PAYMENTUS HOLDINGS, INC. Overview
We are a leading provider of cloud-based bill payment technology and solutions. We deliver our next-generation product suite through a modern technology stack to more than 1,700 biller business and financial institution clients. Our platform was used by approximately 21 million consumers and businesses inNorth America inDecember 2021 to pay their bills, make money movements and engage with our clients. We serve billers of all sizes that primarily provide non-discretionary services across a variety of industry verticals, including utilities, financial services, insurance, government, telecommunications and healthcare. We also serve financial institutions by providing them with a modern platform that their customers use for bill payment, account-to-account transfers and person-to-person transfers. By powering this comprehensive network of billers and financial institutions, each with their own set of bill payment requirements, we believe we have created an enviable feedback loop that enables us to continuously drive innovation, grow our business and uniquely improve the electronic bill payment experience for participants in the bill payment ecosystem. Our platform provides our clients with easy-to-use, flexible and secure electronic bill payment experiences powered by an omni-channel payment infrastructure that allows consumers to pay their bills using their preferred payment type and channel. Because our biller platform is developed on a single code base and leverages a SaaS infrastructure, we can rapidly deploy new features and tools to our entire biller base simultaneously. Through a single point of integration to our billers' core financial and operating systems, our mission-critical solutions provide our billers with a payments operating system that helps them collect revenue faster and more profitably and empower their consumers with the information and transparency needed to control their finances. We generate substantially all of our revenue from payment transaction fees and have achieved significant growth through our capital efficient model. We rely on a diversified go-to-market strategy to reach new billers. We acquire new billers through direct sales channels, software and strategic partnerships and our Instant Payment Network, or IPN, which together promote rapid adoption of our platform through partnerships with leading business networks. Through these channels, our platform reaches millions of consumers, driving transaction growth. 23 -------------------------------------------------------------------------------- We believe our revenue is highly visible. We derive the majority of our revenue from a fee paid per transaction by the consumer, the biller or a combination of both. Our usage-based monetization strategy aligns our economic success with the success of our billers and partners. Since we benefit from increased transactional volume, we do not charge separate license fees or implementation fees. In addition, our modern platform architecture generally allows us to provide integration, implementation, maintenance and system upgrades at no additional cost to billers. Impact of Economic and Inflationary Trends In 2022,the United States economy has experienced inflationary conditions, increased interest rates and two consecutive quarters of decreased gross domestic product. While we believe our business is resilient and can generally weather unusual levels of inflation, the economic uncertainty and continuing inflationary pressures, which has been particularly acute in the utility sector, have had some impact on our expected 2022 financial performance and will likely have some impact on our 2023 performance. For example, some of our clients have deferred anticipated 2022 implementations into 2023 or are reevaluating the development of technology resources, which will delay expected revenue recognition. Furthermore, inflationary pressure is resulting in higher average bills, particularly in the utility sector, and increased interchange fees. While we are seeking to adjust our prices to address the inflationary pressures, our ability to do so typically lags behind the impact of inflation on our clients, the increase in average bill amounts and increased interchange fees. We intend to continue to manage through this uncertain economic environment by working closely with clients on implementations and price adjustments. In addition, although we are focused on prudent expense management, we are seeing ongoing wage pressure in our current workforce due to the levels of inflation, which is also putting some short-term pressure on our EBITDA margins. Impact of the COVID-19 Pandemic The COVID-19 pandemic, including its variants, and efforts to control its spread have at times significantly curtailed the movement of people, goods and services inthe United States , where we generate substantially all of our revenue, and worldwide, where we are targeting future growth. It has also caused extreme societal, economic and financial market volatility, resulting in business shutdowns and a global economic downturn. The magnitude and duration of the COVID-19 pandemic and the magnitude and duration of its effect on business activity cannot be predicted with any certainty. In light of the uncertainty relating to the spread of COVID-19, we have taken precautionary measures intended to reduce the risk of the virus spreading to our employees, billers and partners, and we may take further precautionary measures. In particular, governmental authorities have at times instituted, and in the future may institute, shelter-in-place policies and other restrictions in many jurisdictions in which we operate or maintain significant operations, which policies and restrictions have at times required our employees to work remotely. Even though many of the shelter-in-place policies or other governmental restrictions have been lifted, we are taking, and expect to continue to take, a measured and careful approach to having employees return to offices and travel for business. To the extent our employees are required to work from our offices, we may experience turnover from employees unwilling to return to the office. These precautionary measures and policies could negatively impact employee productivity, training and collaboration or otherwise disrupt our business operations. In addition, such restrictions impact certain of our sales efforts, marketing efforts and implementations, adversely affecting the effectiveness of such efforts in some cases, delaying potential revenue recognition and potentially inhibiting future growth. In addition, the COVID-19 pandemic has disrupted and may continue to disrupt the operations of our billers and partners for an indefinite period of time, which in turn could negatively impact our business and operating results. Widespread remote work arrangements may also negatively impact our billers' and partners' operations, and the operations of third-party service providers who perform critical services for us, and, by extension, our operations.
