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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-11 · 141 added, 164 removed, 249 unchanged (55% of the section changed)

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A discussion regarding our liquidity, financial condition and results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 is presented below.

A discussion regarding our liquidity, financial condition and results of operations for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus dated June 8, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on June 10, 2021, which is hereby incorporated by reference.

Marqeta’s modern card issuing platform, or our Platform, empowers our customers, or our Customers - which include businesses like Affirm, Block, DoorDash, Instacart, and Klarna - to create customized payment cards that provide innovative payment experiences for their customers, shoppers, and end users.

Before the rise of modern card issuing, creating cards was slow, complex, and subject to mistakes.

A discussion regarding our liquidity, financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 11, 2022, which is hereby incorporated by reference.

Marqeta’s modern card issuing platform empowers our customers to create customized and innovative payment cards, giving them the ability to build more configurable and flexible payment experiences.

We serve customers in multiple industry verticals including on-demand services, lending (including BNPL financing), expense management, disbursements, online marketplaces, and digital banking.

Before the rise of modern card issuing, issuing 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 platform, powered by open APIs, enables businesses to develop modern, frictionless payment card experiences for consumer and commercial use cases.

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, or Nasdaq, on June 9, 2021.

We received aggregate net proceeds of $1.3 billion from the IPO less 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.

Key Factors Affecting Our Performance

We believe Marqeta’s growth, future success, and performance are dependent upon a number of factors, including those listed below.

While these factors present significant opportunities for us, they also represent challenges we must successfully address to grow the adoption and use of the Marqeta Platform and improve our results of operations.

Our growth is aligned with our Customers’ growth.

We believe our growth, future success, and performance is closely aligned with that of our Customers.

We employ a usage-based model, based on processing volume, and derive the majority of our revenue from Interchange Fees generated by card transactions through our Platform.

As our Customers’ processing volumes grow, they may earn an increased percentage of Revenue Share.

Sharing an increased percentage of Interchange Fees with our Customers aligns our interests with our Customers’ growth and builds deeper Customer relationships.

Revenue model.

We derive the majority of our revenue from Interchange Fees generated by processing payment transactions through our Platform.

Interchange Fees are established by the Card Networks and the total Interchange Fees we collect are dependent on various factors including processing volume, merchant category code, transaction size, and other transaction attributes.

For Customers under certain contracts, their percentage of Revenue Share increases as their respective processing volumes increase.

Our gross margin percentage may decrease as a result of this dynamic.

However, we remain strategically focused on growing incremental gross profit dollars and have the ability to partially offset margin declines with better pricing that we achieve with Issuing Banks and Card Networks.

Changes in transaction mix, such as the proportion of signature debit versus PIN debit transactions and consumer versus commercial debit cards that make up our TPV, and changes in TPV as a result of the COVID-19 pandemic, could result in fluctuations to our net revenue.

Further, certain Customers’ processing volumes are subject to seasonal fluctuations that could cause varied net revenue results across the quarters.

Ecosystem of key vendor partners.

We partner with Card Networks who oversee their global payment networks, through which debit, credit, and prepaid card payments are authorized, processed, and settled.

We incur fees charged by the Card Networks to route our Customers’ transactions within the payments ecosystem.

These fees are reflected in our costs of revenue.

Given our ability to direct processing volume to specific Card Networks, we are able to negotiate certain incentive rebates that effectively reduce the overall network fees.

With the scale of the transactions we process on behalf of our Customers, we believe we can continue to negotiate favorable incentive rebates.

However, if these fees increase, our gross margins will decrease.

We partner with Issuing Banks to facilitate the issuance of payment cards to our Customers and to sponsor our Customers’ card programs on Card Networks because we do not have regulatory authority to perform these activities ourselves.

We pay volume-based and transaction-based fees to the Issuing Banks.

The fees are typically structured based on volume tiers;

as our processing volumes grow, these fees as a percentage of processing volume decline.

These fees are reflected in our costs of revenue.

