| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
March 31, 2024
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
_______ to_______
| Delaware | 82-4844620 | |||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| 92626 | ||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
Title of each class | Trading Symbol(s) |
| Name of each exchange on which registered | |||||||
| Common stock, par value $0.001 per share | MLNK | The New York Stock Exchange | ||||||||
| Large accelerated filer | o | Accelerated filer | ||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
Special Note about Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within includes trademarks, such as MeridianLink®, which are protected under applicable intellectual property laws and are the meaningproperty of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future eventsMeridianLink, Inc. or our future financial or operating performance. All statements other than statements of historical fact included in thisits subsidiaries. This Quarterly Report on Form 10-Q including statements regarding also contains trademarks, service marks, copyrights, and trade names of other companies, which are the property of their respective owners. Solely for convenience, our strategy, future operations, financial position, estimated revenuestrademarks and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in this Quarterly Report on Form 10-Q and those included within our prospectus dated July 27, 2021 and as filed with the SEC on July 28, 2021. These forward-looking statements are based on management’s current beliefs, based on currently available information, astrade names referred to the outcome and timing of future events. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our expectations regarding our revenue, annual recurring revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, revenue mix and ability to achieve and maintain future profitability;
our ability to execute on our strategies, plans, objectives and goals;
our ability to compete with existing and new competitors in existing and new markets and offerings;
our ability to develop and protect our brand;
our ability to effectively manage privacy and information and data security;
increases in spending by financial institutions on cloud-based technology;
anticipated trends and growth rates in our business and in the markets in which we operate;
our ability to maintain and expand our customer base and our partner network;
our ability to sell our applications and expand internationally;
our ability to comply with laws and regulations;
our ability to anticipate market needs and successfully develop new and enhanced solutions to meet those needs;
the impact of the COVID-19 pandemic on our industry, business and results of operations;
our ability to successfully identify, acquire and integrate complementary businesses and technologies;
our ability to hire and retain necessary qualified employees to grow our business and expand our operations;
the evolution of technology affecting our applications, platform and markets;
economic and industry trends;
seasonal fluctuations in consumer borrowing trends;
our ability to adequately protect our intellectual property; and
our ability to service our debt obligations.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and 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. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we, in the future, may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
1
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 Quarterly Report on Form 10-Q, 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 you are cautioned not to unduly rely upon these statements.
As used in this Quarterly Report on Form 10-Q unlessmay appear without the context otherwise requires,® or ™ symbols, but such references are not intended to “we,” “us,” “our,” the “Company,” and similar references refer: (1) following the consummation of our conversion to a Delaware corporation on July 27, 2021indicate, in connection with our initial public offering, to MeridianLink, Inc., and (2) priorany way, that we will not assert, to the completionfullest extent under applicable law, our rights or the right of such conversion,the applicable licensor to Project Angel Parent, LLC. See Note 2, “Organizationthese trademarks and description of business — Corporate Conversion” in Quarterly Report on Form 10-Q for further information.
2
Assets Current assets: Cash and cash equivalents Restricted cash Accounts receivable, net of allowance for doubtful accounts Prepaid expenses and other current assets Related party receivable from sellers of MeridianLink Total current assets Property and equipment, net Intangible assets, net Deferred tax assets, net Goodwill Other assets Total assets Liabilities and Members’ Deficit Current liabilities: Accounts payable Accrued liabilities Deferred revenue TazWorks, LLC purchase liability Related party liability due to sellers of MeridianLink Payable due to sellers of Teledata Communications, Inc. Current portion of long-term debt, net of debt issuance costs Total current liabilities Long-term debt, net of debt issuance costs Deferred rent Other long-term liabilities Total liabilities Commitments and contingencies (Note 4) Class A preferred units, no par value, unlimited units authorized, 319,859 and 319,913 units issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; liquidation preference of $420,706 and $402,607 as of June 30, 2021 and December 31, 2020, respectively Members’ Deficit Class B common units, no par value, unlimited units authorized, 52,112,904 and 51,492,805 units issued and outstanding as of June 30, 2021 and December 31, 2020, respectively Additional paid-in capital Accumulated deficit Total members’ deficit Total liabilities, preferred units, and members’ deficit unitshare and per unitshare data) As of June 30, 2021 December 31, 2020 $ 29,236 $ 37,739 2,221 2,142 29,086 22,358 9,322 5,812 — 4,123 69,865 72,174 7,105 7,600 320,162 328,032 5,121 9,484 565,054 542,965 3,043 3,450 $ 970,350 $ 963,705 $ 2,400 $ 2,257 21,730 21,070 21,094 10,873 — 85,646 — 30,000 2,142 — 1,757 2,955 49,123 152,801 613,095 516,877 456 543 127 — 662,801 670,221 319,859 319,913 9 — 3,368 3,909 (15,687 ) (30,338 ) (12,310 ) (26,429 ) $ 970,350 $ 963,705 As of March 31, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 62,285 $ 80,441 Accounts receivable, net 36,623 32,412 Prepaid expenses and other current assets 12,238 11,574 Total current assets 111,146 124,427 Property and equipment, net 3,011 3,337 Right of use assets, net 967 1,140 Intangible assets, net 238,818 251,060 Goodwill 610,063 610,063 Other assets 6,495 6,224 Total assets $ 970,500 $ 996,251 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 4,135 $ 4,405 Accrued liabilities 28,369 30,673 Deferred revenue 37,683 17,224 Current portion of debt, net of debt issuance costs 3,543 3,542 Total current liabilities 73,730 55,844 Debt, net of debt issuance costs 419,102 420,004 Deferred tax liabilities, net 10,639 10,823 Long-term deferred revenue 257 792 Other long-term liabilities 439 541 Total liabilities 504,167 488,004 Commitments and contingencies (Note 5) Stockholders’ Equity: Preferred stock, $0.001 par value; 50,000,000 shares authorized; zero shares issued and outstanding at March 31, 2024 and December 31, 2023 — — Common stock, $0.001 par value; 600,000,000 shares authorized, 76,338,829 and 78,447,701 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively 127 129 Additional paid-in capital 662,403 654,634 Accumulated deficit (196,197) (146,516) Total stockholders’ equity 466,333 508,247 Total liabilities and stockholders’ equity $ 970,500 $ 996,251
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenues, net | $ | 68,474 | $ | 49,535 | $ | 136,285 | $ | 93,153 | ||||||||
Cost of revenues: | ||||||||||||||||
Subscription and services | 17,997 | 12,114 | 34,611 | 23,249 | ||||||||||||
Amortization of developed technology | 3,109 | 2,131 | 5,971 | 4,204 | ||||||||||||
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|
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| |||||||||
Total cost of revenues | 21,106 | 14,245 | 40,582 | 27,453 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Gross profit | 47,368 | 35,290 | 95,703 | 65,700 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 16,622 | 13,693 | 34,967 | 27,318 | ||||||||||||
Research and development | 7,288 | 4,726 | 14,274 | 9,033 | ||||||||||||
Sales and marketing | 4,224 | 2,177 | 7,823 | 4,201 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total operating expenses | 28,134 | 20,596 | 57,064 | 40,552 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Operating income | 19,234 | 14,694 | 38,639 | 25,148 | ||||||||||||
Other (income) expense, net: | ||||||||||||||||
Other income | (10 | ) | (23 | ) | (30 | ) | (24 | ) | ||||||||
Interest expense, net | 9,846 | 8,517 | 19,908 | 17,374 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total other expense, net | 9,836 | 8,494 | 19,878 | 17,350 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before provision for income taxes | 9,398 | 6,200 | 18,761 | 7,798 | ||||||||||||
Provision for income taxes | 1,966 | 1,304 | 4,098 | 1,576 | ||||||||||||
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|
|
|
|
|
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| |||||||||
Net income | $ | 7,432 | $ | 4,896 | $ | 14,663 | $ | 6,222 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Class A preferred return | (9,232 | ) | (8,462 | ) | (18,165 | ) | (16,747 | ) | ||||||||
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|
|
|
|
|
| |||||||||
Net loss attributable to common unitholders | $ | (1,800 | ) | $ | (3,566 | ) | $ | (3,502 | ) | $ | (10,525 | ) | ||||
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|
|
|
|
| |||||||||
Weighted average units outstanding – basic and diluted | 52,015,526 | 51,248,738 | 51,843,086 | 51,024,837 | ||||||||||||
Loss per common unit – basic and diluted | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Revenues, net | $ | 77,816 | $ | 77,135 | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||
| Subscription and services | 21,344 | 23,501 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of developed technology | 4,729 | 4,454 | ||||||||||||||||||||||||||||||||||||||||||
| Total cost of revenues | 26,073 | 27,955 | ||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 51,743 | 49,180 | ||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 25,179 | 22,555 | ||||||||||||||||||||||||||||||||||||||||||
| Research and development | 9,485 | 13,812 | ||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 10,536 | 8,213 | ||||||||||||||||||||||||||||||||||||||||||
| Restructuring related costs | 3,191 | 2,904 | ||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 48,391 | 47,484 | ||||||||||||||||||||||||||||||||||||||||||
| Operating income | 3,352 | 1,696 | ||||||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net: | ||||||||||||||||||||||||||||||||||||||||||||
| Interest and other income | (956) | (470) | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 9,582 | 9,031 | ||||||||||||||||||||||||||||||||||||||||||
| Total other expense, net | 8,626 | 8,561 | ||||||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (5,274) | (6,865) | ||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 32 | (1,199) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (5,306) | $ | (5,666) | ||||||||||||||||||||||||||||||||||||||||
| Net loss per share: | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | (0.07) | $ | (0.07) | ||||||||||||||||||||||||||||||||||||||||
| Diluted | $ | (0.07) | $ | (0.07) | ||||||||||||||||||||||||||||||||||||||||
| Weighted average common stock outstanding: | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | 77,335,072 | 80,659,978 | ||||||||||||||||||||||||||||||||||||||||||
| Diluted | 77,335,072 | 80,659,978 | ||||||||||||||||||||||||||||||||||||||||||
STOCKHOLDERS’ EQUITY
(unaudited)
| Class A Preferred Units | Class B Common Units | Total Members’ Deficit | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated deficit | |||||||||||||||||||||||
Balance at December 31, 2020 | 319,913 | $ | 319,913 | 51,492,805 | $ | — | $ | 3,909 | $ | (30,338) | $ | (26,429) | ||||||||||||||||
Payment of Class A units cumulative preferred return | — | — | — | — | — | (12 | ) | (12 | ) | |||||||||||||||||||
Vesting of Class B carried equity units | — | — | 575,004 | 38 | — | — | 38 | |||||||||||||||||||||
Repurchase of vested units | (54 | ) | (54 | ) | (103,421 | ) | (38 | ) | (1,849 | ) | — | (1,887 | ) | |||||||||||||||
Unit-based compensation expense | — | — | — | — | 643 | — | 643 | |||||||||||||||||||||
Net income | — | — | — | — | — | 7,231 | 7,231 | |||||||||||||||||||||
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| |||||||||||||||
Balance at March 31, 2021 | 319,859 | $ | 319,859 | 51,964,388 | $ | — | $ | 2,703 | $ | (23,119) | $ | (20,416) | ||||||||||||||||
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Vesting of Class B carried equity units | — | — | 148,516 | 9 | — | — | 9 | |||||||||||||||||||||
Unit-based compensation expense | — | — | — | — | 665 | — | 665 | |||||||||||||||||||||
Net income | — | — | — | — | — | 7,432 | 7,432 | |||||||||||||||||||||
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Balance at June 30, 2021 | 319,859 | $ | 319,859 | 52,112,904 | $ | 9 | $ | 3,368 | $ | (15,687) | $ | (12,310) | ||||||||||||||||
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| |||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 78,447,701 | $ | 129 | $ | 654,634 | $ | (146,516) | $ | 508,247 | ||||||||||||||||||||
| Vesting of restricted stock units (“RSUs”) | 261,847 | — | — | — | — | ||||||||||||||||||||||||
| Issuance of common stock due to exercise of stock options | 26,856 | — | 191 | — | 191 | ||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | 8,440 | — | (294) | — | (294) | ||||||||||||||||||||||||
| Repurchases of common stock | (2,406,015) | (2) | — | (44,375) | (44,377) | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | 7,872 | — | 7,872 | ||||||||||||||||||||||||
| Net loss | — | — | — | (5,306) | (5,306) | ||||||||||||||||||||||||
| Balance at March 31, 2024 | 76,338,829 | $ | 127 | $ | 662,403 | $ | (196,197) | $ | 466,333 | ||||||||||||||||||||
PROJECT ANGEL PARENT, LLC
STOCKHOLDERS’ EQUITY
(unaudited)
| Class A Preferred Units | Class B Common Units | Total Members’ Deficit | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated deficit | |||||||||||||||||||||||
Balance at December 31, 2019 | 320,820 | $ | 320,820 | 50,732,795 | $ | 1,371 | $ | 1,791 | $ | (39,353) | $ | (36,191) | ||||||||||||||||
Payment of Class A units cumulative preferred return | — | — | — | — | — | (4 | ) | (4 | ) | |||||||||||||||||||
Vesting of Class B carried equity units | — | — | 217,634 | 14 | — | — | 14 | |||||||||||||||||||||
Repurchase of vested units | (30 | ) | (30 | ) | (25,954 | ) | (157 | ) | — | — | (157 | ) | ||||||||||||||||
Unit-based compensation expense | — | — | — | — | 640 | — | 640 | |||||||||||||||||||||
Net income | — | — | — | — | — | 1,326 | 1,326 | |||||||||||||||||||||
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Balance at March 31, 2020 | 320,790 | $ | 320,790 | 50,924,475 | $ | 1,228 | $ | 2,431 | $ | (38,031) | $ | (34,372) | ||||||||||||||||
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Payment of Class A units cumulative preferred return | — | — | — | — | — | (131 | ) | (131 | ) | |||||||||||||||||||
Vesting of Class B carried equity units | — | — | 579,505 | 39 | — | — | 39 | |||||||||||||||||||||
Repurchase of vested units | (870 | ) | (870 | ) | (208,431 | ) | (1,263 | ) | — | — | (1,263 | ) | ||||||||||||||||
Unit-based compensation expense | — | — | — | — | 673 | — | 673 | |||||||||||||||||||||
Net income | — | — | — | — | — | 4,896 | 4,896 | |||||||||||||||||||||
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Balance at June 30, 2020 | 319,920 | $ | 319,920 | 51,295,549 | $ | 4 | $ | 3,104 | $ | (33,266) | $ | (30,158) | ||||||||||||||||
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| |||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 80,644,452 | $ | 128 | $ | 621,396 | $ | (42,433) | $ | 579,091 | ||||||||||||||||||||
| Vesting of restricted stock awards | 59,558 | 4 | — | — | 4 | ||||||||||||||||||||||||
| Vesting of RSUs | 65,770 | — | — | — | — | ||||||||||||||||||||||||
| Issuance of common stock due to exercise of stock options | 97,412 | — | 594 | — | 594 | ||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | (1,769) | — | (24) | — | (24) | ||||||||||||||||||||||||
| Repurchases of common stock | (228,529) | — | — | (3,499) | (3,499) | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | 4,939 | — | 4,939 | ||||||||||||||||||||||||
| Net loss | — | — | — | (5,666) | (5,666) | ||||||||||||||||||||||||
| Balance at March 31, 2023 | 80,636,894 | $ | 132 | $ | 626,905 | $ | (51,598) | $ | 575,439 | ||||||||||||||||||||
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 14,663 | $ | 6,222 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 24,957 | 19,458 | ||||||
Provision for doubtful accounts | 89 | 300 | ||||||
Amortization of debt issuance costs | 1,817 | 349 | ||||||
Unit-based compensation expense | 1,308 | 1,313 | ||||||
Loss on disposal of fixed assets | 207 | 72 | ||||||
Loss on sublease liability | 405 | — | ||||||
Other adjustments | (16 | ) | — | |||||
Deferred income taxes | 3,842 | 1,522 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,641 | ) | (5,777 | ) | ||||
Prepaid expenses and other assets | (1,774 | ) | (1,030 | ) | ||||
Accounts payable | (39 | ) | 972 | |||||
Accrued liabilities | (3,081 | ) | (339 | ) | ||||
Deferred revenue | 10,221 | 7,286 | ||||||
Deferred rent | (49 | ) | (31 | ) | ||||
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Net cash provided by operating activities | 49,909 | 30,317 | ||||||
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Cash flows from investing activities: | ||||||||
Acquisitions, net of cash acquired – TazWorks, LLC | (85,421 | ) | — | |||||
Acquisitions, net of cash acquired – Saylent Technologies, Inc | (35,957 | ) | — | |||||
Capitalized software additions | (2,216 | ) | (1,428 | ) | ||||
Purchases of property and equipment | (553 | ) | (2,829 | ) | ||||
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| |||||
Net cash used in investing activities | (124,147 | ) | (4,257 | ) | ||||
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| |||||
Cash flows from financing activities: | ||||||||
Repurchases of Class A Units | (54 | ) | (900 | ) | ||||
Repurchases of Class B Units | (1,887 | ) | (1,420 | ) | ||||
Proceeds from long-term debt | 100,000 | — | ||||||
Principal payments of long-term debt | (2,590 | ) | (2,078 | ) | ||||
Payments of debt issuance costs | (1,970 | ) | — | |||||
Payments of financing obligation due to related party | — | (40 | ) | |||||
Payments of Class A cumulative preferred return | (12 | ) | (135 | ) | ||||
Payments of deferred offering costs | (2,008 | ) | — | |||||
Holdback payment to prior shareholders | (25,665 | ) | — | |||||
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| |||||
Net cash provided by (used in) financing activities | 65,814 | (4,573 | ) | |||||
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| |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (8,424 | ) | 21,487 | |||||
Cash, cash equivalents, and restricted cash, beginning of period | 39,881 | 97,770 | ||||||
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Cash, cash equivalents, and restricted cash, end of period | $ | 31,457 | $ | 119,257 | ||||
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Reconciliation of cash, cash equivalents, and restricted cash | ||||||||
Cash and cash equivalents | $ | 29,236 | $ | 119,257 | ||||
Restricted cash | 2,221 | — | ||||||
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Cash, cash equivalents, and restricted cash | $ | 31,457 | $ | 119,257 | ||||
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Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 18,078 | $ | 17,258 | ||||
Cash paid for income taxes | 212 | 69 | ||||||
Non-cash investing and financing activities: | ||||||||
Purchases of property and equipment included in accounts payable and accrued expenses | $ | 56 | $ | 146 | ||||
Deferred offering costs included in accounts payable and accrued expenses | 327 | — | ||||||
Vesting of Class B Units | 47 | 53 | ||||||
Paycheck Protection Program (“PPP”) Loan forgiven, reclassified from long- and short-term debt to payable due to sellers of Teledata Communications, Inc | 2,142 | — | ||||||
Related party receivable net against holdback payment to prior shareholders | 4,335 | — | ||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss | $ | (5,306) | $ | (5,666) | |||||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 14,524 | 14,531 | |||||||||||||||
| Provision for expected credit losses | 234 | 532 | |||||||||||||||
| Amortization of debt issuance costs | 212 | 235 | |||||||||||||||
| Share-based compensation expense | 7,803 | 4,891 | |||||||||||||||
| Deferred income taxes | (184) | (1,198) | |||||||||||||||
| Loss on disposal of property and equipment | 6 | — | |||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||||||||
| Accounts receivable | (4,444) | (5,028) | |||||||||||||||
| Prepaid expenses and other assets | (960) | (1,636) | |||||||||||||||
| Accounts payable | (270) | 2,717 | |||||||||||||||
| Accrued liabilities | (2,501) | 1,706 | |||||||||||||||
| Deferred revenue | 19,924 | 16,997 | |||||||||||||||
| Net cash provided by operating activities | 29,038 | 28,081 | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capitalized software additions | (1,837) | (1,924) | |||||||||||||||
| Purchases of property and equipment | (92) | (134) | |||||||||||||||
| Net cash used in investing activities | (1,929) | (2,058) | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Repurchases of common stock | (44,000) | (3,490) | |||||||||||||||
| Proceeds from exercise of stock options | 191 | 594 | |||||||||||||||
| Taxes paid related to net share settlement of restricted stock units | (294) | (24) | |||||||||||||||
| Principal payments of debt | (1,088) | (1,087) | |||||||||||||||
| Payments of deferred offering costs | (74) | — | |||||||||||||||
| Net cash used in financing activities | (45,265) | (4,007) | |||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (18,156) | 22,016 | |||||||||||||||
| Cash and cash equivalents, beginning of period | 80,441 | 55,780 | |||||||||||||||
| Cash and cash equivalents, end of period | $ | 62,285 | $ | 77,796 | |||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 9,365 | $ | 9,019 | |||||||||||||
| Cash paid for income taxes | 32 | 50 | |||||||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Shares withheld with respect to net settlement of restricted stock units | 294 | 24 | |||||||||||||||
| Excise taxes payable included in repurchases of common stock | 377 | 9 | |||||||||||||||
| Share-based compensation expense capitalized to software additions | 69 | 48 | |||||||||||||||
| Purchase price allocation adjustment related to income tax effects for StreetShares acquisition | — | 245 | |||||||||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | 44 | 79 | |||||||||||||||
| Vesting of restricted stock awards and restricted stock units | — | 4 | |||||||||||||||
7
PROJECT ANGEL PARENT, LLC
Project Angel Parent, LLC, (“Parent”), conducting business as
Under the terms of the Amended and Restated Limited Liability Company Operating Agreement (“Agreement”), dated as of May 31, 2018, of Project Angel Parent, LLC, the members are not obligated for debt, liabilities, contracts or other obligations of Project Angel Parent, LLC. Profits and losses are allocated to members as defined in the Agreement.
Corporate Conversion
Prior to July 27, 2021, the Company operated as a Delaware limited liability company under the name Project Angel Parent, LLC, which directly and indirectly held all the equity interests in its operating subsidiaries. On July 27, 2021, prior to the effectiveness of the registration statement for the Company’s initial public offering, MeridianLink, Inc., the operating company and the indirect wholly owned subsidiary of Project Angel Parent, LLC, changed its name to ML California Sub, Inc., and Project Angel Parent, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to MeridianLink, Inc. As a result of the corporate conversion, MeridianLink, Inc. succeeded to all property and assets, and debts and obligations of Project Angel Parent, LLC. Effective July 27, 2021, MeridianLink, Inc. is governed by its certificate of incorporation filed with the Delaware Secretary of State and its bylaws.
Upon its conversion into a corporation, the Company converted each of its outstanding Class A Units into a number of shares of common stock equal to the result of the accrued preferred return price per Class A Unit divided by the initial public offering price per share of common stock of $26.00. The preferred return price for each Class A Unit is equal to the future value of $1,000 at a 9% interest rate compounded quarterly over the time passed since the issuance of such unit. Upon the Company’s conversion into a corporation, the outstanding Class A Units converted into an aggregate of 16,607,235 shares of common stock. Additionally, all the outstanding Class B Units converted into an aggregate of 53,646,668 shares of common stock on a one-for-one basis.
The effects of the events described in the preceding two paragraphs are collectively referred to as the “Corporate Conversion.”
In connection with the Corporate Conversion, outstanding options to purchase Class B Units granted under the Project Angel Parent, LLC 2019 Equity Option Plan (“2019 Option Plan”) were converted into options to purchase shares of common stock, and outstanding units granted under the Project Angel Parent, LLC Equity Plan (“Equity Plan”) were converted into shares of common stock or restricted stock, which have been granted under the 2021 Stock Option and Incentive Plan (“2021 Plan”).
8
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Initial Public Offering and Reverse Stock Split
On July 28, 2021, the Company completed its initial public offering (“IPO”) through an underwritten sale of 14.4 million shares of its common stock, of which 10.0 million shares were sold by the Company at a price to the public of $26.00 per share. The Company received net proceeds of approximately $241.5 million after deducting approximately $18.5 million in underwriting discounts, commissions, and offering-related expenses.
The IPO also included the sale of 3.2 million shares of our common stock by the selling stockholders. The Company did not receive any proceeds from the sale of common stock by the selling stockholders. Additionally, the selling stockholders granted the underwriters an option, exercisable for 30 days after the effective date of the Prospectus, to purchase up to 2.0 million additional shares of common stock. The option was exercised for 1.2 million additional shares on August 26, 2021.