We will continue to evaluate the nature and extent of the COVID-19 pandemic's potential impact on our business, operating results and financial condition.
Components of Results of Operations
Revenue
We generate substantially all of our revenue from payment transaction fees.
Transaction fees are fees collected for each transaction processed through our
platform, on either a fixed basis or variable basis based on the transaction
value, with the actual fees dependent on type of transaction, payment or
transaction channel and industry vertical. However, irrespective of these
factors, the transaction fees that we receive are generally consistent across
transaction types, payment and transaction channels and industry verticals. We
receive such transaction fees directly from billers, financial institutions,
partners or, in some cases, from consumers as a convenience fee.
Cost of Revenue, Gross Profit and Gross Margin
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Cost of revenue consists of certain direct costs that are directly attributed to
processing transactions on our platform. This includes interchange, assessment
and network expenses incurred for processing payments as well as costs of
servicing our clients through product support, implementations and customer
care. Cost of revenue also includes an allocation of hosting and data center
costs for our infrastructure and platform environment, telecommunication
expenses used by sales and customer support teams and a portion of amortization
of capitalized internal-use software development costs and a portion of
amortization of intangible assets, including amortization of intangible assets
acquired as part of our acquisitions of other businesses. We expect that cost of
revenue will increase in absolute dollars, but it may fluctuate as a percentage
of revenue from period to period, as our transaction mix changes and we continue
to invest in growing our business across all geographical segments, including
through the acquisition of other businesses.
There are external factors that impact interchange fees, such as the average
transaction amount in a particular month or quarter. For example, hot summers
and cold winters tend to increase utility bills, and property taxes result in
two larger payments per year, each of which increases our interchange cost.
Gross profit is equal to our revenue less cost of revenue. Gross profit as a
percentage of our revenue is referred to as gross margin. Our gross margin has
been and will continue to be affected by a number of factors, including average
transaction value, payment type and payments and transactions through our IPN.
Operating Expenses
Research and Development
Research and development expenses consist of personnel-related expenses,
including stock-based compensation expenses, incurred in developing new products
or enhancing existing products and are expensed as incurred, unless they qualify
as internal-use software development costs, which are capitalized and amortized.
We expect our research and development expenses to increase in absolute dollars,
but they may fluctuate as a percentage of revenue from period to period as we
expand our research and development team to develop new products and product
enhancements. Over the longer term, we expect research and development expenses
to decrease as a percentage of revenue as we leverage the scale of our business.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses,
including stock-based compensation expenses for sales and marketing personnel,
sales commissions, partner fees, marketing program expenses, travel-related
expenses and costs to market and promote our platform through advertisements,
marketing events, partnership arrangements and direct biller acquisition as well
as amortization of intangible assets acquired as part of our acquisitions of
other businesses. We expect our sales and marketing expenses to increase in
absolute dollars, but they may fluctuate as a percentage of revenue from period
to period.
General and Administrative
General and administrative expenses consist primarily of personnel-related
expenses, including stock-based compensation expenses for finance, risk
management, legal and compliance, human resources, information technology and
facilities personnel. General and administrative expenses also include costs
incurred for external professional services and other corporate expenses. We
expect to incur additional general and administrative expenses as a result of
operating as a public company, and to support the growth in our business. We
expect that our general and administrative expenses will increase in absolute
dollars, but they may fluctuate as a percentage of revenue from period to
period. Over the longer term, we expect general and administrative expenses to
decrease as a percentage of revenue as we leverage the scale of our business.