Continued investment in our Platform.

We make significant investments in both new product development and platform enhancements.

Further, we will continue to invest in operational support to maintain service levels expected by our Customers.

We believe these investments in product development and operational efficiency will lead to long-term growth and profitability.

Impact of COVID-19

The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S.

It also enables us to rapidly expand our platform’s functionality, creating added value for our customers.

See the section titled “Business” under Part I, Item 1 of this Annual Report on Form 10-K for further discussion of our business, products, business model, and trends.

Impact of Macroeconomic Factors

We are unable to predict the impact macroeconomic factors, including the military action against Ukraine launched by Russia , ongoing supply chain shortages, higher inflation and interest rates, and other global economic conditions, will have on our processing volumes, and on our future results of operations.

A deterioration in macroeconomic conditions could increase the risk of lower consumer spending, consumer and merchant bankruptcy, insolvency, business failure, higher credit losses, foreign currency fluctuations, or other business interruption, which may adversely impact our business.

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.

In addition, the COVID-19 pandemic had a significant impact on the U.S.

economy and the markets in which we operate.

While the rate of vaccinations continues to improve, the emergence of, and response to new variants has shown that the COVID-19 virus continues to be a public health concern worldwide.

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.

We believe the COVID-19 pandemic intensified the consumer need for virtual and contactless forms of payments, the need for greater flexibility with purchases, and for easy online financing options.

Many of the providers of these services are our Customers and they are experiencing accelerated adoption of technologies that enable such payment experiences.

However, we experienced a slowdown of on-demand delivery processing volume in the second half of 2021, likely due to the reopening that occurred in the United States.

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 TPV, and net revenue, we believe these stimulus payments contributed to the increase in our TPV and net revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The Card Networks publish changes to interchange rates in April and October of each year.

Visa and Mastercard 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 on the U.S.

The Interchange Fees we earn are affected by multiple factors including 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, 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.

There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government.

Businesses continue to face difficulty in hiring and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak.

It is uncertain how the COVID-19 pandemic will evolve and what effect the lifting of pandemic-related restrictions, and the levels of infection, will have on our processing volumes, and on our future results of operations.

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.

Key Operating Metric and Financial Measures

Various governmental measures to slow and control the spread of COVID-19 have led to uncertainty related to the labor market, inflation, and fiscal and monetary policy responses.

Businesses continue to face difficulty in meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays.

See the section titled “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K for further discussion of the possible impact of these macroeconomic factors on our business .

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.

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Net loss margin (25) % (32) % (16) %

Total operating expenses (in thousands) $ 529,809 $ 393,711 $ 164,994

Non-GAAP Measures:

Adjusted EBITDA (in thousands) $ (41,796) $ (12,767) $ (15,378)

Adjusted EBITDA margin (6) % (2) % (5) %

Non-GAAP operating expenses (in thousands) $ 361,797 $ 244,472 $ 133,285

Total Processing Volume (TPV) - 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.

We believe that TPV is a key operating metric and a principal 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 depreciation and amortization;

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payroll tax related to share-based compensation;

legal, financial, and tax due diligence costs related to potential acquisitions;

acquisition related expenses which consists of due diligence costs related to potential acquisitions, and transaction costs, integration costs and amortization of intangible assets related to successful acquisitions;

income tax expense (benefit);

and other expense (income) 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, interest income from our marketable securities, impairment of equity method investments or other financial instruments, and interest expense from a bank loan.

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, interest income from our marketable securities, our share of equity method investments’ profit or loss, impairment of equity method investments or other financial instruments, and gain from sale of equity method investments.

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 a performance measure used to calculate payments under our annual employee bonus plans.

Additionally, we utilize adjusted EBITDA as an input into our calculation of our 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.

Adjusted EBITDA Margin - 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.

