Marqeta, Inc. (MQ) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. As discussed in the section titled “Note About Forward Looking Statements,” our actual results may differ materially from those discussed in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” under Part I, Item 1A.
A discussion regarding our liquidity, financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020 is presented below. A discussion regarding our liquidity, financial condition and results of operations for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus dated June 8, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on June 10, 2021, which is hereby incorporated by reference.
Overview
Marqeta’s modern card issuing platform, or our Platform, empowers our customers, or our Customers - which include businesses like Affirm, Block, DoorDash, Instacart, and Klarna - to create customized payment cards that provide innovative payment experiences for their customers, shoppers, and end users. Before the rise of modern card issuing, creating cards was slow, complex, and subject to mistakes. Marqeta helps solve these problems. Our Platform, powered by open APIs, enables businesses to develop modern, frictionless payment card experiences for consumer and commercial use cases that are either the core of, or in support of, their core business.
Our modern architecture allows for flexibility, a high degree of configurability, and accelerated product development, democratizing access to card issuing technology. Marqeta’s open APIs provide instant access to our highly scalable, cloud-based, and configurable payment infrastructure that enables our Customers to launch and manage their own card programs, issue cards, and authorize and settle payments transactions.
Initial Public Offering
In June 2021, we completed our initial public offering, or the IPO, in which we issued and sold an aggregate of 52,272,727 shares of newly authorized Class A common stock, which included 6,818,181 shares that were offered and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $27.00 per share. Our shares of Class A common stock began trading on the Nasdaq Global Select Market, or Nasdaq, on June 9, 2021. We received aggregate net proceeds of $1.3 billion from the IPO less underwriting discounts and commissions of $91.6 million, and offering costs of $7.5 million. Immediately prior to the completion of the IPO, we filed our Amended and Restated Certificate of Incorporation which authorized a total of 1,500,000,000 shares of Class A common stock, 600,000,000 shares of Class B common stock, and 100,000,000 shares of undesignated preferred stock. All shares of common stock then outstanding were reclassified as Class B common stock and all shares of redeemable convertible preferred stock then outstanding were converted into 351,844,340 shares of common stock on a one-for-one basis and then reclassified into Class B common stock. Warrants exercisable for 2,569,528 shares of common stock were converted to an equivalent number of shares of warrants exercisable for Class B common stock and 203,610 shares of warrants exercisable for convertible preferred stock were converted to an equivalent number of warrants exercisable for shares of Class B common stock.
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Key Factors Affecting Our Performance
We believe Marqeta’s growth, future success, and performance are dependent upon a number of factors, including those listed below. While these factors present significant opportunities for us, they also represent challenges we must successfully address to grow the adoption and use of the Marqeta Platform and improve our results of operations.
Our growth is aligned with our Customers’ growth. We believe our growth, future success, and performance is closely aligned with that of our Customers. We employ a usage-based model, based on processing volume, and derive the majority of our revenue from Interchange Fees generated by card transactions through our Platform. As our Customers’ processing volumes grow, they may earn an increased percentage of Revenue Share. Sharing an increased percentage of Interchange Fees with our Customers aligns our interests with our Customers’ growth and builds deeper Customer relationships.
Revenue model. We derive the majority of our revenue from Interchange Fees generated by processing payment transactions through our Platform. Interchange Fees are established by the Card Networks and the total Interchange Fees we collect are dependent on various factors including processing volume, merchant category code, transaction size, and other transaction attributes. For Customers under certain contracts, their percentage of Revenue Share increases as their respective processing volumes increase. Our gross margin percentage may decrease as a result of this dynamic. However, we remain strategically focused on growing incremental gross profit dollars and have the ability to partially offset margin declines with better pricing that we achieve with Issuing Banks and Card Networks. Changes in transaction mix, such as the proportion of signature debit versus PIN debit transactions and consumer versus commercial debit cards that make up our TPV, and changes in TPV as a result of the COVID-19 pandemic, could result in fluctuations to our net revenue. Further, certain Customers’ processing volumes are subject to seasonal fluctuations that could cause varied net revenue results across the quarters.
Ecosystem of key vendor partners. We partner with Card Networks who oversee their global payment networks, through which debit, credit, and prepaid card payments are authorized, processed, and settled. We incur fees charged by the Card Networks to route our Customers’ transactions within the payments ecosystem. These fees are reflected in our costs of revenue. Given our ability to direct processing volume to specific Card Networks, we are able to negotiate certain incentive rebates that effectively reduce the overall network fees. With the scale of the transactions we process on behalf of our Customers, we believe we can continue to negotiate favorable incentive rebates. However, if these fees increase, our gross margins will decrease.
We partner with Issuing Banks to facilitate the issuance of payment cards to our Customers and to sponsor our Customers’ card programs on Card Networks because we do not have regulatory authority to perform these activities ourselves. We pay volume-based and transaction-based fees to the Issuing Banks. The fees are typically structured based on volume tiers; as our processing volumes grow, these fees as a percentage of processing volume decline. These fees are reflected in our costs of revenue.