Factors Affecting Our Performance
The discussion below includes a number of forward-looking statements regarding
our future performance. For a discussion of important factors, including the
continuing development of our business and other factors which could cause
actual results to differ materially from matters referred to below, see the
discussions under "Risk Factors" and "Special Note Regarding Forward-Looking
Statements" herein and in our Form 10-K for the year ended December 31, 2021 or
the "2021 Form 10-K".
Increased Adoption of Electronic Bill Payment Solutions
As the number of financial transactions online continues to increase, electronic
bill payment is becoming a greater share of the bill payment market. We have
observed that consumers demand a frictionless electronic bill payment experience
and increasingly prefer more flexible and innovative digital payment options. We
expect this trend to continue, providing us with a greater opportunity to
provide next-generation bill and digital payment technology and power more
transactions, further fueling our growth.
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--------------------------------------------------------------------------------Acquiring New and Maintaining Existing Billers and Financial Institutions
Our future growth depends on the continued adoption of our platform by new billers and financial institutions, as well as maintaining our existing billers and financial institutions. We intend to continue investing in our efficient go-to-market strategies, increasing brand awareness and driving adoption of our platform and products. We had more than 1,700 billers and financial institution clients as ofDecember 31, 2021 , including billers of all sizes and across numerous vertical markets and financial institutions of all sizes. Our ability to attract new, and maintain existing, billers and financial institutions and drive adoption of our platform will depend on a number of factors, including the effectiveness and pricing of our products, offerings of our competitors and the effectiveness of our marketing efforts. Our growth and performance also depends on our ability to promptly implement and begin recognizing revenues from our new billers and financial institutions.
Expanding Usage of Our Platform with Existing Billers and Financial Institutions
We believe our large base of existing billers and financial institutions represents a significant opportunity for further consumption of our platform. We believe our solutions create a superior experience for consumers and accelerate revenue realization for billers, which drives increased usage of our platform. We intend to continue investing in this value proposition. Leveraging our platform to capture more transactions from our existing biller and financial institution base is expected to organically drive transaction growth at lower cost. Growing Our Partner Base We believe there is a significant opportunity to increase the transactions on our platform through expanding our base of software, strategic and IPN partners. While revenue derived from or through our IPN partnerships has not been significant historically, we expect that the revenue contribution from our IPN will grow over time. As our IPN partner base expands, and new partners use our platform to power bill payment experiences within their ecosystems, we expect to organically expand the reach of our platform to millions of new consumers and thereby drive new, revenue-generating transactions to our platform. We intend to invest in the expansion of our partner base, including the addition of new IPN partners, because our ability to secure new partners will have a direct impact on our transaction growth.
Investing in Sales and Marketing
We will continue to expand efforts to market our platform through our diversified sales and marketing strategy. We intend to invest in sales and marketing strategies that we believe will drive further brand awareness and preference among our billers, financial institutions, partners and consumers. Given the nature of our biller, financial institution and partner base, our investment in sales and marketing in a given period may not impact results until subsequent periods. We approach sales and marketing spend strategically to maintain efficient biller and partner acquisition.
Innovation and Enhancement of Our Platform
We will continue to invest in our platform and IPN to maintain our position as a
leading provider of biller communication and payments. To drive adoption and
increase penetration of our platform, we intend to continue to introduce new
products and features. We believe that investment in research and development
will contribute to our long-term growth, but may also negatively impact our
short-term profitability. We will continue to leverage emerging technologies and
invest in the development of more features and better functionality for
consumers.
Key Performance and Non-GAAP Measures
We use the following metrics to measure our performance, identify trends
affecting our business, prepare financial projections and make strategic
decisions. We believe that these key performance and non-GAAP measures provide
meaningful supplemental information for management and investors in assessing
our historical and future operating performance. The calculation of the key
performance and non-GAAP measures discussed below may differ from other
similarly titled metrics used by other companies, securities analysts or
investors.