In connection with the listing of the Company’s common stock on the NYSE, the Company entered into indemnification agreements with its directors and certain officers and employees that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or services as directors, officers, or employees.
Upon the Corporate Conversion, all then-outstanding shares of the Company’s Class A Preferred Units outstanding (see Note 6) were automatically converted into an aggregate of 16,607,235 issued common shares and were reclassified into permanent equity. Following the Corporate Conversion, there were no units of Class A Preferred Units outstanding.
In advance of the IPO, on July 16, 2021, the Company effected a 1-for-2 reverse unit split of the Company’s Class B Units, whereby every two Class B Units converted into one Class B unit. All Class B unit and per unit information included in the accompanying condensed consolidated financial statements have been adjusted to reflect this reverse unit split for all periods presented.
The condensed consolidated financial statements as of June 30, 2021, including unit and per unit amounts, do not give effect to the IPO, the Corporate Conversion, or the conversion of the Class A Preferred Units into common stock and related reclassification into permanent equity, as the IPO, the Corporate Conversion, and such conversions and reclassifications into permanent equity were completed subsequent to June 30, 2021.
Novel Coronavirus (COVID-19)
In March 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) outbreak as a pandemic. The Company’s operating results depend significantly on the demand by customers. While the Company has not seen a significant negative impact on the demand for its subscription and services resulting from the COVID-19 outbreak as of the date of these financial statements, if the outbreak causes weakness in national, regional, and local economies that negatively impact the demand for services and/or increase bad debts, the Company’s business, financial condition, liquidity, results of operations and prospects could be adversely impacted in 2021 and potentially beyond. To date, the Company has experienced an increased demand in its mortgage loan products and has not experienced any significant supplier disruptions or bad debts related to customer receivables.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security (CARES) Act.” The Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the Company’s income tax provision in 2020 and 2021. To date, the Company has elected to defer employer social security payments until the fourth quarter of 2021 when they will begin to be repaid. In addition, as part of the Company’s acquisition of Teledata Communications, Inc., the Company assumed a $1.8 million liability within current portion of long-term debt, net of issuance costs and a $0.3 million liability within long-term debt, net of issuance costs, as of December 31, 2020 related to an outstanding preacquisition Paycheck Protection Program loan. As a condition of the purchase agreement, the funds were escrowed to cover the outstanding loan balance in the event that TCI did not receive full forgiveness of the loan. The loan was forgiven by the Small Business Association in June 2021. See Note 12 for subsequent events related to the Paycheck Protection Program Loan.
9
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.
Note 2 – Summary of Significant Accounting Policies
In the Company’s opinion, the The unaudited interim unaudited condensed consolidated financial statements have been prepared on the same basis as the auditedannual consolidated financial statements and includereflect, in the opinion of management, all adjustments consisting of a normal and recurring adjustments,nature that are necessary for athe fair presentation. Certainpresentation of the Company’s condensed consolidated financial position as of March 31, 2024, its condensed consolidated results of operations for the three months ended March 31, 2024 and 2023 and its cash flows for the three months ended March 31, 2024 and 2023. The financial data and the other financial information and disclosures normally includeddisclosed in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuantrelated to the rulesthree months ended March 31, 2024 and regulations2023 and as of March 31, 2024, are also unaudited. The condensed consolidated balance sheet as of December 31, 2023, included herein, and financial information as of December 31, 2023, disclosed in the SEC. Accordingly, these interim unauditednotes to the condensed consolidated financial statements should be read in conjunction withwas derived from the audited consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2020 included within the Company’s prospectus dated July 27, 2021 (“Prospectus”) and as filed with the Securities and Exchange Commission (“SEC”) on July 28, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (“Securities Act”). that date.
There have been no changes to the Company’s significant accounting policies described in the Company’s Prospectus that have had a material impact on its These interim condensed consolidated financial statements and related notes.
should be read in conjunction with our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 12, 2024 (“2023 Annual Report on Form 10-K”).
As of June 30, 2021, the
10
PROJECT ANGEL PARENT, LLC
The following table disaggregates the Company’s net revenues by solution type (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Lending Software Solutions | $ | 45,243 | $ | 32,799 | $ | 88,377 | $ | 63,338 | ||||||||
Data Verification Software Solutions | 23,231 | 16,736 | 47,908 | 29,815 | ||||||||||||
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Total | $ | 68,474 | $ | 49,535 | $ | 136,285 | $ | 93,153 | ||||||||
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Lending Software Solutions accounted for 66% of total revenues for both the three months ended June 30, 2021 and 2020. Lending Software Solutions accounted for 65% and 68% of total revenues for the six months ended June 30, 2021 and 2020, respectively. Data Verification Software Solutions accounted for 34% of total revenues for both the three months ended June 30, 2021 and 2020. Data Verification Software Solutions accounted for 35% and 32% of total revenues for the six months ended June 30, 2021 and 2020, respectively.
Business Combinations
The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Transaction costs associated with business combinations are expensed as incurred and are included in acquisition related costs in the condensed consolidated statements of operations. The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with management’s determination of the fair values of assets acquired and liabilities assumed in a business combination. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date, changes in the estimated fair values of the net assets recorded may change the amount of the purchase price allocable to goodwill. During the measurement period, which expires one year from the acquisition date, changes to any purchase price allocations that are material to the Company’s consolidated financial results will be adjusted prospectively.
11
PROJECT ANGEL PARENT, LLC
Cash and Cash Equivalents
Restricted Cash
Restricted cash included cash held in escrow to pay-off Teledata Communications, Inc.’s (“TCI”) outstanding Paycheck Protection Program (“PPP”) Loan in the event the loan was not forgiven by the Small Business Administration (“SBA”), as a part of the acquisition of TCI (see Note 11). The Company received notice in June 2021 that the entirety of the loan was forgiven by the SBA, and the Company subsequently released the cash held in escrow to the sellers of TCI in August 2021. See Note 12 for subsequent events related to the Paycheck Protection Program Loan. As of June 30, 2021, $2.1 million held in escrow was included within restricted cash and the corresponding liability was included within payable due to sellers of TCI onfollowing table disaggregates the Company’s condensed consolidated balance sheets. As of December 31, 2020, prior to receiving forgiveness from the SBA, the corresponding liability was included within long-term and short-term debt on the Company’s condensed consolidated balance sheets.
As of June 30, 2021, restricted cash included $0.1 million related to a standby letter of credit from the acquisition of Saylent Technologies, Inc. This standby letter of credit was for the security deposit of the Saylent office lease.
Any cash that is legally or contractually restricted from immediate use is classified as restricted cash.
Fair Value of Financial Instruments
The Company accounts for certain of its financial assets at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 – Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroboratednet revenues by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents approximate fair value due to their high liquidity in actively quoted trading markets and their short maturities. The Company’s accounts receivable, related party receivable due from sellers of MeridianLink, accounts payable, accrued liabilities, related party liability due to sellers of MeridianLink, payable due to sellers of TCI, and deferred revenue approximate fair value due to their short maturities. The carrying value of the Company’s long-term debt is considered to approximate the fair value of such debt as of June 30, 2021 and December 31, 2020, based upon the interest rates that the Company believes it can currently obtain for similar debt. Certain trademark intangible assets were recorded at fair value as of December 31, 2020 in connection with the Company’s impairment testing. The inputs used to measure the fair value of these assets are primarily unobservable inputs and, as such, considered Level 3 fair value measurements. There were no assets or liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2021.
12
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, and accounts receivable. Cash and cash equivalents are invested in short-term and highly liquid investment-grade obligations, which are held in safekeeping by large and creditworthy financial institutions. Deposits in these financial institutions may exceed federally insured limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable includes billed and unbilled receivables, net of allowance for doubtful accounts. Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The expectation of collectability is based on a review of credit profiles of customers, contractual terms and conditions, current economic trends, and historical payment experience. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine the appropriate amount of allowance for doubtful accounts. Allowance for doubtful accounts totaled $0.4 million and $0.6 million, and is classified as accounts receivable, net of allowance for doubtful accounts on the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. Bad debt expense is included in general and administrative expenses on the accompanying condensed consolidated statements of operations.
Property and Equipment
The Company records property and equipment at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
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Expenditures for maintenance and repairs are charged to expense as incurred, and major renewals and betterments are capitalized. Gains or losses on disposal of property and equipment are recognized in the period when the assets are sold or disposed of and the related cost and accumulated depreciation is removed from the accounts.
Goodwill
The Company evaluates and tests the recoverability of goodwill for impairment at least annually, on October 1, or more frequently if circumstances indicate that goodwill may not be recoverable. The Company performs the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. The Company has one reporting unit. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company tests for impairment by comparing the estimated fair value of the reporting unit with its carrying amount. The Company estimates the fair value of the reporting unit using a “step one” analysis using a fair-value-based approach based on the market capitalization or a discounted cash flow analysis of projected future results to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. In assessing the qualitative factors, the Company considers the impact of certain key factors including macroeconomic conditions, industry and market considerations, management turnover, changes in regulation, litigation matters, changes in enterprise value, and overall financial performance. No goodwill impairment was recorded during the three and six months ended June 30, 2021 and 2020.
13
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Research and Development and Capitalized Software
For development costs related to internal use software, such as the Company’s subscription offerings, the Company follows guidance of ASC 350-40, “Internal Use Software.” ASC 350-40 sets forth the guidance for costs incurred for computer software developed or obtained for internal use and requires companies to capitalize qualifying computer software development costs, which are incurred during the application development stage. Once the application development stage is reached, internal and external costs are capitalized until the software is substantially complete and ready for its intended use. These capitalized costs are to be amortized on a straight-line basis over the expected useful life of the software of three years. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. For the three months ended June 30, 2021 and 2020, the Company capitalized $1.4 million and $0.7 million, respectively, related to internally developed software costs. For the six months ended June 30, 2021 and 2020, the Company capitalized $2.2 million and $1.4 million, respectively, related to internally developed software costs. Such capitalized costs related to developed technology are included within the intangible assets balance in the condensed consolidated balance sheets.
Deferred Offering Costs
Costs directly related to the Company’s IPO are deferred for expense recognition and instead capitalized and recorded on the accompanying condensed consolidated balance sheets. These costs consist of legal fees, accounting fees, and other applicable professional services incurred incrementally as a result of the IPO. These deferred offering costs were reclassified to additional paid-in capital upon the closing of the IPO in July 2021. As of June 30, 2021 and December 31, 2020, $2.8 million and $1.0 million, respectively, of deferred offering costs were reported on the accompanying condensed consolidated balance sheets within prepaid expenses and other current assets. See Note 12 for subsequent events related to the IPO.
Impairment of Long-Lived Assets
Identifiable intangible assets with finite lives, such as developed technology, customers relationships, trademarks, and non-agreements, are amortized over their estimated useful lives on either a straight-line or accelerated basis, depending on the nature of the intangible asset.
The Company evaluates the carrying value of long-lived assets, including intangible assets with finite lives and property and equipment, whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The impairment to be recognized is measured as the amount by which the carrying amount exceeds the fair value of the assets.
No impairment of long-lived assets was recorded during the three and six months ended June 30, 2021 and 2020.
Cumulative Preferred Return
As of June 30, 2021 and prior to the Corporate Conversion, Class A preferred unitholders were entitled to a cumulative preferred return, as disclosed further in Note 6. At each reporting period-end, the Company evaluated whether the Class A Units were considered currently redeemable or probable of becoming redeemable in accordance with ASC 480-10, “Distinguishing Liabilities from Equity,” based on the facts and circumstances of the deemed liquidation events that would give rise to the redemption of the units. In accordance with the prescribed accounting literature, the Company does not record the cumulative preferred return in the condensed consolidated financial statements until the Company determines that such units are probable of becoming redeemable.
14
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Revenue Recognition
Revenue-generating activities are directly related to the sale, implementation, and support of the Company’s solutions. The Company derives the majority of its revenues from subscription fees for the use of its solutions hosted in either the Company’s data centers or cloud-based hosting services, volume-based fees, as well as revenues for customer support and professional implementation services related to the Company’s solutions.
Under ASC 606, “Revenue from Contracts with Customers,” revenue is recognized upon the transfer of control of a promised service to a customer in an amount that reflects the consideration the Company expects to receive in exchange for those services, net of sales taxes. The Company applies the following five-step revenue recognition model in accounting for its revenue arrangements:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.
Subscription Fee Revenues
The Company’s software solutions are generally available for use as hosted application arrangements under subscription fee agreements. The Company’s software solutions consist of an obligation for the Company to provide continuous access to a technology solution that it hosts and routine customer support, both of which the Company accounts for as a stand-ready performance obligation. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue in the month when the usage amounts are determined and reported.
The Company has a limited number of legacy customers that host and manage its solutions on-premises under term license and maintenance agreements. This type of arrangement is no longer sold and represents an immaterial amount of the Company’s subscription fee revenues. However, there is no planned sunset or end of life for these on-premises solutions.
Professional Services Revenues
The Company offers implementation, consulting and training services for the Company’s software solutions and SaaS offerings. Revenues from services are recognized in the period the services are performed, provided that collection of the related receivable is probable.
Other Revenues
The Company enters into referral and marketing agreements with various third parties, in which revenues for the Company are primarily generated from transactions initiated by the third parties’ customers. The Company may introduce its customers to a referral partner or offer additional services available from the referral partner via an integration with the Company’s software solutions. Revenues are recognized in the period the services are performed, provided that collection of the related receivable is probable.
15
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Three Months Ended March 31, 2024 2023 Lending Software Solutions $ 60,903 $ 58,001 Data Verification Software Solutions 16,913 19,134 Total $ 77,816 $ 77,135
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Subscription fees | $ | 60,427 | $ | 44,000 | $ | 120,743 | $ | 82,771 | ||||||||
Professional services | 5,615 | 3,651 | 11,106 | 7,400 | ||||||||||||
Other | 2,432 | 1,884 | 4,436 | 2,982 | ||||||||||||
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Total revenues, net | $ | 68,474 | $ | 49,535 | $ | 136,285 | $ | 93,153 | ||||||||
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Significant Judgments
A performance obligation
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Subscription fees | $ | 65,912 | $ | 66,405 | |||||||||||||||||||||||||||||||||||||
| Professional services | 9,010 | 8,435 | |||||||||||||||||||||||||||||||||||||||
| Other | 2,894 | 2,295 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 77,816 | $ | 77,135 | |||||||||||||||||||||||||||||||||||||
| As of March 31, | As of January 1, | As of March 31, | As of January 1, | ||||||||||||||||||||
| 2024 | 2024 | 2023 | 2023 | ||||||||||||||||||||
| Accounts receivable | $ | 34,441 | $ | 30,314 | $ | 35,722 | $ | 29,010 | |||||||||||||||
| Unbilled receivables | 2,182 | 2,098 | 1,679 | 3,895 | |||||||||||||||||||
| Accounts receivable, net | $ | 36,623 | $ | 32,412 | $ | 37,401 | $ | 32,905 | |||||||||||||||
| Deferred revenue, current | $ | 37,683 | $ | 17,224 | $ | 34,090 | $ | 16,945 | |||||||||||||||
| Long-term deferred revenue | $ | 257 | $ | 792 | $ | 992 | $ | 1,141 | |||||||||||||||
In determining whether SaaS services are distinct, we considered whether the series guidance applies to the Company’s subscription services. The Company considered various factors including that substantially all the Company’s SaaS arrangements involve the transfer of a service to the customer, which represents a performance obligation that is satisfied over time because the customer simultaneously receives and consumes the benefits of the services provided. Customer support services, forms maintenance, and subscription services are considered a series of distinct services that are accounted for as a single performance obligation as the nature of the services are substantially the same and have the same pattern of transfer (i.e., distinct days of service). For these contracts, the Company allocates the ratable portion of the consideration to each perioddecrease based on the services provided in such period.
In determining whether implementation services are distinct from subscription services, the Company considered that there is not a significant leveltiming of integration between implementationinvoices and subscription services. Further, implementation servicesrecognition of revenue. Significant changes in our contracts provide benefit todeferred revenue balances during the customer with other readily available resourcesthree months ended March 31, 2024
Consulting and training services are generally considered a separate performance obligation as they are considered distinct services that provide a benefit to the customer on their own.
The determinationfollows (in thousands):
PROJECT ANGEL PARENT, LLC
MERIDIANLINK, INC.
The Company evaluates whether it is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) with respect to the vendor reseller agreements pursuant to which the Company resells certain third-party solutions along with
| As of March 31, | |||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| Deferred revenue, beginning balance | $ | 18,016 | $ | 18,086 | |||||||||||||
| Billing of transaction consideration | 97,740 | 94,131 | |||||||||||||||
| Revenue recognized | (77,816) | (77,135) | |||||||||||||||
| Deferred revenue, ending balance | $ | 37,940 | $ | 35,082 | |||||||||||||
| Deferred revenue, current | $ | 37,683 | $ | 34,090 | |||||||||||||
| Long-term deferred revenue | 257 | 992 | |||||||||||||||
| Total deferred revenue | $ | 37,940 | $ | 35,082 | |||||||||||||
The Company has concluded that its subscription fees related to monthly usage above the levels included in the standard subscription fee relates specifically to the transfer of the service to the customer in that month and is consistent with the allocation objective of ASC 606 when considering all the performance obligations and payment terms in the contract. Therefore, the Company recognizes additional usage revenues in the month when the usage amounts are determined and reported. This allocation reflects the amount the Company expects to receiveallowance for expected credit losses balance for the services for the given period.
Contract Balances
The timing of customer billingthree months ended March 31, 2024
The payment terms and conditions vary by contract; however, the Company’s terms generally require payment within 30 days from the invoice date. In instances where the timing of revenue recognition differs from the timing of payment, the Company elected to apply the practical expedient in accordance with ASC 606 to not adjust contract consideration for the effects of a significant financing component. The Company expects, at contract inception, that the period between when promised goods and services are transferred to the customer and when the customer pays for those goods and services will be one year or less. As such, the Company determined its contracts do not generally contain a significant financing component.
Deferred Revenue
The deferred revenue balance consists of subscription and implementation fees which have been invoiced upfront and are recognized as revenue only when the revenue recognition criteria are met. The Company’s subscription contracts are typically invoiced to its customers annually, and revenue is recognized ratably over the service term. Implementation and service-based fees are most commonly invoiced 50% upfront and 50% upon completion. The Company believes that it is the passage of time that corresponds to the satisfaction of its subscription implementation and professional services performance obligations, so the appropriate measurement of progress is a time-based input method based on estimated or projected hours to complete the professional services. Accordingly, the Company’s deferred revenue balance does not include revenues for future years of multi-year noncancelable contracts that have not yet been billed and is considered current since the deferred balance will all be recognized within 12 months.
The changes in the Company’s deferred revenue as of June 30, 2021 and 2020 were as follows (in thousands):
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
Deferred revenue, beginning balance | $ | 10,873 | $ | 7,841 | ||||
Billing of transaction consideration | 146,506 | 100,440 | ||||||
Revenue recognized | (136,285 | ) | (93,153 | ) | ||||
|
|
|
| |||||
Deferred revenue, ending balance | $ | 21,094 | $ | 15,128 | ||||
|
|
|
| |||||
17
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
As of March 31, 2024 2023 Allowance for expected credit losses, beginning balance $ 514 $ 165 Provision for expected credit losses 234 532 Write offs, net (115) (33) Allowance for expected credit losses, ending balance $ 633 $ 664
The Company capitalizes sales commissions related to its customer agreements because the commission charges are so closely related to the revenues from the noncancelable customer agreements that they should be recorded as an asset and charged to expense over the expected period of customer benefit. The Company capitalizes commissions and bonuses for those involved in the sale of our SaaS offerings, including direct employees and indirect supervisors, as these are incremental to the sale. The Company begins amortizing deferred
The Company applies a practical expedient to expenserecognized from costs to obtain a contract with a customer, as incurred, when the amortization period would have been one year or less.
The following table represents the changes in contract cost assets (in thousands):
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
Beginning balance | $ | 3,207 | $ | 1,635 | ||||
Additions | 1,940 | 814 | ||||||
Amortization | (594 | ) | (297 | ) | ||||
|
|
|
| |||||
Ending balance | $ | 4,553 | $ | 2,152 | ||||
|
|
|
| |||||
Contract cost assets, current | $ | 1,796 | $ | 825 | ||||
Contract cost assets, noncurrent | 2,757 | 1,327 | ||||||
|
|
|
| |||||
Total deferred contract cost assets | $ | 4,553 | $ | 2,152 | ||||
|
|
|
| |||||
Cost
| As of March 31, | |||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| Beginning balance | $ | 8,018 | $ | 6,539 | |||||||||||||
| Additions | 1,024 | 1,151 | |||||||||||||||
| Amortization | (980) | (747) | |||||||||||||||
| Ending balance | $ | 8,062 | $ | 6,943 | |||||||||||||
| Contract cost assets, current | $ | 3,845 | $ | 3,196 | |||||||||||||
| Contract cost assets, noncurrent | 4,217 | 3,747 | |||||||||||||||
| Total contract cost assets | $ | 8,062 | $ | 6,943 | |||||||||||||
Cost of revenues consists primarily of salaries and other personnel-related costs, including employee benefits, bonuses, and unit-based compensation, for employees providing services to our customers. This includes the costs of our implementation, customer support, data center, and customer training personnel. Cost of revenues also includes the direct costs from third-party services included in our solutions, an allocation of general overhead costs, and the amortization of developed technology. We allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation.
Marketing Costs
Marketing costs are expensed as incurred. Advertising and tradeshow expenses were $0.3 million and $0.1 million forcontract cost assets during the three months ended June 30, 2021March 31, 2024, and 2020, respectively, and $0.4 million for both the six months ended June 30, 2021 and 2020. Advertising and tradeshow expenses are included in sales and marketing expenses in the accompanying condensed consolidated statements2023.
PROJECT ANGEL PARENT, LLC
MERIDIANLINK, INC.
In accordance with ASC 470-50, Debt—Modifications and Extinguishments, the Company will perform an analysis on a creditor-by-creditor basis when its debt is modified to determine if the debt instruments were substantially different. In the event of extinguishment, capitalized deferred financing costs are expensed. In the event of debt modification, lender related fees are capitalized, and third-party costs are expensed.
Unit-Based Compensation
The Company accounts for unit-based compensation by estimating the fair value of unit-based payment awards at the grant date. The Company estimates the fair value of its unit options using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation expense over the requisite service period.
Calculating unit-based compensation expense requires the input of highly subjective assumptions, including the expected term of the unit-based awards, fair value of its units, and unit price volatility. The Company utilized an independent valuation specialist to assist with the Company’s determination of the fair value per unit. The methods used to determine the fair value per unit included discounted cash flow analysis, comparable public company analysis, and comparable acquisition analysis. Starting in the third quarter of 2020, the probability-weighted expected return method was used and considered multiple exit scenarios, including a near term IPO. The estimate of the expected term of options granted was determined by utilizing a weighted average approach, considering the use of the “simplified method” (where the expected term is presumed to be equal to the vesting period plus the midpoint of the remaining contractual term) and an expected liquidation event occurrence. The Company utilizes this method, as it does not have the historical experience to calculate the term. Since the Company was a privately-held entity with no historical data on volatility of its units until its IPO went effective in July 2021, the expected volatility is based on the volatility of similar entities (referred to as guideline companies). In evaluating similarity, the Company considered factors such as industry, stage of life cycle, size, and financial leverage. The assumptions used in calculating the fair value of unit-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, unit-based compensation expense could be materially different in the future. The risk-free rate for periods within the contractual life of the option is based on U.S. Treasury yield for a term consistent with the expected life of the unit option in effect at the time of grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.
The Company accounts for forfeitures when they occur. The Company has elected to recognize unit-based compensation expense for service-based awards on a straight-line basis over the service vesting period. The Company recognizes compensation expense for awards subject to performance conditions using the graded attribution method. See Note 12 for subsequent events related to the unit-based compensation.
Net Loss Per Common Unit
As of June 30, 2021 and prior to the Corporate Conversion, basic net loss per common unit was computed by dividing the net loss attributable to the then-existing Class B common unitholders by the weighted average number of Class B common units (“common units”) outstanding during the period, without the consideration for potential dilutive common units. For the purpose of calculating basic net loss per common unit for the three and six months ended June 30, 2021 and 2020, the Company adjusted net income or loss for cumulative dividends on the then-existing Class A preferred units (“preferred units”). Net loss attributable to common unitholders was computed by deducting the dividends accumulated for the period on cumulative preferred units from net income. If there was a net loss, the amount of the loss is increased by those preferred dividends.
