Marqeta, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and in our final prospectus, or the Prospectus, dated June 8, 2021, filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. As discussed in the section titled “Note About Forward Looking Statements”, our actual results may differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” under Part II, Item 1A below. Overview Marqeta created modern card issuing, and we believe modern card issuing is at the heart of today’s digital economy. Marqeta’s modern card issuing platform, or our Platform, empowers our customers, or our Customers - which include businesses like Affirm, DoorDash, Instacart, Klarna, and Square - to create customized payment cards that provide innovative payment experiences for their customers and end users. Before the rise of modern card issuing, creating cards was slow, complex, and subject to mistakes. Marqeta helps solve these problems. Our Platform, powered by open APIs, enables businesses to develop modern, frictionless payment card experiences for consumer and commercial use cases that are either the core of, or in support of, their core business. Our modern architecture allows for flexibility, a high degree of configurability, and accelerated product development, democratizing access to card issuing technology. Marqeta’s open APIs provide instant access to our highly scalable, cloud-based, and configurable payment infrastructure that enables our Customers to launch and manage their own card programs, issue cards, and authorize and settle payments transactions. Initial Public Offering In June 2021, we completed our initial public offering, or the IPO, in which we issued and sold an aggregate of 52,272,727 shares of newly authorized Class A common stock, which included 6,818,181 shares that were offered and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $27.00 per share. Our shares of Class A common stock began trading on the Nasdaq Global Select Market on June 9, 2021. We received aggregate net proceeds of $1.3 billion from the IPO deducting underwriting discounts and commissions of $ 91.6 million, and offering costs of $7.5 million. Immediately prior to the completion of the IPO, we filed our Amended and Restated Certificate of Incorporation which authorized a total of 1,500,000,000 shares of Class A common stock, 600,000,000 shares of Class B common stock, and 100,000,000 shares of undesignated preferred stock. All shares of common stock then outstanding were reclassified as Class B common stock and all shares of redeemable convertible preferred stock then outstanding were converted into 351,844,340 shares of common stock on a one-for-one basis and then reclassified into Class B common stock. Warrants exercisable for 2,569,528 shares of common stock were converted to an equivalent number of shares of warrants exercisable for Class B common stock and 203,610 shares of warrants exercisable for convertible preferred stock were converted to an equivalent number of warrants exercisable for shares of Class B common stock . Impact of COVID-19 The unprecedented and rapid spread of COVID-19 and the resultant shelter-in-place orders, promotion of social distancing measures, restrictions on businesses deemed non-essential, and travel restrictions implemented throughout the United States in March 2020 significantly impacted many aspects of the economy during 2020, and have continued to do so during 2021 to date. While the U.S. economy appears to be on a path to recovery in 2021 with millions of Americans receiving the COVID-19 vaccine, decreases in general unemployment, and many states and municipalities increasingly easing shelter-in-place restrictions, the path of the U.S. economy continues to depend, in part, on the course of the COVID-19 pandemic, including the spread of new or novel strains of the virus. 26 Table of Contents In response to the COVID-19 pandemic, we implemented measures to focus on employee safety and Customer support, while at the same time seeking to mitigate any negative impact on our financial position and operations. We implemented remote working capabilities for our entire company and, to date, there has been minimal disruption to our operations. Retail, restaurant, travel, and hospitality sectors of the U.S. economy have been significantly and adversely affected by the COVID-19 pandemic. We believe this has accelerated the shift of purchasing activities from offline to online and the growth of buy-now-pay-later solution providers along with the growth of on-demand delivery services. The COVID-19 pandemic intensified the need of consumers for virtual and contactless forms of payments, the need for greater flexibility with purchases and for easy online financing options. Many of these service providers are our Customers and they are experiencing accelerated adoption of technologies that enable such payment experiences. The lifting of the shelter-in-place orders and the restrictions on indoor activities that largely occurred in the United States in the second quarter of 2021, has slowed down some on-demand delivery processing volume compared to the peaks reported during the height of the COVID-19 pandemic in the second quarter of 2020. Further, in March 2021, the American Rescue Plan, among other things, provided individuals affected by the COVID-19 pandemic with cash stimulus payments. While we cannot reasonably estimate the actual effect on our total processing volume, or our TPV, and net revenue, we believe these stimulus payments contributed to the increase in our TPV and net revenue for the three and six months ended June 30, 2021 compared to the same period in 2020. Overall, we believe these trends significantly contributed to the increases in our net revenue of $52.9 million, or 76%, and in our gross profit of $19.4 million, or 70%, for the three months ended June 30, 2021 compared to the same period in 2020. It is uncertain how the COVID-19 pandemic will evolve