Transactions Processed
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Growth 2022 2021 % Growth
(in millions) (in millions)
Transactions processed 92.2 70.6 30.6 % 269.6 197.2 36.7 %
We define transactions processed as the number of revenue generating payment
transactions, such as checks, credit card and debit card transactions, automated
clearing house, or ACH, items and emerging payment types, which are initiated
and generally processed through our platform during a period. The number of
transactions also includes
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account-to-account and person-to-person transfers. The number of transactions
processed during the three and nine months ended September 30, 2022 increased
approximately 30.6% and 36.7%, respectively, as compared to the same periods in
2021. The increase was primarily driven by the addition of new billers and
financial institutions and increased transactions from our existing billers and
financial institutions.
Non-GAAP Measures
We use supplemental measures of our performance that are derived from our
consolidated financial information but which are not presented in our
consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. These supplemental non-GAAP measures
include contribution profit, adjusted gross profit, adjusted EBITDA and free
cash flow.
Contribution Profit
We calculate contribution profit as gross profit plus other cost of revenue.
Other cost of revenue equals cost of revenue less interchange and assessment
fees paid by us to our payment processors.
Adjusted Gross Profit
We calculate adjusted gross profit as gross profit adjusted for non-cash items, primarily stock-based compensation and amortization.
Adjusted EBITDA
We calculate adjusted EBITDA as net income before other income (expense) (which consists of interest income (expense), net and foreign exchange gain (loss)), depreciation and amortization, income taxes, adjusted to exclude the effects of stock-based compensation expense and certain nonrecurring expenses that management believes are not indicative of ongoing operations, consisting primarily of professional fees and other indirect charges associated with our IPO. Free Cash Flow
We calculate free cash flow as net cash provided by (used in) operating activities less capital expenditures and software and capitalized internal-use software development costs.
How we use Non-GAAP Measures
We use non-GAAP measures to supplement financial information presented on a GAAP
basis. We believe that excluding certain items from our GAAP results allows
management and our board of directors to more fully understand our consolidated
financial performance from period to period and helps management project our
future consolidated financial performance as forecasts are developed at a level
of detail different from that used to prepare GAAP-based financial measures.
Moreover, we believe these non-GAAP measures provide our investors with useful
information to help them evaluate our operating results by facilitating an
enhanced understanding of our operating performance and enabling them to make
more meaningful period-to-period comparisons. In particular, we exclude
interchange and assessment fees in the presentation of contribution profit
because we believe inclusion is less directly reflective of our operating
performance as we do not control the payment channel used by consumers, which is
the primary determinant of the amount of interchange and assessment fees. We use
contribution profit to measure the amount available to fund our operations after
interchange and assessment fees, which are directly linked to the number of
transactions we process and thus our revenue and gross profit. There are
limitations to the use of the non-GAAP measures presented in this report. Our
non-GAAP measures may not be comparable to similarly titled measures of other
companies; other companies, including companies in our industry, may calculate
non-GAAP measures differently than we do, limiting the usefulness of those
measures for comparative purposes. These non-GAAP measures should not be
considered in isolation from or as a substitute for financial measures prepared
in accordance with GAAP.
We also urge you to review the reconciliation of these non-GAAP financial
measures included below. To properly and prudently evaluate our business, we
encourage you to review the condensed consolidated financial statements and
related notes included elsewhere in this report and to not rely on any single
financial measure to evaluate our business.
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--------------------------------------------------------------------------------Contribution Profit
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
(in thousands)
Gross profit $ 37,857 $ 31,164 $ 108,539 $ 87,639
Plus: other cost of revenue 13,277 9,488 38,704 25,563
Contribution profit $ 51,134 $ 40,652 $ 147,243 $ 113,202
In general, contribution profit is driven by the number of transactions we
process offset by network fees associated with processing those transactions.
The amount of contribution profit per transaction may vary due to a variety of
factors including client size, type and industry as well as whether the client
is a biller, financial institution or other partner. Contribution profit for the
three and nine months ended September 30, 2022 increased approximately 26.0% and
30.1%, respectively, as compared to the same periods in 2021. The increase was
primarily driven by the addition of new billers and financial institutions and
increased transactions from our existing billers and financial institutions. For
the three and nine months ended September 30, 2022 , contribution profit
increased at a slower rate than transactions due to a continued mix shift to
larger, high volume clients.