Diluted net loss per common unit was computed by dividing the net loss by the weighted-average number of common unit equivalents outstanding for the period determined using the treasury-stock method and if-converted method, as applicable. Due to a net loss after adjusting for the cumulative dividends on preferred units in the periods presented, all otherwise potentially dilutive securities were antidilutive. Accordingly, basic net loss per common unit equals diluted net loss per common unit for all periods presented in the accompanying condensed consolidated financial statements.
19
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for the Company for interim and annual reporting periods beginning after December 15, 2022; early adoption is permitted. The Company has elected to early adopt this standard effective January 1, 2021, and the adoption did not have a material impact on its condensed consolidated financial statements and disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. The new standard provides for a modified retrospective approach which requires recognition at the beginning of the earliest comparative period presented of leases that exist at that date, as well as adjusting equity at the beginning of the earliest comparative period presented as if the new standard had always been applied. In July 2018, the FASB issued ASU 2018-11, which provides an additional transition method. Under the additional transition method, an entity initially applies the new leases guidance at the adoption date (rather than at the beginning of the earliest period presented). Therefore, an entity which elects the additional transition method would apply Topic 840 in the comparative periods and recognize the effects of applying Topic 842 as a cumulative adjustment to retained earnings as of the adoption date. If an entity elects the new transition method, it is required to provide the Topic 840 disclosures for all prior periods presented that remain under the legacy lease guidance. For the Company, the new standard is effective for fiscal years beginning after December 15, 2021, and interim periods beginning the following year. Early adoption is permitted. The Company is evaluating the potential impact of this guidance on the Company’s condensed consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. For the Company, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. The Company is in the early stages of evaluating the effect of this guidance on its condensed consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. For the Company, the amendments are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the potential impact of this guidance on the Company’s condensed consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740). The amendments in the updated guidance simplify the accounting for income taxes by removing certain exceptions and improving consistent application of other areas of the topic by clarifying the guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Company is currently evaluating the timing of and impact of this guidance on the Company’s condensed consolidated financial statements.
20
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates, such as the London Inter-Bank Offered Rate (LIBOR), which regulators in the United Kingdom have announced will be phased out by the end of 2021. The expedients and exceptions provided by ASU 2020-04 are for the application of U.S. GAAP to contracts, hedging relationships and other transactions affected by the rate reform, and will not be available after December 31, 2022, other than for certain hedging relationships entered into before December 31, 2022. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022, as noted above). The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements and related disclosures.
| As of June 30, 2021 | As of December 31, 2020 | |||||||
Prepaid expenses | $ | 4,585 | $ | 2,938 | ||||
Capitalized contract costs – current | 1,796 | 1,256 | ||||||
Deferred offering costs | 2,767 | 995 | ||||||
Prepaid income taxes | — | 196 | ||||||
Others | 174 | 427 | ||||||
|
|
|
| |||||
Total prepaid expenses and other current assets | $ | 9,322 | $ | 5,812 | ||||
|
|
|
| |||||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Prepaid expenses | $ | 7,149 | $ | 5,762 | |||||||
| Contract cost assets, current | 3,845 | 3,782 | |||||||||
| Income tax receivable | 459 | 961 | |||||||||
| Other | 785 | 1,069 | |||||||||
| Total prepaid expenses and other current assets | $ | 12,238 | $ | 11,574 | |||||||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Capitalized deferred implementation costs | $ | 2,054 | $ | 1,779 | |||||||
| Accumulated amortization | (233) | (208) | |||||||||
| Capitalized deferred implementation costs, net | $ | 1,821 | $ | 1,571 | |||||||
| As of June 30, 2021 | As of December 31, 2020 | |||||||
Computer equipment and software | $ | 7,685 | $ | 7,317 | ||||
Leasehold improvements | 3,292 | 2,953 | ||||||
Office equipment and furniture | 1,426 | 1,683 | ||||||
Construction in progress | — | 3 | ||||||
|
|
|
| |||||
Total | 12,403 | 11,956 | ||||||
Less: Accumulated depreciation and amortization | (5,298 | ) | (4,356 | ) | ||||
|
|
|
| |||||
Property and equipment, net | $ | 7,105 | $ | 7,600 | ||||
|
|
|
| |||||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Computer equipment and software | $ | 8,850 | $ | 8,794 | |||||||
| Leasehold improvements | 2,424 | 2,732 | |||||||||
| Office equipment and furniture | 991 | 990 | |||||||||
| Total | 12,265 | 12,516 | |||||||||
| Accumulated depreciation | (9,254) | (9,179) | |||||||||
| Property and equipment, net | $ | 3,011 | $ | 3,337 | |||||||
PROJECT ANGEL PARENT, LLC
MERIDIANLINK, INC.
| As of June 30, 2021 | ||||||||||||
| Gross Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Customer relationships | $ | 328,600 | $ | (82,987 | ) | $ | 245,613 | |||||
Developed technology | 74,800 | (24,155 | ) | 50,645 | ||||||||
Trademarks | 24,175 | (6,139 | ) | 18,036 | ||||||||
Non-competition agreements | 600 | (75 | ) | 525 | ||||||||
Capitalized software | 8,102 | (2,759 | ) | 5,343 | ||||||||
|
|
|
|
|
| |||||||
| $ | 436,277 | $ | (116,115 | ) | $ | 320,162 | ||||||
|
|
|
|
|
| |||||||
| As of December 31, 2020 | ||||||||||||
| Gross Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Customer relationships | $ | 322,800 | $ | (66,750 | ) | $ | 256,050 | |||||
Developed technology | 69,000 | (19,275 | ) | 49,725 | ||||||||
Trademarks | 22,675 | (4,637 | ) | 18,038 | ||||||||
Capitalized software | 5,887 | (1,668 | ) | 4,219 | ||||||||
|
|
|
|
|
| |||||||
| $ | 420,362 | $ | (92,330 | ) | $ | 328,032 | ||||||
|
|
|
|
|
| |||||||
| As of March 31, 2024 | |||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Customer relationships | $ | 343,300 | $ | (175,032) | $ | 168,268 | |||||||||||
| Developed technology | 96,400 | (54,845) | 41,555 | ||||||||||||||
| Trademarks | 24,975 | (13,430) | 11,545 | ||||||||||||||
| Non-competition agreements | 5,500 | (1,988) | 3,512 | ||||||||||||||
| Capitalized software | 30,903 | (16,965) | 13,938 | ||||||||||||||
| Total intangible assets, net | $ | 501,078 | $ | (262,260) | $ | 238,818 | |||||||||||
| As of December 31, 2023 | |||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Customer relationships | $ | 343,300 | $ | (166,485) | $ | 176,815 | |||||||||||
| Developed technology | 96,400 | (52,039) | 44,361 | ||||||||||||||
| Trademarks | 24,975 | (12,803) | 12,172 | ||||||||||||||
| Non-competition agreements | 5,500 | (1,743) | 3,757 | ||||||||||||||
| Capitalized software | 28,997 | (15,042) | 13,955 | ||||||||||||||
| Total intangible assets, net | $ | 499,172 | $ | (248,112) | $ | 251,060 | |||||||||||
| Weighted Average Remaining Useful Life (in years) | ||||||||
| Customer relationships | 5 | |||||||
| 6 | |||||||
| 5 | |||||||
| 4 | |||||||
| ||||||||
Capitalized software | 2 | |||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenues | $ | 4,729 | $ | 4,454 | |||||||||||||||||||||||||||||||||||||
| General and administrative expense | 9,419 | 9,582 | |||||||||||||||||||||||||||||||||||||||
| Total amortization expense | $ | 14,148 | $ | 14,036 | |||||||||||||||||||||||||||||||||||||
Years ending December 31, 2021 (remaining six months) | $ | 24,188 | ||
2022 | 48,039 | |||
2023 | 46,075 | |||
2024 | 44,344 | |||
2025 | 40,337 | |||
Thereafter | 117,179 | |||
|
| |||
Total amortization expense | $ | 320,162 | ||
|
|
| Years ending December 31, | |||||
| 2024 (remaining nine months) | $ | 42,210 | |||
| 2025 | 50,697 | ||||
| 2026 | 44,872 | ||||
| 2027 | 42,272 | ||||
| 2028 | 24,901 | ||||
| Thereafter | 33,866 | ||||
| Total amortization expense | $ | 238,818 | |||
| As of | ||||||||
| June 30, 2021 | December 31, 2020 | |||||||
Accrued bonuses | $ | 3,872 | $ | 5,423 | ||||
Accrued payroll and payroll-related expenses | 7,845 | 7,305 | ||||||
Sales tax liability from acquisitions | 2,939 | 2,739 | ||||||
Accrued costs of revenues | 3,740 | 1,988 | ||||||
Accrued operating costs | 1,419 | 1,609 | ||||||
Other accrued expenses | 1,915 | 2,006 | ||||||
|
|
|
| |||||
| $ | 21,730 | $ | 21,070 | |||||
|
|
|
| |||||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Accrued payroll and payroll-related expenses | $ | 8,237 | $ | 9,501 | |||||||
| Accrued operating costs | 4,371 | 3,655 | |||||||||
| Sales tax liabilities from acquisitions | 3,383 | 3,383 | |||||||||
| Accrued costs of revenues | 2,576 | 2,003 | |||||||||
| Accrued bonuses | 2,476 | 6,424 | |||||||||
| User conference accrual | 1,861 | 1,073 | |||||||||
| Customer deposits | 1,243 | 1,302 | |||||||||
| Operating lease liabilities – current | 778 | 773 | |||||||||
| Other sales tax liabilities | 436 | 404 | |||||||||
| Excise taxes payable | 756 | 379 | |||||||||
| Other accrued liabilities | 2,252 | 1,776 | |||||||||
| Total accrued liabilities | $ | 28,369 | $ | 30,673 | |||||||
| Contractual Commitments | |||||
| Years ending December 31, | |||||
| 2024 (remaining nine months) | $ | 2,398 | |||
| 2025 | 1,115 | ||||
| 2026 | 975 | ||||
| Thereafter | — | ||||
| Total | $ | 4,488 | |||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| 2021 Term loan | $ | 426,300 | $ | 427,388 | |||||||
| Debt issuance costs | (3,655) | (3,842) | |||||||||
| Total debt, net | 422,645 | 423,546 | |||||||||
| Less: Current portion of debt | |||||||||||
| 2021 Term loan | 4,350 | 4,350 | |||||||||
| Debt issuance costs | (807) | (808) | |||||||||
| Total current portion of debt, net | 3,543 | 3,542 | |||||||||
| Total non-current portion of debt, net | $ | 419,102 | $ | 420,004 | |||||||
PROJECT ANGEL PARENT, LLC
MERIDIANLINK, INC.
Note 5 – Long-Term Debt
Long-term debt was comprised
| As of June 30, 2021 | As of December 31, 2020 | |||||||
First lien | $ | 503,665 | $ | 406,255 | ||||
Second lien | 125,000 | 125,000 | ||||||
Paycheck Protection Program loan | — | 2,142 | ||||||
|
|
|
| |||||
Total principal payments due | 628,665 | 533,397 | ||||||
Debt issuance costs | (13,813 | ) | (13,565 | ) | ||||
|
|
|
| |||||
Total debt, net | $ | 614,852 | $ | 519,832 | ||||
|
|
|
| |||||
Less: Current portion of long-term debt | ||||||||
First lien | $ | 5,179 | $ | 4,156 | ||||
Paycheck Protection Program loan | — | 1,785 | ||||||
Debt issuance costs | (3,422 | ) | (2,986 | ) | ||||
|
|
|
| |||||
Total current portion of long-term debt, net | 1,757 | 2,955 | ||||||
|
|
|
| |||||
Non-current portion of long-term debt, net | $ | 613,095 | $ | 516,877 | ||||
|
|
|
| |||||
On MayCompany to grant or incur liens, incur additional indebtedness, enter into joint ventures or partnerships, engage in mergers and acquisitions, engage in asset sales, and declare dividends on its capital stock, subject in each case to certain customary exceptions. A failure to comply with covenants could permit the lenders to declare the 2021 Term Loan, and any then outstanding borrowings on the 2021 Revolving Credit Facility, together with accrued interest and fees thereon, to be immediately due and payable. The Company was in compliance with all financial covenants of the 2021 Credit Agreement at March 31, 2018, Holdings, Intermediate and MeridianLink (collectively,2024.
The First Lien consists of a $315.0 million term loan, itself consisting of a $245.0 million initial term loan and a delayed draw term loan of $70.0 million, as well as a $35.0 million revolving credit facility. UnderAgreement), which was 3.00% at March 31, 2024. Beginning in June 2022, the First Lien term loan, the Borrowers borrowed $245.0 million on May 31, 2018 and $70.0 million on June 7, 2018. The First Lien term loan requiresCompany is required to make quarterly principal payments equal to 0.25% of the original principal, with the remainder due at maturity. The First Lien term loan bears interest at
The Second Lien consists of a term loan of $125.0 million, itself consisting of a $95.0 million initial term loan and a delayed draw term loan of $30.0 million. The Borrowers borrowed $95.0 million on May 31, 2018 and $30.0 million on June 7, 2018. The Second Lien term loan requires interest only payments, bears interest at a rate per annum equal to LIBOR plus 8.0% (which was 9.0% at both June 30, 2021 and December 31, 2020), and matures on May 29, 2026.
The First and Second Liens are secured by substantially all assets of the Borrowers. Under the First Lien and Second Lien, the Borrowers are subject to various financial covenants, as well as customary affirmative and negative covenants, as discussed below.
In connection with First Lien and Second Lien term loans, the Borrowers incurred $16.2 million in issuance costs. Expenses associated with the issuance of the term loans are presented in thecondensed consolidated balance sheets as a direct deduction from the carrying amount of the debt and are amortized tointo interest expense over the contractual life of the term loanloans using the effective interest method. Included in the debt issuance costs were $4.8 million incurred in connection with the 2021 Term Loan, and $2.8 million carried forward from the Company’s previous 2018 First Lien. The Company recognized $0.2 million and $0.2 million, of amortization of debt issuance costs for the 2021 Term Loan during the three months ended March 31, 2024 and 2023, respectively. The effective interest rate on the 2021 Term Loan was 8.9% as of March 31, 2024.
25
| Years ending December 31, | |||||
| 2024 (remaining nine months) | $ | 3,262 | |||
| 2025 | 4,350 | ||||
| 2026 | 4,350 | ||||
| 2027 | 4,350 | ||||
| 2028 | 409,988 | ||||
| Total | $ | 426,300 | |||
PROJECT ANGEL PARENT, LLC
On October
In connection withSecondary Offering (defined below).
excise taxes are recorded as an adjustment to accumulated deficit on the Company’s condensed consolidated balance sheets and statements of stockholders’ equity.
In connection withCompany did not receive any proceeds from the 2021 Incremental Term debt,sale of its common stock by the Borrowers incurred $2.2 millionselling stockholders in expenses, of which approximately $2.0 million and $0.2 million related to lender fees and third-party fees, respectively.
Total amortization of financing costs was $0.7 million and $0.4 million forthe Secondary Offering. During the three months ended June 30, 2021March 31, 2024, the Company incurred costs of $1.4 million in connection with the Secondary Offering. These costs are included within general and 2020, respectivelyadministrative expenses on the Company’s condensed consolidated statements of operations.
The First Lien and Second Lien also contain customary affirmative and negative covenants including, among other requirements, negative covenants that restrict the Borrowers’ ability to dispose of assets, create liens, incur indebtedness, pay dividends, make acquisitions, make investments, or make distributions to the Company or the Company’s ultimate unitholders. Parent (as a standalone legal entity)2023, is not a party to the First Lien or Second Lien and the business operations of the Company are almost entirely conducted by Parent’s wholly-owned subsidiaries.
Further, under the First Lien, if the amount outstanding under the revolving credit facility is greater than 30% of the revolving credit commitments at each quarter end, the First Lien contains a financial covenant that requires testing of maximum consolidated First Lien net leverage ratio (the ratio of the aggregate indebtedness under the First Lien as of such date minus the aggregate amount of unrestricted cash and cash equivalents, to consolidated EBITDA for the period of the four fiscal quarters most recently ended). If required to test, the Borrowers must maintain a maximum Consolidated First Lien Net Leverage Ratio of 7.00 to 1.00.
The Borrowers were in compliance with all covenants of the First Lien and Second Lien as of June 30, 2021.
See Note 2 for discussion related to the PPP loan.
Future principal payments of long-term debt as of June 30, 2021 were as follows (in thousands)thousands except share data):
Years ending December 31, 2021 (remaining six months) | $ | 2,589 | ||
2022 | 5,179 | |||
2023 | 5,179 | |||
2024 | 5,179 | |||
2025 | 485,539 | |||
2026 | 125,000 | |||
|
| |||
Total | $ | 628,665 | ||
|
|
See Note 12 for subsequent events related to prepayment
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Total number of shares repurchased | 2,406,015 | 228,529 | |||||||||||||||||||||
| Total cost of shares repurchased, including commissions, fees, and excise taxes | $ | 44,377 | $ | 3,499 | |||||||||||||||||||
PROJECT ANGEL PARENT, LLC
MERIDIANLINK, INC.
Note 6 – Preferred Units and Members’ Deficit
Class A Units
Voting Rights—Class A Units did not have voting, approval, or consent rightsrepurchase under the Members’ Agreement.
Conversion Rights—Class A Units did not have any conversion rights into common units.
Preferred Return—Company’s stock repurchase programs.
Liquidation Preference—The Class A preferred unitholders were entitled to liquidation preference over Class B Units. The distribution would first be made to the Class A Unpaid Return on such unitholder’s outstanding Class A preferred units until the Class A Unpaid Return was zero, and then to the Class A Unreturned Capital (at $1,000 per unit) with respect to such unitholder’s Class A preferred units held until the Class A Unreturned Capital was zero. Any remaining amounts would be distributed pro rata among holders of Class B Units based on the outstanding Class B Units held at the time of such distribution. Therefore, all Class A unitholders had first priority with regard to any distributions made by the Company to its unitholders, whether the result of a liquidation event (such as a sale or dissolution of the Company) or the result of a distribution electedadopted by the board of managers ofdirectors and approved by the Company. The liquidation preference provisions related toCompany’s stockholders following the Class A Units were considered contingent redemption provisions and the deemed liquidation events were not solely within the control of the Company, such as a sale or change in control of the Company. Accordingly, the Company has presented the Class A Units within the mezzanine portion of the accompanying consolidated balance sheet. However, the Class A Units were not considered currently redeemable because redemption is contingent on the sale of the Company (or similar change of control event), whereas the identification of a market participant willing to purchase the Company for consideration in an amount sufficient to distribute the redemption amount to the holders of the Class A Units was not considered probable. As a result, the Company has not recorded the Preferred Return on the Class A Units within the accompanying condensed consolidated statements of preferred units and members’ deficit.
Repurchase Rights—In accordance with the terms and conditions of certain investor unit agreements, co-invest unit agreements, or other incentive unit agreements entered into between the Company and its unitholders, the Class A Units were subject to repurchase at the election of the Company, Thoma Bravo, or another related party upon theunitholder’s termination orcorporate conversion effected in connection with a sale of the Company. The repurchase price for each Class A Unit was the fair market value of such unitCompany’s initial public offering and became effective as of the date of repurchase; provided, however, that if the unitholder was terminated for cause, the repurchase price would be the lesser of the unitholder’s original cost for such unit and the fair market value of such unit.
Class B Units
As of and June 30,July 26, 2021. The 2021 and December 31, 2020, there were and 52,112,904 and 51,492,805 units, respectively of Class B Units issued and outstanding. Class B Units did not have voting, approval, or consent rights under the Members’ Agreement. No distribution would be made on Class B Units, unless and until the distributions were made to holders of Class A Units and any remaining amounts to be distributed pro rata among holders of Class B Units based on the Class
27
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
B Units held as of the time of such distribution. Certain Class B Units, including Carried Equity Units (as defined below) were subject to repurchase by the Company, Thoma Bravo, or another related party upon the unitholder’s termination. Refer to Note 7 for further information regardingPlan replaced both the Company’s repurchase rights on the Class B Units, including the nature2019 Equity Option Plan (the “2019 Plan”) and classification of certain Class B Units on the condensed consolidated balance sheets. See Note 12 for subsequent events related to the Class B Units.
Note 7 – Unit-Based Compensation
On October 23, 2018, the Company’s board of managers approved the adoption of the Project Angel Parent, LLC Equity Plan (the “2018 Plan”). The 2018 Plan provides incentivesOutstanding options to employees, consultants, directors, managers or advisers of the Company and its subsidiaries through the sale or grant of the Company’s Class A Units,purchase Class B Units and/or other equity-based awards. Undergranted under the 20182019 Plan 4,868 Class Awere converted into options to purchase shares of common stock, and all outstanding Carried Equity Units and 738,796 Class B Units have been issued under co-invest agreements (“Co-Invest Units”), which remain outstanding as of June 30, 2021 and December 31, 2020. No additional Co-Invest Units will be granted in subsequent years.
In addition, under the 2018 Plan in 2019,were converted into restricted stock awards (“RSAs”), both of which have been granted under the 2021 Plan.
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding – January 1, 2024 | 3,976,372 | $ | 12.53 | 6.68 | $ | 49,670 | |||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | (26,856) | 7.12 | |||||||||||||||||||||
| Forfeited | (18,964) | 22.19 | |||||||||||||||||||||
| Outstanding – March 31, 2024 | 3,930,552 | $ | 12.52 | 6.39 | $ | 30,230 | |||||||||||||||||
| Vested and expected to vest in the future at March 31, 2024 | 3,930,552 | 12.52 | 6.39 | 30,230 | |||||||||||||||||||
| Exercisable at March 31, 2024 | 3,189,348 | $ | 10.62 | 6.05 | $ | 29,546 | |||||||||||||||||
The Company recognized approximately $0.1 million in unit-based compensation expenseoptions exercised during both the three months ended June 30, 2021March 31, 2024 and 2020,2023 was $0.4 million and $0.3$0.9 million, in unit-based compensation expense during both the six months ended June 30, 2021 and 2020 for Carried Equity Units related to the excess of fair value per unit on date of issuance over the $0.06 per unit purchase price paid by the participants, which has been recognized as additional compensation expense attributable to the participants.
On May 6, 2019, the Company established the 2019 Equity Option Plan (the “2019 Plan”). The 2019 Plan provides for grants of certain unit options to employees, which allow option holders to purchase Class B Units in the Company. For time-based service options granted, the options vest over a period of three to four years. The performance-based options vest upon achieving annual EBITDA targets or upon a change of control as defined in the 2019 Plan documents. An option holder must be an employee of the Company at the date of these vesting conditions.
As of June 30, 2021 and December 31, 2020, the maximum aggregate number of Class B Units that could be sold or granted to participants under both the 2018 Plan and the 2019 Plan amounted to 9,450,667.