Continued investment in our Platform. We make significant investments in both new product development and platform enhancements. Further, we will continue to invest in operational support to maintain service levels expected by our Customers. We believe these investments in product development and operational efficiency will lead to long-term growth and profitability.
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Impact of COVID-19
The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S. economy and the markets in which we operate. While the rate of vaccinations continues to improve, the emergence of, and response to new variants has shown that the COVID-19 virus continues to be a public health concern worldwide.
In response to the COVID-19 pandemic, we implemented measures to focus on employee safety and Customer support, while at the same time seeking to mitigate any negative impact on our financial position and operations. We implemented remote working capabilities for our entire company and, to date, there has been minimal disruption to our operations.
We believe the COVID-19 pandemic intensified the consumer need for virtual and contactless forms of payments, the need for greater flexibility with purchases, and for easy online financing options. Many of the providers of these services are our Customers and they are experiencing accelerated adoption of technologies that enable such payment experiences. However, we experienced a slowdown of on-demand delivery processing volume in the second half of 2021, likely due to the reopening that occurred in the United States.
Further, in March 2021, the American Rescue Plan, among other things, provided individuals affected by the COVID-19 pandemic with cash stimulus payments. While we cannot reasonably estimate the actual effect on our TPV, and net revenue, we believe these stimulus payments contributed to the increase in our TPV and net revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020.
The Card Networks publish changes to interchange rates in April and October of each year. Visa and Mastercard postponed nearly all of their interchange rate updates for April and October 2020, and in March 2021 again announced further postponements in interchange rate changes through April 2022 as a result of COVID-19’s impact on the U.S. economy. The Interchange Fees we earn are affected by multiple factors including changes to the published interchange rates, the size of the individual transaction, and the mix of transactions between signature-based and PIN-based consumer card and commercial card product types, and merchant categories, and Card Network-negotiated merchant rates. Although the Card Networks have announced some expected interchange rate changes for April 2022, it is uncertain if more changes will be implemented after lifting the current postponements. Additionally, in the normal course of updating interchange rates, the Card Networks continually assess the influence of improved payments technology, industry trends, and the ongoing need to maintain balance of the payments ecosystem. All these factors combined can affect how future changes in interchange rates will impact our net revenue.
There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. Businesses continue to face difficulty in hiring and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak.
It is uncertain how the COVID-19 pandemic will evolve and what effect the lifting of pandemic-related restrictions, and the levels of infection, will have on our processing volumes, and on our future results of operations. While our business has not been adversely affected by the COVID-19 pandemic to date, we continue to monitor the situation and may take actions that alter our operations and business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our Customers, vendors, and employees.
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Key Operating Metric and Financial Measures
We review a number of operating and financial metrics, including the key operating metric set forth below, to help us evaluate our business and growth trends, establish budgets, evaluate the effectiveness of our investments, and assess operational efficiencies. In addition to the results determined in accordance with GAAP, the following table sets forth a key operating metric and non-GAAP financial measures that we consider useful in evaluating our operating performance.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| Total Processing Volume (TPV) (in millions) | $ | 111,133 | $ | 60,075 | $ | 21,674 | ||||
| Net revenue (in thousands) | $ | 517,175 | $ | 290,292 | $ | 143,267 | ||||
| Gross profit (in thousands) | $ | 231,705 | $ | 117,907 | $ | 60,453 | ||||
| Gross margin | 45 | % | 41 | % | 42 | % | ||||
| Net loss (in thousands) | $ | (163,929) | $ | (47,695) | $ | (58,200) | ||||
| Net loss margin | (32) | % | (16) | % | (41) | % | ||||
| Adjusted EBITDA (in thousands) | $ | (12,767) | $ | (15,378) | $ | (34,026) | ||||
| Adjusted EBITDA margin | (2) | % | (5) | % | (24) | % |
Total Processing Volume (TPV) - TPV represents the total dollar amount of payments processed through our Platform, net of returns and chargebacks. We believe that TPV is a key indicator of the market adoption of our Platform, growth of our brand, growth of our Customers' businesses and scale of our business.
Adjusted EBITDA - Adjusted EBITDA is a non-GAAP financial measure that is calculated as net income (loss) adjusted to exclude depreciation and amortization; share-based compensation expense; payroll tax related to share-based compensation; legal, financial, and tax due diligence costs related to potential acquisitions; income tax expense (benefit); and other expense (income) net, which consists of changes in the fair value of redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, interest income from our marketable securities, impairment of equity method investments or other financial instruments, and interest expense from a bank loan. We believe that adjusted EBITDA is an important measure of operating performance because it allows management and our board of directors to evaluate and compare our core operating results, including our operating efficiencies, from period to period. Additionally, we utilize adjusted EBITDA as a performance measure used to calculate payments under our annual employee bonus plans. See the section below titled “Use of Non-GAAP Financial Measures” for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA.