Adjusted Gross Profit
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Gross profit $ 37,857 $ 31,164 $ 108,539 $ 87,639
Stock-based compensation - - - -
Amortization 3,186 1,398 8,575 3,610
Adjusted gross profit $ 41,043 $ 32,562 $ 117,114 $ 91,249
Adjusted gross profit for the three and nine months ended September 30, 2022
increased approximately 26.0% and 28.3%, respectively, as compared to the same
periods in 2021. Adjusted gross profit is driven primarily by the same factors
that impact gross profit with the exception of excluding the amortization in
cost of revenue. The percentage increase in adjusted gross profit is lower than
the percentage increase in contribution profit due to additional other cost of
revenue recorded related to the PayVeris, LLC or Payveris, and Finovera, Inc. ,
or Finovera, acquisitions. The increase in amortization was driven by additional
capitalization of software costs as well as amortization of acquired intangibles
associated with our acquisitions of Payveris and Finovera.
Adjusted EBITDA
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Net (loss) income $ (737 ) $ 422 $ (1,470 ) $ 4,635
Excluding
Interest income, net (504 ) (11 ) (594 ) (4 )
Provision for (benefit from) income taxes 296 701 (2,397 ) 5,423
Depreciation and amortization 6,158 3,647 17,518 8,587
Foreign exchange (gain) loss 28 16 (52 ) 8
Stock-based compensation 2,002 754 4,622 1,885
Other nonrecurring expenses(1) 769 - 769 2,711
Adjusted EBITDA $ 8,012 $ 5,529 $ 18,396 $ 23,245
(1)
Other nonrecurring expenses consist of indirect costs incurred associated with
our IPO in the nine months ended September 30, 2021 and an estimated liability
booked in the three months ended September 30, 2022 related to the potential
costs of terminating a commercial contract.
As adjusted EBITDA is a measure of profitability, it would generally be expected
to move in line with revenue, contribution profit, gross profit and adjusted
gross profit. Adjusted EBITDA decreased in the nine months ended September 30,
2022 as compared to the same period in 2021 due to our investment in sales and
marketing and research and development in order to drive future growth of the
business as well as the increased costs associated with being a public company
and the impact of the Payveris and Finovera acquisitions.
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Free Cash Flow
Three Months Ended Nine Months Ended September
September 30, 30,
2022 2021 2022 2021
(in thousands)
Net cash provided by operating activities
5,143 $ 19,357
Purchases of property and equipment and
software (368 ) (261 ) (1,163 ) (825 )
Other intangible assets acquired (125 ) -- (248 ) --
Capitalized internal-use software
development costs (7,793 ) (4,737 ) (22,257 ) (13,473 )
Free cash flow $ (10,235 ) $ 1,602 $ (18,525 ) $ 5,059
Net cash used in investing activities(1) $ (8,286 ) $ (62,118 ) $ (23,668 ) $ (71,418 )
Net cash provided by financing activities $ 18,722 $ 4,724 $
42,940
(1)
Net cash used in investing activities includes payments for purchases of property and equipment and software and costs related to capitalized internal-use software development, which is also included in our calculation of free cash flow.