28
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
A summary of unit option activity under the 2019 Plan is as follows:
| Number of Options | Weighted Average Exercise Price | |||||||||
Outstanding – January 1, 2021 | 3,169,696 | $ | 6.30 | |||||||
Granted | 37,500 | 18.26 | ||||||||
|
|
|
| |||||||
Outstanding – June 30, 2021 | 3,207,196 | $ | 6.44 | |||||||
|
|
|
| |||||||
| Number of Options | Weighted Average Exercise Price | |||||||||
Outstanding – January 1, 2020 | 2,757,696 | $ | 6.06 | |||||||
Granted | 127,500 | 6.06 | ||||||||
|
|
|
| |||||||
Outstanding – June 30, 2020 | 2,885,196 | $ | 6.06 | |||||||
|
|
|
| |||||||
The Company recognized approximately $0.5$1.3 million and $1.3 million in unit-basedshare-based compensation expense related to time-based and performance-based unitstock options for both the three months ended June 30, 2021March 31, 2024 and 2020. The Company recognized approximately $1.0 million in unit-based compensation expense related to time-based and performance-based unit options for both2023, respectively. During the sixthree months ended June 30, 2021March 31, 2024 and 2020. During the six months ended June 30, 2021 and 2020,2023, performance-based options were probable of vesting and, therefore, were included as part of unit-basedshare-based compensation expense. All
Unit-basedweighted-average period of 1.7 years.
| Number of RSUs | Weighted Average Grant Date Fair Value | ||||||||||
| Non-vested – January 1, 2024 | 4,919,744 | $ | 17.19 | ||||||||
| Granted | 85,949 | 19.01 | |||||||||
| Vested | (261,847) | 17.86 | |||||||||
| Forfeited | (174,781) | 17.18 | |||||||||
| Non-vested – March 31, 2024 | 4,569,065 | $ | 17.18 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Cost of revenues | $ | 93 | $ | 28 | $ | 165 | $ | 55 | ||||||||
General and administrative | 353 | 485 | 706 | 958 | ||||||||||||
Research and development | 82 | 88 | 164 | 159 | ||||||||||||
Sales and marketing | 137 | 72 | 273 | 141 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total unit-based compensation expense | $ | 665 | $ | 673 | $ | 1,308 | $ | 1,313 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Cost of revenues | $ | 782 | $ | 853 | |||||||||||||||||||||||||
| General and administrative | 4,393 | 2,264 | |||||||||||||||||||||||||||
Research and development (1) | 1,502 | 1,783 | |||||||||||||||||||||||||||
| Sales and marketing | 1,259 | 290 | |||||||||||||||||||||||||||
Restructuring related costs (2) | (133) | (299) | |||||||||||||||||||||||||||
| Total share-based compensation expense | $ | 7,803 | $ | 4,891 | |||||||||||||||||||||||||
| ______________ | |||||||||||||||||||||||||||||
“Restructuring.”
Theprior year, the Company’s provision for income taxes reflected an effective tax rate of approximately 20.9%(0.6)% and 21.0%17.5% for the three months ended June 30, 2021March 31, 2024 and 2020, respectively, and approximately 21.8% and 20.2% for2023, respectively.
29
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
The Company has leased one property from a related party. Rental expense for this property totaled $0.1 million and $0.2 million for
The Company entered into a sale-leaseback transaction with a related party on April 29, 2019 for onecourse of its office properties, inbusiness operations, transactions are conducted with parties with which the Company was involved inhas a close association that may be deemed to be related party transactions.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Cost of revenues | $ | 364 | $ | 319 | |||||||||||||||||||||||||
| General and administrative | 166 | 248 | |||||||||||||||||||||||||||
| Research and development | 25 | 162 | |||||||||||||||||||||||||||
| Total related party expenses | $ | 555 | $ | 729 | |||||||||||||||||||||||||
| As of March 31, | As of December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Prepaid expenses and other current assets | $ | 269 | $ | 38 | |||||||
| Total current assets | $ | 269 | $ | 38 | |||||||
| Accounts payable | $ | 225 | $ | 110 | |||||||
| Accrued liabilities | 146 | 243 | |||||||||
| Total current liabilities | $ | 371 | $ | 353 | |||||||
On May 31, 2018, the Company entered into an Advisory Services Agreement with Thoma Bravo, a private equity firm, that owns the majoritydate of the Company through private equity funds managed by the firm. During the three months ended June 30, 2021 and 2020, the Company recorded $0.5 million and $0.6 million, in general and administrative expenses on the accompanying condensed consolidated statements of operations for management and advisory fees. During the six months ended June 30, 2021 and 2020, the Company recorded $1.0 million and $1.1 million, in general and administrative expenses on the accompanying condensed consolidated statements of operations for management and advisory fees. As of June 30, 2021, the Company has an accounts payable balance of $0.5 million due to Thoma Bravo on the accompanying condensed consolidated balance sheets. As of December 31, 2020, the Company had a balance of $0.5 million, for amounts paid to Thoma Bravo included within prepaid expenses and other current assets on the accompanying condensed consolidated balance sheets. The Advisory Services Agreement was terminated upon completion of the IPO.
In June 2021, the Company signed an agreement with the sellers of MeridianLink which finalized the terms for payment of the remaining $30 million holdback liability outstanding as of December 31, 2020 reflected as a related party liability on the condensed consolidated balance sheets. During June 2021, the Company released $25.7 million to the sellers representing the funds remaining in the holdback amount, net of the claims against the holdback which had been recorded as a related party receivable due from the sellers.
Share
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Basic and diluted net loss per unit | ||||||||||||||||
Numerator: | ||||||||||||||||
Net loss attributable to common unitholders | $ | (1,800 | ) | $ | (3,566 | ) | $ | (3,502 | ) | $ | (10,525 | ) | ||||
Denominator: | ||||||||||||||||
Weighted-average number of common units—basic and dilutive | 52,015,526 | 51,248,738 | 51,843,086 | 51,024,837 | ||||||||||||
Net loss per unit: | ||||||||||||||||
Basic and dilutive | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.21 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
30
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Basic and diluted net loss per share | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (5,306) | $ | (5,666) | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common stock outstanding: | |||||||||||||||||||||||
| Basic | 77,335,072 | 80,659,978 | |||||||||||||||||||||
| Diluted | 77,335,072 | 80,659,978 | |||||||||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic | $ | (0.07) | $ | (0.07) | |||||||||||||||||||
| Diluted | $ | (0.07) | $ | (0.07) | |||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding for basic loss per share | 77,335,072 | 80,659,978 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Options outstanding, unexercised | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| RSAs unvested | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| RSUs unvested | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase rights committed under the ESPP | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding for diluted loss per share | 77,335,072 | 80,659,978 | |||||||||||||||||||||||||||||||||||||||||||||||||||
PROJECT ANGEL PARENT, LLC
| As of June 30, | ||||||||
| 2021 | 2020 | |||||||
Class B options outstanding, unexercised | 3,207,196 | 2,885,196 | ||||||
Class B carried equity units unvested | 1,533,882 | 3,058,596 | ||||||
|
|
|
| |||||
Total | 4,741,078 | 5,943,792 | ||||||
|
|
|
| |||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Options to purchase common stock outstanding, unexercised | 3,930,552 | 2,017,496 | |||||||||||||||||||||||||||
| Restricted stock units, unvested | 4,569,065 | 600,981 | |||||||||||||||||||||||||||
| Purchase rights committed under the ESPP | 18,293 | — | |||||||||||||||||||||||||||
| Total | 8,517,910 | 2,618,477 | |||||||||||||||||||||||||||
Teledata Communications, Inc.Restructuring Activities
During the quarter ended June 30, 2021, the Company settled its remaining obligationallow for the acquisitiongrowth in areas of TazWorks, LLC (“TazWorks”).strategic importance. The Company’s final remaining provisional purchase price allocation amount related to the final working capital adjustment, which amounted to approximately $0.2 million being received by the Company from the sellers of TazWorks, was settled in April 2021 and resulted in2024 Realignment Plan included a corresponding adjustment to prepaid expenses and other current assets.
The pro forma consolidated statement of operations data presented below for the period ended June 30, 2020, gives effect to the 2020 acquisitions of Teledata Communications , Inc., (“TCI”) and TazWorks which were acquired in November 2020 and December 2020, respectively, as if they had occurred on January 1, 2019. These amounts have been calculated after adjusting the operating results of TCI and TazWorks for the following primary items: (1) additional intangible amortization from the transaction, (2) additional interest expense on borrowings, (3) removal of historical interest expensereduction of the acquired entities, (4) acquisition-related expenses incurred, (5) adjustmentsCompany’s current workforce by approximately 9%.
The pro forma results have been prepared for comparative purposes onlyMarch 31, 2024, and are not necessarily indicative ofreflected in restructuring related costs on the actual results of operations had the acquisitions taken place as of January 1, 2019 or the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the completed acquisitions.
Saylent Technologies, Inc.
On April 1, 2021, the Company acquired all the outstanding stock of Saylent Technologies, Inc. (“Saylent”) for cash consideration of $38.5 million, subject to adjustment as defined in the purchase agreement. In connection with the acquisition, the Company incurred $0.8 million in acquisition related costs. Such costs have been included in general and administrative expenses in the accompanyingCompany’s condensed consolidated statements of operations. Accrued severance and related costs as of March 31, 2024 were $0.2 million. The acquisition was funded byCompany expects to complete the Company’s available cash. Saylent is based out2024 Realignment Plan during the second quarter of Boston, MA. Saylent is a data analytics and marketing solution that offers insights to financial institutions that help drive account and credit and debit card usage. The acquisition was accounted for using the acquisition method of accounting whereby the acquired assets and liabilities of Saylent were recorded at their respective fair values, including an amount for goodwill. Results of operations of Saylent have been included in the operations of the Company beginning with the closing date of the acquisition. The acquisition was deemed immaterial to the Company’s operating results as a whole.
The table below summarizes the preliminary allocation of the purchase price of Saylent based on the estimated fair value of the assets acquired and the liabilities assumed (in thousands). The Company’s remaining provisional purchase price allocations at June 30, 2021 related to the final working capital adjustment and income tax effects.
31
Assets acquired: | ||||
Cash and cash equivalents | $ | 2,451 | ||
Restricted cash | 104 | |||
Accounts receivable, net | 4,174 | |||
Prepaid expenses and other current assets | 121 | |||
Property and equipment, net | 371 | |||
Goodwill | 22,042 | |||
Intangible assets | 13,700 | |||
|
| |||
Total assets acquired | 42,963 | |||
|
| |||
Liabilities assumed: | ||||
Accounts payable | 210 | |||
Accrued compensation and benefits | 2,191 | |||
Accrued expenses | 754 | |||
Deferred tax liability | 521 | |||
Notes payable (PPP Loan) | 775 | |||
|
| |||
Total liabilities assumed | 4,451 | |||
|
| |||
Fair value of assets acquired and liabilities assumed | $ | 38,512 | ||
|
|
The goodwill recognized is attributable to increased customer base and expanded service capabilities. The Saylent acquisition is treated as a stock purchase for income tax purposes; therefore, of the goodwill recorded, none is considered deductible for income tax purposes. A rollforward of the Company’s goodwillrestructuring reserve balance at Decemberfor the three months ended March 31, 2021 to June 30, 20212024 is as follows:
| Total | ||||
Balance, December 31, 2020 | $ | 542,965 | ||
Saylent Technologies, Inc Acquisition | 22,042 | |||
Adjustments to TazWorks acquisition date fair value made in 2021 | 47 | |||
|
| |||
Balance, June 30, 2021 | $ | 565,054 | ||
|
| |||
The fair value of the separately identifiable finite-lived intangible assets acquired and estimated useful lives are as follows (in thousands, except years)thousands):
| Estimated Fair Values | Weighted Average Amortization Life (years) | |||||||||
Customer Relationships | $ | 5,800 | 15.0 | |||||||
Trademarks | 1,500 | 6.3 | ||||||||
Non-compete | 600 | 2.0 | ||||||||
Developed technology | 5,800 | 8.7 | ||||||||
|
|
|
| |||||||
Total acquisition-related intangible assets | $ | 13,700 | 10.8 | |||||||
|
|
|
| |||||||
| As of March 31, | |||||||||||
| 2024 | |||||||||||
| Beginning balance | $ | — | |||||||||
| Restructuring related costs | 3,191 | ||||||||||
| Payments | (3,014) | ||||||||||
| Ending balance | $ | 177 | |||||||||
32
PROJECT ANGEL PARENT, LLC
Use of Proceeds
In July 2021, the Company utilized a portion of the net proceeds received from the IPO offering
Equity Award Grants
The Company’s board of directors approved a program pursuant to which the Company granted awards to certain of its directors, officers, and employees totaling approximately 1,023,668 restricted stock unit awards, based on the IPO price of $26.00 per share and options to purchase 1,511,038 shares of common stock at an exercise price equal to the IPO price, which restricted stock unit awards became effective immediately following the effectiveness of the Company’s registration statement on Form S-8, and which option awards became effective immediately following the effectiveness of the registration statement for the Company’s IPO. The equity awards will be primarily subject to 4 year vesting schedules.
2021 Stock Option and Incentive Plan
The 2021 Plan was adoptedapproval by the board of directors and approved by the Company’s stockholders following the Corporate Conversion on July 27, 2021 and became effective as of July 26, 2021. The 2021 Plan has replaced the 2019 Option Plan and the Equity Plan. The 2021 Plan provides flexibility to the Company’s compensation committee and board of directors, in April 2024, the Company awarded $61.4 million of service-based RSUs to use various equity-based incentive awards as compensation tools to motivate the Company’s workforce. The incentive awards that may be grantedits employees under the 2021 PlanPlan. Service-based RSUs generally vest over four years.
The Company has initially reserved 13,171,588 sharesfinancing sources for any such repurchases;
33
PROJECT ANGEL PARENT, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (CONTINUED)
The shares issued under the 2021 Plan are authorized but unissued shares or shares that the Company reacquires. The shares of common stock underlying any awards under the 2021 Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock or are otherwise terminated (other than by exercise) will be added back to the shares of common stock availablereasonable basis for issuance under the 2021 Plan.
The maximum aggregate number of shares thatsuch statements, such information may be issued in the form of incentive stock options shalllimited or incomplete, and our statements should not exceed the Initial Limit, cumulatively increased on January 1, 2022 and on each January 1 thereafter by the lesser of the Annual Increase for such yearbe read to indicate that we have conducted an exhaustive inquiry into, or 4,051,727 shares of common stock.
Persons eligible to participate in the 2021 Plan will be those full or part-time officers, employees, non-employee directors and consultants as selected from time to time by the compensation committee in its discretion.
2021 Employee Stock Purchase Plan
The 2021 Employee Stock Purchase Plan (the “2021 ESPP”), was adopted by the board of directors and approved by the Company’s stockholders following the Corporate Conversion on July 27, 2021 and became effective as of July 26, 2021. The 2021 ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code.
The 2021 ESPP initially reserves and authorizes the issuance of up to a total of 810,345 shares of common stock to participating employees. The 2021 ESPP provides that the number of shares reserved and available for issuance will automatically increase on January 1, 2022 and each January 1 thereafter through January 1, 2031, by the least of (i) 900,000 shares of common stock, (ii) 1% of the outstanding number of shares of common stock on the immediately preceding December 31 or (iii) such lesser number of shares of common stock as determined by the administrator of the 2021 ESPP. The number of shares reserved under the 2021 ESPP will be subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization.
All employees will be eligible to participate in the 2021 ESPP. However, any employee who owns 5% or more of the total combined voting power or valuereview of, all classespotentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
final prospectus, dated July 27, 2021, filed with the SEC pursuant to Rule 424(b) under the Securities Act.2023 Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our fiscal year ends on December 31. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period.consumercredit reporting agencies, or CRAs. Financial institutions are undergoing digital transformation as they seek to transition business models, create new revenue streams, and increase customer engagement. We support our customers’ digital transformations by helping them create a superior consumer experience with our mission-critical loan origination software,system, or LOS, digital lending platform, data verification solutions, and data analytics. Our solutions allow our customers to meet their clients’ financial needs across the institution, which enables improved client acquisition and retention. Additionally, our solutions allow our customers to operate more efficiently by enabling automated loan decisioning and enhanced risk management.The financial services sector is in the midst of a transition from offering primarily in-branch services to providing hybrid in-person and digital experiences for consumers. This transition has recently accelerated, leading to increased investment in software that enables digital capabilities. We are well-positioned to assist our customers to compete with tier 1 banks and digital market entrants. We enable mid-market financial institutions to leverage their cost of capital advantage and community presence by allowing them to execute faster. With the digital edge we provide, our customers can become more competitive in this evolving environment, which, in turn, can drive further volume on our platform. transaction fees for transactions processed using our solutions. Our subscription fees consist of revenues from software solutions that are governed by pricing and terms contained in contracts between us and our customers. The initial term of our contracts is typically three years, but may range from one to seven years. Our customer contracts are typically not cancellable without penalty. Our contracts almost always contain an evergreen autorenewalauto-renewal termthat is often for a one-year extension after the initial term, but can extend the autorenewalauto-renewal of the contract up to the length of the original term. Our subscription fee revenues include annual base fees, platform partner fees, and, depending on the product, fees per search or per loan application or per closed loan (with contractual minimums based on volume) that are charged on a monthly basis, which we refer to as volume-based fees. We earn additional revenues based on the volume of loan applications or closed loans processed above our customers’ contractual minimums.35
Our current focus is on the middle market, catering
expand into this market.
36
We have designed our Partner Marketplace to act as the gateway for third parties to access our customers, which allows our customers to leverage the capabilities from these third parties to enable an accelerated loan process with improved efficiency and reduced cost. We are able to capitalize on one-time service fees from our partners upon their integration into our Partner Marketplace and a revenue share from our partners as they derive revenues from our software solution.solutions. As we grow our business, we expect to add additional vendorproduct partners and drive additional monetization opportunities. We also intend to cultivate and leverage existing and future partners to grow our market presence.
Impact
Effortspotential for a global recession, we may see reduced spending on our products and, therefore, may take additional precautionary measures to contain the spread of COVID-19limit or delay expenditures and preserve capital and liquidity.
We have been carefully monitoring the COVID-19 pandemic as it continues to progress and its potential impactlimitations on our business. We, like virtually all other companies, have suspended travel for employees, temporarily closed our offices,ability to access credit or otherwise raise debt and since mid-March 2020, have required that most employees work remotely. We have been operating effectively under our remote work model, which we anticipate continuing forequity capital. In addition, the foreseeable future to ensure the safetyUnited States Federal Reserve has raised, and well-being of our employees.
The COVID-19 pandemic creates significant risks and uncertainties for our customers, their clients, our partners and suppliers, our employees, and our business generally. However, we believe that these events could accelerate the transition to digital financial solutions and that our portfolio of digital financial services solutions and our position and reputation in the market provide us with an opportunity to continue to serve clients and grow our business. We are being cautious as a result of the uncertainties and risks posed by the COVID-19 pandemic, andmay again raise, interest rates in response to these uncertainties, weconcerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may cause us to experience lower than expected volumes if there is a decrease in customer spending.
Registered Equity Offering
On July 28, 2021, we completed a registered public offering of 14.4 millionrepurchased 2,406,015 shares of our common stock from the underwriters at a price of $26.00 per share before underwriting discounts and commissions. We sold 10.0 million of suchequal to $18.2875, which is equal to the per share price at which the underwriters purchased the shares and existingfrom the selling stockholders soldin the Secondary Offering, resulting in an aggregate of 4.4 million of such shares, inclusive of the underwriters’ option to purchase additional shares that was partially exercised in August 2021. The July 2021 common stock offering generated net proceeds to usprice of approximately $241.5$44.4 million after deducting $18.5 million in underwriting discounts and commissions and offering costs, which have been recorded against the proceeds received from the offering, which as of June 30, 2021, included $0.3 million in unpaid offering costs.
37
Our subscription fees consist of revenues from software solutions that are governed by pricing and terms contained in contracts between us and our customers. Our subscription fee revenues include annual base fees, platform partner fees, and, depending on the solution, fees per search or per loan application or per closed loan (with contractual minimums based on volume) that are charged on a monthly basis, which we refer to as volume-based fees.
Certain of our subscription contracts are invoiced to our customers annually, and revenue is recognized ratably over the service term.
there is not a significant level of integration between implementation and subscription services. Further, implementation services in our contracts provide benefit to the customer with other readily available resources and the implementation services generally are not interdependent with the SaaS subscription services. Therefore, implementation services are generally accounted for as a separate performance obligation, as they represent distinct services that provide benefit to the customer apart from SaaS services.
probable.
38
We capitalize certain software development costs related to programmers, software engineers, and quality control teams working on our software solutions. We commence amortization of capitalized costs for solutions that have reached general release. Capitalized software development costs are amortized to cost of revenues over their estimated economic lives.
business.
Operating Expenses
Operatingadministrative expenses consist primarily of salessalaries, and marketing, researchother personnel-related costs, including employee benefits, bonuses, and development,share-based compensation, of our administrative, finance and generalaccounting, information systems, legal, and human resources employees. General and administrative expenses. Theyexpenses also include costs related to our acquisitionsconsulting and the resultingprofessional fees, insurance, franchise taxes, travel, and credit loss expense.
the long term as we scale the business and continue to adjust to being a public reporting company.
Sales and marketing expenses as a percentage of total revenues will change in any given period based on several factors including the addition of newly-hired sales professionals, the number and timing of newly-installed customers, and the amount of sales commissions related to those customers. Commissions related to software sales are generally capitalized and then amortized over the expected period of customer benefit.
Research and Development
Research and development expenses include salaries and personnel-related costs, including employee benefits, bonuses, unit-based compensation, third-party contractor expenses, software development costs, allocated overhead, and other related expenses incurred in developing new solutions and enhancing existing solutions.
39
Certain research and development costs that are related to our software development, which include salaries and other personnel-related costs, including employee benefits and bonuses attributed to programmers, software engineers, and quality control teams working on our software solutions, are capitalized and are included in intangible assets, net on the consolidated balance sheets.
We believe that continuing to improve and enhance our solutions is essential to maintaining our reputation for innovation and growing our customer base and revenues. We plan to continue investing in research and development by increasing the number of our software developers. As a result, we expect our research and development expenses to increase in absolute dollars and as a percentage of revenues over the long term as we scale the business, including through integration of our acquisitions.
General and Administrative
General and administrative expenses consist primarily of salaries and other personnel-related costs, including employee benefits, bonuses, and unit-based compensation, of our administrative, finance and accounting, information systems, legal, and human resources employees. General and administrative expenses also include consulting and professional fees, insurance, and travel.
General and administrative expenses include depreciation and amortization of property and equipment and amortization of acquired intangibles. Depreciation of fixed assets is computed on a straight-line basis over the estimated useful lives of the assets, which range from three to five years for computer equipment and software, three to seven years for office equipment and furniture, and twenty-five years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the useful life of the assets.
Identifiable intangible assets with finite lives, such as customer relationships, trademarks, and non-competition agreements, are amortized over their estimated useful lives on either a straight-line or accelerated basis, depending on the nature of the intangible asset.
We expect to continue to incur incremental expenses associated with the growth of our business and to meet increased compliance requirements associated with operating as a public company. These expenses include costs to comply with Section 404 of the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors’ and officers’ liability insurance, and investor relations activities, partially offset by the termination of sponsor-related costs. As a result, we expect our general and administrative expenses to increase in absolute dollars, but to decrease as a percentage of revenues over the long term as we scale the business and adjust to being a public reporting company.
Total Other (Income) Expense, Net
Other Income
Other income primarily consists of customer receipts that were paid as part of settlements related to billing disputes or buyout of agreements for early terminations.