Adjusted EBITDA Margin - Adjusted EBITDA Margin is a non-GAAP financial measure that is calculated as Adjusted EBITDA divided by net revenue. This measure is used by management and our board of directors to evaluate our operating efficiency. See the section below titled “Use of Non-GAAP Financial Measures” for a discussion of the use of non-GAAP measures and a reconciliation of net loss to Adjusted EBITDA Margin.
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Components of Results of Operations
Net Revenue
We have two components of net revenue: platform services revenue, net and other services revenue.
Platform services revenue, net. Platform services revenue includes Interchange Fees, net of Revenue Share, and other service-level payments to Customers. Platform services revenue also includes processing and other fees. Interchange Fees are earned on card transactions we process for our Customers and are based on a percentage of the transaction amount plus a fixed amount per transaction. Interchange Fees are recognized when the associated transactions are settled.
Revenue Share payments are incentives to Customers to increase processing volumes on our Platform. Revenue Share is generally computed as a percentage of the Interchange Fees earned or processing volume and is paid to Customers monthly. Revenue Share payments are recorded as a reduction to revenue. As Customers' processing volumes increase, they may earn an increased percentage of Revenue Share.
Processing and other fees include fees earned when end users use payment cards at automated teller machines and minimum processing fees if Customers' processing volumes fall below certain thresholds.
Other services revenue. Other services revenue primarily consists of revenue earned for card fulfillment services. Card fulfillment fees are generally billed to Customers upon ordering card inventory and recognized as revenue when the cards are shipped to the Customers.
Costs of Revenue
Costs of revenue consist of Card Network costs, Issuing Bank costs, and card fulfillment costs. Card Network costs are equal to a specified percentage of processing volume or a fixed amount per transaction routed through the respective Card Network. Issuing Bank costs compensate our Issuing Banks for issuing cards to our Customers and sponsoring our card programs with the Card Networks and are equal to a specified percentage of processing volume or a fixed amount per transaction. Card fulfillment costs include physical cards, packaging, and other fulfillment costs.
We have separate marketing and incentive arrangements with Card Networks that provide us with monetary incentives for establishing Customer card programs with, and routing volume through, the respective Card Network. The amount of the incentives is determined based on a percentage of the processing volume or the number of transaction routed over the Card Network. We record these incentives as a reduction of Card Network fees included in costs of revenue. Generally, as processing volumes increase we earn a higher rate of monetary incentives from these arrangements, subject to attaining certain volume thresholds during a six-month or annual measurement period. For certain incentive arrangements with an annual measurement period, the one-year period may not align with our fiscal year. Additionally, unusual fluctuations in Card Network fees can occur in the quarter in which volume thresholds are attained as higher incentive rates are applied to volumes over the entire measurement periods, which can span six or twelve months.
Operating Expenses
Compensation and Benefits. Compensation and benefits consist primarily of salaries, employee benefits, incentive compensation, contractors’ cost and share-based compensation.
Professional Services. Professional services consist primarily of consulting, legal, and recruiting fees.
Technology. Technology consists primarily of third-party hosting fees, software licenses, and hardware purchases below our capitalization threshold, and support and maintenance costs.
Occupancy. Occupancy consists primarily of rent expense, repairs, maintenance, and other building related costs.
Depreciation and Amortization. Depreciation and amortization consist primarily of depreciation of our fixed assets.
Marketing and Advertising. Marketing and advertising consist primarily of costs of general marketing activities and promotional activities.
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Other Operating Expenses. Other operating expenses consist primarily of indirect state and local taxes, insurance costs, employee travel-related expenses, employee training, charitable donations, and other general office expenses.
We expect our operating expenses to increase in absolute dollars as our business grows. We also expect to continue to incur increased expenses to operate as a public company including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, including regarding internal control over financial reporting under Section 404 of the Sarbanes Oxley Act.