Results of Operations
The following table sets forth our condensed consolidated statements of operations for the periods presented:
Three Months Ended Nine Months Ended September
September 30, 30,
2022 2021 2022 2021
(in thousands)
Revenue $ 128,152 $ 101,676 $ 364,825 $ 287,393
Cost of revenue(1) 90,295 70,512 256,286 199,754
Gross profit 37,857 31,164 108,539 87,639
Operating expenses
Research and development(1) 10,350 8,818 30,925 24,469
Sales and marketing(1) 19,048 11,314 53,089 29,041
General and administrative(1) 9,376 9,904 29,038 24,067
Total operating expenses 38,774 30,036 113,052 77,577
(Loss) income from operations (917 ) 1,128 (4,513 ) 10,062
Other income (expense)
Interest income (expense), net 504 11 594 4
Foreign exchange gain (loss) (28 ) (16 ) 52 (8 )
(Loss) income before income taxes (441 ) 1,123 (3,867 ) 10,058
(Provision for) benefit from income taxes (296 ) (701 ) 2,397 (5,423 )
Net (loss) income $ (737 ) $ 422 $ (1,470 ) $ 4,635
(1)Stock-based compensation expense was allocated in cost of revenue and operating expenses as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Cost of revenue $ - $ - $ - $ -
Research and development 507 110 1,080 141
Sales and marketing 612 56 1,062 92
General and administrative 883 588 2,480 1,652
Total stock-based compensation $ 2,002 $ 754 $ 4,622 $ 1,885
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The following table presents the components of our condensed consolidated
statements of operations for the periods presented as a percentage of revenue:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 70.5 69.3 70.2 69.5
Gross profit 29.5 30.7 29.8 30.5
Operating expenses
Research and development 8.1 8.7 8.5 8.5
Sales and marketing 14.9 11.1 14.6 10.1
General and administrative 7.3 9.7 8.0 8.4
Total operating expenses 30.3 29.6 31.0 26.9
(Loss) income from operations (0.7 ) 1.1 (1.2 ) 3.6
Other income (expense)
Interest income (expense), net 0.4 - 0.2 -
Foreign exchange gain (loss) - - - -
(Loss) income before income taxes (0.3 ) 1.1 (1.1 ) 3.5
(Provision for) benefit from income taxes (0.2 ) (0.7 ) 0.7 (1.9 )
Net (loss) income (0.6 %) 0.4 % (0.4 %) 1.6 %
Comparison of the Three Months Ended
Revenue
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Revenue $ 128,152 $ 101,676 $ 26,476 26.0
The increase in revenue was primarily due to an increase in the number of
transactions processed, which was driven by the implementation of new billers,
increased transactions from our existing billers and additional transactions as
a result of the Payveris and Finovera acquisitions, offset by the decrease in
revenue we received per transaction on a blended basis.
Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 90,295 $ 70,512 $ 19,783 28.1
Gross profit $ 37,857 $ 31,164 $ 6,693 21.5
Gross margin 29.5 % 30.6 %
The increase in cost of revenue was driven by the increase in revenue and transactions processed as it consists primarily of interchange fees and processor costs, driven by higher average bill amounts due primarily to inflation, as well as other direct and indirect costs associated with making our platform available to our billers.
Gross margin decreased for the three months endedSeptember 30, 2022 due to an increase in amortization expense included in cost of revenue associated with the Payveris and Finovera acquisitions. 30 --------------------------------------------------------------------------------
Operating Expenses
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Operating expenses
Research and development $ 10,350 $ 8,818 $ 1,532 17.4
Sales and marketing 19,048 11,314 7,734 68.4
General and administrative 9,376 9,904 (528 ) (5.3 )
Total operating expenses $ 38,774 $ 30,036 $ 8,738
Percentage of total revenue
Research and development 8.1 % 8.7 %
Sales and marketing 14.9 % 11.1 %
General and administrative 7.3 % 9.7 %
Research and Development Expenses
The increase in research and development expenses was primarily due to an increase in employee-related costs, including benefits due to an increase in headcount as we continued to invest in building and adding additional features and functionality to our platform. Additionally, we incurred increased hosting costs as we transitioned from data center to the cloud and an increase in stock-based compensation expense associated with routine grants.
Sales and Marketing Expenses
The increase in sales and marketing expenses was primarily due to an increase in employee-related costs, including benefits, as we continued to expand our sales and marketing efforts with additional headcount in order to continue to drive our growth. In addition, we incurred amortization expense related to the identifiable intangible assets from the Payveris and Finovera acquisitions as well as increased stock-based compensation associated with routine grants.
General and Administrative Expenses
The decrease in general and administrative expenses was primarily due to lower
costs for our directors and officers insurance and corporate premiums, a
reduction in lease cost and a decreases in employee-related costs, primarily
from a reduction in executive salaries and our bonus accrual.
Other Income (Loss)
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Interest income, net $ 504 $ 11 $ 493 n/m
Foreign exchange loss (28 ) (16 ) (12 ) 75.0
___________
n/m - not meaningful
The changes in interest income, net was primarily due to the increase in the
federal reserve rates which had a positive impact on our included government
issued securities, which are included in cash and cash equivalents on the
balance sheet. The changes in foreign exchange loss were immaterial.