Interest Expense,
Interest expense consists primarily of interest expense
Our
40
We recognize deferred tax assets to the extent that these assets are more likely than not to be realized. If they are not, deferred tax assets are reduced by a valuation allowance. We assess whether a valuation allowance should be recorded against our deferred tax assets based on the consideration of all available evidence, both positive and negative, using a “more likely than not” realization standard. In making such a determination, all available positive and negative evidence isare considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If itIn making such judgements, significant weight is subsequently determinedgiven to evidence that can be objectively verified. After analyzing all available evidence, including the past and current trend in volatility in our business operating environment which has impacted our current ability and expectation to generate sufficient future taxable income to fully realize our deferred tax assets, would bewe have determined that it is more likely thanthat we would not realized in the future, in excessbe able to utilize all of their net recorded amount, an adjustment would be made to theour deferred tax asset valuation allowance, which would reduce the provision for income taxes. Afterassets, and therefore, we have established a review of the four sources of taxable income (as described above), and after consideration of our continuing cumulative income position, as of June 30, 2021, the Company has not recorded apartial valuation allowance on itsour deferred tax assets.
assets as of March 31, 2024 and December 31, 2023. Our valuation allowance was $31.3 million and $29.4 million at March 31, 2024, and December 31, 2023, respectively.
adjusted EBITDA for each of the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Net loss | $ | (5,306) | $ | (5,666) | |||||||||||||||||||||||||
| Interest expense | 9,582 | 9,031 | |||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 32 | (1,199) | |||||||||||||||||||||||||||
| Depreciation and amortization | 14,524 | 14,531 | |||||||||||||||||||||||||||
| Share-based compensation expense | 7,936 | 5,190 | |||||||||||||||||||||||||||
| Employer payroll taxes on employee stock transactions | 422 | 126 | |||||||||||||||||||||||||||
| Expenses associated with public offering | 1,389 | — | |||||||||||||||||||||||||||
| Restructuring related costs | 3,191 | 2,904 | |||||||||||||||||||||||||||
| Deferred revenue reduction from purchase accounting for acquisitions prior to 2022 | — | 20 | |||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 31,770 | $ | 24,937 | |||||||||||||||||||||||||
| Consolidated statements of operations data | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| (in thousands, except share and unit and per share and per unit amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Revenues, net | $ | 68,474 | $ | 49,535 | $ | 136,285 | $ | 93,153 | ||||||||
Cost of revenues: | ||||||||||||||||
Subscription and services(1) | 17,997 | 12,114 | 34,611 | 23,249 | ||||||||||||
Amortization of developed technology | 3,109 | 2,131 | 5,971 | 4,204 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total cost of revenues | 21,106 | 14,245 | 40,582 | 27,453 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 47,368 | 35,290 | 95,703 | 65,700 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative(1) | 16,622 | 13,693 | 34,967 | 27,318 | ||||||||||||
Research and development(1) | 7,288 | 4,726 | 14,274 | 9,033 | ||||||||||||
Sales and marketing(1) | 4,224 | 2,177 | 7,823 | 4,201 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 28,134 | 20,596 | 57,064 | 40,552 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 19,234 | 14,694 | 38,639 | 25,148 | ||||||||||||
Other (income) expense, net: | ||||||||||||||||
Other income | (10 | ) | (23 | ) | (30 | ) | (24 | ) | ||||||||
Interest expense, net | 9,846 | 8,517 | 19,908 | 17,374 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other expense, net | 9,836 | 8,494 | 19,878 | 17,350 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before provision for income taxes | 9,398 | 6,200 | 18,761 | 7,798 | ||||||||||||
Provision for income taxes | 1,966 | 1,304 | 4,098 | 1,576 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | $ | 7,432 | $ | 4,896 | $ | 14,663 | $ | 6,222 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Class A preferred return | (9,232 | ) | (8,462 | ) | (18,165 | ) | (16,747 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net loss attributable to common unitholders | $ | (1,800 | ) | $ | (3,566 | ) | $ | (3,502 | ) | $ | (10,525 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Weighted average units outstanding – basic and diluted | 52,015,526 | 51,248,738 | 51,843,086 | 51,024,837 | ||||||||||||
Loss per common unit – basic and diluted | (0.03 | ) | (0.07 | ) | (0.07 | ) | (0.21 | ) | ||||||||
|
41
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Revenues, net | $ | 77,816 | $ | 77,135 | |||||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||||||||
Subscription and services (1) | 21,344 | 23,501 | |||||||||||||||||||||||||||||||||||||||
| Amortization of developed technology | 4,729 | 4,454 | |||||||||||||||||||||||||||||||||||||||
| Total cost of revenues | 26,073 | 27,955 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 51,743 | 49,180 | |||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
General and administrative (1) | 25,179 | 22,555 | |||||||||||||||||||||||||||||||||||||||
Research and development (1) | 9,485 | 13,812 | |||||||||||||||||||||||||||||||||||||||
Sales and marketing (1) | 10,536 | 8,213 | |||||||||||||||||||||||||||||||||||||||
Restructuring related costs (1) | 3,191 | 2,904 | |||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 48,391 | 47,484 | |||||||||||||||||||||||||||||||||||||||
| Operating income | 3,352 | 1,696 | |||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net: | |||||||||||||||||||||||||||||||||||||||||
| Interest and other income | (956) | (470) | |||||||||||||||||||||||||||||||||||||||
| Interest expense | 9,582 | 9,031 | |||||||||||||||||||||||||||||||||||||||
| Total other expense, net | 8,626 | 8,561 | |||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (5,274) | (6,865) | |||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 32 | (1,199) | |||||||||||||||||||||||||||||||||||||||
| Net loss | (5,306) | (5,666) | |||||||||||||||||||||||||||||||||||||||
| Net loss per share: | |||||||||||||||||||||||||||||||||||||||||
| Basic | $ | (0.07) | $ | (0.07) | |||||||||||||||||||||||||||||||||||||
| Diluted | $ | (0.07) | $ | (0.07) | |||||||||||||||||||||||||||||||||||||
| Weighted average common stock outstanding: | |||||||||||||||||||||||||||||||||||||||||
| Basic | 77,335,072 | 80,659,978 | |||||||||||||||||||||||||||||||||||||||
| Diluted | 77,335,072 | 80,659,978 | |||||||||||||||||||||||||||||||||||||||
| ______________ | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||
| Cost of revenues | $ | 782 | $ | 853 | |||||||||||||||||||||||||||||||||||||
| General and administrative | 4,393 | 2,264 | |||||||||||||||||||||||||||||||||||||||
| Research and development, net of amounts capitalized | 1,502 | 1,783 | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 1,259 | 290 | |||||||||||||||||||||||||||||||||||||||
| Forfeitures included in restructuring related costs | (133) | (299) | |||||||||||||||||||||||||||||||||||||||
| Total share-based compensation expense | $ | 7,803 | $ | 4,891 | |||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Cost of revenues | $ | 93 | $ | 28 | $ | 165 | $ | 55 | ||||||||
General and administrative | 353 | 485 | 706 | 958 | ||||||||||||
Research and development | 82 | 88 | 164 | 159 | ||||||||||||
Sales and marketing | 137 | 72 | 273 | 141 | ||||||||||||
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|
|
|
|
|
| |||||||||
Total unit-based compensation expense | $ | 665 | $ | 673 | $ | 1,308 | $ | 1,313 | ||||||||
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|
|
|
|
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| |||||||||
2023
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Revenues, net | $ | 68,474 | $ | 49,535 | $ | 18,939 | 38% | $ | 136,285 | $ | 93,153 | $ | 43,132 | 46% | ||||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues, net | $ | 77,816 | $ | 77,135 | $ | 681 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues increased $43.1 million, or 46%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase wascustomers, partially due tooffset by decreased revenue from TCI and TazWorks acquisitions, which accounted for 24% of the growth. The remaining increase primarily resulted from new and ramping customers and also volume increases from existing customers. Of the 22% remaining growth, Lending Software Solutions accounted for 14% of the growth and Data Verification Software Solutions accounted for 8% of the growth, primarily driven by increased revenues from existing customers. An increase in closed and funded loans was the key driver for the increase in our Lending Software Solutions and the transactions driving growth for our Data Verification Software Solutions were primarily for mortgage credit reports.Services, which is driven by lower volumes in our mortgage-related revenues. For both of our solutions, we receive incremental revenues if customers exceed their minimum commitments.
commitments for monthly transactions, which typically is based off of number of applications or closed and funded loans for Lending Software Solutions and credit, tenant, or employment verification reports for our Data Verification Software Solutions.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Subscription and services | $ | 17,997 | $ | 12,114 | $ | 5,883 | 49% | $ | 34,611 | $ | 23,249 | $ | 11,362 | 49% | ||||||||||||||
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subscription and services | $ | 21,344 | $ | 23,501 | $ | (2,157) | (9) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
42
Subscription and services cost of revenues increased $11.4 million, or 49%, for the six months ended June 30, 2021 comparedlower employee headcount due to the six months ended June 30, 2020. The increase2023 Restructuring Plan that was completed in part due to an increasethe second quarter of $4.9 million in third-party costs, driven by higher volumes and additional costs related to TCI and TazWorks revenue. The remaining increase was related to higher compensation and benefits spend, largely from the addition of TCI, TazWorks, and Saylent employees.
2023.
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Amortization of Developed Technology | $ | 3,109 | $ | 2,131 | $ | 978 | 46% | $ | 5,971 | $ | 4,204 | $ | 1,767 | 42% | ||||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of Developed Technology | $ | 4,729 | $ | 4,454 | $ | 275 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 51,743 | $ | 49,180 | $ | 2,563 | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 25,179 | $ | 22,555 | $ | 2,624 | 12 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of developed technologyadministrative expenses increased $1.8$2.6 million, or 42%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to an additional $1.2 million in amortization related to the acquisitions of developed technology of TCI, TazWorks, and Saylent. The remaining increase was due to additional capitalized software costs related to internally developed software and the related amortization.
Gross Profit
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Gross Profit | $ | 47,368 | $ | 35,290 | $ | 12,078 | 34% | $ | 95,703 | $ | 65,700 | $ | 30,003 | 46% | ||||||||||||||
Gross profit increased $12.1 million, or 34%12%, for the three months ended June 30, 2021March 31, 2024, compared to the three months ended June 30, 2020.March 31, 2023. The increase was primarily duerelated to an increasethe net effect of revenues, as described above,increased share-based compensation expenses of $2.1 million related to increased amortization expenses from stock options and restricted stock units in 2024 compared to the same period in 2023; and increased fees of $1.4 million related to our Secondary Offering, with none in the comparable prior period in 2023; partially offset by an increasereductions in cost of revenues duethird party consulting and recruiting expenses amounting to an increase in third-party costs$0.5 million.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 9,485 | $ | 13,812 | $ | (4,327) | (31) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit increased $30.0development expenses decreased $4.3 million, or 46%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to an increase of revenues, as described above, partially offset by an increase in cost of revenues due to an increase in third-party costs and the acquisitions of TCI, TazWorks, and Saylent.
Operating Expenses
Sales and Marketing
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Sales and Marketing | $ | 4,224 | $ | 2,177 | $ | 2,047 | 94% | $ | 7,823 | $ | 4,201 | $ | 3,622 | 86% | ||||||||||||||
Sales and marketing expenses increased $2.0 million, or 94%31%, for the three months ended June 30, 2021March 31, 2024, compared to the three months ended June 30, 2020.March 31, 2023. The decrease was primarily related to decreased compensation expenses of $2.9 million, net of amounts capitalized, and lower stock compensation expense of $0.3 million, largely from lower headcount and personnel costs on our research and development teams during the three months ended March 31, 2024 compared to the same period in 2023 due to the 2024 Realignment Plan that went into effect during the three months ended March 31, 2024; and $0.6 million lower from retention bonuses in 2023 related to the acquisitions of StreetShares and OpenClose, with none in the comparable period in 2024.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 10,536 | $ | 8,213 | $ | 2,323 | 28 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Salesteams, which included increased commissions expenses of $0.7 million, net of amounts capitalized; and marketingincreased share-based compensation expenses of $1.0 million due to increased $3.6 million, or 86%, for the six months ended June 30, 2021amortization in 2024 compared to the sixsame period in 2023.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring related costs | $ | 3,191 | $ | 2,904 | $ | 287 | 10 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other expense, net | $ | 8,626 | $ | 8,561 | $ | 65 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Research and Development
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Research and Development | $ | 7,288 | $ | 4,726 | $ | 2,562 | 54% | $ | 14,274 | $ | 9,033 | $ | 5,241 | 58% | ||||||||||||||
Research and development expenses increased $2.6of $0.1 million, or 54%1%, for the three months ended June 30, 2021March 31, 2024, compared to the three months ended June 30, 2020.March 31, 2023. The increase was primarily due to additional personnel-related expenses, largelythe net effect from higher interest expense due to rising rates on our variable rate term loan during the acquisition of TCI, TazWorks and Saylent teams.
Research and development expenses increased $5.2 million, or 58%, for the sixthree months ended June 30, 2021 comparedMarch 31, 2024, partially offset by increased interest income related to the six months ended June 30, 2020. The increaseCompany’s money market mutual fund.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 32 | $ | (1,199) | $ | 1,231 | (103) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and Administrative
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
General and Administrative | $ | 16,622 | $ | 13,693 | $ | 2,929 | 21% | $ | 34,967 | $ | 27,318 | $ | 7,649 | 28% | ||||||||||||||
General and administrative expenses increased $2.9$0.0 million or 21%, for the three months ended June 30, 2021March 31, 2024, compared to the three months ended June 30, 2020. The increase includes an additional $2.1a benefit from income taxes of $1.2 million in intangible asset amortization related to the TCI, TazWorks, and Saylent’s acquired intangibles. The remaining increase was largely related to higher advisory services spend due to additional work around the IPO, various system implementations, and acquisitions.
General and administrative expenses increased $7.6 million, or 28%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase includes an additional $3.8 million in intangible asset amortization related to the TCI, TazWorks, and Saylent’s acquired intangibles. The remaining increase was largely related to higher advisory services spend due to additional work around the IPO, various system implementations, and acquisitions.
Other (Income) Expense, net
Other Income
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Other Income | $ | (10 | ) | $ | (23 | ) | $ | 13 | 57% | $ | (30 | ) | $ | (24 | ) | $ | (6 | ) | 25% | |||||||||
Other income decreased for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.March 31, 2023. The decrease was primarily due to lower customer settlement fees.
Other income increased for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to higher customer settlement fees.
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Interest Expense, net
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Interest Expense, net | $ | 9,846 | $ | 8,517 | $ | 1,329 | 16% | $ | 19,908 | $ | 17,374 | $ | 2,534 | 15% | ||||||||||||||
Interest expense, net increased $1.3 million, or 16%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was primarily due to additional interest expense incurred from an incremental term loan borrowing in January 2021tax provision (benefit) effects of $100.0 million.
Interest expense, net increased $2.5 million, or 15%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to additional interest expense incurred from an incremental term loan borrowing in January 2021 of $100.0 million.
Provision for Income Taxes
| Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ | % | 2021 | 2020 | $ | % | ||||||||||||||||||||
Provision for Income Taxes | $ | 1,966 | $ | 1,304 | $ | 662 | 51% | $ | 4,098 | $ | 1,576 | $ | 2,522 | 160% | ||||||||||||||
Provision fromresearch and development credits, state income taxes, increased $0.7 million, or 51%, for the three months ended June 30, 2021 comparedpermanent unfavorable differences related to the three months ended June 30, 2020. The increase was primarily due to income before provision for income taxes of $9.4 million during the three months ended June 30, 2021 compared to $6.2 million during the three months ended June 30, 2020.
Provision from income taxes increased $2.5 million, or 160%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to income before provision for income taxes of $18.8 million during the six months ended June 30, 2021 compared to $7.8 million during the six months ended June 30, 2020.
Seasonality and Quarterly Results
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonality as well as the timing of investments in growing our business. The timing and amount of any transaction revenues generated in excessshare-based compensation expense, certain employee remuneration under section 162(m) of the contractually committed monthly minimum fee can be subject to fluctuations of consumer behavior tied to seasonality as well as macroeconomic conditions that impact consumer loan volumes. Typically, consumer loan activity is lowerInternal Revenue Code, and other expected permanent differences; primarily offset by a change in the fourth calendar quarter of the year, corresponding to the traditional holiday season in the United States.
The timing of our implementation activities and corresponding revenues from new customers also are subject to fluctuation based on the timing of our sales. Sales may tend to be lower in the first quarter of each year than in subsequent quarters, but any resulting impact on our results of operation has been difficult to measure due to the timing of our implementations and overall growth in our business. The timing of our implementations also varies period-to-period based on our implementation capacity, the number of solutions purchased by our customers, the size and unique needs of our customers, and the readiness of our customers to implement our solutions. Our solutions are often the most frequent point of engagement between our customers and their clients. As a result, we and our customers are very deliberate and careful in our implementation activities to help ensure a successful roll-out of the solutions to their clients. Unusually long or short implementations, for even a small number of customers, may result in short-term quarterly variability in our results of operations.
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Our unaudited quarterly results of operations may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future results.
One
Quarterly Report on Form 10-Q.
| Six Months Ended June 30, | Change |
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| (in thousands) | 2021 | 2020 | $ | % | ||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 49,909 | $ | 30,317 | $ | 19,592 | 65% | |||||||||
Investing activities | (124,147 | ) | (4,257 | ) | (119,890 | ) | (2,816)% | |||||||||
Financing activities | 65,814 | (4,573 | ) | 70,387 | 1,539% | |||||||||||
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Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (8,424) | $ | 21,487 | $ | (29,911) | (139)% | |||||||||
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Three Months Ended March 31, Change (in thousands) 2024 2023 $ % Net cash provided by (used in): Operating activities $ 29,038 $ 28,081 $ 957 3 % Investing activities (1,929) (2,058) 129 6 % Financing activities (45,265) (4,007) (41,258) (1,030) % Net (decrease) increase in cash, cash equivalents $ (18,156) $ 22,016 $ (40,172) (182) %
third-party vendors, and interest expense.
For the six months ended June 30, 2021, the primary driver of
For the six months ended June 30, 2020, the primary driver of cash provided by operating activities was net income. Additionally, net cash inflows from changes in operating assets and liabilities of $1.1 million primarily consisted of increased deferred revenue of $7.3 million duedecreases related to timing of annual fees billing, partially offset by increases in accounts receivabledisbursements for operations of $5.8 million, and prepaid expenses and other assets of $1.0 million, resulting primarily from timing of payments and receipts.
$7.2 million.
Net
Net cash used in investing activities of $4.3 million for the sixthree months ended June 30, 2020 consisted of $2.8 million cash paid forMarch 31, 2023
additions of $0.1 million.
Net cash provided by financing activities of $65.8 million for the six months ended June 30, 2021 consisted primarily of $100 million proceeds from issuance of long-term debt, partially offset by a $25.7 million of payments on the financing obligation due to related party, $2.6 million of principal payments of long-term debt, $2.0 million payments of deferred offering costs, $2.0 million payments of debt issuance costs, and $1.9 million of repurchases of units.
Net
Indemnification Agreements
In the ordinary course$40.5 million, higher taxes paid for net share settlements of business, we enter into agreementsrestricted stock units of varying scope$0.3 million, and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising outlower proceeds from exercise of the breachstock options of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties.
Additionally, in connection with the listing of our common stock on the NYSE, we entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands have been made upon us to provide indemnification under such director, officer, or employee agreements, and there are no claims that we are aware of that management believes could have a material adverse effect on our financial position, results of operations, or cash flows.
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Off-Balance Sheet Arrangements
As of June 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities, or variable interest entities.
The preparation of our interim unaudited condensed consolidated financial statements in accordance with GAAP requires estimates, judgments and assumptions that affect the reported amounts and classifications of assets and liabilities, revenues and expenses and the related disclosures of contingent liabilities in our interim unaudited condensed consolidated financial statements and accompanying notes. We
We evaluate our estimates judgments, and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
since December 31, 2023. For a full discussion of critical accountingthese estimates and policies, and estimates, see the section “Critical Accounting Policies and Significant JudgmentsJudgments” within “Management’s Discussion and Estimates” includedAnalysis of Financial Condition and Results of Operations” in our prospectus dated July 27, 2021 and as filed with the SEC
48
We are exposedin the ordinary coursesince December 31, 2023. For a full discussion of our business.exposures to market risks, see “Quantitative and Qualitative Disclosures about Market risk is the riskRisk” within “Management’s Discussion and Analysis of loss that may impactFinancial Condition and Results of Operations” in our financial position, future earnings, or future cash flows that may result from changes in financial market prices and rates. Our market risk is primarily a result of fluctuations in interest rates and inflation. We do not use derivative financial instruments for speculative, hedging, or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.Interest Rate RiskWe had cash of $29.2 million and $37.7 million as of June 30, 2021 and December 31, 2020, respectively, consisting of checking and demand deposit accounts. We did not hold any cash or cash equivalents as of June 30, 2021 or December 31, 2020 that held a significant degree of interest rate risk.As of June 30, 2021 and December 31, 2020, we had an outstanding principal amount of $628.7 million and $531.3 million, respectively, under the First Lien Credit Agreement and the Second Lien Credit Agreement. The interest rates2023 Annual Report on our First Lien Credit Agreement and Second Lien Credit Agreement are floating. If overall interest rates had increased by 10% during the periods presented, our interest expense would not have been materially affected.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition, or results of operations. We continue to monitor the impact of inflation in order to reduce its effects through pricing strategies, productivity improvements, and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.
operating effectively.pursuant to Rule 13a-15(as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (“the “Exchange Act”)Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.thisthat evaluation, and in light of the material weakness existing in our internal controls over financial reporting as of December 31, 2023 (as described in greater detail in our 2023 Annual Report on Form 10-K), our principal executive officer and principal financial officer have concluded that as of June 30, 2021,the end of the period covered by this Quarterly Report on Form 10-Q, our disclosurereview controls and procedures were not effective. Notwithstanding the material weakness, our management has concluded that the condensed consolidated financial statements fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company for the periods presented in conformity with U.S. generally accepted accounting principles.tountil they are performed for a sufficient period of time and have been operating effectively.reasonableany assurance that informationour remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. We are committed to continuing to improve our internal control processes and will continue to review, optimize, and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or we may modify certain of the remediation measures described above. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.ThereJune 30, 2021March 31, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.II. OTHER INFORMATIONII
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. nor isany litigation or claims that, if determined adversely to us, would have a material adverse effect on our property currently subject to, any material legal proceedings, nor are we involved in any legal proceedings the outcome of which we believe would be material to ourbusiness, operating results, financial condition, or results of operations.cash flows. We are, not awarefrom time to time, party to litigation and subject to claims in the ordinary course of any governmental inquiries or investigations into our business.49
included in this Quarterly Report on Form 10-Q, including the financial statements and the related notes, before deciding to invest in our common stock. Any of the risk factors we describe below could have a material adverse effect on our business, financial condition, results of operations, cash flow, and prospects. The market price of our common stock could decline if one or more of these risks or uncertainties develop into actual events, causing you to lose all or part of your investment. While we believe theseOther risks, and uncertainties are especially important for you to consider, we may face other risksevents, and uncertainties that could have a material adverse effect onwe do not currently anticipate or that we currently deem immaterial may also affect our business. Certain statements contained in the risk factors described below are forward-looking statements. See the section titled “Special Note Regardingabout Forward-Looking Statements” for more information.Our business is subject to numerous risks and uncertainties, including those highlightedthis section titled “Risk Factors” and summarized below. We have various categories of risks, including risks relating to our financial position and need for additional capital, risks related to our business and industry, risks relating to intellectual property, risks relating to managing our business and operations, risks relating to ownership of our common stock, and risks relating to potential conflicts of interests and related parties, which are discussed more fully below. As a result, this risk factorus presents. This summary does not contain all of the information that may be important to you, and you should read this risk factor summary together with the more detailed discussion of risks and uncertainties set forth following this section as well as elsewhere in this Quarterly Report on Form 10-Q. Additional10-Q. The risks beyond those summarized below or discussed elsewhere in this Quarterly Report on Form 10-Q, may applyand uncertainties to which our business activities or operations as currently conducted or as we may conduct them in the future or in the markets in which we operate or may in the future operate. These risksis subject include, but are not limited to, the following:We have experienced rapid subscription fee revenueRisks Related to Our Strategy and Industryrecent periods, and our recent growth rates may not be indicativethe performance or delivery of our future growth.software solutions, whether due to security compromises, third-party providers, or other unforeseeable circumstances, could affect brand perception, decrease demand, and subject us to substantial liability.
Our•Integration or implementation challenges could affect the functionality of our software solutions and delay revenue recognition.
If we cannot successfully execute on our strategy and continue to develop and effectively market solutions that anticipate and respond to the needs of our customers, our business, operating results and financial condition may suffer.
Our future revenues and operating results will be harmed if we are unable to acquire new customers, if our customers do not renew their contracts with us, or if we are unable to expand sales to our existing customers or develop new products that achieve market acceptance.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increaseretain and attract product partners to drive further volume through our customer baseplatform.
We face significant competition which may adversely affect our ability to add new customers, retain existing customers•Failures in data protection, privacy, and grow our business.
If we are unable to maintain successful relationships with our partners, or if our partners fail to perform, our ability to market, sell and distribute our products and services will be limited, and our business, operating results and financial condition could be harmed.
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A breach or compromise of ourinformation security measures or those we rely on could result in unauthorized access to or other compromise of customers’ data or customers’ clients’ data, which may materially and adversely impact our reputation, business and results of operations.
Failure to protect and enforce our proprietary technology and intellectual property rights could substantially harmcritically impair our business, operating resultsofferings and financial condition.
Real or perceived errors, failures, defects or vulnerabilities in our software solutions could adversely affect our financial results and growth prospects.
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extentability to which this will impact our future results of operations and overall financial performance remain uncertain.
Our failure to achieve and maintain an effective system of internal control over financial reporting may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
Our debt obligations contain restrictions that impact our business and expose us to risks that could adversely affect our liquidity and financial condition.