Other Income (Expense), net
Other income (expense), net consists primarily of changes in the fair value of the redeemable convertible preferred stock warrant liabilities (for periods prior to the IPO), realized foreign currency gains and losses, equity method investment share of loss, and interest income from our marketable securities.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes and U.K. income taxes. We maintain a full valuation allowance against our U.S. federal and state net deferred tax assets as we have concluded that it is not more likely than not that we will realize our net deferred tax assets.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | 2019 | ||||||||
| Net revenue | $ | 517,175 | $ | 290,292 | $ | 143,267 | |||||
| Costs of revenue | 285,470 | 172,385 | 82,814 | ||||||||
| Gross profit | 231,705 | 117,907 | 60,453 | ||||||||
| Operating expenses: | |||||||||||
| Compensation and benefits | 318,116 | 129,802 | 88,309 | ||||||||
| Professional services | 18,443 | 7,188 | 7,157 | ||||||||
| Technology | 33,637 | 13,239 | 7,796 | ||||||||
| Occupancy | 4,181 | 4,337 | 3,777 | ||||||||
| Depreciation and amortization | 3,534 | 3,498 | 3,080 | ||||||||
| Marketing and advertising | 2,284 | 1,670 | 2,080 | ||||||||
| Other operating expenses | 13,516 | 5,260 | 7,117 | ||||||||
| Total operating expenses | 393,711 | 164,994 | 119,316 | ||||||||
| Loss from operations | (162,006) | (47,087) | (58,863) | ||||||||
| Other income (expense), net | (2,563) | (521) | 698 | ||||||||
| Loss before income tax expense | (164,569) | (47,608) | (58,165) | ||||||||
| Income tax expense (benefit) | (640) | 87 | 35 | ||||||||
| Net loss | $ | (163,929) | $ | (47,695) | $ | (58,200) |
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Comparison of the Fiscal Years Ended December 31, 2021 and 2020
Net Revenue
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||
| Net revenue: | |||||||||||||
| Total platform services, net | $ | 502,296 | $ | 283,305 | $ | 218,991 | 77 | % | |||||
| Other services | 14,879 | 6,987 | 7,892 | 113 | % | ||||||||
| Total net revenue | $ | 517,175 | $ | 290,292 | $ | 226,883 | 78 | % | |||||
| Total Processing Volume (TPV) (in millions) | $ | 111,133 | $ | 60,075 | $ | 51,058 | 85 | % |
Total net revenue increased by $226.9 million, or 78%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, of which increase $152.6 million was attributable to Block. The increase in net revenue was primarily driven by an 85% increase in TPV, partially offset by a decreased average interchange rate earned on transactions processed and by a 2% increase in Revenue Share payments attributable to increased average Revenue Share rates, compared to the same period in 2020. Interchange rates may vary due to changes in rates published by the Card Networks as well as the mix of transaction types, average transaction size, merchant classifications, and consumer versus commercial card classifications. Revenue Share rates may vary due to customers’ earning an increased percentage of Revenue Share as they increase processing volumes on our Platform. Sharing an increased percentage of Interchange Fees with our Customers aligns our interests with our Customers’ growth and builds deeper customer relationships.
The increase in TPV was mainly driven by increases in processing volume from our digital banking and BNPL Customers. TPV for our top five Customers, measured by TPV in each respective period, grew by 70% for the year ended December 31, 2021 compared to the year ended December 31, 2020, while TPV from all other Customers, as a group, grew 230% for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Costs of Revenue and Gross Margin
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||
| Costs of revenue: | |||||||||||||
| Card Network fees, net | $ | 244,387 | $ | 145,617 | $ | 98,770 | 68 | % | |||||
| Issuing Bank fees | 27,282 | 19,785 | 7,497 | 38 | % | ||||||||
| Other | 13,801 | 6,983 | 6,818 | 98 | % | ||||||||
| Total costs of revenue | $ | 285,470 | $ | 172,385 | $ | 113,085 | 66 | % | |||||
| Gross profit | $ | 231,705 | $ | 117,907 | $ | 113,798 | 97 | % | |||||
| Gross margin | 45 | % | 41 | % |
Costs of revenue increased by $113.1 million, or 66%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to increased Card Network fees as the result of the 85% increase in TPV and 70% increase in the number of corresponding transactions.
Network fees increased $98.8 million, or 68% in the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was due to a 85% increase in TPV, partially offset by the effect of $14.8 million of additional Card Network incentives resulting from reaching specified volume tiers and other discounts during the year ended December 31, 2021. The higher volume tiers were not reached in the year ended December 31, 2020. Certain of our network incentive arrangements have 6-month or annual measurement periods that do not correspond to our fiscal year and we can earn additional rates of incentives when specified volume tiers are met. As such, additional incentives can be earned on volume processed in a prior fiscal year and multiple incentive tiers can be met in the same fiscal year.
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Issuing Bank fees increased $7.5 million, or 38%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, which was lower than the percentage of increase in TPV as a result of volume tiers being met at Sutton Bank, and reduced Issuing Bank fees for certain of our processing volume, as a result of amending our contract with Sutton Bank. Issuing Bank fees are typically determined based on volume tiers; as our processing volumes grow, these fees as a percentage of processing volume decline.
As a result of the increases in net revenue and costs of revenue discussed above, our gross profit increased by $113.8 million, or 97%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Our gross margin increased to 45% during the year ended December 31, 2021 - including the benefit of the monetary incentives mentioned above - from 41% during the year ended December 31, 2020.