and what effect the lifting of shelter-in-place orders and other restrictions, and the possible resumption of high levels of infection and hospitalization in light of new variant strains of the virus, will have on the processing volumes of our Customers, and on our results of operations in future periods. The Card Networks, which provide infrastructure for settlement and card payment information flow between card issuer infrastructure providers, or Issuer Processors, and acquirer processors, which facilitate the flow of card payment data to the financial institutions that actually issue payments cards, known as Issuing Banks, publish changes to interchange rates in April and October each year. Visa and Mastercard had postponed nearly all of their interchange rate updates for April and October 2020, and in March 2021 again announced further postponements in interchange rate changes through April 2022 as a result of COVID-19’s impact to the U.S. economy. Interchange Fees are transaction-based and volume-based fees set by a Card Network based on its interchange rates and paid by the financial institution that merchants use to hold funds and manage their business to the Issuing Bank that issued the payment card used to purchase goods or services from a merchant. Our agreements with Issuing Banks provide that we receive 100% of the Interchange Fees for processing our Customers’ card transactions. The net Interchange Fees we earn are affected by multiple factors. These factors include changes to the published interchange rates, the size of the individual transaction, and the mix of transactions between signature-based and PIN-based, consumer card and commercial card product types, and merchant categories, and Card Network-negotiated merchant rates. Although the Card Networks have announced some expected interchange rate changes for April 2022, it is uncertain if more changes will be implemented after lifting the current postponements. Additionally, as in the normal course of updating interchange rates, the Card Networks continually assess the influence of improved payments technology, industry trends, and the ongoing need to maintain balance of the payments ecosystem. All these factors combined can affect how future changes in interchange rates will impact our net revenue. While our business has not been adversely affected by the COVID-19 pandemic to date, we continue to monitor the situation and may take actions that alter our operations and business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our Customers, vendors, and employees. 27 Table of Contents Key Operating Metric and Non-GAAP Financial Measures We review a number of operating and financial metrics, including the key operating metric set forth below, to help us evaluate our business and growth trends, establish budgets, evaluate the effectiveness of our investments, and assess operational efficiencies. In addition to the results determined in accordance with GAAP, the following table sets forth a key operating metric and non-GAAP financial measures that we consider useful in evaluating our operating performance. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Total Processing Volume (TPV) (in millions) $ 26,520 $ 15,082 $ 50,518 $ 24,077 Net loss (in thousands) $ (68,554) $ (7,107) $ (81,392) $ (21,637) Net loss margin (56) % (10) % (35) % (18) % Adjusted EBITDA (in thousands) $ (10,637) $ (3,029) $ (8,990) $ (13,440) Adjusted EBITDA margin (9) % (4) % (4) % (11) % Total Processing Volume (TPV) - Total Processing Volume (TPV) represents the total dollar amount of payments processed through our Platform, net of returns and chargebacks. We believe that TPV is a key indicator of the market adoption of our Platform, growth of our brand, growth of our Customers' businesses and scale of our business. Adjusted EBITDA - Adjusted EBITDA is a non-GAAP financial measure that is calculated as net income (loss) adjusted to exclude share-based compensation expense; payroll tax related to share-based compensation; depreciation and amortization; income tax expense; and other income (expense) net, which consists of changes in the fair value of redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, and interest income from our marketable securities. We believe that adjusted EBITDA is an important measure of operating performance because it allows management and our board of directors to evaluate and compare our core operating results, including our operating efficiencies, from period to period. Additionally, we utilize adjusted EBITDA as an input into our calculation of certain annual employee bonus plans. See the section below titled “Use of Non-GAAP Financial Measures” for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA. Adjusted EBITDA Margi n - Adjusted EBITDA Margin is a non-GAAP financial measure that is calculated as Adjusted EBITDA divided by net revenue. This measure is used by management and our board of directors to evaluate our operating efficiency. See the section below titled “Use of Non-GAAP Financial Measures” for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA Margin. 