Non-GAAP operating expenses - Non-GAAP operating expenses is a non-GAAP financial measure that is calculated as total operating expenses adjusted to exclude depreciation and amortization;

share-based compensation expense;

payroll tax related to share-based compensation;

and acquisition related expenses which consists of due diligence costs related to potential acquisitions, and transaction costs, integration costs and amortization of intangible assets related to successful acquisitions.

We believe that non-GAAP operating expenses 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.

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 total operation expenses to non-GAAP operating expenses.

Components of Results of Operations

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Platform services revenue also includes processing and other fees.

Interchange Fees are earned on card transactions we process for our Customers and are based on a percentage of the transaction amount plus a fixed amount per transaction.

Interchange Fees are earned on card transactions we process for our MxM customers and are based on a percentage of the transaction amount 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 incentives to our MxM 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 our MxM 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.

As MxM customers' processing volumes increase, the rates at which we share revenue generally increase.

Processing and other fees are priced as either a percentage of processing volume or on a fee per transaction basis and are earned when payment cards are used at automated teller machines or to make cross-border purchases, and under our PxM agreements.

Minimum processing fees, where customers' processing volumes fall below certain thresholds, are also included in processing and other fees.

Platform services revenue is recognized as Marqeta satisfies our performance obligations which typically aligns with the period when volumes and transactions are processed.

Other services revenue.

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Costs of Revenue

Costs of revenue consist of Card Network costs, Issuing Bank costs, and card fulfillment costs.

Card Network costs are 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 equal to a specified percentage of processing volume or a fixed amount per transaction.

Costs of revenue consist of Card Network fees, Issuing Bank fees, and card fulfillment costs.

Card Network fees are equal to a specified percentage of processing volume or a fixed amount per transaction routed through the respective Card Network.

Issuing Bank fees compensate our Issuing Banks for issuing cards to our customers and sponsoring our card programs with the Card Networks and are 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 establishing customer card programs with, and routing volume through, the respective Card Network.

The amount of the incentives is determined based on a percentage of the processing volume or the number of transaction routed over the Card Network.

The amount of the incentives is generally determined based on a percentage of the processing volume or the number of transactions routed over the Card Network.

We record these incentives as a reduction of Card Network fees included in costs of revenue.

Generally, as processing volumes increase we earn a higher rate of monetary incentives from these arrangements, subject to attaining certain volume thresholds during a six-month or annual measurement period.

Generally, as processing volumes increase, we earn a higher rate of monetary incentives from these arrangements, subject to attaining certain volume thresholds during an annual measurement period.

For certain incentive arrangements with an annual measurement period, the one-year period may not align with our fiscal year.

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Compensation and benefits consist primarily of salaries, employee benefits, incentive compensation, contractors’ cost and share-based compensation.

Professional Services.

Professional services consist primarily of consulting, legal, and recruiting fees.

Technology consists primarily of third-party hosting fees, software licenses, and hardware purchases below our capitalization threshold, and support and maintenance costs.

Professional Services.

Professional services consist primarily of consulting, legal, audit, and recruiting fees.

Occupancy consists primarily of rent expense, repairs, maintenance, and other building related costs.

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Marketing and Advertising.

Marketing and advertising consist primarily of costs of general marketing activities and promotional activities.

Marketing and advertising consist primarily of costs of general marketing and promotional activities.

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.

We also 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, and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, including regarding internal control over financial reporting under Section 404 of the Sarbanes Oxley Act.

Other operating expenses consist primarily of insurance costs, indemnification costs, employee travel-related expenses, employee training costs, indirect state and local taxes, and other general office expenses.

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, equity method investment share of loss, and interest income from our marketable securities.

Other income (expense), net consists primarily of interest income from our marketable securities, gain from from sale of equity method investments, impairment of equity method investments or other financial instruments, equity method investment share of loss, realized foreign currency gains and losses, and changes in the fair value of the redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO).

Income Tax Expense

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federal and state income taxes, and U.K.

income taxes.

and Australia income taxes.

We maintain a full valuation allowance against our U.S.