Operating Expenses
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||
| Operating expenses: | |||||||||||||
| Salaries, bonus, benefits and payroll taxes | $ | 175,456 | $ | 101,591 | $ | 73,865 | 73 | % | |||||
| Share-based compensation | 142,660 | 28,211 | 114,449 | 406 | % | ||||||||
| Total compensation and benefits | 318,116 | 129,802 | 188,314 | 145 | % | ||||||||
| Percentage of net revenue | 62 | % | 45 | % | |||||||||
| Professional services | 18,443 | 7,188 | 11,255 | 157 | % | ||||||||
| Percentage of net revenue | 4 | % | 2 | % | |||||||||
| Technology | 33,637 | 13,239 | 20,398 | 154 | % | ||||||||
| Percentage of net revenue | 7 | % | 5 | % | |||||||||
| Occupancy | 4,181 | 4,337 | (156) | (4) | % | ||||||||
| Percentage of net revenue | 1 | % | 1 | % | |||||||||
| Depreciation and amortization | 3,534 | 3,498 | 36 | 1 | % | ||||||||
| Percentage of net revenue | 1 | % | 1 | % | |||||||||
| Marketing and advertising | 2,284 | 1,670 | $ | 614 | 37 | % | |||||||
| Percentage of net revenue | — | % | 1 | % | |||||||||
| Other operating expenses | 13,516 | 5,260 | 8,256 | 157 | % | ||||||||
| Percentage of net revenue | 3 | % | 2 | % | |||||||||
| Total operating expenses | $ | 393,711 | $ | 164,994 | $ | 228,717 |
Compensation and benefits expenses increased by $188.3 million, or 145%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Salaries, bonus, benefits, and payroll taxes increased by $73.9 million predominately due to a $46.2 million increase in salaries due to the 47% increase in the average full time employees from 427 in the year ended December 31, 2020 to 629 in the year ended December 31, 2021, a $18.7 million increase in bonus expense, and a $8.9 million increase in contractors’ costs, due to the 162% increase in the average number of contractors from 27 in the year ended December 31, 2020 to 70 in the year ended December 31, 2021. Additionally, bonus expense increased $18.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 due to the increase in full time employees, the broadening of our corporate bonus plan to cover more employees, and higher bonus payout for the year ended December 31, 2021. We expect rates of compensation to increase in the future in part due the labor market shortage that is currently prevalent in the U.S. economy and increases in rates of inflation observed in 2021.
Compensation and benefits expenses also increased in the year ended December 31, 2021 compared to the year ended December 31, 2020 due to a $114.4 million increase in share-based compensation expense, mainly because of the increase in our employees base and the CEO Long-Term Performance Award as detailed in the table below:
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| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||
| Share-based compensation | |||||||||||||
| Restricted stock units (1) | $ | 59,652 | $ | — | $ | 59,652 | n/m | ||||||
| Stock options | 31,231 | 10,895 | 20,336 | 187 | % | ||||||||
| CEO Long-Term Performance Award | 38,189 | — | 38,189 | n/m | |||||||||
| Employee Stock Purchase Plan | 1,946 | — | 1,946 | n/m | |||||||||
| Secondary sales of common stock | 11,642 | 17,316 | (5,674) | (33) | % | ||||||||
| Total share-based compensation | $ | 142,660 | $ | 28,211 | $ | 114,449 | 406 | % | |||||
| n/m = not meaningful | |||||||||||||
| (1) Includes $23.1 million of expense recognized for cumulative prior service as of the IPO completion date for RSUs with both a service and liquidity vesting condition. |
Professional services expenses increased by $11.3 million, or 157%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due to a $9.5 million increase in accounting, consulting, and legal fees, and a $1.8 million increase in recruiting fees.
Technology expenses increased by $20.4 million, or 154%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due to a $12.7 million increase in third-party hosting costs to support our continued growth and increase in TPV, increasing the resiliency of our Platform and continued migration to the cloud from third-party data centers, and a $7.6 million increase in software licensing costs as we continue implementing new systems and tools and increasing the number of licenses for existing systems.
Occupancy expense decreased by $0.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 as a result of a lease cost credit received due to the reduced use of our office space during shelter-in-place orders. As most of our employees and service providers continue to work remotely, we will continue to evaluate the need for additional office space.
Depreciation and amortization remained consistent for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Marketing and advertising expenses increased by $0.6 million, or 37%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily related to conferences, trade shows, and brand awareness investments to further grow our Customer base.
Other operating expenses increased by $8.3 million, or 157%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 as a result of an increase in insurance costs of $4.9 million, an increase in various state and local non-income taxes of $1.3 million, and an increase in general office operating expenses of $2.1 million.
Other Income (Expense), Net
| Year Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2021 | 2020 | $ Change | % Change | |||||||||||
| Other income (expense), net | $ | (2,563) | $ | (521) | $ | (2,042) | 392 | % | |||||||
| Percentage of net revenue | — | % | — | % |
Other income (expense), net decreased by $2.0 million, or 392%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a $1.0 million increase in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant liabilities, a $0.7 million decrease in interest income from our marketable securities portfolio, and $0.3 million increase in realized foreign currency exchange loss. The redeemable convertible preferred stock warrants were exercised during 2021 and therefore we do not expect to record additional changes in the fair value of these warrants.