28 Table of Contents Components of Results of Operations Net Revenue We have two components of net revenue: platform services revenue, net and other services revenue. Platform services revenue, net . Platform services revenue includes Interchange Fees, net of Revenue Share, and other service-level payments to Customers. Platform services revenue also includes processing and other fees. Interchange Fees are earned on card transactions we process for our Customers and are calculated based on a percentage of the amount of a specific card transaction plus a fixed amount per transaction. Interchange Fees are recognized when the associated transactions are settled. Revenue Share payments are incentives to Customers to increase processing volumes on our Platform. Revenue Share is generally computed as a percentage of the Interchange Fees earned or processing volume and is paid to Customers monthly. Revenue Share payments are recorded as a reduction to revenue. As Customers' processing volumes increase, they may earn an increased percentage of Revenue Share. Processing and other fees include fees earned when end users use payment cards at automated teller machines and minimum processing fees if Customers' processing volumes fall below certain thresholds. Other services revenue. Other services revenue primarily consists of revenue earned for card fulfillment services. Card fulfillment fees are generally billed to Customers upon ordering card inventory and recognized as revenue when the cards are shipped to the Customers. Costs of Revenue Costs of revenue consist of Card Network costs, Issuing Bank costs, and card fulfillment costs. Card Network costs are generally equal to a specified percentage of processing volume or a fixed amount per transaction routed through the respective Card Network. Issuing Bank costs compensate our Issuing Banks for issuing cards to our Customers and sponsoring our card programs with the Card Networks and are generally equal to a specified percentage of processing volume or a fixed amount per transaction. Card fulfillment costs include physical cards, packaging, and other fulfillment costs. We have separate marketing and incentive arrangements with Card Networks that provide us with monetary incentives for processing volume via the respective Card Network. The amount of the incentives is determined based on a percentage of the processing volume routed over the Card Network. We record these incentives as a reduction of Card Network fees included in costs of revenue. Generally, as Customers’ processing volumes increase we earn a higher rate of monetary incentives from these arrangements, subject to attaining certain volume tiering thresholds during a six-month or annual measurement period. For certain incentive arrangements with an annual measurement period, the one-year period may not align with our fiscal year. Operating Expenses Compensation and Benefits. Compensation and benefits consist primarily of salaries, employee benefits, incentive compensation, and share-based compensation. We expect that our compensation and benefits expenses will increase in absolute dollars as our business grows. Professional Services. Professional services consist primarily of consulting, legal, and recruiting fees. We expect that our professional services expenses will increase in absolute dollars as our business grows. Technology. Technology consists primarily of third-party hosting fees, software licenses, and hardware purchases below our capitalization threshold, and support and maintenance costs. We expect that our technology expenses will increase in absolute dollars as our business grows. Occupancy. Occupancy consists primarily of rent expense, repairs, maintenance, and other building related costs. We expect that our occupancy expenses will increase in absolute dollars as our business grows. Depreciation and Amortization. Depreciation and amortization consist primarily of depreciation of our fixed assets. We expect that our depreciation and amortization expenses will increase in absolute dollars as our business grows. 29 Table of Contents Marketing and Advertising. Marketing and advertising consist primarily of costs of general marketing activities and promotional activities. We expect that our marketing and advertising expenses will increase in absolute dollars as our business grows. Other Operating Expenses. Other operating expenses consist primarily of indirect state and local taxes, insurance costs, employee travel-related expenses, employee training, charitable donations, and other general office expenses. We expect our operating expenses to increase in absolute dollars as our business grows. Additionally, we expect to continue to incur increased expenses to operate as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. Other Income (Expense), net Other income (expense), net consists primarily of changes in the fair value of the redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, and interest income from our marketable securities. Income Tax Expense Income tax expense consists of U.S. federal and state income taxes and U.K. income taxes. We maintain a full valuation allowance against our federal and state net deferred tax assets as we have concluded that it is not more likely than not that we will realize our net deferred tax assets. 30 Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2021 2020 2021 2020 Net revenue $ 122,266 $ 69,402 $ 230,249 $ 117,790 Costs of revenue 75,291 41,785 133,417 71,611 Gross profit 46,975 27,617 96,832 46,179 Operating expenses: Compensation and benefits 95,204 25,901 140,043 50,883 Professional services 6,382 2,479 12,643 4,825 Technology 7,569 2,660 13,195 5,099 Occupancy 907 1,080 1,993 2,167 Depreciation and amortization 874 850 1,781 1,707 Marketing and advertising 495 343 990 681 Other operating expenses 3,530 1,101 4,825 2,627 Total operating expenses 114,961 34,414 175,470 67,989 Loss from operations (67,986) (6,797) (78,638) (21,810) Other income (expense), net (481) (295) (2,648) 200 Loss before income tax expense (68,467) (7,092) (81,286) (21,610) Income tax expense (87) (15) (106) (27) Net loss $ (68,554) $ (7,107) $ (81,392) $ (21,637) 31 Table of Contents Comparison of the Three Months Ended June 30, 2021 and 2020 Net Revenue Three Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Net revenue: Net interchange fees $ 95,146 $ 56,795 $ 38,351 68 % Processing and other fees 23,117 10,455 12,662 121 % Total platform services, net $ 118,263 $ 67,250 51,013 76 % Other services 4,003 2,152 1,851 86 % Total net revenue $ 122,266 $ 69,402 $ 52,864 76 % Total Processing Volume (TPV) (in millions) $ 26,520 $ 15,082 $ 11,438 76 % Total net revenue increased by $52.9 million, or 76%, for the three months ended June 30, 2021 compared to the