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Compensation and benefits 415,094 318,116 129,802

Professional services 18,443 7,188 7,157

Technology 52,361 33,637 13,239

Professional services 23,479 18,443 7,188

Occupancy 4,514 4,181 4,337

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Total Processing Volume (TPV) (in millions) $ 166,260 $ 111,133 $ 55,127 50 %

Total net revenue increased by $226.9 million, or 78%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, of which increase $152.6 million was attributable to Block.

The increase in net revenue was primarily driven by an 85% increase in TPV, partially offset by a decreased average interchange rate earned on transactions processed and by a 2% increase in Revenue Share payments attributable to increased average Revenue Share rates, compared to the same period in 2020.

Interchange rates may vary due to changes in rates published by the Card Networks as well as the mix of transaction types, average transaction size, merchant classifications, and consumer versus commercial card classifications.

Revenue Share rates may vary due to customers’ earning an increased percentage of Revenue Share as they increase processing volumes on our Platform.

Sharing an increased percentage of Interchange Fees with our Customers aligns our interests with our Customers’ growth and builds deeper customer relationships.

The increase in TPV was mainly driven by increases in processing volume from our digital banking and BNPL Customers.

TPV for our top five Customers, measured by TPV in each respective period, grew by 70% for the year ended December 31, 2021 compared to the year ended December 31, 2020, while TPV from all other Customers, as a group, grew 230% for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Total net revenue increased by $231.0 million, or 45%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, of which $173.0 million was generated by Block, including Afterpay starting February 1, 2022 following the completion of its acquisition by Block.

The increase in net revenue was primarily driven by a 50% increase in TPV, partially offset by unfavorable changes in our card program mix, particularly the growth of our PxM offering, compared to the same period in 2021.

Other services revenue increased $7.7 million, or 52%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 due primarily to the increase in card fulfillment revenue.

The increase in TPV was mainly driven by growth across all our major verticals, particularly financial services, and PxM customers.

The growth in TPV for our top five customers, as determined by their individual TPV in each respective period, was 50% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

This growth was mirrored by a 46% increase in TPV from all other customers for the same period.

Note that the top five customers may differ between the two periods.

Costs of Revenue and Gross Margin

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The increase was primarily due to increased Card Network fees as the result of the 50% increase in TPV and 51% increase in the number of corresponding transactions.

Network fees increased $98.8 million, or 68% in the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was due to a 85% increase in TPV, partially offset by the effect of $14.8 million of additional Card Network incentives resulting from reaching specified volume tiers and other discounts during the year ended December 31, 2021.

The higher volume tiers were not reached in the year ended December 31, 2020.

Certain of our network incentive arrangements have 6-month or annual measurement periods that do not correspond to our fiscal year and we can earn additional rates of incentives when specified volume tiers are met.

As such, additional incentives can be earned on volume processed in a prior fiscal year and multiple incentive tiers can be met in the same fiscal year.

Issuing Bank fees increased $7.5 million, or 38%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, which was lower than the percentage of increase in TPV as a result of volume tiers being met at Sutton Bank, and reduced Issuing Bank fees for certain of our processing volume, as a result of amending our contract with Sutton Bank.

Network fees are presented net of monetary incentives from Card Networks for processing volume through the respective Card Networks during the period.

Card Network fees, net increased $135.8 million, or 56% in the year ended December 31, 2022 compared to the year ended December 31, 2021 and reflect an amendment to one of our Card Networks incentive arrangements that was executed in the third quarter of 2021.

This increase was due to a 50% increase in TPV and a decrease in Card Networks incentives mainly due to the timing of annual cumulative incentives for the years ended December 31, 2022 and 2021.

Issuing Bank fees increased $2.9 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, as a result of an amendment to one of our Issuing Banks’ arrangements that was executed in the third quarter of 2021.

Issuing Bank fees are typically determined based on volume tiers;

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As a result of the increases in net revenue and costs of revenue discussed above, our gross profit increased by $88.3 million, or 38%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Our gross margin increased to 45% during the year ended December 31, 2021 - including the benefit of the monetary incentives mentioned above - from 41% during the year ended December 31, 2020.