Customer Concentration
We generated 69% and 70% of our net revenue from our largest Customer, Block, during the years ended December 31, 2021 and 2020, respectively.
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Quarterly Results of Operations
The following tables set forth selected unaudited consolidated quarterly statements of operations data for each of the eight fiscal quarters ended December 31, 2021. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. In the fourth quarter of 2021, we reclassified contractor costs from professional services to compensation and benefits and all statements of operations below have been adjusted to conform to this new presentation. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.
| Three Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec 31, 2021 | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | Jun 30, 2020 | Mar 31, 2020 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Net revenue | $ | 155,414 | $ | 131,512 | $ | 122,266 | $ | 107,983 | $ | 88,196 | $ | 84,307 | $ | 69,402 | $ | 48,389 | ||||||||||||||
| Costs of revenue | 79,615 | 72,438 | 75,291 | 58,126 | 51,750 | 49,024 | 41,785 | 29,826 | ||||||||||||||||||||||
| Gross profit | 75,799 | 59,074 | 46,975 | 49,857 | 36,446 | 35,283 | 27,617 | 18,563 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||
| Compensation and benefits | 88,995 | 84,462 | 97,755 | 46,904 | 38,964 | 38,816 | 26,449 | 25,574 | ||||||||||||||||||||||
| Professional services | 5,712 | 4,704 | 3,831 | 4,196 | 1,955 | 1,547 | 1,931 | 1,753 | ||||||||||||||||||||||
| Technology | 11,143 | 9,299 | 7,569 | 5,626 | 4,708 | 3,432 | 2,660 | 2,439 | ||||||||||||||||||||||
| Occupancy | 1,097 | 1,091 | 907 | 1,086 | 1,070 | 1,100 | 1,080 | 1,087 | ||||||||||||||||||||||
| Depreciation and amortization | 967 | 786 | 874 | 907 | 890 | 901 | 850 | 857 | ||||||||||||||||||||||
| Marketing and advertising | 804 | 490 | 495 | 495 | 618 | 371 | 343 | 338 | ||||||||||||||||||||||
| Other operating expenses | 4,811 | 3,880 | 3,530 | 1,295 | 1,346 | 1,287 | 1,101 | 1,526 | ||||||||||||||||||||||
| Total operating expenses | 113,529 | 104,712 | 114,961 | 60,509 | 49,551 | 47,454 | 34,414 | 33,574 | ||||||||||||||||||||||
| Loss from operations | (37,730) | (45,638) | (67,986) | (10,652) | (13,105) | (12,171) | (6,797) | (15,011) | ||||||||||||||||||||||
| Other income (expense), net | 142 | (57) | (481) | (2,167) | (638) | (83) | (295) | 495 | ||||||||||||||||||||||
| Loss before income tax expense | (37,588) | (45,695) | (68,467) | (12,819) | (13,743) | (12,254) | (7,092) | (14,516) | ||||||||||||||||||||||
| Income tax expense (benefit) | (781) | 35 | 87 | 19 | 17 | 43 | 15 | 12 | ||||||||||||||||||||||
| Net loss | $ | (36,807) | $ | (45,730) | $ | (68,554) | $ | (12,838) | $ | (13,760) | $ | (12,297) | $ | (7,107) | $ | (14,528) |
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Use of Non-GAAP Financial Measures
Our non-GAAP measures have limitations as analytical tools and you should not consider them in isolation. These non-GAAP measures should not be viewed as a substitute for, or superior to, measures prepared in accordance with GAAP. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses similar to the adjustments in the presentation of our non-GAAP measures set forth under “Key Operating Metric and Non-GAAP Financial Measures”. There are a number of limitations related to the use of these non-GAAP measures versus their most directly comparable GAAP measures, including the following:
•other companies, including companies in our industry, may calculate adjusted EBITDA differently than how we calculate this measure or not at all; this reduces its usefulness as a comparative measure;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures; and
•adjusted EBITDA does not reflect the effect of income taxes that may represent a reduction in cash available to us.
We encourage investors to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures.