same period in 2020, of which $41.8 million was generated by Square. The increase in net revenue was primarily driven by a 76% increase in TPV. Net Interchange Fees in the three months ended June 30, 2021 increased primarily due to the increase in TPV, partially offset by a 78% increase in Revenue Share, compared to the same period in 2020. Processing and other fees increased $12.7 million or 121% in the three months ended June 30, 2021 compared to the same period in 2020 due primarily to the increase in automated teller machine processing volume. The increase in TPV was mainly driven by increases in processing volume from our digital banking and buy-now-pay-later Customers. TPV for our top five Customers, measured by TPV in each respective period, grew by 63% for the three months ended June 30, 2021 compared to the same period in 2020, while TPV from all other Customers, as a group, grew 265% for the three months ended June 30, 2021 compared to the same period in 2020. Costs of Revenue and Gross Margin Three Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Costs of revenue: Card Network fees, net 63,887 34,334 $ 29,553 86 % Issuing Bank fees 7,559 5,440 2,119 39 % Other 3,845 2,011 1,834 91 % Total costs of revenue $ 75,291 $ 41,785 $ 33,506 80 % Gross profit $ 46,975 $ 27,617 $ 19,358 70 % Gross margin 38 % 40 % Costs of revenue increased by $33.5 million, or 80%, for the three months ended June 30, 2021 compared to the same period in 2020. The increase was primarily due to increased Card Network fees as the result of the 76% increase in TPV and 77% increase in the number of corresponding transactions. Network fees are net of monetary incentives from Card Networks for processing volume through the respective Card Networks during the period. Issuing Bank fees increased $2.1 million, or 39%, for the three months ended June 30, 2021 compared to the same period in 2020, which was lower than the percentage of increase in TPV as a result of volume tiers being met at Sutton Bank. Issuing Bank fees are typically structured based on volume tiers; as our processing volumes grow, these fees as a percentage of processing volume decline. 32 Table of Contents As a result of the increases in net revenue and costs of revenue discussed above, our gross profit increased by $19.4 million, or 70%, for the three months ended June 30, 2021 compared to the same period in 2020. Our gross margin decreased by 2% during the three months ended June 30, 2021 compared to the same period in 2020. Operating Expenses Three Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Operating expenses: Salaries, bonus, benefits and payroll taxes 39,668 22,983 $ 16,685 73 % Share-based compensation 55,536 2,918 $ 52,618 1803 % Total compensation and benefits 95,204 25,901 $ 69,303 268 % Percentage of net revenue 78 % 37 % Professional services 6,382 2,479 3,903 157 % Percentage of net revenue 5 % 4 % Technology 7,569 2,660 4,909 185 % Percentage of net revenue 6 % 4 % Occupancy 907 1,080 (173) (16) % Percentage of net revenue 1 % 2 % Depreciation and amortization 874 850 24 3 % Percentage of net revenue 1 % 1 % Marketing and advertising 495 343 $ 152 44 % Percentage of net revenue — % — % Other operating expenses 3,530 1,101 2,429 221 % Percentage of net revenue 3 % 2 % Total operating expenses $ 114,961 $ 34,414 $ 80,547 Compensation and benefits expenses increased by $69.3 million, or 268%, for the three months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $16.7 million increase in employee-related costs due to the increase in the average number of full-time employees to 586 from 401 and a $52.6 million increase in share-based compensation expense. The increase in share-based compensation expense in the three months ended June 30, 2021 compared to the same period in 2020 was due to $23.1 million of expense recognized for cumulative prior service as of the IPO completion date for RSUs with both a service and liquidity vesting condition, $7.0 million of expense recognized for RSUs that vested upon the satisfaction of a service condition, $11.4 million of expense related to the CEO Long-Term Performance Award, $5.8 million expense related to secondary sales of common stock and $5.3 million increase in expense related to stock options. Professional services expenses increased by $3.9 million, or 157%, for the three months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $1.9 million increase in contractors costs, a $1.3 million increase in accounting, consulting, and legal fees, and a $0.7 million increase in recruiting fees. Technology expenses increased by $4.9 million, or 185%, for the three months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $3.0 million increase in third-party hosting costs to support our continued growth and increase in TPV and a $1.9 million increase in software licensing costs as we continue implementing new systems and tools and increasing the number of licenses for existing systems. Occupancy expense decreased by $0.2 million for the three months ended June 30, 2021 compared to the same period in 2020 as a result of a lease cost credit received due to the reduced use of our office space during prior shelter-in-place orders. As many of our employees and service providers continue to work remotely, we will continue to evaluate the need for additional office space. 