We are highly leveraged and have substantial indebtedness, which reduces our capability to withstand adverse developments or business conditions.
Our customers are highly regulated and subject to a number of challenges and risks. Our failure•Failure to comply with laws and regulations applicable to us as a technology provider to financial institutions could adversely affect our business and results of operations, increase costs, and impose constraints on the way we conduct our business.
Any use of our solutions by our customers who operate in violation ofa highly regulated industry, as well as failure to create solutions that assist our customers to comply with their regulatory requirements, could damagedisrupt our reputationoperations and subjectresult in significant expense to alter and update our solutions.
Thoma Bravo has significant influence over matters requiring stockholder approval, which may have the effect of delaying or preventing changes of control or limiting the ability of other stockholderscharges booked to approve transactions they deem to be in their best interest.
Our market valuation could be volatile, and returns to stockholders may be impacted by high trading volume or issuance of shares for strategic objectives.
If we are unable to adequately address these and other risks we face, our business, results of operations, financial condition and prospects may be harmed.
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Risks Related to Our Financial PositionFinance and Need for Additional Capital
Our debt agreements contain restrictions that limit our flexibility.
Our debt agreements contain, and any future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on ourAccounting
incur additional indebtedness;
incur liens;
engage in mergers, consolidations, liquidations, or dissolutions;
pay dividendsrecognize the benefits of deferred tax assets is dependent on future cash flows and distributions on, or redeem, repurchase or retiretaxable income, and therefore our capital stock;
make investments, acquisitions, loans, or advances;
create negative pledge or restrictions on the paymentuse of dividends or payment of other amounts owed from subsidiaries;
sell, transfer or otherwise dispose ofthose deferred tax assets including capital stock of subsidiaries;
make prepayments of material debt that is subordinated with respect to right of payment or liens, or is unsecured;
engage in certain transactions with affiliates;
modify certain documents governing material debt that is subordinated with respect to right of payment;
change our fiscal year; and
change our lines of business.
As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.
We may not be able to secure sufficient additional financing on favorable terms, or at all, to meet our future capital needs.
We may require additional capital in the future to pursue business opportunities or acquisitions or respond to challenges and unforeseen circumstances. We may also decide to engage in equity or debt financings or enter into additional credit facilities for other reasons. We may not be able to secure additional debt or equity financing in a timely manner, on favorable terms, or at all. Any debt financing we obtain in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential acquisitions.
We are highly leveraged and have substantial indebtedness, which reduces our capability to withstand adverse developments or business conditions.
We have incurred substantial amountslimited.
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Economic downturns may impact our ability to comply with the covenants and restrictions in the agreements governing our indebtedness and may impact our ability to pay or refinance our indebtedness as it comes due. If we do not repay or refinance our debt obligations when they become due and do not otherwise comply with the covenants and restrictions in the agreements governing our indebtedness, we would be in default under those agreements and the underlying debt could be declared immediately due and payable. In addition, any default under any of the agreements governing our indebtedness could lead to an acceleration of debt under any other debt instruments or agreements that contain cross-acceleration or cross-default provisions. If the indebtedness incurred under the agreements governing our indebtedness were accelerated, we may not have sufficient cash to repay amounts due thereunder. To avoid a default, we could be required to defer capital expenditures, sell assets, seek strategic investments from third parties or otherwise reduce or eliminate discretionary uses of cash. However, if such measures were to become necessary, there can be no assurance that we would be able to sell sufficient assets or raise strategic investment capital sufficient to meet our scheduled debt maturitieswell as they come due.
Our overall leverage and the terms of our financing arrangements could also:
make it more difficult for usexisting debt, or our inability to satisfy obligations under our outstanding indebtedness;
limiteffectively access capital markets may restrict our ability to obtain additional financing in the future for working capital, capital expenditures, or acquisitions;
limit our ability to refinance our indebtedness on terms acceptable to us or at all;
limit our ability to adapt to changing market conditions;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
require us to dedicate a significant portion of our cash flow from operations to paying the principal of and interest on our indebtedness, thereby limiting the availability of our cash flow to fund future capital expenditures, working capital, and other corporate purposes;
limit our flexibility in planning for, or reactingcompete, react to changes in our business, and fund future needs.
place us at•Changes in applicable tax laws, rules, or regulations could adversely affect our financial position.
In addition, a substantial portionours and those of our indebtedness bears interest at variable rates. If marketother stockholders.
The phase-out, replacement, or unavailabilityinvestor demand for loans, more stringent underwriting guidelines, supply chain shortages for goods subject to financing, high levels of the London Inter-Bank Offered Rate, or LIBOR, could affectunemployment, high levels of consumer debt, lower consumer confidence, changes in tax and other regulatory policies, and other macroeconomic factors.
We are subject to interest rate risk on floating interest rate borrowings under our credit facilities. Borrowings under our credit facilities use LIBOR as a benchmark for establishingof March 20, 2024, which was the interest rate. In July 2017,most recent announcement from the Financial Conduct Authority (the regulatory authority over LIBOR) stated that it would phase out LIBOR as a benchmark after 2021 to allow for an orderly transition to an alternative reference rate. Our revolving credit facilities provide for a mechanism to amendFederal Reserve regarding the facilities to reflect the establishment of an alternative rate of interest upon the occurrence of certain events relatedFederal Funds Rate prior to the phase-outfiling of LIBOR. However, we have not yet pursued any technical amendment or other
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contractual alternativethis Quarterly Report on Form 10-Q. The Federal Reserve has been raising and maintaining the Federal Funds Rate to address this matter and are currently evaluating the impact of the potential replacement of the LIBOR interest rate. Incombat higher than expected inflation in the United States, which could cause interest rates to rise further. Increases in mortgage interest rates have reduced the Alternative Reference Rates Committee has proposedvolume of new mortgages originated, and further increases in interest rates could reduce the Secured Overnight Financing Rate,volume of mortgage and non-mortgage loans originated.
Risks Related to Our Business and Industry
business.
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We may not accurately predict the long-term rate of customer subscription renewals or adoption of our software solutions, or any resulting impact on our revenues or operating results.
We have experienced rapid growth in recent periods. Our net revenues were $68.5 million and $49.5 million for the three months ended June 30, 2021 and 2020, respectively, representing a 38.4% growth rate. Our net revenues were $136.3 million and $93.2 million for the six months ended June 30, 2021 and 2020, respectively, representing a 46.2% growth rate. In future periods, we may not be ableunable to sustain net revenue growthattract new customers based on the same subscription models that we have used historically or at fee levels that are consistent with recent history,our pricing models and operating budget. Moreover, large or at all. We believeinfluential customers may demand more favorable pricing or other contract terms from us. In addition, our net revenue growth depends on several factors, including, but not limitedpricing strategy for new solutions may prove to be unappealing to our ability to add newpotential customers, and our competitors could choose to expand our existing customers’ usage of our solutions. The markets in which we compete are highly competitive, fragmented, evolving, complex, and defined by rapidly changing technology and customer demands, and we expect competition to continue to increase in the future. A number of companies have developed or are developingbundle certain solutions and services that currently, orcompetitive with ours. If any of these were to occur, we may in the future may, compete with somebe required to change our pricing model, reduce our prices, or all of our solutions. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and our failure to increase, or loss of, market share,accept other unfavorable contract terms, any of which could adversely affect our business, operating results,revenues, gross margin, profitability, financial position, cash flow, or growth prospects.
Our competitors may have longer-termits capabilities or address evolving technological requirements, our software solutions could become obsolete or less competitive and more extensive relationships with potential customers that provide them with an advantage that weour revenue growth rate may be unable to overcome. Further, to the extent that one ofreduced.
We may also face competition from companies entering our market. Many existingsolutions is characterized by rapid technological advancements, changes in customer requirements and potential competitors enjoy substantial competitive advantages, such as:
larger salestechnologies, frequent new solution introductions and marketing budgetsenhancements, and resources;
the ability to bundle competitive offerings;
greater brand recognition and longer operating histories;
lower labor and development costs;
greater resources to make acquisitions;
larger and more mature intellectual property portfolios; and
substantially greater financial, technical, management and other resources.
These competitive pressures in our markets or our failure to compete effectively may result in fewer customers, reduced revenues and gross profit, and loss of market share. Any failure to meet and address these factors could materially and adversely affect our business, operating results, and financial condition.
Our future performance will be highly dependent on our ability to grow revenues from new feature functionality and deeper adoptionchanging regulatory requirements. The life cycles of our software solutions.
Wesolutions are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors or large financial institutions could undermine our current market position. Other means of digital or virtual consumer lending and banking may be developed or adopted in the future, and our software solutions may not be compatible with these new technologies. In addition, the technological needs of, and services provided by, the banks, credit unions, mortgage lenders, specialty lending providers, and CRAs that we endeavor to serve may change if they or their competitors offer new services to account holders. Maintaining adequate research and development resources to meet the demands of the market is essential. The process of developing new technologies and software solutions is complex and expensive. The introduction of new products by our competitors, the market acceptance of competitive products based on new or alternative technologies, or the emergence of new technologies or products in the broader financial services industry could render our solutions obsolete or less effective.
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We may not accurately predict the long-term rate of customer subscription renewals or adoption of our software solutions, or any resulting impact on our revenues or operating results.
Our customers have no obligation to renew their subscriptions for our software solutions after the expiration of the initial or current subscription term, and our customers, if they choose to renew at all, may renew for shorter subscription terms, or on less favorable usage-based or volume-based pricing terms. Since we have only been tracking our retention rates since November of 2020, we have limited historical data with respect to rates of customer subscription renewals and cannot be certain of anticipated renewal rates. Our renewal rates may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our pricing or our software solutions or their ability to continue their operations or spending levels. Strategic acquisitions, such as our recent acquisition of TCI, can further complicate our ability to predict customer subscription renewals. If our customers do not renew their subscriptions for our software solutions on similar pricing terms, our revenues may decline and our business could suffer.
Additionally, as the markets for our solutions develop, or as new or existing competitors introduce new solutions or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or we may be unable to attract new customers based on the same subscription models that we have used historically or at fee levels that are consistent with our pricing models and operating budget. Moreover, large or influential customers may demand more favorable pricing or other contract terms from us. As a result, we may in the future be required to change our pricing model, reduce our prices or accept other unfavorable contract terms, any of which could adversely affect our revenues, gross margin, profitability, financial position, and/or cash flow. Our pricing strategy for new solutions we introduce may prove to be unappealing to our potential customers and our competitors could choose to bundle certain solutions and services competitive with ours. If this were to occur, it is possible that we would have to change our pricing strategies or reduce our prices, which could harm our business, operating results, and growth prospects.
Because we recognize certain subscription fee revenues over the term of the contract, downturns or upturns in our business may not be fully reflected in our results of operations until future periods.
We generally recognize revenues from subscription fees ratably over the terms of our customer contracts, which typically have an initial term of three years. Our subscription fee revenues include annual base fees, fees per search or per loan application or per closed loan (with contractual minimums based on volume) that are charged on a monthly basis and platform partner fees. We earn additional revenues based on the volume of applications and closed loans processed above our customers’ contractual minimums. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date our product is made available to the customer. Amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met. Additional fees for monthly usage above the levels included in the standard subscription fee are recognized as revenue in the month when the usage amounts are determined and reported. As such, a portion of the subscription fee revenues we report each quarter are derived from the recognition of deferred revenues relating to subscriptions activated in previous quarters. Consequently, a reduction in
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customer subscriptions in any single quarter may only have a small impact on our revenues for that quarter. However, such a decline will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns in sales or market acceptance of our software solutions may not be fully reflected in our results of operations until future periods.
We derive alla significant majority of our revenues from customers in the financial services industry, and any downturn or consolidation or decrease in technology spend in the financial services industry could adversely affect our business.
All
We currently compete with providers of technology and products incustomers’ ability or willingness to purchase our software solutions, delay prospective customers’ purchasing decisions, reduce the financial services industry, primarily point solution vendors that focus on building functionality that competes with specific components of our solutions. From time to time, we also compete with systems internally developed by financial institutions. Many of our competitors have significantly more financial, technical, marketing, and other resources than we have, may devote greater resources to the development, promotion, sale, and supportvalue or duration of their systems than we can, have more extensive customer bases and broader customer relationships than we have and have longer operating histories and greater name recognition than we do.
We may also face competition from new companies enteringsubscriptions or affect renewal rates, or impact the demand for our markets,customers’ services, any of which may include large established businesses that decide to develop, market or resell cloud-based banking technology, acquire one of our competitors, or form a strategic alliance with one of our competitors. In addition, new companies entering our markets may choose to offer cloud-based consumer lending and related products at little or no additional cost to the customer by bundling them with their existing products, including adjacent financial services technologies. Competition from these new entrants may make attracting new customers and retaining our current customers more difficult, which maycould adversely affect our results of operations.
If As a result, our operating results are sensitive to changes in macroeconomic conditions that impact our customers’ technology spending and overall usage, volume, and type of transactions handled or processed using our software solutions.
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As the number of customers that we serve increases, we may encounter implementation challenges, and we may have to delay revenue recognition for some complex engagements, which would harm our business and operating results.
We may face unexpected implementation challengestechnical standards related to the complexity of our customers’ implementationcybersecurity and integration requirements. Our implementation expenses increase when customers have unexpected data, hardware or software technology challenges, or complex or unanticipated business requirements.privacy and meets certain service levels. In addition, certain of our customers require complex acceptance testing relatedcontracts, a cybersecurity incident or compromise or operational disruption impacting us or one of our vendors, or system unavailability or damage due to other circumstances, may constitute a material breach of contract and give rise to a customer’s right to terminate their contract with us or may cause us to be liable for certain monetary penalties, including as a result of a failure to meet service level agreements.
Our product partners may change their dependencecustomer contracts typically include limitations on our system for providing service to their customers, which could harm our business and operating results.
Our continued success will depend in part on our ability to retain a number of key product partners. In addition, we believe that our future success will depend in large part on our ability to attract product partners who utilize our system to service their customers, driving further volumes through our platform. Value associated with our platform is derived from the ability of our customers to access these product partners through our solutions. Therepotential liability, there can be no assurance that wesuch limitations of liability would be adequate. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will be successfulavailable on acceptable terms or in attracting and retaining such partners. The loss of certain key product partnerssufficient amounts to cover one or our inability to attractmore claims or retain other product partners could have a material adverse effect on our business, operating results, and financial condition.
Our sales cycle can be unpredictable, time-consuming, and costly, which could harm our business and operating results.
Our sales process involves educating prospective customers and existing customers about the use, technical capabilities, and benefits of our software solutions. Prospective customers often undertake a prolonged evaluation process, which typically involves not only our software solutions, but also those of our competitors and typically lasts from six to nine months or longer. We may spend substantial time, effort, and money on our sales and marketing efforts without any assurance that our effortsinsurers will producenot deny or attempt to deny coverage as to any sales. It is also difficult to predict the level and timingfuture claim. The successful assertion of sales opportunities that come from our referral partners. Events affecting our customers’ businesses may occur during the sales cycle that could affect the sizeone or timing of a purchase, contributing to more unpredictability in our business and operating results. As a result of these factors, we may face greater costs, longer sales cycles, and less predictability in the future.
Risks Related to Regulation and Taxation
Privacy, information security and data protection concerns, data collection and transfer restrictions, and related domestic regulations may limit the use and adoption of our software solutions and adversely affect our business and results of operations.
Personal privacy, information security, and data protection are significant issues in the United States where we offer our solutions. The regulatory framework governing the collection, processing, storage, and use of certain information, particularly financial and other personally identifiable information, or PII, is rapidly evolving. Any failure or perceived failure by us to comply with applicable privacy, information security or data protection laws, regulations or industry standards may materially and adversely affect our business and results of operations, and result in reputational harm, governmental investigations and enforcement actions, litigation, claims, fines and penalties, or adverse publicity.
We expect that there will continue to be new proposed and adopted laws, regulations, and industry standards concerning privacy, data protection, and information security in the United States. For example, California enacted the California Consumer Privacy Act, or CCPA, which went into effect in January 2020 and, among other things, requires companies covered by the legislation to provide new disclosures to California consumers and afford such consumers new rights of access and deletion for personal information, as well as the right to opt-out of certain sales of personal information. Additionally, on November 3, 2020 the California Privacy Rights Act, or CPRA, was approved by California voters. The CPRA amends and expands the CCPA. The CCPA and the CPRA will require us to modify and augment our practices and policies and incur substantial costs and expenses in an effort to comply or respond to further changes to laws or regulations.
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We cannot yet fully determine the impact these or future laws, rules and regulations may have on our business or operations. Any such laws, rules, and regulations may be inconsistent among different jurisdictions, subject to new or differing interpretations, or conflict with our current or future practices. Additionally, we may be bound by contractual requirements applicable to our collection, use, processing, and disclosure of various types of information, including financial and PII, and may be bound by, or voluntarily comply with, self-regulatory or other industry standards relating to these matters that may further change as laws, rules and regulations evolve.
Any failure or perceived failure by us, our third-party service providers, or any other third parties with which we do business, to comply with these laws, rules, and regulations, or with other obligations to which we or such third parties are or may become subject, may result in claims, actions, investigations, and other proceedings or other claims against us, by governmental entitiesthe inadequacy or private actors, the expendituredenial of substantial costs, time and other resourcescoverage under our insurance policies, litigation to pursue claims under our policies, or the incurrenceoccurrence of fines, penalties, or other liabilities. In addition, any such claims, actions, investigations, other proceedings, or other claims, particularly to the extent we were found to be in violation of any laws, rules, regulations or obligations, or otherwise liable for fines, penalties, or damages, would damage our reputation and adversely affect our business and results of operations.
Additionally, if in the future we seek to sell our solutions outside of the United States, we would face similar or potentially more stringent laws and regulations relating to personal privacy, information security, and data protection and we cannot be certain we would be able to adequately address these laws and regulations as part of any international expansion.
Our customers are highly regulated and subject to a number of challenges and risks. Our failure to comply with laws and regulations applicable to us as a technology provider to financial institutions could adversely affect our business and results of operations, increase costs, and impose constraints on the way we conduct our business.
Our customers and prospective customers are highly regulated and are generally required to comply with stringent regulations in connection with performing business functions that our software solutions address. As a provider of technology to financial institutions, and as a result of obligations under some of our customer contracts, we are required to comply with certain provisions of the Gramm-Leach-Bliley Act, or GLBA, related to the privacy and security of certain consumer information, in addition to other contractual obligations that relate to our customers’ obligations under the GLBA and other laws and regulations to which they are subject. We also may be subject to other laws and regulations, including those relating to privacy and data security, because of the software solutions we provide to financial institutions.
Matters subject to review and examination by federal and state financial institution regulatory agencies and external auditors include our internal information technology controls in connection with our performance of data processing services, the agreements giving rise to those processing activities, and the design of our software solutions. Any inability to satisfy these examinations and maintain compliance with applicable regulations could adversely affect our ability to conduct our business, including attracting and maintaining customers. If we have to make changes to our internal processes and software solutions as result of these regulations, we could be required to invest substantial additional time and funds and divert time and resources from other corporate purposes to remedy any identified deficiency.
Our indirect, wholly-owned subsidiary, Professional Credit Reporting Inc., functions as a consumer reporting agency and, as a result, is subject to rules and regulations applicable to consumer reporting agencies, such as the Fair Credit Reporting Act, or FCRA. In addition, in connection with the closing of our acquisition of the assets of TazWorks, we may have additional exposure to FCRA. Other than these exposures to FCRA, we have adopted the position that we are not otherwise subject directly to the FCRA in our position as a provider of technology to financial institutions. It is possible that this position may be challenged by regulatory authorities or others, however, which could result in regulatory investigations and other proceedings, claims, and other liability, and which could require us to redesign our solutions and otherwise substantially modify our operations, processes, and solutions. This could require dedication of substantial funds and other resources, and time of management and technical personnel, and could be highly disruptive to our operations. This could adversely affect our business and results of operations.
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The evolving, complex, and often unpredictable regulatory environment in which our customers operate could result in our failure to provide compliant software solutions, which could result in customers not purchasing our software solutions or terminating their contracts with usinsurance policies, including premium increases or the imposition of fineslarge deductible or other liabilities for which we may be responsible. In addition, as a service provider to financial institutions, we may be subject to direct regulation and examination by federal and/or state agencies, and such agencies may attempt to further regulate our activities in the future which could adversely affect our business and results of operations.
Any use of our solutions by our customers in violation of regulatorycoinsurance requirements, could damage our reputation and subject us to additional liability.
If our customers or their clients use our solutions in violation of regulatory requirements and applicable laws, we could suffer damage to our reputation and could become subject to claims. We rely on contractual obligations made to us by our customers that their use and their clients’ use of our solutions will comply with applicable laws. However, we do not audit our customers or their clients to confirm compliance. We may become subject to or involved with claims for violations by our customers or their clients of applicable laws in connection with their use of our solutions. Even if claims asserted against us do not result in liability, we may incur costs in investigating and defending against such claims. If we are found liable in connection with our customers’ or their clients’ activities, we could incur liabilities and be required to redesign our solutions or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
The financial services industry is heavily regulated and changes in current legislation or new legislation could adversely affect our business.
The financial services industry in the United States, and in particular, the consumer lending and mortgage industries, are heavily regulated. Federal and state governments and agencies could enact legislation or other policies that could negatively impact the business of our customers and our product partners. Any changes to existing laws or regulations or adoption of new laws or regulations that increase restrictions on the consumer lending and mortgage industries may decrease usage and volumes transacted with our solutions or otherwise limit the ability of our customers and our product partners to operate their businesses, resulting in decreased usage of our software solutions.
Changes in current legislation or new legislation may increase our costs by requiring us to update our solutions and services.
Changes to existing laws or regulations or adoption of new laws or regulations relating to the consumer lending and mortgage industries could require us to incur significant costs to update our solutions and services. Our software solutions are designed to assist our customers with compliance with consumer protection laws and institutionally mandated compliance policies and therefore must continually be updated to incorporate changes to such laws and policies. For example, we made the decision to make certain changes to our software solutions to assist our customers with compliance with modifications to the Truth in Lending Act, or TILA. These updates have caused us to incur significant expense, and future updates will likely similarly cause us to incur significant expense.
While our customers are ultimately responsible for compliance with the laws and regulations that apply to the consumer lending and mortgage industries, a failure to design or to appropriately update our software solutions to reflect and comply with changes to existing laws or regulations or with new laws or regulations may contribute to violations by our customers of such laws and regulations. Any such violations could encourage our customers to discontinue using our software solutions and cause us reputational harm, which would negatively impact our financial position and results of operations.
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Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws, foreign export controls and trade sanctions, and similar laws, could subject us to penalties and other adverse consequences.
Failure to comply with anti-bribery, anti-corruption, anti-money laundering, and similar laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act and other federal, state, and local laws that address anti-bribery, anti-corruption, and anti-money laundering. If we expand internationally, we may become subject to the anti-corruption, anti-bribery, and anti-money laundering laws of other countries. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector.
If we pursue international expansion, our risks under these laws may increase as we, our employees, agents, representatives, business partners, and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of these employees, agents, representatives, business partners, or third-party intermediaries even if we do not explicitly authorize such activities. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners, or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
In some cases, our solutions may be subject to U.S. and foreign export controls, trade sanctions, and import laws and regulations. Governmental regulation of the import or export of our solutions, or our failure to obtain any required import or export authorization for our solutions, when applicable, could harm future international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our solutions may create delays in the introduction of our solutions in international markets or, in some cases, prevent the export of our solutions to some countries altogether. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. If we fail to comply with export and import regulations and such economic sanctions, penalties could be imposed, including fines and/or denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or products targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business.
Any allegations or violation of the FCPA or other applicable anti-bribery or anti-corruption laws, anti-money laundering laws, or foreign export controls and trade sanctions could result in whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, fines, damages, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, results of operations, and prospects. Responding to any investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. In addition, the U.S. government may seek to hold us liable for successor liability for FCPA violations committed by companies in which we invest or that we acquire. As a general matter, investigations, enforcement actions and sanctions could harm our reputation, business, results of operations, and financial condition.
If one or more U.S. states or local jurisdictions successfully assert that we should have collected or in the future should collect additional sales or use taxes on our fees, we could be subject to additional liability with respect to past or future sales, and the results of our operations could be adversely affected.