Income Taxes
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)Provision for income taxes $ (296 ) $ (701 ) $
405 (57.8 )
The change in provision for income taxes for the three months endedSeptember 30, 2022 as compared to the same period in the prior year, was primarily due to changes in pre-tax (loss) and income and the result of excess tax benefits on stock-based compensation, state taxes, foreign income taxed at different rates and permanent tax adjustments related to nondeductible executive compensation, in addition to a valuation allowance recorded against the net deferred tax assets.
Comparison of the Nine Months Ended
Revenue
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Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Revenue $ 364,825 $ 287,393 $ 77,432 26.9
The increase in revenue was primarily due to an increase in the number of
transactions processed, which was driven by the implementation of new billers,
increased transactions from our existing billers and additional transactions as
a result of the Payveris and Finovera acquisitions, offset by the decrease in
revenue we received per transaction on a blended basis.
Cost of Revenue, Gross Profit and Gross Margin
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 256,286 $ 199,754 $ 56,532 28.3
Gross profit $ 108,539 $ 87,639 $ 20,900 23.8
Gross margin 29.8 % 30.5 %
The increase in cost of revenue was driven by the increase in revenue and transactions processed as it consists primarily of interchange fees and processor costs, driven by higher average bill amounts due primarily to inflation, as well as other direct and indirect costs associated with making our platform available to our billers.
Gross margin decreased for the nine months endedSeptember 30, 2022 due to an increase in amortization expense included in cost of revenue associated with the Payveris and Finovera acquisitions. 32 --------------------------------------------------------------------------------
Operating Expenses
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Operating expenses
Research and development $ 30,925 $ 24,469 $ 6,456 26.4
Sales and marketing 53,089 29,041 24,048 82.8
General and administrative 29,038 24,067 4,971 20.7
Total operating expenses $ 113,052 $ 77,577 $ 35,475
Percentage of total revenue
Research and development 8.5 % 8.5 %
Sales and marketing 14.6 % 10.1 %
General and administrative 8.0 % 8.4 %
Research and Development Expenses
The increase in research and development expenses was primarily due to an increase in employee-related costs, including benefits due to an increase in headcount as we continued to invest in building and adding additional features and functionality to our platform. Additionally, we incurred increased hosting costs as we transitioned from data center to the cloud and an increase in stock-based compensation expense associated with routine grants.
Sales and Marketing Expenses
The increase in sales and marketing expenses was primarily due to an increase in employee-related costs, including benefits, as we continued to expand our sales and marketing efforts with additional headcount in order to continue to drive our growth. In addition, we incurred amortization expense related to the identifiable intangible assets from the Payveris and Finovera acquisitions as well as increased stock-based compensation associated with routine grants.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to
increased costs of operating as a public company, including significant
increases in our directors and officers insurance premiums, and increases in
employee-related costs, including benefits and stock-based compensation, due to
an increase in general and administrative headcount.
Other Income (Loss)
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Interest income, net $ 594 $ 4 $ 590 n/m
Foreign exchange gain (loss) 52 (8 ) 60 n/m
___________
n/m - not meaningful
The changes in interest income (expense), net and foreign exchange gain were
immaterial.
Income Taxes
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Benefit from (provision
for) income taxes $ 2,397 $ (5,423 ) $ 7,820 (144.2 )
The change in benefit from (provision for) income taxes for the nine months
ended September 30, 2022 as compared to the same period in the prior year, was
primarily due to changes in pre-tax (loss) and income and the result of excess
tax benefits on stock-based compensation, state taxes, foreign income taxed at
different rates and permanent tax adjustments related to nondeductible executive
compensation, in addition to a valuation allowance recorded against the net
deferred tax assets.
33
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Liquidity and Capital ResourcesSources and Uses of Funds
As ofSeptember 30, 2022 , we had$148.3 million of unrestricted cash and cash equivalents. We believe that existing unrestricted cash and cash equivalents will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months. Since inception, we have financed operations primarily through the sale of equity securities and revenue from payment transaction fees and subscriptions. Our principal uses of cash are funding operations and capital expenditures. From time to time, we may explore additional financing sources and means to lower our cost of capital, which could include equity, equity-linked and debt financing. We cannot assure you that any additional financing will be available to us on acceptable terms, or at all. The inability to raise capital would adversely affect our ability to achieve our business objectives. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we may be subject to increased fixed payment obligations and could be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business or execute our growth strategy. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors.
Historical Cash Flows
The following table summarizes our condensed consolidated cash flows.
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash provided by (used in)
Operating activities $ 5,143 $ 19,357
Investing activities (23,668 ) (71,418 )
Financing activities 42,940 220,948
Effects of foreign exchange on cash (329 ) 24
Net increase in cash, cash equivalents and
restricted cash $ 24,086 Net Cash Provided by Operating Activities
Our primary source of operating cash is revenue from payment transaction fees. Our primary uses of operating cash are personnel-related costs, payments to third parties to fulfill our payment transactions and payments to sales and marketing partners. Net cash provided by operating activities mainly consists of our net income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, other non-cash income and expense items, and net changes in operating assets and liabilities. Net cash provided by operating activities for the nine months endedSeptember 30, 2022 was$5.1 million . Net loss was$1.5 million , adjusted for non-cash charges of$22.0 million consisting primarily of depreciation and amortization, stock-based compensation, and non-cash lease expense, which contributed positively to operating activities. This was offset by net cash outflows of$15.4 million provided by changes in our operating assets and liabilities. Net cash provided by operating activities for the nine months endedSeptember 30, 2021 was$19.4 million . Net income was$4.6 million , adjusted for non-cash charges of$15.7 million consisting primarily of depreciation and amortization, stock-based compensation, and non-cash lease expense, which contributed positively to operating activities. This was offset by net cash outflows of$1.0 million provided by changes in our operating assets and liabilities.
Cash used in our investing activities consists primarily of cash paid for acquisitions, capitalized internal-use software development costs, purchases of property and equipment and intangible assets.
Net cash used in investing activities for the nine months endedSeptember 30, 2022 consisted of$22.3 million of capitalized internal-use software development costs,$1.2 million of purchases of property and equipment and$0.2 of other intangible assets acquired. Net cash used in investing activities for the nine months endedSeptember 30, 2021 consisted of$57.1 million of cash paid for acquisitions, net of cash and restricted cash acquired and contingent consideration,$13.5 million of capitalized internal-use software development costs and$0.8 million of purchases of property and equipment. 34 --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Cash provided by financing activities consists primarily of proceeds from the IPO and private placement and proceeds from stock option exercises, changes in financial institution funds in-transit offset by the redemption of the Series A preferred stock, payment of deferred offering costs related to the IPO, and payments on capital lease and other financing arrangements and principal payments on debt. Net cash provided by financing activities for the nine months endedSeptember 30, 2022 consisted of an increase in financial institution funds in-transit of$44.2 million and proceeds from stock option exercises of$1.5 million , offset by$2.7 million of payments on finance leases and other financing obligations. Net cash provided financing activities for the nine months endedSeptember 30, 2021 consisted of proceeds from the IPO of$224.6 million , proceeds from the private placement of$50.0 million , increase in financial institution funds in-transit of$6.6 million and proceeds of$0.8 million from the repayment of a related party loan, offset by$23.0 million for the redemption of the Series A preferred stock,$34.4 million for the repayment of dividends on the Series A preferred stock,$1.7 million of payments on finance leases and other financing obligations and$2.0 million of payments of deferred offering costs directly related to our IPO. Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these condensed
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, net sales, expenses and
related disclosures. We evaluate our estimates and assumptions on an ongoing
basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.
There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our 2021 Form 10-K.
Emerging Growth Company Status
Section 107 of the Jumpstart Our Business Startups Act of 2012, as amended, or
the JOBS Act, provides that an "emerging growth company" may take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an
"emerging growth company" may delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. Section 107 of
the JOBS Act provides that any decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable. We
have elected to use this extended transition period under the JOBS Act.
Recent Accounting PronouncementsSee Note 2 to our condensed consolidated financial statements included elsewhere in this report for more information regarding recently issued accounting pronouncements.
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