33 Table of Contents Depreciation and amortization remained relatively flat for the three months ended June 30, 2021 compared to the same period in 2020. Marketing and advertising expenses increased by $0.2 million, or 44%, for the three months ended June 30, 2021 compared to the same period in 2020. The increase was primarily related to advertising and brand awareness investments to further grow our customer base. Other operating expenses increased by $2.4 million, or 221%, for the three months ended June 30, 2021 compared to the same period in 2020 as a result of an increase in various state and local non-income taxes of $1.1 million, an increase in insurance costs of $0.7 million, and an increase in other miscellaneous operating expenses of $0.5 million. Other income (expense), net Three Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Other income (expense), net $ (481) $ (295) $ (186) 63 % Percentage of net revenue — % — % Other income (expense), net decreased by $0.2 million, or 63%, for the three months ended June 30, 2021 compared to the same period in 2020 primarily due to the decrease in interest income from our marketable securities portfolio. Customer Concentration We generated 72% and 66% of our net revenue from our largest Customer, Square, during the three months ended June 30, 2021 and 2020, respectively. 34 Table of Contents Comparison of the Six Months Ended June 30, 2021 and 2020 Net Revenue Six Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Net revenue: Net interchange fees $ 182,401 $ 95,903 $ 86,498 90 % Processing and other fees 42,095 18,352 23,743 129 % Total platform services, net $ 224,496 $ 114,255 110,241 96 % Other services 5,753 3,535 2,218 63 % Total net revenue $ 230,249 $ 117,790 $ 112,459 95 % Total Processing Volume (TPV) (in millions) $ 50,518 $ 24,077 $ 26,441 110 % Total net revenue increased by $112.5 million, or 95%, for the six months ended June 30, 2021 compared to the same period in 2020, of which $89.2 million was generated by Square. The increase in net revenue was primarily driven by a 110% increase in TPV. Net Interchange Fees for the six months ended June 30, 2021 increased primarily due to the increase in TPV, partially offset by the effects of a decrease in the average Interchange rate earned in transactions, compared to the same period in 2020. Interchange rates may vary due to changes in rates published by the Card Networks as well as transaction volume type, including average transaction size, merchant classifications, and consumer versus commercial classification. The increase in net Interchange Fees due to the increase in TPV was also partially offset by the increase of Revenue Share by 111% in the six months ended June 30, 2021 compared to the same period in 2020. Processing and other fees increased $23.7 million or 129% in the six months ended June 30, 2021 compared to the same period in 2020 due primarily to an increase in automated teller machine processing volume. The increase in TPV was mainly driven by increases in processing volume from our digital banking and buy-now-pay-later Customers. TPV for our top five Customers, measured by TPV in each respective period, grew by 101% for the six months ended June 30, 2021 compared to the same period in 2020, while TPV from all other Customers, as a group, grew 210% for the six months ended June 30, 2021 compared to the same period in 2020. Costs of Revenue and Gross Margin Six Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Costs of revenue: Card Network fees, net 113,716 58,645 $ 55,071 94 % Issuing Bank fees 14,010 9,508 4,502 47 % Other 5,691 3,458 2,233 65 % Total costs of revenue $ 133,417 $ 71,611 $ 61,806 86 % Gross profit $ 96,832 $ 46,179 $ 50,653 110 % Gross margin 42 % 39 % Costs of revenue increased by $61.8 million, or 86%, for the six months ended June 30, 2021 compared to the same period in 2020. The increase was primarily due to increased Card Network fees as the result of the 110% increase in TPV and 88% increase in the number of corresponding transactions. Network fees are net of monetary incentives from Card Networks for processing volume through the respective Card Networks during the period. 35 Table of Contents Card Network fees for the six months ended June 30, 2021 reflect a reduction of $4.8 million related to monetary incentives that we earned as a result of processing volume reaching a specified threshold during the period. The additional incentive rates were applied to the relevant processing volumes in the 12-month period ended March 31, 2021. The processing volume thresholds resulting in additional incentives were not reached in the three months ended March 31, 2020, or during the 12-month period ended March 31, 2020. Issuing Bank fees increased $4.5 million, or 47%, for the six months ended June 30, 2021 compared to the same period in 2020, which was lower than the percentage of increase in TPV as a result of volume tiers being met at Sutton Bank. Issuing Bank fees are typically structured based on volume tiers; as our processing volumes grow, these fees as a percentage of processing volume decline. As a result of the increases in net revenue and costs of revenue discussed above, our gross profit increased by $50.7 million, or 110%, for the six months ended June 30, 2021 compared to the same period in 2020. Our gross margin increased to 42% during the six months ended June 30, 2021 - including the benefit of the monetary incentives mentioned above - from 39% during the same period in 2020. Operating Expenses Six Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Operating expenses: Salaries, bonus, benefits and payroll taxes 73,115 44,220 $ 28,895 65 % Share-based compensation 66,928 6,663 $ 60,265 904 % Total compensation and benefits 140,043 50,883 $ 89,160 175 % Percentage of net revenue 61 % 43 % Professional services 12,643 4,825 7,818 162 % Percentage of net revenue 5 % 4 % Technology 13,195 5,099 8,096 159 % Percentage of net revenue 6 % 4 % Occupancy 1,993 2,167 (174) (8) % Percentage of net revenue 1 % 2 % Depreciation and amortization 1,781 1,707 74 4 % Percentage of net revenue 1 % 1 % Marketing and advertising 990 681 $ 309 45 % Percentage of net revenue — % 1 % Other operating expenses 4,825 2,627 2,198 84 % Percentage of net revenue 2 % 2 % Total operating expenses $ 175,470 $ 67,989 $ 107,481 Compensation and benefits expenses increased by $89.2 million, or 175%, for the six months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $28.9 million increase in employee-related costs due to the increase in the average number of full-time employees to 561 from 385 and a $60.3 million increase in share-based compensation expense. The increase in share-based compensation expense in the six months ended June 30, 2020 compared to the same period in 2020 was primarily due to $23.1 million expense recognized for cumulative prior service as of the IPO completion date for RSUs with both a service and liquidity vesting condition, $7.0 million expense recognized for RSUs that vested upon the satisfaction of a service condition, $11.4 million expense related to the CEO Long-Term Performance Award, the increase of share-based compensation related to secondary sales of common stock by $10.2 million, and the increase of share-based compensation related to options by $8.5 million. 