Our gross margin decreased to 43% during the year ended December 31, 2022 from 45% during the year ended December 31, 2021.

Operating Expenses

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Percentage of net revenue 55 % 62 %

Professional services 18,443 7,188 11,255 157 %

Percentage of net revenue 4 % 2 %

Technology 52,361 33,637 18,724 56 %

Percentage of net revenue 7 % 7 %

Professional services 23,479 18,443 5,036 27 %

Percentage of net revenue 3 % 4 %

Occupancy 4,514 4,181 333 8 %

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Total operating expenses $ 529,809 $ 393,711 $ 136,098

Compensation and benefits expenses increased by $188.3 million, or 145%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Salaries, bonus, benefits, and payroll taxes increased by $73.9 million predominately due to a $46.2 million increase in salaries due to the 47% increase in the average full time employees from 427 in the year ended December 31, 2020 to 629 in the year ended December 31, 2021, a $18.7 million increase in bonus expense, and a $8.9 million increase in contractors’ costs, due to the 162% increase in the average number of contractors from 27 in the year ended December 31, 2020 to 70 in the year ended December 31, 2021.

Additionally, bonus expense increased $18.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 due to the increase in full time employees, the broadening of our corporate bonus plan to cover more employees, and higher bonus payout for the year ended December 31, 2021.

We expect rates of compensation to increase in the future in part due the labor market shortage that is currently prevalent in the U.S.

economy and increases in rates of inflation observed in 2021.

Compensation and benefits expenses also increased in the year ended December 31, 2021 compared to the year ended December 31, 2020 due to a $114.4 million increase in share-based compensation expense, mainly because of the increase in our employees base and the CEO Long-Term Performance Award as detailed in the table below:

Percentage of net revenue 71% 76%

Compensation and benefits expenses increased by $97.0 million, or 30%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, predominately due to the $78.9 million increase in salaries, bonus, benefits, and payroll taxes driven by the increase in average headcount, and the increase in compensation rates.

Our headcount has increased to 966 employees as of December 31, 2022 from 789 employees as of December 31, 2021.

Compensation and benefits expenses also increased in the year ended December 31, 2022 compared to the year ended December 31, 2021 due to a $18.1 million increase in share-based compensation expense, mainly because of the increase in our headcount and the Executive Chairman Long-Term Performance Award as detailed in the table below:

Year Ended December 31,

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Restricted stock units (1)

$ 59,652 $ — $ 59,652 n/m

$ 76,094 $ 59,652 $ 16,442 28 %

Stock options 28,816 31,231 (2,415) (8) %

CEO Long-Term Performance Award 38,189 — 38,189 n/m

Employee Stock Purchase Plan 1,946 — 1,946 n/m

Secondary sales of common stock 11,642 17,316 (5,674) (33) %

Executive Chairman Long-Term Performance Award 53,214 38,189 15,025 39 %

Employee Stock Purchase Plan 2,619 1,946 673 35 %

Secondary sales of common stock — 11,642 (11,642) n/m

Total share-based compensation $ 160,743 $ 142,660 $ 18,083 13 %

n/m = not meaningful

(1) Includes $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.

Professional services expenses increased by $11.3 million, or 157%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was due to a $9.5 million increase in accounting, consulting, and legal fees, and a $1.8 million increase in recruiting fees.

(1) Includes $23.1 million of expense, for the year ended December 31, 2021, recognized for cumulative prior service as of the IPO completion date for RSUs with both a service and liquidity vesting condition.

Technology expenses increased by $18.7 million, or 56%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was due to a $12.7 million increase in third-party hosting costs to support our continued growth and increase in TPV, increasing the resiliency of our Platform and continued migration to the cloud from third-party data centers, and a $7.6 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 year ended December 31, 2021 compared to the year ended December 31, 2020 as a result of a lease cost credit received due to the reduced use of our office space during shelter-in-place orders.