A reconciliation of net loss to adjusted EBITDA for the periods presented is as follows:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (dollars in thousands) | ||||||||||
| Net revenue | $ | 517,175 | $ | 290,292 | $ | 143,267 | ||||
| Net loss | $ | (163,929) | $ | (47,695) | $ | (58,200) | ||||
| Net loss margin | (32) | % | (16) | % | (41) | % | ||||
| Net loss | $ | (163,929) | $ | (47,695) | $ | (58,200) | ||||
| Depreciation and amortization expense | 3,534 | 3,498 | 3,080 | |||||||
| Share-based compensation expense | 142,660 | 28,211 | 21,757 | |||||||
| Payroll tax expense related to share-based compensation | 1,956 | — | — | |||||||
| Due diligence costs related to potential acquisitions | 1,089 | — | — | |||||||
| Other expense (income), net | 2,563 | 521 | (698) | |||||||
| Income tax expense (benefit) | (640) | 87 | 35 | |||||||
| Adjusted EBITDA | $ | (12,767) | $ | (15,378) | $ | (34,026) | ||||
| Adjusted EBITDA Margin | (2) | % | (5) | % | (24) | % |
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Liquidity and Capital Resources
Since our inception through June 30, 2021, we financed our operations primarily through sales of equity securities and payments received from our Customers. In June 2021, we completed our IPO and we received aggregate net proceeds of $1.3 billion after deducting underwriting discounts and commissions of $91.6 million, and offering costs of $7.5 million.
At December 31, 2021, our principal sources of liquidity included cash, cash equivalents, and marketable securities totaling $1.7 billion, with such amounts held for working capital purposes. At December 31, 2021, our cash equivalents and marketable securities were comprised primarily of money market funds, U.S. government securities, commercial paper, asset-backed securities, and corporate debt securities. We have generated significant operating losses as reflected in our accumulated deficit. We expect to continue to incur operating losses for the foreseeable future.
We believe our existing cash and cash equivalents, and our marketable securities will be sufficient to meet our working capital and capital expenditure needs for more than the next 12 months. Our future capital requirements will depend on many factors, including our planned continuing investment in product development, platform infrastructure, and global expansion. We will use our cash for a variety of needs, including for ongoing investments in our business, potential strategic acquisitions, capital expenditures and investment in our infrastructure, including our non-cancellable purchase commitments with cloud-computing service providers and certain Issuing Banks.
At December 31, 2021, we had $7.8 million in restricted cash which included a deposit held at an Issuing Bank to provide the Issuing Bank collateral in the event that our Customers' funds are not deposited at the Issuing Bank in time to settle our Customers' transactions with the Card Networks. Restricted cash also includes cash held at a bank to secure our payments under a lease agreement for our office space.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Net cash provided by (used in) operating activities | $ | 56,972 | $ | 50,273 | $ | (15,428) | ||||
| Net cash used in investing activities | (329,121) | (57,562) | (100,318) | |||||||
| Net cash provided by financing activities | 1,299,297 | 167,378 | 139,049 | |||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 1,027,148 | $ | 160,089 | $ | 23,303 |
Operating Activities
Our largest source of cash provided by our operating activities is our net revenue. Our primary uses of cash in our operating activities are for Card Network and Issuing Bank fees, and employee-related compensation. The timing of settlement of certain operating liabilities, including Revenue Share payments and bonus payments, can affect the amounts reported as net cash provided by operating activities on the consolidated statement of cash flows.
Net cash provided by operating activities increased for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the net impact of increases in net revenue and related cash collections and cash paid for costs of revenues and operating expenses, the majority of it related to employees compensation.
Investing Activities
Net cash provided by investing activities consists primarily of maturities of our investments in marketable securities. Net cash used in investing activities consists primarily of purchases of marketable securities, purchases of property and equipment, and equity method investments.
Net cash used in investing activities increased for the year ended December 31, 2021 compared to the same period in December 31, 2020 primarily due to the increase in purchases of marketable securities, an equity method investment, and a purchase call option to acquire the remaining interest in the equity method investee, partially offset by the increase in maturities of marketable securities.
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Financing Activities
Net cash provided by financing activities consists primarily of proceeds from the sale of our equity securities. Net cash used in financing activities consists primarily of net payments related to tax withholdings for RSU settlements and payments of offering costs related to the IPO.
Net cash provided by financing activities increased for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the proceeds received from our IPO, net of underwriters’ commission and discounts, partially offset by the decrease in proceeds from the issuance of redeemable convertible preferred stock, and the payments made to satisfy the tax withholding and remittance obligations related to the settlement of our outstanding RSUs.
Obligations and Other Commitments
Our principal commitments consist of obligations under our operating leases for office space and other non-cancellable purchase commitments. For additional information about our operating leases, see Note 7 to our Consolidated Financial Statements “Commitments and Contingencies — Operating Leases.”
In connection with our corporate headquarters lease, we are required to provide the landlord a letter of credit in the amount of $1.5 million. We have secured this letter of credit by depositing $1.5 million with the issuing financial institution. This deposit is classified as restricted cash in the consolidated balance sheets.