36 Table of Contents Professional services expenses increased by $7.8 million, or 162%, for the six months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $3.6 million increase in accounting, consulting, and legal fees, a $3.3 million increase in contractors costs, and a $0.9 million increase in recruiting fees. Technology expenses increased by $8.1 million, or 159%, for the six months ended June 30, 2021 compared to the same period in 2020. The increase was due to a $5.0 million increase in third-party hosting costs to support our continued growth and increase in TPV and a $3.1 million increase in software licensing costs as we continue implementing new systems and tools and increasing the number of licenses for existing systems. Occupancy expense decreased by $0.2 million for the six months ended June 30, 2021 compared to the same period in 2020 as a result of a lease cost credit received due to the reduced use of our office space during prior shelter-in-place orders. As many of our employees and service providers continue to work remotely, we will continue to evaluate the need for additional office space. Depreciation and amortization remained relatively flat for the six months ended June 30, 2021 compared to the same period in 2020. Marketing and advertising expenses increased by $0.3 million, or 45%, for six months ended June 30, 2021 compared to the same period in 2020. The increase was primarily due to advertising and brand awareness investments to further grow our customer base. Other operating expenses increased by $2.2 million, or 84%, for the six months ended June 30, 2021 compared to the same period in 2020 as a result of an increase in various state and local non-income taxes of $1.3 million, an increase in insurance costs of $0.7 million, and an increase in other miscellaneous operating expenses of $0.6 million. The increase was offset by a decrease of $0.4 million in employee travel and related expenses and office meals as a result of the shelter-in-place orders instituted in response to the spread of COVID-19 in March 2020. Other income (expense), net Six Months Ended June 30, (dollars in thousands) 2021 2020 $ Change % Change Other income (expense), net $ (2,648) $ 200 $ (2,848) (1424) % Percentage of net revenue (1) % — % Other income (expense), net decreased by $2.8 million, or 1424%, for the six months ended June 30, 2021 compared to the same period in 2020. The decrease was due to a $2.3 million increase in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant liabilities and a $0.6 million decrease in interest income from our marketable securities portfolio. Customer Concentration We generated 73% and 66% of our net revenue from our largest Customer, Square, during the six months ended June 30, 2021 and 2020, respectively. 37 Table of Contents Use of Non-GAAP Financial Measures Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation. These non-GAAP measures should not be viewed as a substitute for, or superior to, measures prepared in accordance with GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses similar to the adjustments in the presentation of our non-GAAP measures set forth under “Key Operating Metric and Non-GAAP Financial Measures”. There are a number of limitations related to the use of these non-GAAP measures versus their most directly comparable GAAP measures, including the following: • other companies, including companies in our industry, may calculate adjusted EBITDA differently than how we calculate this measure or not at all; this reduces its usefulness as a comparative measure; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures; and • adjusted EBITDA does not reflect the effect of income taxes that may represent a reduction in cash available to us. We encourage investors to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures. A reconciliation of net loss to adjusted EBITDA for the periods presented is as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (dollars in thousands) Net revenue $ 122,266 $ 69,402 $ 230,249 $ 117,790 Net loss $ (68,554) $ (7,107) $ (81,392) $ (21,637) Net loss margin (56) % (10) % (35) % (18) % Net loss $ (68,554) $ (7,107) $ (81,392) $ (21,637) Depreciation and amortization expense 874 850 1,781 1,707 Share-based compensation expense 55,536 2,918 66,928 6,663 Payroll tax expense related to share-based compensation 939 — 939 — Other income (expense), net 481 295 2,648 (200) Income tax expense 87 15 106 27 Adjusted EBITDA $ (10,637) $ (3,029) $ (8,990) $ (13,440) Adjusted EBITDA Margin (9) % (4) % (4) % (11) % 38 Table of Contents Liquidity and Capital Resources Since our inception through June 30, 2021, we have financed our operations primarily through sales of equity securities and payments received from our Customers. In June 2021, we completed our IPO in which we received aggregate proceeds of $1.3 billion after deducting underwriting discounts and commissions of $91.6 million, and offering costs of $7.5 million. As of June 30, 2021, our principal sources of liquidity included cash, cash equivalents, and marketable securities totaling $1.7 billion, with such amounts held for working capital purposes. Our cash equivalents and marketable