As most 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 consistent for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was due to higher third-party hosting costs to support our continued growth and higher software licensing costs as we added headcount and implemented new internal systems and tools.

Professional services expenses increased by $5.0 million, or 27%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was due to the increase in consulting, accounting, and legal fees.

Occupancy expense remained relatively flat for the year ended December 31, 2022 compared to the year ended December 31, 2021 as most of our employees and service providers continue to work remotely.

Depreciation and amortization remained relatively flat for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Marketing and advertising expenses increased by $1.7 million, or 75%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily related to conferences, trade shows, and brand awareness investments to further grow our customer base.

Other operating expenses increased by $8.3 million, or 157%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 as a result of an increase in insurance costs of $4.9 million, an increase in various state and local non-income taxes of $1.3 million, and an increase in general office operating expenses of $2.1 million.

Other operating expenses increased by $13.0 million, or 96%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily as a result of an indemnification cost of $5.9 million, and an increase in insurance and travel costs of $5.2 million.

Other Income (Expense), Net

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(dollars in thousands) 2022 2021 $ Change % Change

Other income (expense), net $ (2,563) $ (521) $ (2,042) 392 %

Other income (expense), net $ 24,926 $ (2,563) $ 27,489 n/m

Percentage of net revenue 3 % — %

Other income (expense), net decreased by $2.0 million, or 392%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a $1.0 million increase in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant liabilities, a $0.7 million decrease in interest income from our marketable securities portfolio, and $0.3 million increase in realized foreign currency exchange loss.

The redeemable convertible preferred stock warrants were exercised during 2021 and therefore we do not expect to record additional changes in the fair value of these warrants.

Other income (expense), net increased by $27.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase of $19.1 million in interest income earned on our marketable securities portfolio and other cash deposit balances, a gain of $17.9 million from the sale of the Company’s equity method investment in a private company, offset by an impairment of $11.6 million of an option to purchase the remaining equity interests in an equity method investee.

Customer Concentration

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The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods.

The Company adopted ASU No.

2016-13, Financial instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments as of December 31, 2022 upon the loss of ”emerging growth company” status, with an effective date of January 1, 2022, using a modified retrospective approach.

The adoption did not have a material impact on the quarterly results previously reported in fiscal year 2022.

In the fourth quarter of 2021, we reclassified contractor costs from professional services to compensation and benefits and all statements of operations below have been adjusted to conform to this new presentation.

This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus.

This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report.

These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.

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Compensation and benefits 110,991 105,887 97,868 100,348 88,995 84,462 97,755 46,904

Professional services 5,712 4,704 3,831 4,196 1,955 1,547 1,931 1,753

Technology 14,401 13,422 13,154 11,384 11,143 9,299 7,569 5,626

Professional services 6,295 6,620 5,794 4,770 5,712 4,704 3,831 4,196

Occupancy 1,126 1,125 1,148 1,115 1,097 1,091 907 1,086

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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;

• other companies, including companies in our industry, may calculate adjusted EBITDA and non-GAAP operating expenses differently than how we calculate this measure or not at all;

this reduces its usefulness as a comparative measure;

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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:

A reconciliation of net loss to adjusted EBITDA and non-GAAP operating expenses for the periods presented is as follows:

Year Ended December 31,

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Net loss margin (25) % (32) % (16) %

Total operating expenses $ 529,809 $ 393,711 $ 164,994

Net loss $ (184,780) $ (163,929) $ (47,695)

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Payroll tax expense related to share-based compensation 1,977 1,956 —

Due diligence costs related to potential acquisitions 1,089 — —

Acquisition related expenses 1,439 1,089 —

Other expense (income), net (24,926) 2,563 521

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Adjusted EBITDA Margin (6) % (2) % (5) %

Total operating expenses $ 529,809 $ 393,711 $ 164,994

Depreciation and amortization expense $ (3,853) $ (3,534) $ (3,498)

Share-based compensation expense $ (160,743) $ (142,660) $ (28,211)

Payroll tax expense related to share-based compensation $ (1,977) $ (1,956) $ —

Acquisition related expenses $ (1,439) $ (1,089) $ —

Non-GAAP operating expenses $ 361,797 $ 244,472 $ 133,285

Liquidity and Capital Resources

Since our inception through June 30, 2021, we financed our operations primarily through sales of equity securities and payments received from our customers.