As of December 31, 2021, we had non-cancellable purchase commitments with certain service providers and Issuing Banks of $263.8 million, payable over the next 5 years. These purchase obligations include $255.0 million related to minimum commitments as part of a cloud-computing service agreement. The remaining obligations are related to various service providers and Issuing Banks processing fees over the fixed, non-cancellable respective contract terms.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, discussed in Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies,” the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Under the JOBS Act, “an emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an “emerging growth company” to delay the adoption of new or revised accounting standards that have different transition dates for public and private companies until those standards would otherwise apply to private companies. We meet the definition of an “emerging growth company” and have elected to use this extended transition period. As a result of this election, our timeline to comply with these standards will in many cases be delayed as compared to other public companies that are not eligible to take advantage of this election or have not made this election. Therefore, our financial statements may not be comparable to those of companies that comply with the public company effective dates for these standards.
Revenue Recognition
We adopted Accounting Standards Codification, or ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, effective as of January 1, 2019. We recognize revenue from contracts with Customers using the five-step method described in Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies.” We generate revenue from providing Platform services, which includes Interchange Fees and processing fees, and other services, which includes card fulfillment revenue, to our Customers.
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Our contracts with Customers typically include two performance obligations: (i) providing access to our payment processing Platform and (ii) providing card fulfillment services. Certain Customer contracts require us to allocate the transaction price of the contract based on the relative stand-alone selling price of the performance obligations which are estimated using an analysis of our historical contract pricing and costs incurred to fulfill services.
We satisfy our performance obligation to provide platform services over time as Customers have continuous access to our Platform, and we stand ready to process Customer transactions throughout their term of access. We allocate variable consideration to the distinct month in which our Platform services are delivered. When pricing terms are not consistent throughout the entire term of the contract, we estimate variable consideration in Customers' contracts primarily using the expected value method. We develop estimates of variable consideration on the basis of both historical information and current trends and do not expect or anticipate significant reversal of revenue in the future periods.
As the Issuer Processor for our Customers, we are the principal in providing services under our contracts with Customers. To deliver the services required by our Customers, we contract with Card Networks for transaction routing, reporting, and settlement services and with Issuing Banks for card issuing, Card Network sponsorship, and regulatory compliance approval services. We control these integrated services before delivery to our Customers, we are primarily responsible for the delivery of the services to Customers, and we have discretion in vendor selection. As such, we record fees paid to the Issuing Banks and Card Networks as costs of revenue.
For certain revenue contracts, we estimate variable consideration and material rights to record each period. This requires that we estimate the expected processing volume over the term of the contract, including any additional extension of the term associated with a material right. These estimates are predominantly derived by analysis of historical trends and are updated on a quarterly basis. Changes made to these assumptions during the year ended December 31, 2021 did not have a material impact to the net revenue recorded during the year ended December 31, 2021.
Share-Based Compensation
We measure compensation expense for all share-based payment awards, including stock options and RSUs, granted to employees, directors, and other service providers, based on the estimated fair value of the awards on the date of grant. Prior to our IPO, the most significant input in determining the fair value of a stock option and RSUs was the estimated fair value of our common stock. Additionally, prior to our IPO, the determination of whether to recognize share-based compensation expense related to secondary sales of common stock by employees or former employees required a significant judgment.
Our methods to estimate the fair value of our common stock and to determine share-based compensation expense related to secondary sales of common stock prior to the completion of the IPO are discussed below.
Fair Value of Common Stock: Prior to our IPO, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting in which awards were approved. The factors considered included, but were not limited to: (i) contemporaneous independent third-party valuations of our common stock; (ii) observed secondary sales of our common stock; (iii) rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock; (iv) our actual operating and financial performance; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions; and (vii) precedent transactions involving our capital stock.
Subsequent to our IPO, we use the closing share price of our Class A common stock, which is traded on Nasdaq, on the grant date to measure share-based compensation.
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Secondary Sales of Common Stock. During the years ended December 31, 2021, 2020 and 2019, and in all cases, prior to our IPO, certain stockholders acquired outstanding common stock from current or former employees for a purchase price greater than our estimated fair value of our common stock at the time of the respective transaction. The determination of whether the excess of purchase price over the estimated fair value represented share-based compensation was highly judgmental. We determined whether secondary sales of common stock by then current or former employees resulted in share-based compensation expense by evaluating the extent of our involvement in secondary sale transactions, whether the purchaser of the shares was an existing or new stockholder, and the extent the sale price per share exceeded our estimated fair value per share. For such transactions, we recorded share-based compensation expense as measured as the difference between the aggregate price paid by the stockholder and our estimated aggregate fair value on the date of the transaction, and recorded $11.6 million, $17.3 million and $14.8 million during the years ended December 31, 2021, 2020 and 2019, respectively. Such amounts were recorded in compensation and benefits expense on the consolidated statements of operations.
After our IPO, we have not, and no longer expect to, record share-based compensation expense related to secondary sales of our common stock.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements “Summary of Significant Accounting Policies—Adoptions of New Accounting Standards” and “Summary of Significant Accounting Policies—New Accounting Standards Not Yet Adopted” for additional information.
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