securities were comprised primarily of money market funds, U.S. government securities, commercial paper, asset-backed securities, and corporate debt securities. We have generated significant operating losses as reflected in our accumulated deficit. We expect to continue to incur operating losses for the foreseeable future. We believe our existing cash and cash equivalents, and our marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our planned continuing investment in product development, platform infrastructure, and global expansion. As of June 30, 2021, we had $7.8 million in restricted cash. This restricted cash includes $6.3 million held at our Issuing Banks to provide the Issuing Banks collateral in the event that our Customers' funds are not deposited at the Issuing Banks in time to settle our Customers' transactions with the Card Networks. Restricted cash also includes $1.5 million of cash held at a bank to secure our payments under a lease agreement for our office space. Cash Flows The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2021 2020 (in thousands) Net cash provided by operating activities $ 5,813 $ 14,710 Net cash provided by (used in) investing activities 42,947 (2,814) Net cash provided by financing activities 1,310,094 143,094 Net increase in cash, cash equivalents, and restricted cash $ 1,358,854 $ 154,990 Operating Activities Our largest source of cash provided by our operating activities is Interchange Fees generated by card transactions through our Platform. Our primary uses of cash in our operating activities are for Card Network and Issuing Bank fees, and employee-related expenditures. The timing of settlement of certain operating liabilities, including Revenue Share payments, can affect the amounts reported as net cash provided by operating activities on the condensed consolidated statement of cash flows. Net cash provided by operating activities decreased for the six months ended June 30, 2021 compared to the same period in 2020 primarily due to the net impact of increases in net revenue and related cash collections and cash paid for costs of revenues and operating expenses, increases in non-cash charges primarily for share-based compensation expense , and net changes in operating assets and liabilities. Investing Activities Net cash provided by investing activities consists primarily of maturities of our investments in marketable securities. Net cash used in investing activities consists primarily of purchases of marketable securities and purchases of property and equipment. Net cash provided by investing activities increased for the six months ended June 30, 2021 compared to the same period in 2020 primarily due to the decrease in purchases of marketable securities, partially offset by the decrease in maturities of marketable securities. 39 Table of Contents Financing Activities Net cash provided by financing activities consists primarily of proceeds from the sale of our equity securities. Net cash used in financing activities consists primarily of net payments related to share-based compensation activities, and payments of offering costs related to the IPO. Net cash provided by financing activities increased for the six months ended June 30, 2021 compared to the same period in 2020 primarily due to the proceeds received from our IPO, net of underwriters’ commission and discounts, partially offset by payments of offering costs related to the IPO, and the payment to satisfy the tax withholding and remittance obligations related to the settlement of our outstanding RSUs. Obligations and Other Commitments Our principal commitments consist of obligations under our operating leases for office space and other non-cancellable purchase commitments. For additional information about our operating leases, see Note 7 to our Condensed Consolidated Financial Statements “Commitments and Contingencies — Operating Leases.” In connection with our corporate headquarters lease, we are required to provide the landlord a letter of credit in the amount of $1.5 million. We have secured this letter of credit by depositing $1.5 million with the issuing financial institution. This deposit is classified as restricted cash in the condensed consolidated balance sheets. As of June 30, 2021, we had non-cancellable purchase commitments with certain Issuing Banks and service providers of $11.3 million, payable over the next 5 years. These purchase obligations generally represent minimum commitments for issuing bank processing fees over the fixed, non-cancellable respective contracts terms. Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms whereby we agree to indemnify Customers, Issuing Banks, Card Networks, vendors, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 40 Table of Contents Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies discussed in “Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies” in the Prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our condensed consolidated financial condition and results of operations. Under the Jumpstart our Business Startups Act, or JOBS Act, “an emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an “emerging growth company” to delay the adoption of new or revised accounting standards that have different transition dates for public and private companies until those standards would otherwise apply to private companies. We meet the definition of an “emerging growth company” and have elected to use this extended transition period. As a result of this election, our timeline to comply with these standards will in many cases be delayed as compared to other public companies that are not eligible to take advantage of this election or have not made this election. Therefore, our financial statements may not be comparable to those of companies that comply with the public company effective dates for these standards. Revenue Recognition We adopted Accounting Standards Codification, or ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, effective as of January 1, 2019. We recognize revenue from contracts with Customers using the five-step method described in “Consolidated Financial Statements — Note 2. Summary of Significant Accounting Policies” in the Prospectus. We generate revenue from providing Platform services, which includes Interchange Fees and processing fees, and other services, which includes card fulfillment revenue, to our Customers. Our contracts with Customers typically include two performance obligations: 1) providing access to our payment processing Platform and 2) providing card fulfillment services. Certain Customer contracts require us to allocate the transaction price of the contract based on the relative stand-alone selling price of the performance obligations which are estimated using an analysis of our historical contract pricing and costs incurred to fulfill services. We satisfy our performance obligation to provide platform services over time as Customers have continuous access to our Platform, and we stand ready to process Customer transactions throughout their term of access. We allocate variable consideration to the distinct month in which our Platform services are delivered. When pricing terms are not consistent throughout the entire term of the contract, we estimate variable consideration in Customers' contracts primarily using the expected value method. We develop estimates of variable consideration on the basis of both historical information and current trends and do not expect or anticipate significant reversal of revenue in the future periods. As the Issuer Processor for our Customers, we are the principal in providing services under our contracts with Customers. To deliver the services required by our Customers, we contract with Card Networks for transaction routing, reporting, and settlement services and with Issuing Banks for card issuing, Card Network sponsorship, and regulatory compliance approval services. We control these integrated services before delivery to our Customers, we are primarily responsible for the delivery of the services to Customers, and we have discretion in vendor selection. As such, we record fees paid to the Issuing Banks and Card Networks as costs of revenue. 41 Table of Contents Share-Based Compensation We measure compensation expense for all share-based payment awards, including stock options and RSUs, granted to employees, directors, and other service providers, based on the estimated fair value of the awards on the date of grant. Prior to the completion of the IPO, the most significant input in determining the fair value of a stock option was the estimated fair value of our common stock. The estimated fair value of our common stock was also used to measure the grant date fair value of RSUs granted prior to the completion of the IPO. Additionally, prior to the completion of the IPO, the determination of whether to recognize share-based compensation expense related to secondary sales of common stock by employees or former employees required a significant amount of judgment. Our methods to estimate the fair value of our common stock and to determine share-based compensation expense related to secondary sales of common stock prior to the completion of the IPO are discussed below. Fair Value of Common Stock : Prior to the completion of the IPO, the Company’s board of directors considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards were approved. The factors considered included, but were not limited to: (i) contemporaneous independent third-party valuations of the Company’s common stock; (ii) observed secondary sales of the Company’s common stock; (iii) rights, preferences, and privileges of the Company’s redeemable convertible preferred stock relative to those of its common stock; (iv) the Company’s actual operating and financial performance; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s capital stock. Subsequent to the completion of the IPO, the fair value of the Company’s common stock is determined by the closing price, on the date of grant, of its Class A common stock, which is traded on the Nasdaq Global Select Market. Secondary Sales of Common Stock . During the three and six months ended June 30, 2021 and 2020, and in all cases, prior to the completion of the IPO, certain stockholders acquired outstanding common stock from current or former employees for a purchase price greater than the estimated fair value of our common stock at the time of the respective transaction. The determination of whether the excess of purchase price over the estimated fair value represents share-based compensation is highly judgmental. We determined whether secondary sales of common stock by employees and former employees resulted in share-based compensation expense by evaluating the extent of our involvement in secondary sale transactions, whether the purchaser of the shares is an existing or new stockholder, and the extent the sale price per share exceeds our estimated fair value per share. We recorded share-based compensation expense for the difference between the price paid and the estimated fair value on the date of the transaction of $5.8 million and $0.0 million during the three months ended June 30, 2021 and 2020, respectively, and $11.6 million and $1.4 million during the six months ended June 30, 2021 and 2020, respectively. Such amounts were recorded in compensation and benefits expense on the condensed consolidated statements of operations. Subsequent to the completion of the IPO, we do not expect to record share-based compensation expense related to secondary sales of our common stock. Recent Accounting Pronouncements See Note 2 to our Condensed Consolidated Financial Statements “Summary of Significant Accounting Policies—Adoptions of New Accounting Standards” and “Summary of Significant Accounting Policies—New Accounting Standards Not Yet Adopted” for additional information. 42 Table of Contents