. Non-Operating Income (Expense), Net Non-operating income increased $0.6 million and $2.4 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. For the three months ended September 30, 2024, the increase was primarily due to a $0.8 million increase in net interest income, partially offset by a $0.2 million reduction in gain on financial instruments related to marketable securities. For the nine months ended September 30, 2024, the increase was primarily due to a $2.9 million increase in net interest income, partially offset by a $0.4 million reduction in gains on financial instruments related to marketable securities. Provision for Income Taxes The Company recorded an income tax benefit of less than $0.1 million and income tax expense of $0.4 million for the three and nine months ended September 30, 2024, respectively, resulting in an effective tax rate of 0.2% and (1.1)%, respectively, compared to income tax expense of less than $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, resulting in an effective tax rate of (0.3)% and (0.6)%, respectively. Our effective tax rate for the three and nine months ended September 30, 2024 and September 30, 2023 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, 2024, we had $101.0 million in cash and cash equivalents and marketable securities, and an accumulated deficit of $468.6 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 cash generated from the sale of SaaS subscription services. 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. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine months ended September 30, (in thousands) 2024 2023 Net cash provided by (used in) operating activities $ 12,486 $ (12,197) Net cash provided by (used in) investing activities $ 26,046 $ (16,358) Net cash provided by (used in) financing activities $ 1,497 $ (4,801) Net Cash Provided by (Used in) Operating Activities During the nine months ended September 30, 2024, net cash provided by operating activities was $12.5 million, which consisted of a net loss of $33.2 million, adjusted by non-cash charges of $51.0 million and net cash outflows from the change in net operating assets and liabilities of $5.3 million. The non-cash charges were primarily comprised of depreciation and amortization expense of $7.9 million, stock-based compensation expense of $43.8 million, and other non-cash charges of $0.2 million, partially offset by accrued interest on marketable securities, net of $0.9 million. The net cash outflows from the change in our net operating assets and liabilities were primarily due to a $6.9 million increase in accounts receivable, $5.1 million increase in deferred costs, and a $2.6 million increase in prepaid expenses and other current assets, partially offset by a $6.3 million increase in accounts payable and accrued liabilities and a $3.0 million increase in deferred revenues. 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. Net Cash Provided by (Used in) Investing Activities During the nine months ended September 30, 2024, net cash provided by investing activities was $26.0 million, primarily consisting of $62.8 million in proceeds from maturities and redemptions of marketable securities, partially offset by $30.7 million in purchases of marketable securities, $5.0 million related to capitalized software development costs and $1.0 million related to capital expenditures related to updates for computer and other equipment. 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. Net Cash Provided by (Used in) Financing Activities For the nine months ended September 30, 2024, net cash provided by financing activities was $1.5 million, which was primarily due to $12.1 million in proceeds from the exercise of stock options to purchase 1.8 million shares of our common stock and proceeds from issuances under the Employee Stock Purchase Plan (“ESPP”) of $2.6 million, partially offset by $12.8 million in payments for taxes related to net settlement of equity awards and $0.4 million of debt issuance costs paid. 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 ESPP of $2.4 million. Amended Credit Agreement On July 1, 2024, the Company entered into a Second Amendment (the “Second Amendment”) to the Company’s Amended and Restated Credit Agreement dated as of April 29, 2022 (as amended, the “Amended Credit Agreement”), with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company, as administrative agent, and other lenders party thereto. The Second Amendment, among other things, (i) extended the maturity date of the Revolving Facility from April 29, 2026 to April 29, 2027, (ii) increased the amount of the Revolving Facility commitment by $65.0 million, for a total revolving loan commitment of $125.0 million, (iii) increased the accordion feature from $50.0 million to $100.0 million, (iv) modified certain existing covenants, including increasing the minimum trailing four quarters free cash flow requirement to $(25.0) million, and (v) for any fiscal quarter ending after the financial covenant trigger date (which was extended to April 28, 2026 or such earlier date as designated by the Company) (the “Financial Covenant Trigger Date”), replaced compliance with a fixed charge coverage ratio with compliance of a minimum interest coverage ratio of 3.0x. Revolving Facility loans under the Amended Credit Agreement may be voluntarily prepaid and re-borrowed. The Amended Credit Agreement previously provided for a term loan, which was fully repaid in December 2023 and cannot be re-borrowed. The Company has no outstanding borrowings as of September 30, 2024 related to the Amended Credit Agreement. 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 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. 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 interest coverage 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 3.00:1.00. The Second Amendment revised the free cash flow covenant, as calculated at the last day of each fiscal quarter for the period of 12 consecutive months then ending, requiring free cash flow to be not less than $(25.0) million for the fiscal quarter ended September 30, 2024 and each fiscal quarter ending thereafter. The Amended Credit Agreement also contains customary events of default, which if they occur, could result in the termination of commitments under the Amended Credit Agreement, the declaration that all outstanding loans are immediately due and payable in whole or in part, and the requirement to maintain cash collateral deposits in respect of outstanding letters of credit. The Company was in compliance with all covenants as of September 30, 2024. Total interest expense, including commitment fees and unused line fees, for the three and nine months ended September 30, 2024 was $0.2 million and $0.3 million, respectively, and $1.9 million and $5.5 million for the three and nine months ended September 30, 2023, respectively. In conjunction with closing the Amended Credit Agreement in 2022, First Amendment in 2023 and Second Amendment in 2024, we incurred issuance costs of $0.9 million, $0.3 million and $0.4 million, respectively, which were deferred and were scheduled to be amortized over the remaining term of the agreement. Unamortized debt issuance costs totaled $0.5 million and $0.3 million as of September 30, 2024 and December 31, 2023, respectively. Amortization expense was $0.1 million and $0.2 million for the three and nine months ended September 30, 2024, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. Contractual Obligations and Commitments There were no material changes to our contractual obligations and commitments as of September 30, 2024, compared to those discussed as of December 31, 2023 in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 29, 2024. Off-Balance Sheet Arrangements During the period presented, we did not have, 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, 2023, filed with the SEC on February 29, 2024. 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 when 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. Based on the market value of our common stock held by non-affiliates as of June 30, 2024, we will cease to qualify as an emerging growth company as of December 31, 2024.