We do not collect state and local sales and use taxes in all jurisdictions in which our customers are located, based on our belief that such taxes are not applicable. Sales and use tax laws and rates vary by jurisdiction and such laws are subject to interpretation. Jurisdictions in which we do not collect sales and use taxes may assert that such taxes are applicable, which could result in the assessment of such taxes, interest, and penalties, and we could be required to collect such taxes in the future. This additional sales and use tax liability could adversely affect the results of our operations. In addition, one or more states, the federal government or other countries may seek to impose additional reporting, record-keeping,
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or indirect tax collection obligations on businesses like ours that offer subscription services. For example, on June 21, 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state sellers even if those sellers lack any physical presence within the states imposing the sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after the publication of Wayfair) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state sellers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state sellers on sales that occurred in prior tax years, which could create additional administrative burdens for us, put us at a competitive disadvantage if such states do not impose similar obligations on our competitors and decrease our future sales, which could adversely impact our business and results of operations. New taxes could also require us to incur substantial costs to capture data and collect and remit taxes. If such obligations were imposed, the additional costs associated with tax collection, remittance and audit requirements could have an adverse effect on our business, financial condition, and results of operations.
Risks Related to Our Reliance on Third Parties
We depend on data centers operated by us as well as third parties and third-party Internet hosting providers, and any disruption in the operation of these facilities or access to the Internet could adversely affect our business.
We currently serve our customers from our own internal data center located in Costa Mesa, California and two third-party data center hosting facilities located in Lone Mountain, Nevada and Atlanta, Georgia. The third-party owners and operators of these current and future facilities do not guarantee that our customers’ access to our software solutions will be uninterrupted, error-free, or secure. We may experience website disruptions, outages and other performance problems at our data center and third-party data centers. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks (including ransomware attacks), fraud, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Data center facilities are vulnerable to damage or interruption from human error, intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes, or similar catastrophic events. They also could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or terminate our hosting arrangement or other unanticipated problems could result in lengthy interruptions in the delivery of our software solutions, cause system interruptions, prevent our customers’ account holders from accessing their accounts online, reputational harm and loss, corruption, or unavailability of critical data, prevent us from supporting our software solutions or cause us to incur additional expense in arranging for new facilities and support.
We also depend on third-party Internet-hosting providers and continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. As we continue to expand the number of our customers and available solutions, we may not be able to scale our technology to accommodate the increased capacity requirements, which may result in interruptions or delays in service. In addition, the failure of data centers, Internet service providers or other third-party service providers to meet our capacity requirements could result in interruptions or delays in access to our solutions or impede our ability to grow our business and scale our operations. If our third-party infrastructure service agreements are terminated, or there is a lapse of service, interruption of Internet service provider connectivity, or damage to data centers. If we lose the services of one or more of our Internet-hosting or bandwidth providers for any reason or if their services are disrupted, for example due to viruses or denial of service, ransomware or other cybersecurity attacks or other attacks on their systems, or due to human error, intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes or similar catastrophic events, we could experience disruption in our ability to offer our software solutions and adverse perception of our software solutions’ reliability, or we could be required to retain the services of replacement providers, which could cause interruptions in access to our solutions as well as delays and additional expense in arranging new facilities and services and could also increase our operating costs and harm our business and reputation. Additionally, any need to change Internet-hosting service providers would require a significant amount of time and effort by our information technology department. We are working to transition all of our software solutions to the public cloud by the end of 2022 and this migration could introduce risks associated with data and services migration that could affect our business continuity, result in loss, corruption, or compromise of data, and impact the provision of our software solutions. If this planned transition is delayed or impacts the reliability and availability of our software solutions, our customer relationships could be negatively impacted, which could result in a materially and adversely affect our business and results of operations.
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Defects, errors, or other performance problems in our software solutions could harm our reputation, result in significant costs to us, impair our ability to sell our software solutions, and subject us to substantial liability.
We may experience temporary system interruptions, either to our solutions as a whole, individual software solutions or groups thereof, or to some or all of our software hosting locations, for a variety of reasons, including network failures, power failures, software errors, or an overwhelming number of users trying to access our software solutions during periods of strong demand. Defects, errors, outages, or other performance problems or disruptions in our software solutions or service could be costly for us, damage our customers’ businesses, result in loss of credibility with current or potential customers or partners, and harm our reputation, any of which could result in a material adverse effect on our business, operating results, and financial condition. In addition, our customers could seek to our primary data center located in our leased facility in Costa Mesa, California which we control and maintain, two of our additional data centers, located in Lone Star, Nevada and Atlanta, Georgia, are hosted by a third-party service provider over which we have little control. We depend on this third-party service providerterminate their contracts, elect not to provide continuous and uninterrupted access to our solutions and our hosted software solutions. If for any reason our relationship with this third-party were to end, it would require a significant amount of time to transition the hosting of our data centers to a new third-party service provider.
renew their subscriptions, delay or withhold payment, or make claims against us.
We have entered, and may in the future enter into, partnership agreements with third parties for reseller services, which may adversely affect our ability to generate revenues.
We have entered into and may seek to enter into additional collaborations or partnerships with third parties for reseller services. Should we seek to collaborate with a third party with respect to a prospective reseller program, we may not be able to locate a suitable partner or to enter into an agreement on commercially reasonable terms or at all. Even if we succeed in securing partners for reseller services, such as the arrangement we have entered into with Jack Henry & Associates, Inc., we have limited control over the time and resources that our partners may dedicate to such services. These partnerships pose a number
partners may not have sufficient resources or decide not to devote the necessary resources due to internal constraints such as budget limitations, lack of human resources or a change in strategic focus; or
partners may decide to pursue a competitive product developed outside of the collaboration arrangement.
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As a result of the foregoing risks and others, partnership agreements may not lead to successful reseller programs. We also face competition in seeking out partners. If we are unable to secure new partnerships that achieve the partner’s objectives and meet our expectations, we may be unable to generate meaningful revenues.
We have shifted a significant portion of our product development operations to India, which poses risks.
Since August 2018, unrelated third parties have provided us with technology development services, as well as certain customer implementation and support services through individuals based in India. We have increased the proportion of our product development work being performed by contractors in India in order to take advantage of cost efficiencies associated with India’s lower wage scale. However, we may not achieve the cost savings and other benefits we anticipate from these programs and we may not be able to find sufficient numbers of developers with the necessary skill sets in India to meet our needs. While our experience to date with our India-based contractors has been positive, there is no assurance that this will continue. Specifically, there are a number of risks associated with this activity, including but not limited to the following:
communications and information flow may be less efficient and accurate as a consequence of the time, distance and language differences between our primary development organization and the foreign-based activities, resulting in delays in development or errors in the software developed;
in addition to the risk of misappropriation of intellectual property from departing personnel, there is a general risk of the potential for misappropriation of our intellectual property that might not be readily discoverable;
the ability to obtain fulsome rights to intellectual property arising from the work performed by India-based individuals may be more difficult than it is with respect to intellectual property arising from work performed for us by our U.S.-based employees;
the quality of the development efforts undertaken offshore may not meet our requirements, including due to experiential differences, resulting in potential product errors and/or delays;
currency exchange rates could fluctuate and adversely impact the cost advantages intended from maintaining these relationships; and
as would be the case with any of our third-party developers, if those based in India were to leave their employment or if the third-party development services agreement with us were terminated, we would lose some short-term development capacity, and while we believe we would still be able to continue maintaining and improving all of our service offerings, we would need to expend resources and management time to on-board additional development resources.
In addition, as a result of the foregoing arrangements, we have a heightened risk exposure to changes in the economic, security, and political conditions of India. Economic and political instability, military actions, and other unforeseen occurrences in India could impair our ability to develop and introduce new software applications and functionality in a timely manner, which could put our products at a competitive disadvantage whereby we lose existing customers and/or fail to attract new customers.
Risks Related to Intellectual Property
If we are unable to protect our intellectual property, our business could be adversely affected.
Our success depends upon our ability to protect our intellectual property, which may require us to incur significant costs. We have developed much of our intellectual property internally, and we rely on a combination of confidentiality obligations and other restrictions in contracts, copyrights, trademarks, service marks, and trade secret laws to establish and protect our intellectual property and other proprietary rights. In particular, we enter into confidentiality and
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invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have business relationships in which they will have access to our material confidential information. No assurance can be given that these agreements or other steps we take to protect our intellectual property will be effective in controlling access to and distribution of our software solutions and our confidential and proprietary information and these agreements or other steps may not afford complete protection and may not adequately permit us to gain or keep any competitive advantage. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized uses of our intellectual property. Any of our trademarks or other intellectual property rights may lapse, be abandoned, be challenged or circumvented by others, or invalidated through administrative process or litigation. We also may allow certain of our registered intellectual property rights, or our pending applications or registrations for intellectual property rights, to lapse or to become abandoned if we determine that obtaining or maintaining the applicable registered intellectual property rights is not worthwhile.
Despite our precautions, it may be possible for third parties to copy, reverse engineer, or otherwise obtain and use our solutions, technology, systems, methods, processes, or information that we regard as proprietary to create software solutions and services that compete with ours. Third parties may also independently develop technologies that are substantially equivalent to our software solutions, or adopt trade names or domain names similar to ours, thereby impeding our ability to promote our solutions and possibly leading to customer confusion. Some contract provisions protecting against unauthorized use, copying, transfer and disclosure of our software solutions may be unenforceable under the laws of certain jurisdictions. We cannot guarantee that our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties. Further, no assurance can be given that our agreements will be effective in controlling access to and distribution of our solutions and proprietary information, and they do not prevent our competitors or partners from independently developing technologies that are substantially equivalent or superior to our solutions.
In some cases, litigation may be necessary to enforce our intellectual property rights or to protect our trade secrets. Litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights and exposing us to significant damages or injunctions. Our inability to protect our intellectual property against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay sales or the implementation of our software solutions, impair the functionality of our software solutions, delay introductions of new software solutions, result in our substituting less-advanced or more-costly technologies into our software solutions or harm our reputation. In addition, we may be required to license additional intellectual property from third parties to develop and market new software solutions, and we cannot assure you that we could license that intellectual property on commercially reasonable terms or at all.
We use open source software in our solutions, which could subject us to litigation or other actions, or otherwise negatively affect our ability to sell our solutions.
Our solutions incorporate software modules licensed to us by third-party authors under “open source” licenses, and we expect to continue to incorporate open source software in our solutions and platform in the future. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide support, warranties, indemnification, or other contractual protections regarding infringement claims or the quality of the code. In addition, the public availability of such software may make it easier for others to compromise our solutions. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use, or grant other licenses to our intellectual property.
Although we monitor our use of open source software to avoid subjecting our solutions to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to provide or distribute our solutions. Moreover, we cannot assure you that our processes for controlling our use of open source software in our solutions will be effective. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate it into their products. As a result, we could become subject to
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lawsuits by parties claiming ownership of what we believe to be open source software. Litigation could be costly for us to defend, have a negative effect on our business, operating results, and financial condition, or require us to devote additional research and development resources to change our solutions. If we are held to have breached or failed to fully comply with all the terms and conditions of an open source software license, we could face infringement or other liability, or be required to seek costly licenses from third parties to continue providing our offerings on terms that are not economically feasible, to re-engineer our solutions (which could involve substantial time and resources), to discontinue or delay the provision of our offerings if re-engineering could not be accomplished on a timely basis or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, financial condition and results of operations. A release of our proprietary code could also allow our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of our competitive advantages.
Lawsuits by third parties against us or our customers for alleged infringement of the third parties’ proprietary rights or for other intellectual property-related claims relating to our solutions or business could result in significant expenses and harm our operating results.
Our industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in our industry are often required to defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Furthermore, our customer agreements typically require us to indemnify our customers against liabilities incurred in connection with claims alleging our software solutions infringe or otherwise violate the intellectual property rights of a third party. We are currently and, from time to time, have been involved in disputes related to patent and other intellectual property rights of third parties. To date, none of these disputes have resulted in material liabilities. We expect these types of disputes to continue to arise in the future and we cannot be certain that we will not incur material liabilities related to any such disputes. Our business could be adversely affected by any significant disputes between us and our customers as to the applicability or scope of our indemnification obligations to them. There can be no assurances that any existing limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. If such claims are successful, or if we are required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management and have an adverse effect on our business, operating results, and financial condition.
Furthermore, our technologies may not be able to withstand any third-party claims or rights against their use. As a result, our success depends upon our not infringing upon or otherwise violating the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. We do not own any patents, which may prevent us from deterring patent infringement claims, and our competitors and others may now and in the future have significant patent portfolios. From time to time, we seek to obtain patents to protect our proprietary rights, but we cannot be certain that we will be successful in obtaining any such patents and, even if such patents are obtained they may be challenged or provide inadequate protection of our proprietary rights. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop alternative technology for any infringing aspect of our business, we would be forced to limit or stop sales of our solutions or cease business activities related to such intellectual property. From time to time, we have received and may continue to receive threatening letters or notices or in the future may be the subject of claims that our software solutions and underlying technology infringe or otherwise violate the intellectual property rights of others, and we may be found to be infringing upon or otherwise violating such rights. The risk of patent litigation has been amplified by the increase in the number of patent holding companies or other adverse patent owners that have no relevant product revenues, and therefore, any patents we may obtain in the future may provide little or no deterrence as we would not be able to assert them against such entities or individuals. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us or our customers whom we indemnify, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our software solutions or require that we comply with other unfavorable terms. We also face from time to time trade name or trademark or service mark infringement claims brought by owners of other registered or unregistered trademarks or service marks, including trademarks or service marks that may incorporate variations of our brand names. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them could divert the resources of our management and harm our business and operating results. Any claims related to our intellectual property or customer confusion related to our solutions could damage our reputation and adversely affect our growth prospects.
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If our goodwill and other intangibles become impaired, we may be required to record a significant charge to earnings.
We have a significant amount of goodwill and other intangibles. Our goodwill and other intangible asset balances as of June 30, 2021 were approximately $565.1 million and $320.2 million, respectively. We test goodwill at least annually, on October 1, or more frequently if circumstances indicate that goodwill may not be recoverable. Such assets are considered to be impaired when the carrying value of an intangible asset exceeds its estimated fair value. No impairment, except those disclosed related to our trademarks, has been recorded in the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, an impairment of a significant portion of our goodwill could materially adversely affect our financial condition and results of operations.
Risks Related to Managing Our Business and Operations
Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations, including the levels of our revenues, gross margin, profitability, and cash flow may vary significantly in the future and, accordingly, period-to-period comparisons of our results of operations may not be meaningful. Thus, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, and may not fully or accurately reflect the underlying performance of our business. For example, while subscriptions with our customers often include multi-year terms that typically range from three to five years, a majority of our revenues from these subscriptions comes from usage or volume-based fees, such as application fees and per inquiry fees, as opposed to annual or monthly base fees. As such, if our customers terminate their agreements with us prior to their scheduled term, we may only recover all or a portion of our contractual base fees, and not any usage or volume-based fees. Fluctuation in quarterly results may negatively impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed below:
our ability to retain current customers or attract new customers;
the overall usage and volume of transactions handled or processed using our software solutions, which may vary based on external factors such as macroeconomic conditions including the impact of the COVID-19 pandemic, and seasonality;
the activation, delay in activation or cancellation by customers;
the timing of recognition of professional services revenues;
the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;
acquisitions of our customers, to the extent the acquirer elects not to continue using our solutions or reduces subscriptions to it;
customer renewal, expansion, and retention rates;
increases or decreases in usage or pricing changes upon renewals of customer contracts;
network outages or security breaches;
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general economic, industry and market conditions (particularly those affecting financial institutions);
changes in our pricing policies or those of our competitors;
seasonal variations in sales of our software solutions, which have historically been highest in the third quarter of our fiscal year;
the timing and success of introductions of new solutions or features and functionality by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers, or strategic partners;
unexpected expenses such as those related to litigation and other disputes; and
the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies.
Uncertain or weakened economic conditions, including as a result of the COVID-19 pandemic, may adversely affect our industry, business, and results of operations.
Our overall performance depends on economic conditions, which may be challenging at various times in the future. Financial developments seemingly unrelated to us or our industry may adversely affect us. Domestic and international economies have from time-to-time been impacted by falling demand for a variety of goods and services, tariffs and other trade issues, threatened sovereign defaults and ratings downgrades, restricted credit, threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility in credit and equity markets, bankruptcies, and overall uncertainty. For example, COVID-19 has created and may continue to create significant uncertainty in global financial markets as well as industry supply chain shortages and the long-term economic impact of COVID-19 is highly uncertain. We cannot predict the timing, strength or duration of the current or any future potential economic slowdown in the United States or globally. These conditions affect the rate of technology spending generally and could adversely affect our customers’ ability or willingness to purchase our software solutions, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, or impact the demand for our customers’ services, any of which could adversely affect our results of operations.
Efforts to contain the spread of COVID-19 in the United States (including in California where our corporate headquarters are located) have included quarantines, shelter-in-place orders, and various other government restrictions in order to control the spread of this virus. We have been carefully monitoring the COVID-19 pandemic, including the delta variant’s growing impact within the United States and globally, as it continues to progress and its potential impact on our business. We have suspended travel for employees, temporarily closed our offices, and, since mid-March 2020, have requested that our employees work remotely. While we have been operating effectively under our remote work model, which we anticipate continuing for the foreseeable future to ensure the safety and well-being of our employees, we cannot be certain that a prolonged remote work model will continue to be effective or will not introduce new operational difficulties that could result in harm to our business. For example, with our shift to remote work we have had to assess and enhance our IT security measures to identify any vulnerabilities and enhance protections against unauthorized access to our network and systems. While we have not yet experienced any network breaches or intrusions since moving to a remote work model, we cannot be certain that protective measures we have taken will be sufficient, and any such related intrusion or other security breach or intrusion compromise that may occur could materially and adversely impact or business, results of operations or reputation.
The COVID-19 pandemic creates significant risks and uncertainties for our customers, their clients, the industries in which our customers operate, our partners and suppliers, our employees, and our business generally. We are being cautious as a result of the uncertainties and risks posed by the COVID-19 pandemic and in response to these uncertainties for the short-term we are actively monitoring the impacts of COVID-19 on our financial results and adjusting our hiring plans and investment spending accordingly. We are also considering how our physical facilities requirements might change when we eventually return to increased onsite operations, including the costs associated with ensuring a safe work environment and the likely increased prevalence of working from home for many employees. The timing and amount of these investments will vary based on the rate at which we expect to add new customers or sell additional solutions to existing customers, our customer
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retention rates, the implementation and support needs of our customers, our software development plans, our technology and physical infrastructure requirements, and changes thereto resulting from the COVID-19 pandemic, and other needs of our organization (including needs resulting from the COVID-19 pandemic). Many of these investments will occur in advance of our realizing any potential benefit which may make it difficult to determine if we are effectively allocating our resources.
A breach or compromise of our security measures or those we rely on could result in unauthorized access to or other compromise of customers’ data or customers’ clients’ data, which may materially and adversely impact our reputation, business, and results of operations.
Certain elements of our business and software solutions, particularly our origination and analytics solutions, involves the processing and storage of personally identifiable information, or PII, such as banking information and PII of our customers’ clients. We may also have access to PII during various stages of the implementation process of our solutions or during the course of providing customer support. Furthermore, as we develop additional functionality, we may gain greater access to PII and process additional PII. We maintain policies, procedures and technological safeguards designed to protect the confidentiality, integrity and availability of this information and our information technology systems. However, we cannot entirely eliminate the risk of improper or unauthorized access to, or disclosure, alteration, corruption, unavailability, or loss of PII or other data that we process or maintain, or other security events that impact the integrity or availability of PII or our systems and operations (including ransomware and other security attacks), or the related costs we may incur to mitigate the consequences from such events. Additionally, we may be exposed to increased risk of security breaches or other security compromises with our employees working remotely, as they have since the beginning of the COVID-19 pandemic. Further, our solutions are a combination of flexible and complex software and there is a risk that configurations of, or defects in, one or more of the solutions or errors in implementation could create vulnerabilities to, or result in, security breaches or other security compromises. There may be unlawful or unauthorized attempts to disrupt or gain access to our information technology systems or the PII or other data of our customers or their clients that may disrupt our or our customers’ operations or result in improper or unauthorized access to, or disclosure, alteration or loss of, this PII or other data. We may face difficulties or delays in identifying or responding to security compromises or breaches. In addition, because we leverage third-party providers, including cloud, software, data center and other critical technology vendors to deliver our software solutions to our customers and their clients, we rely heavily on the data security procedures, measures and policies adopted by these third-party providers. A vulnerability in a third-party provider’s software or systems, a failure of our third-party providers’ safeguards, policies, measures, or procedures, or a breach of a third-party provider’s software or systems could result in the compromise of the confidentiality, integrity, or availability of our systems or of data housed in our platform or that is maintained or processed by such third-party provider. When engaging third-party providers, we assess their policies and procedures relating to cybersecurity and privacy, however, we have no formal policy regarding subsequent audits of these providers to confirm their ongoing compliance efforts and our failure to detect issues with these third-party providers could result in vulnerabilities that would materially and adversely impact our business, customers, and results of operations.
Cyberattacks and other malicious internet-based activity continue to increase and evolve, and cloud-based providers of products and services have been and are expected to continue to be targeted. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), phishing attempts, theft or misuse and other intentional or negligent acts of our employees and contractors, ransomware attacks, denial-of-service attacks, sophisticated criminal networks as well as nation-state and nation-state supported actors now engage in intrusions and attacks, including advanced persistent threat intrusions. Current or future criminal capabilities, discovery of existing or new vulnerabilities, and attempts to exploit those vulnerabilities or other developments, may compromise or breach our systems or software solutions. In the event our or our third-party providers’ protection efforts are unsuccessful and our systems or software solutions are breached or compromised, we could suffer substantial harm. A security breach or compromise could result in operational disruptions, loss, compromise, unauthorized use of, or access to, alteration or corruption of customer data or customers’ client data or data we rely on to provide our software solutions, including our analytics initiatives and offerings that impair our ability to provide our software solutions and meet our customers’ requirements resulting in decreased revenues and otherwise materially negatively impacting our financial results. Also, in the event that any of these events occurs or is perceived to have occurred, our reputation could suffer irreparable harm, causing our current and prospective customers to decline to use our software solutions in the future. Further, we could be forced to expend significant financial and operational resources in response to any actual or perceived security breach or compromise,
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including repairing system damage, increasing security protection costs by deploying additional personnel and protection technologies, and defending against and resolving legal and regulatory claims and proceedings, all of which could be costly and divert resources and the attention of our management and key personnel away from our business operations. While maintaining and enhancing an incident response and disaster recovery program in the event of any of the foregoing attacks or system unavailability are internal priorities, we cannot be certain that our incident response and disaster recovery efforts will be adequate if they are needed and any gaps in our ability to respond to incidents and move our customers to back-up systems would result in additional adverse impacts on our business, results of operations and reputation. We anticipate expending increasing expenses and other resources in an effort to identify, prevent, and respond to actual or potential security breaches.
Federal and state regulations may require us or our customers to notify individuals or other persons or entities, including regulatory authorities of data security breaches or compromises involving certain types of personal data or information technology systems, and we otherwise may find it necessary or appropriate to notify customers, individuals, or other parties of certain data security incidents. Security breaches or compromises experienced by others in our industry, our customers or us may lead to public disclosures and widespread negative publicity. Any security breach or compromise in our industry, whether actual or perceived, could erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew or expand their use of our software solutions or subject us to third-party claims and lawsuits, indemnification or other claims from customers and other third parties, regulatory investigations or proceedings, fines or other actions or liabilities, which could materially and adversely affect our business and results of operations. In addition, some of our customers contractually require notification of data security breaches or compromises and include representations and warranties in their contracts with us that our software solutions comply with certain legal and technical standards related to data security and privacy and meets certain service levels. In certain of our contracts, a data security breach or compromise or operational disruption impacting us or one of our vendors, or system unavailability or damage due to other circumstances, may constitute a material breach and give rise to a customer’s right to terminate their contract with us or may cause us to be liable for certain monetary penalties, including as a result of a failure to meet service level agreements within customer agreements. While we have not, as of the date of this Quarterly Report on Form 10-Q, incurred any material monetary penalties as a result of these provisions, we cannot be certain that we will not in the future be liable for such payments, which could materially and adversely impact our business, results of operations and reputation with our customers. In these circumstances, it may be difficult or impossible to cure such a breach or compromise in order to prevent customers from potentially terminating their contracts with us. Furthermore, although our customer contracts typically include limitations on our potential liability, there can be no assurance that such limitations of liability would be adequate. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will be available on acceptable terms or will be available in sufficient amounts to cover one or more claims, or that our insurers will not deny or attempt to deny coverage as to any future claim. The successful assertion of one or more claims against us, the inadequacy or denial of coverage under our insurance policies, litigation to pursue claims under our policies or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or coinsurance requirements, could materially and adversely affect our business and results of operations.