In June 2021, we completed our IPO and we received aggregate net proceeds of $1.3 billion after deducting underwriting discounts and commissions of $91.6 million, and offering costs of $7.5 million.

In June 2021, we completed our IPO in which we received aggregate net proceeds of $1.3 billion after deducting underwriting discounts and commissions of $91.6 million, and offering costs of $7.5 million.

At December 31, 2022, our principal sources of liquidity included cash, cash equivalents, and marketable securities totaling $1.6 billion, with such amounts held for working capital purposes.

At December 31, 2021, 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.

At December 31, 2022, our cash equivalents and marketable securities were comprised primarily of bank deposits, money market funds, U.S.

treasury securities, U.S.

agency securities, commercial paper, 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.

On September 14, 2022, our board of directors authorized a share repurchase program of up to $100 million of our Class A common stock beginning September 15, 2022.

Under the repurchase program, we were authorized to repurchase shares through open market purchases, in privately negotiated transactions or by other means, in accordance with applicable federal securities laws, including through trading plans under Rule 10b5-1 of the Exchange Act.

The share repurchase program has no set expiration date.

As of December 31, 2022, $20.8 million remained available for future share repurchases under this repurchase program.

On February 3, 2023, the Company acquired Power Finance Inc.

(Power Finance) for a purchase price of $221.9 million in cash, approximately one-third of which is payable over a two-year period subject to certain conditions.

The purchase price does not include potential future earn-out amounts tied to additional performance-based goals to be achieved within the next 12 months with a maximum payout of up to $53.1 million.

Power Finance’s cloud-native platform offers credit card program management services for companies creating new credit card programs.

We believe that this acquisition will allow our customers to launch a wide range of credit products and constructs.

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 more than 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.

Our future capital requirements will depend on many factors, including our planned continuing investment in product development, platform infrastructure, share repurchases, and global expansion.

We will use our cash for a variety of needs, including for ongoing investments in our business, potential strategic acquisitions, capital expenditures and investment in our infrastructure, including our non-cancellable purchase commitments with cloud-computing service providers and certain Issuing Banks.

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(in thousands)

Net cash provided by (used in) operating activities $ 56,972 $ 50,273 $ (15,428)

Net cash used in investing activities (329,121) (57,562) (100,318)

Net cash provided by financing activities 1,299,297 167,378 139,049

Net cash (used in) provided by operating activities $ (12,966) $ 56,972 $ 50,273

Net cash provided by (used in) investing activities 28,718 (329,121) (57,562)

Net cash (used in) provided by financing activities (79,487) 1,299,297 167,378

Net increase in cash, cash equivalents, and restricted cash $ (63,735) $ 1,027,148 $ 160,089

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The timing of settlement of certain operating liabilities, including Revenue Share payments and bonus payments, can affect the amounts reported as net cash provided by operating activities on the consolidated statement of cash flows.

Net cash provided by operating activities increased for the year ended December 31, 2021 compared to the year ended December 31, 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, the majority of it related to employees compensation.

Net cash used in operating activities was $13.0 million for the year ended December 31, 2022 compared to a net cash provided of $57.0 million in the year ended December 31, 2021.

The net cash used in operating activities during fiscal year 2022 was due mainly to the timing of payments for costs of our services and operating expenses, partially offset by the increase in net revenue

Investing Activities

Net cash provided by investing activities consists primarily of maturities of our investments in marketable securities.

Net cash provided by investing activities consists primarily of maturities of our investments in marketable securities and sale of equity method investments.

