PAYMENTUS HOLDINGS, INC. Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplate," "believe," "estimate," "predict," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this report include statements about: ?
our ability to effectively manage our growth and expand our operations; ? our ability to further attract, retain and expand our biller, partner and consumer base;
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?
our expectations regarding our revenue, expenses and other operating results;
?
the continued impact of the COVID-19 pandemic on our operating results,
liquidity and financial condition and on our employees, billers, partners,
consumers and other key stakeholders;
?
our market opportunity and anticipated trends in our business and industry;
?
our ability to remain competitive as we continue to scale our business;
?
our ability to develop new product features and enhance our platform;
?
our ability to hire and retain experienced and talented employees as we grow our
business;
?
general economic conditions and their impact on consumer demand;
?
the expected impact of our recent acquisitions of Payveris or Finovera;
?
our future acquisitions or strategic investments in complementary companies,
products or technologies;
?
our ability to maintain and enhance our brand;
?
our plan to expand into new channels and industry verticals across different
markets; and
?
our international expansion plans and ability to expand internationally.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this report.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements primarily on our current expectations and projections about future events and trends that we believe may affect our business, operating results, financial condition and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled "Risk Factors" and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. You should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year endedDecember 31, 2020 included in the final prospectus for our initial public offering, or IPO, dated as ofMay 25, 2021 and filed with theUnited States Securities and Exchange Commission , orSEC , pursuant to Rule 424(b)(4) onMay 26, 2021 , or the final prospectus. In this report, unless the context requires otherwise, all references to "we," "our," "us," "Paymentus ," and the "Company" refer toPaymentus Holdings, Inc. , and where appropriate its consolidated subsidiaries. Overview
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platform was used by approximately 16 million consumers and businesses in
Our platform provides our billers 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 platform is developed on a single code
base and leverages a Software-as-a-Service 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 financial destiny.
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.
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 allows us to provide integration,
implementation, maintenance and upgrades at no additional cost to billers.
Recent Developments
In September 2021 , we acquired Payveris for a purchase price of approximately
$145.6 million , comprised of $85.2 million in cash and 2,364,270 shares of our
Class A common stock with a fair value of approximately $60.4 million , of which
56,197 shares of Class A common stock with an approximate value of $1.4 million
remains issuable.
In addition, in September 2021 , we acquired Finovera for a purchase price of
approximately $12.9 million , net of cash acquired, comprised of $5.0 million in
cash of which $0.8 million is being held back by us for a period of twenty-four
months following the transaction closing date, and 293,506 shares of our Class A
common stock with a fair value of approximately $7.9 million .
Impact of the COVID-19 Pandemic
The COVID-19 pandemic and efforts to control its spread have significantly
curtailed the movement of people, goods and services in the 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, including in Redmond, Washington , where our
headquarters are located, and Toronto, Canada , Charlotte, North Carolina and
Delhi, India , where we maintain significant operations, which policies and
restrictions have at times required our employees to work remotely. Even as
shelter-in-place policies or other governmental restrictions are 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. 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 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.
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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. See
the section titled "Risk Factors-Risks Related to Our Business and Industry-The
COVID-19 pandemic could have a material adverse impact on our employees,
billers, partners, consumers and other key stakeholders, which could materially
and adversely impact 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 payment, payment channel and
industry vertical. However, irrespective of these factors, the transaction fees
that we receive are generally consistent across payment types, payment channels
and industry verticals. We receive such transaction fees directly from billers,
partners or, in some cases, from consumers as a convenience fee.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists of certain direct costs that are directly attributed to processing payment 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 payment 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 payment 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 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. 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
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--------------------------------------------------------------------------------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 PerformanceIncreased 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 payment technology and power more transactions, further fueling our growth. Acquiring New Billers Our future growth depends on the continued adoption of our platform by new billers. We intend to continue investing in our efficient go-to-market strategies, increase brand awareness and drive adoption of our platform and products. We had more than 1,100 billers and more than 1,300 billers as ofDecember 31, 2019 and 2020, respectively, including billers of all sizes and across numerous vertical markets. Our ability to attract new billers 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.
Expanding Usage of Our Platform with Existing Billers
Our large base of existing billers 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 our 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 base will 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 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, partners and consumers. Given the nature of our biller 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 will 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 review 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.
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Transactions Processed
Three Months Ended Nine Months Ended September
September 30, 30,
2021 2020 % Growth 2021 2020 % Growth
(in millions) (in millions)
Transactions processed 70.6 48.7 44.9 197.2 140.8 40.1
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 account-to-account and person-to-person transfers.
The increase in transactions processed during the three and nine months ended
September 30, 2021 as compared to the same periods in 2020 was driven by the
addition of new billers and increased transactions from our existing billers as
well as an immaterial amount of additional transactions from the Payveris and
Finovera acquisitions.
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. 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. We calculate adjusted
gross profit as gross profit adjusted for non-cash items, primarily stock-based
compensation and amortization. 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. We calculate free cash flow as net cash provided by
(used in) operating activities less capital expenditures and capitalized
internal-use software development costs.
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.
Contribution Profit
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Gross profit $ 31,164 $ 22,653 $ 87,639 $ 66,832
Plus: other cost of revenue 9,488 7,003 25,563 20,442
Contribution profit $ 40,652 $ 29,656 $ 113,202 $ 87,274
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Adjusted Gross Profit
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Gross profit $ 31,164 $ 22,653 $ 87,639 $ 66,832
Stock-based compensation - - - -
Amortization 1,398 893 3,610 2,553
Adjusted gross profit $ 32,562 $ 23,546 $ 91,249 $ 69,385
Adjusted EBITDA
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Net income $ 422 $ 2,614 $ 4,635 $ 10,078
Excluding
Interest income, net (11 ) (3 ) (4 ) (48 )
Provision for income taxes 701 841 5,423 3,361
Depreciation and amortization 3,647 1,997 8,587 6,012
Foreign exchange loss 16 19 8 109
Stock-based compensation 754 511 1,885 1,448
Other nonrecurring expenses - - 2,711 -
Adjusted EBITDA $ 5,529 $ 5,979 $ 23,245 $ 20,960
Free Cash Flow
Nine Months Ended September
Three Months Ended September 30, 30,
2021 2020 2021 2020
(in thousands)
Net cash provided by operating
activities $ 6,600 $ 12,213 $ 19,357 $ 28,129
Purchases of property and equipment (261 ) (73 ) (825 ) (382 )
Capitalized internal-use software
development costs (4,737 ) (3,681 ) (13,473 ) (10,866 )
Free cash flow $ 1,602 $ 8,459 $ 5,059 $ 16,881
Net cash used in investing
activities(1) $ (62,118 ) $ (4,044 ) $ (71,418 ) $ (11,538 )
Net cash provided by (used in)
financing activities $ 4,724 $ (219 ) $ 220,948 $ (909 )
(1)Net cash used in investing activities includes payments for purchases of property and equipment and costs related to capitalized for internal-use software development, which is also included in our calculation of free cash flow.
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Results of OperationsThe following table sets forth our results of operations for the periods presented:
Nine Months Ended September
Three Months Ended September 30, 30,
2021 2020 2021 2020
(in thousands)
Revenue $ 101,676 $ 78,018 $ 287,393 $ 219,345
Cost of revenue(1) 70,512 55,365 199,754 152,513
Gross profit 31,164 22,653 87,639 66,832
Operating expenses
Research and development(1) 8,818 6,221 24,469 17,970
Sales and marketing(1) 11,314 8,002 29,041 23,246
General and administrative(1) 9,904 4,959 24,067 12,116
Total operating expenses 30,036 19,182 77,577 53,332
Income from operations 1,128 3,471 10,062 13,500
Other income (expense)
Interest income, net 11 3 4 48
Foreign exchange loss (16 ) (19 ) (8 ) (109 )
Income before income taxes 1,123 3,455 10,058 13,439
Provision for income taxes (701 ) (841 ) (5,423 ) (3,361 )
Net income $ 422 $ 2,614 $ 4,635 $ 10,078
(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,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ - $ - $ - $ -
Research and development 110 9 141 19
Sales and marketing 56 8 92 23
General and administrative 588 494 1,652 1,406
Total stock-based compensation $ 754 $ 511 $ 1,885 $ 1,448
The following table presents the components of our consolidated statements of operations for the periods presented as a percentage of revenue:
Nine Months Ended September
Three Months Ended September 30, 30,
2021 2020 2021 2020
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 69.4 71.0 69.5 69.5
Gross profit 30.6 29.0 30.5 30.5
Operating expenses
Research and development 8.7 8.0 8.5 8.2
Sales and marketing 11.1 10.3 10.1 10.6
General and administrative 9.7 6.3 8.4 5.5
Total operating expenses 29.5 24.6 27.0 24.3
Income from operations 1.1 4.4 3.5 6.2
Other income (expense)
Interest income, net - - - -
Foreign exchange loss - - - (0.1 )
Income before income taxes 1.1 4.4 3.5 6.1
Provision for income taxes (0.7 ) (1.1 ) (1.9 ) (1.5 )
Net income 0.4 % 3.3 % 1.6 % 4.6 %
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Comparison of the Three Months Ended
Revenue
Three Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Revenue $ 101,676 $ 78,018 $ 23,658 30.3
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
2021 2020 Amount %
(dollars in thousands)
Cost of revenue $ 70,512 $ 55,365 $ 15,147 27.4
Gross profit $ 31,164 $ 22,653 $ 8,511 37.6
Gross margin 30.6 % 29.0 %
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 as well as other direct and indirect costs associated with
making our platform available to our billers. The average payment amount of our
transactions during the three months ended September 30, 2021 was lower as
compared to the same period in 2020, resulting in decreased interchange fees as
a percentage of revenue.
Gross margin increased during the three months ended
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Operating Expenses
Three Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Operating expenses
Research and development $ 8,818 $ 6,221 $ 2,597 41.7
Sales and marketing 11,314 8,002 3,312 41.4
General and administrative 9,904 4,959 4,945 99.7
Total operating expenses $ 30,036 $ 19,182 $ 10,854
Percentage of total revenue
Research and development 8.7 % 8.0 %
Sales and marketing 11.1 % 10.3 %
General and administrative 9.7 % 6.3 %
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 as well as increased data center and hosting costs. Our average research and development headcount during the three months endedSeptember 30, 2021 increased by approximately 28% compared to the same period in 2020. 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 to existing employees.
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. Our average sales and marketing headcount increased by approximately 32% during the three months endedSeptember 30, 2021 compared to the same period in 2020. 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 to existing employees.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to the increased costs of operating as a public company, including significant increases in our directors and officers insurance premiums, one-time legal and other fees associated with the Payveris and Finovera acquisitions, and increases in employee-related costs, including benefits and stock-based compensation, due to an increase in general and administrative headcount. Our average general and administrative headcount increased by approximately 10% during the three months endedSeptember 30, 2021 compared to the same period in 2020. The increase in general and administrative expenses as a percentage of revenue was primarily due to increased ongoing costs associated with operating as a public company and one-time legal and other fees associated with the Payveris and Finovera acquisitions. Other Income (Loss) Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Interest income, net $ 11 $ 3$ 8 266.7 Foreign exchange loss (16 ) (19 ) 3 (15.8 ) The increase in interest income, net was primarily due to interest on the higher cash balance as a result of the IPO, offset by interest expense recorded for finance leases. Income Taxes Three Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands)
Provision for income taxes $ (701 ) $ (841 ) $
140 (16.6 )
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-------------------------------------------------------------------------------- The change in provision for income taxes as well as the increase in the Company's effective tax rate, which increased to 58.0% for the three months endedSeptember 30, 2021 as compared to 25.3% for the same period in the prior year, was primarily due to discrete tax adjustments related to nondeductible executive compensation and nondeductible IPO costs in connection with the IPO.
Comparison of the Nine Months Ended
Revenue
Nine Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Revenue $ 287,393 $ 219,345 $ 68,048 31.0
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
and increased transactions from our existing billers, offset by a decrease in
the revenue we received per transaction on a blended basis.
Cost of Revenue, Gross Profit and Gross Margin
Nine Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Cost of revenue $ 199,754 $ 152,513 $ 47,241 31.0
Gross profit $ 87,639 $ 66,832 $ 20,807 31.1
Gross margin 30.5 % 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 as well as other direct and indirect costs associated with
making our platform available to our billers. The average payment amount of our
transactions during the nine months ended
Gross margin was consistent during the nine months ended
Operating Expenses
Nine Months Ended September 30, Change
2021 2020 Amount %
(dollars in thousands)
Operating expenses
Research and development $ 24,469 $ 17,970 $ 6,499 36.2
Sales and marketing 29,041 23,246 5,795 24.9
General and administrative 24,067 12,116 11,951 98.6
Total operating expenses $ 77,577 $ 53,332 $ 24,245
Percentage of total revenue
Research and development 8.5 % 8.2 %
Sales and marketing 10.1 % 10.6 %
General and administrative 8.4 % 5.5 %
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 as well as increased data center and hosting costs. Our average research and development headcount during the nine months endedSeptember 30, 2021 was less than the percentage increase in expense compared to the same period in 2020; however, 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 to existing employees.
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
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our growth. Our average sales and marketing headcount during the nine months
ended September 30, 2021 was consistent with the percentage increase in expense
compared to the same period in 2020.
The decrease in sales and marketing expenses as a percentage of revenue was primarily due to lower marketing expense related to events and lower travel-related costs as a result of the COVID-19 pandemic.
General and Administrative Expenses
The increase in general and administrative expenses was primarily due to indirect costs incurred associated with completion of our IPO, the increased costs of operating as a public company, including significant increases in our directors and officers insurance premiums one-time legal and other fees associated with the Payveris and Finovera acquisitions, and increases in employee-related costs, including benefits and stock-based compensation, due to an increase in general and administrative headcount. Our average general and administrative headcount increased by approximately 10% during the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase in general and administrative expenses as a percentage of revenue was primarily due to certain one-time and increased ongoing costs associated with operating as a public company and one-time legal and other fees associated with the Payveris and Finovera acquisitions. Other Income (Loss) Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands) Interest income, net $ 4 $ 48$ (44 ) (91.7 ) Foreign exchange loss (8 ) (109 ) 101 (92.7 ) The increase in interest income, net was primarily due to interest on the higher cash balance as a result of the IPO, offset by interest expense recorded for finance leases. Income Taxes Nine Months Ended September 30, Change 2021 2020 Amount % (dollars in thousands)
Provision for income taxes
The change in provision for income taxes as well as the increase in the Company's effective tax rate, which increased to 53.9% for the nine months endedSeptember 30, 2021 as compared to 25.2% for the same period in the prior year, was primarily due to discrete tax adjustments related to nondeductible executive compensation and nondeductible IPO costs in connection with the IPO. Liquidity and Capital Resources
Sources and Uses of Funds
As ofSeptember 30, 2021 , we had$177.5 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. InSeptember 2021 , we completed the acquisitions of Payveris and Finovera for a total purchase price of$158.5 million for both entities, comprised of$90.2 million in cash, of which$0.8 million is being held back by the Company for a period of twenty-four months following the Finovera transaction closing date, and 2,364,270 shares of the Company's Class A common stock with a fair value of approximately$68.3 million , of which 56,197 shares of Class A common stock with an approximate value of$1.4 million remains issuable. InMay 2021 , we completed our IPO which resulted in aggregate net proceeds of$224.6 million , after underwriting discounts of$16.9 million . We also received aggregate proceeds of$50.0 million related to our concurrent private placement, and did not pay any underwriting discounts or commissions with respect to the shares that were sold in the concurrent private placement. 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 35
-------------------------------------------------------------------------------- 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. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. Historical Cash Flows
The following table summarizes our consolidated cash flows.
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash provided by (used in)
Operating activities $ 19,357 $ 28,129
Investing activities (71,418 ) (11,538 )
Financing activities 220,948 (909 )
Effects of foreign exchange on cash, cash
equivalents and restricted cash 24 23
Net increase in cash, cash equivalents and
restricted cash $ 168,911 $ 15,705
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 for the nine months endedSeptember 30, 2021 was$19.4 million , primarily consisting of our net income of$4.6 million , adjusted for non-cash charges of$8.6 million in depreciation and amortization,$2.1 million in non-cash lease expense related to our operating right-of-use assets,$1.9 million in stock-based compensation,$2.7 million in deferred income taxes,$0.4 million in amortization of contract asset recorded as contra revenue related to the recognition of the warrant issued toJPMC Strategic Investments I Corporation , and net cash outflows of$1.2 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities includes a$7.8 million increase in accounts and other receivables due to higher sales and relative timing of our cash collections, an increase of$0.2 million in prepaid expenses, and a$2.0 million decrease in operating lease liabilities, due to current period payments on operating leases. These amounts were partially offset by a$7.8 million increase in accounts payable due in part to a change in processer payment timing from real-time payments to transactions being processed on a monthly cadence where we are invoiced in arrears for fees owed, an increase of$0.1 million in accrued liabilities, a$0.3 million decrease in income taxes receivable, and an increase of$0.4 million in contract liabilities. Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$28.2 million , primarily consisting of our net income of$10.1 million , adjusted for non-cash charges of$6.0 million in depreciation and amortization,$2.0 million in non-cash lease expense related to our operating right-of-use assets,$1.4 million in stock-based compensation,$1.3 million in deferred income taxes, and net cash inflows of$7.2 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were an increase of$13.7 million in accounts payable, an increase of$2.1 million in accrued liabilities, an increase of$0.5 million in contract liabilities, and a$0.6 million decrease in income taxes receivable due to the receipt of an overpayment from the prior year end. These amounts were partially offset by a$7.7 million increase in accounts and other receivables resulting primarily from higher sales and relative timing of our cash collections, and a$2.0 million decrease in operating lease liabilities due to current period payments on operating leases.
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, 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. 36 -------------------------------------------------------------------------------- Net cash used in investing activities for the nine months endedSeptember 30, 2020 consisted of$10.9 million of capitalized internal-use software development costs,$0.4 million of purchases of property and equipment and$0.3 million related to the payment of deferred consideration for an acquisition.
Net Cash Provided by (Used in) Financing Activities
Cash provided by (used in) financing activities consists primarily of proceeds from the IPO and private placement offset by the redemption of the Series A preferred stock, payment of deferred offering costs related to the IPO, changes in financial institution funds in-transit, 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, 2021 consisted of proceeds from the IPO of$224.6 million , proceeds from the private placement of$50.0 , 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 payment 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. Net cash used in financing activities for the nine months endedSeptember 30, 2020 consisted of$0.8 million of payments on finance leases and other financing obligations. Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations and commitments in
cash as of
Payments Due by Period:
Less than More than
Total 1 Year 1 - 3 Years 3 -5 Years 5 Years
(in thousands)
Operating lease liabilities(1) 9,434 533 2,590 2,283 4,028
Finance lease liabilities(2) 445 68 377 - -
Purchase obligations(3) 3,556 590 2,735 231 -
$ 13,435 $ 1,191 $ 5,702 $ 2,514 $ 4,028
(1)
Consists of operating lease liabilities for our offices and data centers.
(2)
Consists of finance lease liabilities for equipment.
(3)
Consists of purchase obligations which were not recognized on the balance sheet
as of September 30, 2021 , related primarily to infrastructure services and IT
software and maintenance service costs.
Off-Balance Sheet ArrangementsWe have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Critical Accounting Policies
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 prospectus filed pursuant to Rule 424(b) under the
Securities Act with the
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.
37
--------------------------------------------------------------------------------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 Pronouncements
See 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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