Any future litigation against us could damage our reputation and be costly and time-consuming to defend.
We have in the past and may become in the future subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes or employment claims made by current or former employees. In other instances, our customers, become involved in litigation where we are required to provide information pursuant to a court order. While we may never become a party in any such litigation, such information requests can be burdensome, time-consuming, and distracting from our day-to-day operations. Litigation might result in reputational damage and substantial costs and may divert management’s attention and resources, which might adversely impact our business, overall financial condition, and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. Moreover, any negative impact to our reputation will not be adequately covered by any insurance recovery. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our results of operations and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the value of our common stock. From time to time, we also may initiate litigation to enforce our rights, including with respect to payments that we are owed. While we currently are not aware of any material pending or threatened litigation against us, we can make no assurances the same will continue to be true in the future.
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If we fail to develop, maintain, and enhance our brands, our ability to expand our business, operating results, and financial condition could be adversely affected.
We believe that maintaining and enhancing the brands associated with our solutions is important to support the marketing and sale of our existing and future solutions to new customers and to increase adoption of our solutions by existing customers. Successfully maintaining and enhancing our brands will depend largely on the effectiveness of our marketing and demand generation efforts, our ability to provide reliable solutions that continue to meet the needs of our customers at competitive prices, our ability to maintain our customers’ trust, our ability to continue to develop new functionality and solutions, and our ability to successfully differentiate our solutions from competitive products and services. Our promotion activities may not generate brand awareness or yield increased revenues, and even if they do, any increased revenues may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brands, our business, operating results, and financial condition could be adversely affected.
The forecasts included in this Quarterly Report on Form 10-Q may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you that our business will grow at similar rates, or at all.
The forecasts included in this Quarterly Report on Form 10-Q, as well as our internal estimates and research, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, although we have no reason to believe such information is not correct and we are in any case responsible for the contents of this Quarterly Report on Form 10-Q. If the forecasts of market growth, anticipated spending or predictions regarding market size prove to be inaccurate, our business and growth prospects could be adversely affected. Even if all or some of the forecasted growth occurs, our business may not grow at a similar rate, or at all. Our future growth is subject to many factors, including our ability to successfully implement our business strategy, which itself is subject to many risks and uncertainties. Accordingly, investors in our common stock are urged not to put undue reliance on such forecasts.
Mortgage lending volume is expected to be lower in 2021 and 2022 than it was in 2020 due to various economic factors, including the anticipated increase in mortgage interest rates, which could adversely affect our business.
Factors that adversely impact mortgage lending volumes include reduced consumer and investor demand for mortgages, more stringent underwriting guidelines, increased illiquidity in the secondary mortgage market, high levels of unemployment, high levels of consumer debt, lower consumer confidence, changes in tax, and other regulatory policies, including the recent expiration of the home buyer’s tax credit and other macroeconomic factors.
In addition, mortgage interest rates are currently near historic lows and many economists predict that mortgage interest rates will rise in 2021. Mortgage interest rates are influenced by a number of factors, particularly monetary policy. The Federal Reserve Bank may raise the Federal funds rate in light of recent higher than expected inflation in the United States or otherwise and has ceased purchasing Fannie Mae and Freddie Mac mortgage-backed securities, each of which would likely cause mortgage interest rates to rise. Increases in mortgage interest rates would reduce the volume of new mortgages originated, in particular the volume of mortgages refinanced.
The expected lower levels in residential mortgage loan volume in 2021 and 2022 as compared to 2020 levels will require us to increase our revenues per loan effected through use of our solutions in order to maintain our financial performance. Any additional decrease in residential mortgage volumes would exacerbate our need to increase revenues per loan effected through use of our solutions. We cannot assure you that we will be successful in our efforts to increase our revenues per loan effected through use of our solutions, which could materially adversely affect our business.
Specifically for context, quarterly revenues from the mortgage loan market generated 8% and 7% of our Lending Software Solutions revenues in the three months ended June 30, 2021 and 2020, respectively, and revenues from the mortgage loan market generated 71% and 94% of our Data Verification Software Solutions revenues in the three months ended June 30, 2021 and 2020, respectively. In the six months ended June 30, 2021 and 2020, revenues from the mortgage loan market generated 10% and 11%, respectively, of our quarterly Lending Software Solutions revenues, and 72% and 92%, respectively, of our quarterly Data Verification Software Solutions revenues.
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In addition, increases in interest rates generally may also negatively impact consumer demand for loans other than mortgages. If demand for non-mortgage loans also decreases as a result of increased interest rates, our business and operating results could be materially adversely affected.
Certain of our key operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We track certain key operating metrics using internal tools, which have certain limitations. In addition, we rely on data received from third parties, including industry forecast reports, to track certain performance indicators. We have only a limited ability to verify data from both of these sources.
Our methodologies for tracking metrics may also change over time, which could result in changes to the metrics we report. If we undercount or overcount performance due to the internal tools we use or issues with the data received from third parties, or if our internal tools contain errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies.
If our performance metrics are not accurate representations of our financial or operational performance, if we discover material inaccuracies in our metrics, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy and cannot find an adequate replacement for the metric, our business, operating results and financial condition could be adversely affected.
Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as terrorism.
Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war and similar events. For example, a significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices and one of the facilities we lease to house our computer and telecommunications equipment are located in Southern California, a region known for seismic activity. In addition, acts of terrorism, which may be targeted at metropolitan areas which have higher population density than rural areas, could cause disruptions in our or our customers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting Southern California, and our business interruption insurance may be insufficient to compensate us for losses that may occur.
If we fail to meet our service level commitments, we could be obligated to provide credits or refunds or face contract terminations, which could adversely affect our business, operating results and financial condition.
Certain of our agreements with our customers contain service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability for our solutions, we may be contractually obligated to provide these parties with service credits or refunds. In addition, we could face contract terminations, in which case we would be subject to a loss of future revenues. Our revenues could be significantly affected if we suffer unexcused downtime under our agreements with our customers and partners. Further, any extended service outages could adversely affect our reputation, revenues and operating results.
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If we fail to respond to evolving technological requirements or introduce adequate enhancements and new features, our software solutions could become obsolete or less competitive.
The market for our software solutions is characterized by rapid technological advancements, changes in customer requirements and technologies, frequent new solution introductions and enhancements and changing regulatory requirements. The life cycles of our software solutions are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors or large financial institutions could undermine our current market position. Other means of digital or virtual consumer lending and banking may be developed or adopted in the future, and our software solutions may not be compatible with these new technologies. In addition, the technological needs of, and services provided by, the banks, credit unions, mortgage lenders, specialty lending providers and CRAs that we endeavor to serve may change if they or their competitors offer new services to account holders. Maintaining adequate research and development resources to meet the demands of the market is essential. The process of developing new technologies and software solutions is complex and expensive. The introduction of new products by our competitors, the market acceptance of competitive products based on new or alternative technologies or the emergence of new technologies or products in the broader financial services industry could render our solutions obsolete or less effective.
The success of any enhanced or new software solution depends on several factors, including timely completion, adequate testing and market release and acceptance of the solution. Any new software solutions that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to anticipate customer requirements or work with our customers successfully on implementing new software solutions or features in a timely manner or enhance our existing software solutions to meet our customers’ requirements, our business and operating results may be adversely affected.
We may acquire or invest in companies, or pursue business partnerships, which may divert our management’s attention or result in dilution to our stockholders, and we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions, investments or partnerships.
From time to time, we consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets. For example, in April 2021 we acquired Saylent Technologies, Inc., a data analytics and marketing solution that offers insights to financial institutions that help drive account and credit and debit card usage. We also may enter into relationships with other businesses to expand our products, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to approvals that are beyond our control. In addition, we have limited experience in acquiring other businesses. If an acquired business fails to meet our expectations, our operating results, business and financial position may suffer. We may not be able to find and identify desirable acquisition targets, we may incorrectly estimate the value of an acquisition target, and we may not be successful in entering into an agreement with any particular target. If we are successful in acquiring additional businesses, we may not achieve the anticipated benefits from the acquired business due to a number of factors, including:
our inability to integrate or benefit from developed technologies or services;
unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs;
difficulty integrating the operational and compliance policies and practices, technology, accounting systems, operations and control environments of the acquired business and integrating the acquired business or its employees into our culture;
difficulties and additional expenses associated with supporting legacy products and infrastructure of the acquired business;
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difficulty converting the customers of the acquired business to our software solutions and contract terms, including disparities in subscription terms;
additional costs for the support or professional services model of the acquired company;
diversion of management’s attention and other resources;
adverse effects to our existing business relationships with business partners and customers;
the issuance of additional equity securities that could dilute the ownership interests of our stockholders;
incurrence of debt on terms unfavorable to us or that we are unable to repay;
incurrence of substantial liabilities;
difficulties retaining key employees of the acquired business; and
adverse tax consequences, substantial depreciation or deferred compensation charges.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.
We may not be able to successfully integrate the operations of businesses that we acquire or realize the anticipated benefits of the acquisitions, which could adversely affect our financial condition, results of operations and business prospects.
There can be no assurance that we will be able to successfully integrate our recent acquisitions or develop or commercialize products based on recently developed technologies, or that we will be able to successfully integrate any other companies, products or technologies that we acquire and may not realize all or any of the expected benefits of any acquisitions as and when planned.
The difficulties and risks associated with the integration of any other businesses that we may acquire include:
possible inconsistencies in the standards, controls, procedures, policies and compensation structures;
the increased scope and complexity of the acquired company’s operations;
the potential loss of key employees and the costs associated to retain key employees;
risks and limitations on our ability to consolidate corporate and administrative infrastructures of the two companies; and
the possibility of unanticipated delays, costs or inefficiencies associated with the integration of our operations with the operations of any other companies that we may acquire.
As a result of these difficulties and risks, we may not accomplish the integration of the business of any companies we may acquire smoothly, successfully or within our budgetary expectations and anticipated timetable. Accordingly, we may fail to realize some or all of the anticipated benefits of the acquisition, such as increase in our scale, diversification, cash flows and operational efficiency and meaningful accretion to our diluted earnings per share.
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If we fail to effectively expand our sales and marketing capabilities and teams, including through partner relationships, we may not be able to increase our customer base and achieve broader market acceptance of our software solutions.
Increasing our customer base and achieving broader market acceptance of our software solutions will depend on our ability to expand our sales and marketing organizations and their abilities to obtain new customers and sell additional solutions and services to existing customers. We believe there is significant competition for direct sales professionals with the skills and knowledge that we require, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future. Our ability to achieve significant future revenue growth will depend on our success in recruiting, training and retaining a sufficient number of direct sales professionals. New hires require significant training and time before they become fully productive and may not become as productive as quickly as we anticipate. As a result, the cost of hiring and carrying new representatives cannot be offset by the revenues they produce for a significant period of time. Our growth prospects will be harmed if our efforts to expand, train and retain our direct sales team do not generate a corresponding significant increase in revenues. Additionally, if we fail to sufficiently invest in our marketing programs or they are unsuccessful in creating market awareness of our company and software solutions, our business may be harmed, and our sales opportunities may be limited.
In addition to our direct sales team, we also extend our sales distribution through formal and informal relationships with referral and reseller partners. While we are not substantially dependent upon referrals from any partner, our ability to achieve significant revenue growth in the future will depend upon continued referrals from our partners and growth of the network of our referral partners. These partners are under no contractual obligation to continue to refer business to us, nor do these partners have exclusive relationships with us and may choose to instead refer potential customers to our competitors. We cannot be certain that these partners will prioritize or provide adequate resources for promoting our software solutions or that we will be successful in maintaining, expanding or developing our relationships with referral partners. Our competitors may be effective in providing incentives to third parties, including our partners, to favor their software products or prevent or reduce subscriptions to our software solutions either by disrupting our relationship with existing customers or limiting our ability to win new customers. Establishing and retaining qualified partners and training them with respect to our software solutions requires significant time and resources. If we are unable to devote sufficient time and resources to establish and train these partners, or if we are unable to maintain successful relationships with them, we may lose sales opportunities and our revenues could suffer.
If we are unable to effectively integrate our software solutions with other systems, products, or other technologies used by our customers and prospective customers, or if there are performance issues with such third-party systems, products, or other technologies, our software solutions will not operate effectively and our operations will be adversely affected.
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Our business may be harmed if any of our third-party providers:
•change the features or functionality of their applications and platforms in a manner adverse to us;
•discontinue or limit our software solutions’ access to their systems or other technologies;
•terminate or do not allow us to renew or replace our existing contractual relationships on the same or better terms;
•modify their terms of service or other legal terms or policies, including fees charged to, or other restrictions on, us or our customers;
•establish exclusive or more favorable relationships with one or more of our competitors, or acquire one or more of our competitors and offer competing services; or
•otherwise have or develop their own competitive offerings.
revenues and operating results.
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Risks RelatedOur sales cycle can be unpredictable, time-consuming, and costly, which could harm our business and operating results.
nine months or longer. We may spend substantial time, effort, and money on our sales and marketing efforts without any assurance that our efforts will produce any sales. It is also difficult to predict the level and timing of sales opportunities that come from our referral partners. Events affecting our customers’ businesses may occur during the sales cycle that could affect the size or timing of a purchase, contributing to more unpredictability in our business and operating results. As a result of these factors, we may face greater costs, longer sales cycles, and less predictability in the future.
If we fail to offer high-quality customer support, or if our support is more expensive than anticipated, our business and reputation could suffer.
Our customers rely on our customer support services to resolve issues and realize the full benefits provided by our solutions. High-quality support is also important to maintain and drive further adoption by our existing customers. We primarily provide customer support over the phone, chat and via web portal. If we do not help our customers quickly resolve issues and provide effective ongoing support, or if our support personnel or methods
customers are highly regulated and subject to a number of challenges and risks. Our failure to comply with laws and regulations applicable to us as a technology provider to financial institutions could adversely affect our business and results of operations, increase costs, and impose constraints on the way we conduct our business.
Our IPO occurred in July 2021. As such, there has only been a public market fortrade secret laws, confidentiality obligations, and other contractual restrictions to establish and protect our common stock for a short period of time. Althoughintellectual property and other proprietary rights. Despite our common stock is listed on the NYSE, an active trading market for our common stockefforts, these protections may be limited and may not adequately permit us to gain or keep any competitive advantage. Unauthorized third parties may try to copy or reverse engineer our solutions, technology, systems, methods, processes, or proprietary information.
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Since the sharesas a result of our common stock were sold in our IPO in July 2021 at a pricevariety of $26.00 per share, and through September 1, 2021, the price per share of our common stock has ranged from as low as $23.00 to as high as $26.84. Some of the factors, that may cause the market price of our common stock to fluctuate, many of which may be beyondare outside of our control, and may not befully or accurately reflect the underlying performance of our business. For example, while subscriptions with our customers often include multi-year terms that typically range from three to five years, a majority of our revenues from these subscriptions comes from usage or volume-based fees, such as application fees and per inquiry fees, as opposed to annual or monthly base fees. As such, if our customers terminate their agreements with us prior to their scheduled term, we may only recover a portion of our contractual base fees, and not any usage or volume-based fees. Fluctuation in quarterly results may negatively impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed below:
announcements•the timing and amounts of our stock repurchases;
•unexpected expenses such as those related to litigation and other disputes; and
We recognize deferred tax assets when it is considered more likely than not that the tax benefit will be realized; otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit our ability to obtain the future tax benefits represented by our deferred tax assets. After analyzing all available evidence, we have determined that it is more likely that we would not be able to utilize all of our deferred tax assets prior to the expiration of such assets and therefore we have recorded a partial valuation allowance on our deferred tax assets as of December 31, 2023 and March 31, 2024. Our valuation allowance was $31.3 million and $29.4 million as of March 31, 2024 and December 31, 2023, respectively. The amount of the deferred tax asset considered realizable, and therefore the amount of the valuation allowance recorded against our deferred tax assets, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
departures•change our lines of key personnel;
price and volume fluctuationsAs a result of these covenants, we will be limited in the overall stock market from timemanner in which we conduct our business, and we may be unable to time;
fluctuationsengage in favorable business activities or finance future operations or capital needs.
sales of large blocks of our common stock, including by the Thoma Bravo Discover Fund, L.P., Thoma Bravo Discover Fund A, L.P., Thoma Bravo Discover Fund II, L.P., Thoma Bravo Discover Fund II-A, L.P., and Thoma Bravo Discover Executive Fund II, L.P. (collectively, the “Thoma Bravo Funds”);
indebtedness. Additionally, actual or anticipated changes or fluctuations indowngrades to our operating results;
whethercredit rating, including any announcement that our operating results meetcredit rating is under review, could impact our ability to borrow money and increase future lending costs.
changes in actual or future expectations of investors or securities analysts;
litigation involving us, our industry or both;
changes in monetary policy by the Federal Reserve;
regulatory developments;
actual or perceived security compromises or breaches;
general economic conditions and trends, including changes in interest rates and consumer borrowing habits; and
major catastrophic events in domestic and foreign markets.
These fluctuations could cause you to lose all or part of your investment in our common stock.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading priceterms of our common stockfinancing arrangements could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company.
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Our issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all other stockholders.
We may issue additional capital stock in the future that will result in dilution to all other stockholders. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in complementary companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.
Sales of substantial amounts of our common stock in the public markets, or the perception that such sales could occur, could reduce the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and may •make it more difficult for youus to sell your common stocksatisfy obligations under our outstanding indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under any of the agreements governing our indebtedness;
financial statements will not be prevented or detected on a timely basis.
Sales of a substantial number of such shares followingneed to invest additional time, effort, and financial resources to meet our ongoing public reporting obligations, and we may need to hire additional accounting and financial staff to help remedy the expiration of the lock-up agreements, or the perception that such sales may occur, could cause our stock pricedeficiencies described above and to fall or make it more difficult for you to sell your common stock at a timeprevent future deficiencies. The rapid growth and price that you deem appropriate.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansionincreased complexity of our business will continue to require a high level of scrutiny for our finance and accounting functions, which may result in additional future control deficiencies, significant deficiencies and/or material weaknesses. We may need to hire additional personnel with appropriate experience, seniority and skill levels to remediate the control deficiencies we do not anticipate paying any cash dividendshave identified or to help identify, manage and control other potential deficiencies in our internal controls in the foreseeable future. AsWe have worked with both internal and external subject matter experts to help identify and address the areas requiring process improvement and additional controls.
Our bylaws designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for state law claims for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a breach of fiduciary duty by one or more of our directors, officers or employees, (iii) any action asserting a claim against us arising pursuant to the Delaware General Corporation Law or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. Additionally, the forum selection clause in our bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our bylaws. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation and bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. Our bylaws further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. This provision would not apply to any action brought to enforce a duty or liability created by the Exchange Act and the rules and regulations thereunder. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. We recognize that the forum selection clause may impose additional litigation costs on stockholders who assert the provision is not enforceable and may impose more general additional litigation costs in pursuing any such claims. Additionally, the forum selection clause in our bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
Risks Related to Potential Conflicts of Interests and Related Parties
We expect to continue to be a controlled company within the meaning of the NYSE rules and, as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements.
We expect that Thoma Bravo, as the ultimate general partner of the Thoma Bravo Funds, will continue to own a majority of the voting power of all classes of our outstanding voting stock. As a result, we are, and expect we will continue to be, a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:
a majority of the board of directors consist of independent directors as defined under the rules of the NYSE;
the nominating and governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
annual performance evaluations of the nominating and governance committee and the compensation committee be performed.
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These requirements will not apply to us as long as we remain a controlled company. We have and expect to continue to use some or all of these exemptions. Additionally, our executive officers, directors, and the Thoma Bravo Funds beneficially own approximately 70.0% of our issued and outstanding shares of common stock as of September 1, 2021. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Thoma Bravo has a controllingsignificant influence over matters requiring stockholder approval, which may have the effect of delaying or preventing changes of control, or limiting the ability of other stockholders to approve transactions they deem to be in their best interest.
•the composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;
•approving or rejecting a merger, consolidation, or other business combination;
•raising future capital; and
•amending our charter and bylaws, which govern the rights attached to our common stock.
For
committee.
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loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results, or financial condition. In addition, the trading prices of technology stocks have historically experienced high levels of volatility. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company.
If securities analysts were to downgrade
The trading market forof our common stock and may dilute existing stockholders.
On July 27, 2021, after this quarter end, the Registration Statement on Form S-1 (File No. 333-255680) (the “Registration Statement”) relating to our IPO was declared effectiveSEC and we pricedIssuerPeriod Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs January 1 to January 31, 2024 — $ — 3,901,373 $ 135,456 February 1 to February 29, 2024 2,406,015 18.44 6,307,388 91,079 March 1 to March 31, 2024 — — 6,307,388 91,079 Total 2,406,015 ______________ IPO. Pursuantboard of directors authorized a stock repurchase program to acquire up to $75.0 million of the Registration Statement and the Registration Statement on Form S-1 (File No. 333-258207), we registered an aggregate of 13.2 million shares of ourCompany’s common stock, inclusiveand in January 2024, our board of directors authorized an additional stock repurchase program to acquire up to $125.0 million of the underwriters’ optionCompany’s common stock, each with no fixed expiration date and no requirement to purchase additional shares, at a price toany minimum number of shares. Shares may be repurchased under the public of $26.00 per share. We received net proceeds of approximately $241.5 million, after deducting approximately $18.5 million in underwriting discounts, commissions, and offering-related expenses. No payments were made to our directorsprograms through privately negotiated transactions, or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates.82
The IPO also includedopen market purchases, including through the sale of 3.2 million shares of our common stock by selling stockholders. We did not receive any proceeds from the sale of common stock by the selling stockholders. The selling stockholders granted the underwriters an option to purchase up to 2.0 million additional shares of common stock. The option was exercised for 1.2 million additional shares on August 26, 2021.
Our IPO closed in July 2021. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus dated July 27, 2021 and filed with the SEC on July 28, 2021 pursuanttrading plans intended to qualify under Rule 424(b) of10b5-1 under the Securities Act.
DefaultDefaults upon Senior Securities
During the quarter ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 6. Exhibits
408 of Regulation S-K), except as follows:
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| Exhibit No. | Exhibit Title | Form | Exhibit | Filing Date | ||||||||||||||||||||||
| 3.1 | 10-Q | 3.1 | September 7, 2021 | |||||||||||||||||||||||
| 3.2 | S-1 | 3.3 | April 30, 2021 | |||||||||||||||||||||||
| 4.1 | S-1 | 4.1 | April 30, 2021 | |||||||||||||||||||||||
| 4.2 | S-1 | 4.2 | April 30, 2021 | |||||||||||||||||||||||
| 4.3 | S-3 | 4.2 | December 28, 2023 | |||||||||||||||||||||||
| 10.1† | 8-K | 10.1 | March 18, 2024 | |||||||||||||||||||||||
| 10.2† | 8-K | 10.1 | March 18, 2024 | |||||||||||||||||||||||
| 31.1 | — | — | Filed herewith | |||||||||||||||||||||||
| 31.2 | — | — | Filed herewith | |||||||||||||||||||||||
| 32.1# | — | — | Filed herewith | |||||||||||||||||||||||
| 32.2# | — | — | Filed herewith | |||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | — | — | Filed herewith | ||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | — | — | Filed herewith | ||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | — | — | Filed herewith | ||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | — | — | Filed herewith | ||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | — | — | Filed herewith | ||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | — | — | Filed herewith | ||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | — | — | Filed herewith | ||||||||||||||||||||||
| MERIDIANLINK, INC. | |||||||||||||
| Dated: | By: | /s/ Nicolaas Vlok | |||||||||||
| Name: | Nicolaas Vlok | ||||||||||||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||||||||||||
| Dated: | By: | /s/ | |||||||||||
| Name: | |||||||||||||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||||||
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