Net cash used in investing activities consists primarily of purchases of marketable securities, purchases of property and equipment, and equity method investments.

Net cash used in investing activities increased for the year ended December 31, 2021 compared to the same period in December 31, 2020 primarily due to the increase in purchases of marketable securities, an equity method investment, and a purchase call option to acquire the remaining interest in the equity method investee, partially offset by the increase in maturities of marketable securities.

Net cash provided by investing activities was $28.7 million for the year ended December 31, 2022 compared to a net cash used of $329.1 million in the year ended December 31, 2021.

The net cash provided by investing activities during fiscal year 2022 was primarily due to the sale of equity method investments and the decrease in purchases of marketable securities, an equity method investment, and a purchase call option to acquire the remaining interest in the equity method investee.

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 tax withholdings for RSU settlements and payments of offering costs related to the IPO.

Net cash provided by financing activities increased for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the proceeds received from our IPO, net of underwriters’ commission and discounts, partially offset by the decrease in proceeds from the issuance of redeemable convertible preferred stock, and the payments made to satisfy the tax withholding and remittance obligations related to the settlement of our outstanding RSUs.

Net cash used in financing activities consists primarily of net payments related to the share repurchase program, to the payment of tax withholding for RSU settlements and to payments of offering costs related to the IPO.

Net cash used in financing activities was $79.5 million for the year ended December 31, 2022 compared to a net cash provided of $1.3 billion in the year ended December 31, 2021.

The decrease in net cash provided by financing activities in fiscal year 2022 was primarily due to the decrease in proceeds received from our IPO, net of underwriters’ commission and discounts, and the increase in payments related to the share repurchase program.

Obligations and Other Commitments

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Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Under the 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.

Based on the Company's aggregate worldwide market value of voting and non-voting common equity held by non-affiliates as of June 30, 2022, the Company became a “large accelerated filer” and lost emerging growth company status on December 31, 2022.

Prior to December 31, 2022 we were an emerging growth company, as defined in the JOBS Act, and elected to take advantage of the extended transition period for complying with new or revised accounting standards.

In other words, we were permitted 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.

As a result of this election, our prior financial statements may not be comparable to those of companies that comply with the accounting standards as of the public company effective dates.

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 Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies.” 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.

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:

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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 our IPO, the most significant input in determining the fair value of a stock option and RSUs was the estimated fair value of our common stock.

Additionally, prior to our 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 judgment.

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 in June 2021.

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 our IPO, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting in which awards were approved.

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 our common stock;

(ii) observed secondary sales of our common stock;

(iii) rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;

(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) our actual operating and financial performance;

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(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 our capital stock.

Subsequent to our IPO, we use the closing share price of our Class A common stock, which is traded on Nasdaq, on the grant date to measure share-based compensation.

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 years ended December 31, 2021, 2020 and 2019, and in all cases, prior to our IPO, certain stockholders acquired outstanding common stock from current or former employees for a purchase price greater than our 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 represented share-based compensation was highly judgmental.

We determined whether secondary sales of common stock by then current or 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 was an existing or new stockholder, and the extent the sale price per share exceeded our estimated fair value per share.

For such transactions, we recorded share-based compensation expense as measured as the difference between the aggregate price paid by the stockholder and our estimated aggregate fair value on the date of the transaction, and recorded $11.6 million, $17.3 million and $14.8 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Prior to the completion of the IPO in June 2021, 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 as measured as the difference between the aggregate price paid by the stockholder and our estimated aggregate fair value on the date of the transaction, and recorded $0.0 million, $11.6 million and $17.3 million during the years ended December 31, 2022, 2021 and 2020, respectively.

Such amounts were recorded in compensation and benefits expense on the consolidated statements of operations.

After our IPO, we have not, and no longer expect to, record share-based compensation expense related to secondary sales of our common stock.

Subsequent to the completion of the IPO, we did not record share-based compensation expense related to secondary sales of our common stock.

Recent Accounting Pronouncements

See Note 2 to our 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.

See Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements”.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis