Payoneer Global Inc. (PAYO) 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.
Throughout this section, unless otherwise noted, “we”, “us”, “our”, “Payoneer”, and the “Company” refer to Payoneer Inc. for the period prior to the Closing Date (as defined below) and to Payoneer Global Inc. for the period thereafter.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other sections of this Annual Report, including “Item 1. Business,” and the accompanying Consolidated Financial Statements and related Notes included elsewhere in this Report. Some of the information contained in this discussion and analysis, including information with respect to our future performance, liquidity and capital resources, and general and administrative functions, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
As the world’s go-to partner for digital commerce, Payoneer democratizes access to financial services and drives growth for millions of businesses of all sizes around the world. With a single connection to Payoneer’s global payment and commerce-enabling platform, our customers can transact globally as easily as they do locally, empowering participation in the digital economy and driving growth for enterprises, marketplaces and SMBs worldwide.
Payoneer was founded in 2005 with the idea that technology and the internet were transforming commerce and making it possible for anyone, anywhere to build and grow a digital business. From the beginning, we recognized the importance of offering services to both sides of two-sided commerce networks: small businesses who would need help navigating the increasingly complex digital economy, and marketplaces who would need help supporting their increasingly distributed seller-base. Over the past 16 years, we have built a one-of-a-kind platform designed to serve the needs of digital businesses globally.
At the foundation of the Payoneer platform is a robust secured, regulated global payment infrastructure that simplifies the process for any business to pay and get paid globally as easily as it does locally. On top of this foundation, we continue to develop a comprehensive suite of products and services, providing sophisticated tools to help our customers grow.
Owing to the strength of our payment infrastructure and the breadth of our product offerings, Payoneer operates as both a provider of services to enterprises and marketplaces as well as a B2B payment provider, empowering all of our customers to transact internationally with ease. As a result, we have cultivated a meaningful brand in the global digital commerce ecosystem supporting millions of marketplaces, enterprises, and SMBs across more than 190 countries and territories and 7,000+ unique trade corridors.
We primarily generate revenues when Payoneer customers use the funds in their Payoneer account to make a payment, make a purchase or to withdraw the funds locally. Our revenue growth is based on (i) increasing the monetization rates of Payoneer services; and (ii) growing the volume of transactions processed through the Payoneer platform. Our efforts to increase the overall monetization rate of Payoneer services includes increasing our focus on acquiring customers in regions with higher rates of monetization, accelerating the growth of payment services with higher rates of monetization like B2B AP/AR, and also introducing new services for customers that generate improved monetization, like our Digital Purchasing Card. Volume is one of the primary drivers for our revenue growth. See “Key Metrics and Non-GAAP Financial Measures” for additional information.
Our customers have trusted the Payoneer platform to process $56.7 billion, $44.4 billion and $28.9 billion in volume during the years ended December 31, 2021, 2020 and 2019, respectively.
Looking forward, we intend to continue to invest actively to grow our global platform, expand product development, extend our regulatory footprint, further automate our operations, increase new customer growth and make more acquisitions to accelerate our ability to deliver more value to customers around the world.
Reorganization
On June 25, 2021 (the “Closing Date”), we completed our previously announced reorganization (the “Reorganization”) with FTAC Olympus Acquisition Corp. (“FTOC”). In connection with the closing of the Reorganization, Payoneer Global Inc. became a publicly traded company and Payoneer Inc., now a subsidiary of Payoneer Global Inc., continued its existing business operations.
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The Reorganization was accounted for on a reverse recapitalization basis for which Payoneer Inc. has been determined to be the accounting acquirer (the “Reverse Recapitalization”). Since the Reorganization was accounted for as a Reverse Recapitalization, no goodwill or other intangible assets were recorded, in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, FTOC was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Payoneer Global Inc. issuing stock for the net assets of FTOC, accompanied by a recapitalization. The net assets of FTOC were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization will be those of Payoneer Inc. See “Introductory Note” and Note 3 to our consolidated financial statement for additional information.
Key Development and Trends
Seasonality
We have experienced in the past, and expect to continue to experience, seasonal fluctuations in our revenues as a result of consumer spending patterns and high-travel seasons. Historically, our revenues have been strongest during the fourth quarter of every year, primarily as a result of higher eCommerce sales during the holiday season. Additionally, in a typical year, we see revenue fluctuations related to peak travel periods, specifically in the late second quarter into the third quarter of every year, within the northern hemisphere markets and the late fourth quarter into the first quarter of every year, within the southern hemisphere markets. Adverse events that occur during these months, such as COVID-19 which has had an impact to our results in 2020 and 2021, could have a disproportionate effect on our revenue results for the entire fiscal year.
Impact of the COVID-19 Pandemic
Shelter-in-place orders, social distancing measures and travel restrictions following the extraordinary spread of COVID-19 fundamentally shifted commerce and the way buyers and sellers transact, accelerating digitalization and eCommerce trends.
Starting in January 2020, COVID-19 impacted Payoneer teams, customers, and supply chains. Starting in March 2020, due to broader travel restrictions, global travel and tourism slowed, negatively impacting our travel customer base. Furthermore, the Federal Reserve cut interest rates to zero in mid-March 2020, negatively impacting our interest income revenues, associated with underlying customer accounts. Despite the global travel slowdown and interest rate cuts, and wavering consumer confidence, the COVID-19 pandemic driven shift in buying patterns from brick and mortar to eCommerce, led to an acceleration of digital commerce that created tailwinds which further strengthened our role in the global economy.
We will continue to evaluate the nature and extent of the potential impact of COVID-19 on our business, consolidated results of operations and liquidity.
Key Factors Affecting Our Performance
Continued Growth of Digital Commerce. Growth of digital commerce has accelerated due to the COVID-19 pandemic, shifting buying preferences to online from offline. As more economic activity moves to the digital world, we expect to see more businesses adapting and moving online, broadening the number of potential customers we can offer services. For the years ended December 31, 2021, 2020 and 2019, total volume increased by 28%, 53% and 35% on a year-over-year basis, respectively.
Acquiring New Customers. Maintaining our growth requires new customers to continue adopting our platform and products. We will continue to invest in our go-to-market strategy as we further penetrate our addressable markets. Our financial performance will depend in large part on the overall global demand for our platform.
Continue to Grow Within Existing Customers. Our revenue grows as we meet more needs of our customers around the world. Our customers tend to utilize more of our services as their needs grow and as they understand the benefits Payoneer can provide to their business. Sustaining our growth will depend on our ability to continue meeting our customers’ needs and persuading them to use more of our platform.
Network-Effects Drive Low-Cost Customer Acquisition. We support a two-sided network, providing services to buyers and suppliers, marketplaces and marketplace sellers and connecting them all on a single platform. We leverage this unique position in the middle of two-sided networks to cost-effectively acquire customers, ranging from some of the most valuable companies in the world to small sole proprietors in emerging markets. These network effects have allowed us to increase our volume from new customers and to foster relationships with some of the largest marketplaces around the world. As our customers sell more goods and services online through digital channels, our volume increases - we grow our volume as our customers grow their volume. Our customer cohorts have
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grown consistently over time, resulting in more than 100% net volume retention by cohort. We continue to innovate, to connect digital businesses to more digital businesses and deliver new products and services for our customers, such as Working Capital and Merchant Services, which we expect will increase the growth and lifetime value of our customer base.
As part of our network relationships, we enter from time to time into agreements with marketplaces around the world. Many of these agreements contain product offerings to be provided to Payoneer’s customers receiving payments from the marketplaces or service offering to the marketplace directly or a combination of both. Some agreements have exclusivity arrangements with defined term length. Some agreements have fee structures that are defined only partly through the contract’s term while the remaining fee structure is subject to market competitive rates and good faith negotiation with the marketplace. In addition, in a few instances, we compensate the marketplace with structured incentives to acquire additional customers. These incentive structures can apply throughout the contract term or only a portion of the term. Due to the variety of these arrangements, variability exists which can impact revenue, and earnings. In cases where the marketplaces pay us fees, we may recognize all or part of such incentives as a reduction of revenues.
Expand Our Partnership Network. We collaborate with many partners around the world, which enables us to integrate Payoneer services into software platforms, banks and other offerings actively used by small businesses. These integrated partnerships enable us to offer better service to our customers and to cost-effectively acquire new customers. These partnerships cover a broad range of third parties, including SaaS platforms, sourcing platforms, banks, tax providers and accounting software providers. Our ability to innovate and grow is dependent, in part, on our ability to maintain and grow our partnership base.
Investment in new services to drive growth
We will continue to make significant investments in both existing and new products and services, including B2B AP/AR, Working Capital and Merchant Services. By delivering more services to our customers, we can improve their ability to manage and grow their businesses. These investments in product development are necessary to achieve our long-term growth and profitability.
Acquisitions
In 2020, we acquired optile GmbH (now, Payoneer Germany GmbH), or optile, a leading, next-generation payment orchestration technology platform, that empowers merchants to be in control of their online consumer payments and optimize for quality, cost and consumer choice, while unifying reconciliation and reporting. optile’s technology enabled us to expand our product suite to improve the way merchants of all sizes manage their online payments from consumers. We believe there are additional opportunities to deliver value to more customers through targeted acquisitions.
Economic conditions and resulting business trends
Our results of operations are impacted by the relative strength of the overall global economy and its effect on business investment, unemployment, consumer spending behavior, and business and consumer demand. Our customers’ underlying business activities are also linked to the macroeconomic and geopolitical environment. For example, the armed conflict between Ukraine and Russia that developed during early 2022 and the related economic sanctions imposed by several countries on Russia and certain territories in Ukraine and on certain Russian and Belarusian banks, may impact our services to customers in such countries. Continuation or escalation of the conflict may have a significant effect on our results of operations.
Components of Results of Operations
The period to period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document.
Revenue
The majority of our revenues are generated from transaction fees, which vary based on the type of service the customer utilizes. Transaction fee revenue principally consists of revenue generated when customers use their funds, either to withdraw their funds from our platform or to use the funds to make payments. Some services, such as virtual commercial cards, typically generate higher transaction fees from a dollar of volume than if that same dollar was withdrawn to a customer’s bank account.
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To a lesser extent, we generate revenue through collection fees, which mainly refer to fees charged when payments are made into a customer’s account, and also bank transfer fees, which are fees charged when one of Payoneer’s Enterprise customers uses Payoneer to send a payment directly into the bank account of a small business.
The majority of our revenue is recognized and collected upon the completion of the underlying transaction. In some cases, revenues are collected through intermediaries. For more information on our revenue recognition policies, see note 2t. of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Transaction costs
Transaction costs mainly consist of fees paid to the banks, processors and networks that process payments to and from the Payoneer platform, costs to acquire currencies, card supply costs and losses related to certain of our services. These costs are net of any rebate programs with banks and processors, such as volume rebates. Transaction costs are primarily driven by volume and number of transactions and generally increase as volume and number of transactions increase.
We are exposed to potential transaction losses such as credit cards collections losses, Electronic Funds Transfer returns, prepaid card negative balances and chargebacks, and capital advance losses. These costs are included in transaction costs. We also record an allowance for estimated losses arising from doubtful capital advances.
Other operating expenses
Other operating expenses mainly include compensation for our employees and subcontractors who support customer service calls, customer approvals, banking infrastructure implementations, transaction monitoring and liquidity management as well as indirect costs incurred for fraud detection, compliance operations, regulatory services and maintenance costs related to our customer call center infrastructure.
Research and development expenses
Research and development expenses consist primarily of employee compensation and related costs, professional services and consulting expenses, and non-capitalized costs associated with the development of new technologies. Such non-capitalized costs are charged to the statement of operations as incurred.
Sales and marketing expenses
Sales and marketing expenses consist of costs for business development, customer success, product launch costs, marketing and advertising costs, retention costs and certain customer acquisition costs. This also includes employee compensation and related costs to support the sales and marketing process.
General and administrative expenses
General and administrative expenses consist primarily of compensation, benefits and overhead expenses associated with corporate management. This also includes, among other things, directors’ and officers’ liability insurance, director fees, internal and external accounting and legal and administrative resources, including audit and legal fees.
Depreciation and amortization
Depreciation and amortization consist primarily of amortization of intangible assets, internally developed software, and depreciation of our investments in property, equipment, and software. We depreciate and amortize our assets on a straight-line basis in accordance with our accounting policies. The useful lives are 3-5 years for computers, software and peripheral equipment, 6-16 years for furniture and office equipment, and the lesser of the asset useful life or remaining lease term for leasehold improvements. Capitalized development costs and current technology acquired as part of the optile acquisition are amortized over the period of estimated benefit, using the straight-line method and estimated useful lives of 3-6 years.
Financial income, net
Financial income, net includes gains (losses) from foreign exchange fluctuations. We conduct transactions worldwide and settle accounts with our financial intermediaries in various currencies. Interest income (expense) from cash and cash equivalents deposited in its accounts is also included under financial income, net, which vary based on cash and cash equivalents balances, and based on
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market rates. In addition, as a result of the Reorganization, we acquired warrants that are exercisable for shares of the Company’s common stock. These warrants are classified as a liability and remeasured at period end.
Income tax
We are in a loss position in the US and have a full valuation allowance. We are profitable in foreign jurisdictions for which there are income taxes recorded.
Share in losses of associated company
Investment in entities where we have the ability to exercise significant influence, but not control, over the investee and investment in joint ventures, is accounted for using the equity method of accounting. As of December 31, 2021, we had a joint venture with assets and operations located in China. Our share in the results of operations is included as share in losses of associated company on the consolidated statements of loss.
Results of Operations
Year ended December 31, 2021 Compared to the year ended December 31, 2020
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | |||||||||||
| (in thousands) | | 2021 | 2020 | $ Change | % Change | | ||||||
| Revenues | | $ | 473,403 | | $ | 345,592 | | $ | 127,811 | 37 | % | |
| Transaction costs (1) | | 101,476 | | 97,040 | | 4,436 | 5 | % | ||||
| Other operating expenses | | 124,649 | | 81,976 | | 42,673 | 52 | % | ||||
| Research and development expenses | | 80,760 | | 52,301 | | 28,459 | 54 | % | ||||
| Sales and marketing expenses | | 114,331 | | 76,846 | | 37,485 | 49 | % | ||||
| General and administrative expenses | | 64,399 | | 37,629 | | 26,770 | 71 | % | ||||
| Depreciation and amortization | | 17,997 | | 17,095 | | 902 | 5 | % | ||||
| Total operating expenses | | 503,612 | | 362,887 | | 140,725 | 39 | % | ||||
| Operating loss | | (30,209) | | (17,295) | | (12,914) | 75 | % | ||||
| Financial income (expense): | | | | | | | | | ||||
| Gain from change in fair value of Warrants | | | 11,824 | | | — | | | 11,824 | | ** | |
| Other financial income (expense), net | | | (6,854) | | | 2,012 | | | (8,866) | | ** | |
| Financial income, net | | | 4,970 | | | 2,012 | | | 2,958 | | 147 | % |
| Loss before taxes on income and share in losses of associated company | | (25,239) | | (15,283) | | (9,956) | 65 | % | ||||
| Taxes on income | | 8,711 | | 8,320 | | 391 | 5 | % | ||||
| Share in losses of associated company | | 37 | | 143 | | (106) | (74) | % | ||||
| Net loss | | $ | (33,987) | | $ | (23,746) | | $ | (10,241) | 43 | % |
** Not meaningful
| Column 1 | Column 2 |
|---|---|
| (1) | In 2021, interest expense and fees associated with related party transaction was $220. |
Revenues
Revenues were $473.4 million for the year ended December 31, 2021, an increase of $127.8 million, or 37%, compared to $345.6 million for the year ended December 31, 2020. Our volume grew by $12.3 billion, or 28%, compared to the year ended December 31, 2020 as we experienced continued growth in digital commerce stemming from the shift in consumer buying behavior towards eCommerce as well as increases in our value-added products and services that are not influenced directly by volume increases.
Transaction costs
Transaction costs were $101.5 million for the year ended December 31, 2021, an increase of $4.5 million, or 5%, compared to $97.0 million for tar ended December 31, 2020. This increase was driven by an increase in Capital Advance related costs of $4.4
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million, primarily driven by specific advances with higher collection risk, offset by a decrease in network fees due to an increase in payment network incentives of $8.2 million earned by achieving certain volume-related milestones. Excluding these drivers, transaction costs increased by $8.3 million or 8% while volume increased by 28% during the year ended December 31, 2021 as compared to the same period in prior year. Transaction costs receded while volume grew due to improved commercial terms, internal platform optimizations, lower chargebacks and losses, and negotiated cost structure benefits.
Other operating expenses
Other operating expenses were $124.6 million for the year ended December 31, 2021, an increase of $42.6 million, or 52%, compared to $82.0 million for the year ended December 31, 2020. This increase was driven primarily by an increase of $18.7 million in third-party contractor expenses and information technology expenses to support our growing volume and business requirements. In addition, we experienced an increase of $15.5 million in employee compensation, benefits and other employee-related expenses partly as a result of an increase in headcount and reached a regulatory settlement of $1.1 million. In 2020, we recorded a recovery of a reserve amounting to $3.6 million relating to one of our issuing banks, who entered into a liquidation process, and for which we had provisioned for doubtful debts during 2018. In 2021, we recorded a reserve amounting to $2.3 million relating to a separate bank, who entered into a liquidation process.
Research and development expenses
Research and development expenses were $80.8 million for the year ended December 31, 2021, an increase of $28.5 million, or 54%, compared to $52.3 million for the year ended December 31, 2020. This increase was driven primarily by an increase of $23.2 million in employee compensation, benefits and other employee-related expenses as a result of an increase in headcount. In addition, we experienced an increase of $4.8 million in third-party contractor expenses and information technology expenses to support our growing volume and business requirements
Sales and marketing expenses
Sales and marketing expenses were $114.3 million for the year ended December 31, 2021, an increase of $37.5 million, or 49%, compared to $76.8 million for the year ended December 31, 2020. This increase was driven mainly by an increase of $23.1 million in employee compensation, benefits and other employee-related expenses, partly as a result of an increase in headcount, and an increase of $3.1 million in third-party commissions which corresponds to our revenue growth. In addition, we experienced an increase of $2.5 million in consultancy expenses and $3.0 million increase in marketing expenses to support our growing volume and business.
General and administrative expenses
General and administrative expenses were $64.4 million for the year ended December 31, 2021, an increase of $26.8 million, or 71%, compared to $37.6 million for the year ended December 31, 2020. This increase was driven mainly by an increase of $15.7 million in compensation, benefits and other employee-related expenses partly as a result of an increase in headcount, of which share-based compensation related expenses account for $7.6 million. In addition, as part of the Reorganization, we incurred transaction costs of $5.1 million and incremental directors’ and officers’ insurance of $3.0 million. In 2020, we recorded a recovery of a reserve amounting to $1.5 million relating to one of our issuing banks, who entered into a liquidation process, and for which we had provisioned for doubtful debts during 2018.
Depreciation and amortization expenses
Depreciation and amortization expenses were $18.0 million for the year ended December 31, 2021, an increase of $0.9 million, or 5%, compared to $17.1 million for the year ended December 31, 2020. The increase was driven primarily by an increase of $0.7 million in amortization of internal use software costs.
Financial income, net
Financial income, net was $5.0 million for the year ended December 31, 2021, an increase of $3.0 million, or 147%, compared to $2.0 million for the year ended December 31, 2020. This increase was primarily driven by the change in fair value of warrants of $11.8 million acquired during 2021 associated with the Reorganization, partially offset by a decrease of $9.5 million in financial income due to revaluation of foreign currency balances.
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Income tax
Income tax expense was $8.7 million for the year ended December 31, 2021, an increase of $0.4 million, or 5%, compared to an expense of $8.3 million for the year ended December 31, 2020. The increase was primarily driven by the result of income taxes associated with our foreign subsidiaries.
Net loss
For a discussion regarding our net loss position please refer to the Liquidity and Capital Resources section below.
Year ended December 31, 2020 Compared to the year ended December 31, 2019
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||||||||
| (in thousands) | | 2020 | 2019 | $ Change | % Change | |||||||
| Revenues | | $ | 345,592 | | $ | 317,750 | | $ | 27,842 | 9 | % | |
| Transaction costs | | 97,040 | | 94,665 | | 2,375 | 3 | % | ||||
| Other operating expenses | | 81,976 | | 82,295 | | (319) | — | % | ||||
| Research and development expenses | | 52,301 | | 34,772 | | 17,529 | 50 | % | ||||
| Sales and marketing expenses | | 76,846 | | 61,020 | | 15,826 | 26 | % | ||||
| General and administrative expenses | | 37,629 | | 31,016 | | 6,613 | 21 | % | ||||
| Depreciation and amortization | | 17,095 | | 10,341 | | 6,754 | 65 | % | ||||
| Total operating expenses | | 362,887 | | 314,109 | | 48,778 | 16 | % | ||||
| Operating Income (loss) | | (17,295) | | 3,641 | | (20,936) | (575) | % | ||||
| Financial income, net: | | 2,012 | | 524 | | 1,488 | 284 | % | ||||
| Income (loss) before taxes on income | | (15,283) | | 4,165 | | (19,448) | (467) | % | ||||
| Income tax | | 8,320 | | 4,709 | | 3,611 | 77 | % | ||||
| Share in losses of associated company | | 143 | | 81 | | 62 | 77 | % | ||||
| Net loss | | $ | (23,746) | | $ | (625) | | $ | (23,121) | 3,699 | % |
Revenues
Revenues were $345.6 million for the year ended December 31, 2020, an increase of $27.8 million, or 9%, compared to $317.8 million for the year ended December 31, 2019. Our volume grew by $15.4 billion, or 53%, compared to the year ended December 31, 2019 as we experienced continued growth in digital commerce stemming from the shift in consumer buying behavior towards eCommerce due to COVID-19. The COVID-19 pandemic has adversely affected the volume associated with our travel customer base and also negatively impacted our interest income on underlying customer funds, which decreased by 65% over this period due to lower interest rates gained on our deposited funds. When excluding the revenues attributable to our two biggest travel marketplace customers and interest income from each period, our revenue increased by 31% during the year ended December 31, 2020.
Transaction costs
Transaction costs were $97.0 million in the year ended December 31, 2020, representing an increase of $2.4 million, or 3%, compared to $94.7 million in the year ended December 31, 2019. This increase is correlated with the increase in volume as described above, as well as an increase of $3.0 million in lost funds and chargebacks due to the higher volume and an increase in fraudulent transactions during the second quarter of 2020. This trend was partially offset by a decrease of $5.3 million in fees paid to banks and other financial institutions due to improved commercial terms negotiated during the year ended December 31, 2020. Transaction costs as a percentage of Revenue were 28% in the year ended December 31, 2020, representing a decrease of 2% compared to 30% in the year ended December 31, 2019.
Other operating expenses
Other operating expenses were $82.0 million for the year ended December 31, 2020, representing a decrease of $0.3 million compared to $82.3 million for the year ended December 31, 2019. During the year ended December 31, 2020, we recorded a recovery of a reserve amounting to $3.6 million relating to one of our issuing banks, which entered into a liquidation process, and for which we had provisioned for doubtful debts during 2018. In addition, operating expenses were impacted by a $2.0 million decrease relating to
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operational regulatory services. The described decrease was offset by an increase of $3.4 million in employee compensation, benefits and other employee-related expenses and by a $2.3 million expense for new software.
Research and development expenses
Research and development expenses were $52.3 million for the year ended December 31, 2020, representing an increase of $17.5 million, or 50%, compared to $34.8 million for the year ended December 31, 2019. This increase was driven primarily by an increase of approximately $14.1 million in research and development employee compensation, as a result of an increase in the headcount compared to the year ended December 31, 2019, with a corresponding increase of $3.6 million in overhead expenses allocated to the research and development department. $2.5 million of the increase in employee compensation was related to additional headcount as a result of the optile acquisition.
Sales and marketing expenses
Sales and marketing expenses were $76.8 million for the year ended December 31, 2020, an increase of $15.8 million, or 26%, compared to $61.0 million for the year ended December 31, 2019. This increase was driven largely by an increase of $9.4 million in employee compensation, benefits and other employee-related expenses and an increase of $3.3 million in commissions expenses mainly relating to amortization of capitalized expenses, which was partially offset by a decrease of $2.1 million in travel expenses which were lower due to the COVID-19 pandemic. $2.5 million of the increase in employee compensation was related to additional headcount as a result of the optile acquisition.
General and administrative expenses
General and administrative expenses were $37.6 million for the year ended December 31, 2020, an increase of $6.6 million, or 21%, compared to $31.0 million for the year ended December 31, 2019. This increase was driven mainly by an increase of $8.2 million in compensation, benefits and other employee-related expenses, and an increase of $3.3 million in professional services received (including legal and financial services), part of which are related to the acquisition of optile. This was offset by a recovery of a reserve amounting to an additional $1.5 million relating to one of our issuing banks, which entered into a liquidation process, and for which we had provisioned for doubtful debts during 2018. $4 million of the increase in employee compensation is related to additional headcount as a result of the optile acquisition.
Depreciation and amortization expenses
Depreciation and amortization expenses were $17.1 million for the year ended December 31, 2020 compared to $10.3 million for the year ended December 31, 2019, representing an increase of $6.8 million, or 65%. This increase was driven primarily by an increase in amortization of capitalized expenses of software that we developed, of which $3.3 million related to the optile acquisition.
Financial income and expenses, net
Financial income, net was $2.0 million for the year ended December 31, 2020, an increase of $1.5 million, or 284%, compared to $0.5 million for the year ended December 31, 2019. This increase was driven largely by revaluation of foreign currency balances during the year ended on December 31, 2020.
Income tax
Income tax expense was $8.3 million for the year ended December 31, 2020, an increase of $3.6 million, or 77%, compared to an expense of $4.7 million for the year ended December 31, 2019. The increase was primarily the result of income taxes associated with our foreign subsidiaries.
Net loss
For a discussion regarding our net loss position please refer to the Liquidity and Capital Resources section below.
Liquidity and Capital Resources
The following discussion of our liquidity and capital resources is based on the financial information derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Liquidity
As a result of the Reorganization, we raised gross proceeds of $874.5 million including the contribution of $574.5 million of cash held in FTOC’s trust account from its initial public offering, which is net of redemptions of FTOC’s Common Stock held by FTOC’s public stockholders prior to the Reorganization, and $300.0 million of private investment in public equity (“PIPE”) at $10.00 per share of Payoneer Global Inc.’s Common Stock.
As of the end of 2020, we had a Loan and Security Agreement, whereby we can request advances under a revolving line of credit. During 2021, we paid off the term loan and terminated the Loan and Security Agreement on September 14, 2021.
On October 28, 2021, we entered into a multi-party Receivables Loan and Security Agreement (the “Warehouse Facility”) for the purpose of external financing of capital advance activity. The lenders are related parties through our board of director’s chairman’s ownership interest. The Warehouse Facility was entered into at an arm’s length capacity.
The Warehouse Facility bears interest of the greater of 0.25% or LIBOR, plus 9% annual and has a revolving maturity of 36 months from the commencement date with a payback period of an additional 6 months after the revolving maturity date. The initial borrowing commitment is $25 million subject to increases at our request and the lender’s discretion up to $100 million. Additional commitments will carry interest rates ranging from 7% to 7.75%. The Warehouse Facility is secured by eligible capital advance receivables at an initial rate of 80% of the total value of the underlying capital advance receivable outstanding. We are subject to financial covenants including minimum tangible equity, solvency and unrestricted cash requirements that are assessed based on our consolidated financial statements.
As of December 31, 2021, we had $465.9 million of cash and cash equivalents, which included $13.7 million of borrowings under our Warehouse Facility.
In addition, on July 23, 2021, Payoneer Inc. completed a full redemption of the Series 1 Senior Preferred Stock for an aggregate redemption price of approximately $39.8 million.
We believe our existing cash and cash equivalents and cash flows from operating activities will be sufficient to meet our operating working capital and capital expenditure requirements for at least the next twelve months. Our future financing requirements will depend on many factors including our growth rate, the timing and extent of spending to support development of our platform and the expansion of sales and marketing activities. Although we currently are not a party to any agreement and do not have any understanding with any third-parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing.
Cash Flows
The following tables present a summary of cash flows from operating, investing and financing activities for the following comparative periods.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in thousands) | | 2021 | 2020 | 2019 | |||||
| Net cash provided by (used in) operating activities | | $ | 20,015 | | $ | 9,526 | | $ | (14,312) |
| Net cash provided by (used in) investing activities | | 10,156 | | (66,854) | | (20,581) | |||
| Net cash provided by financing activities | | 1,396,195 | | 1,673,464 | | 353,743 | |||
| Effect of exchange rate changes on cash and cash equivalents | | (1,222) | | 636 | | 521 | |||
| Change in cash | | $ | 1,425,144 | | $ | 1,616,772 | | $ | 319,371 |
Operating Activities
Net cash provided by (used in) operating activities consists of net loss adjusted for certain non-cash items and changes in other assets and liabilities.
Our net loss for the year ended December 31, 2021 was $34.0 million after considering non-cash charges primarily consisting of $17.9 million in depreciation and amortization, $36.6 million in share-based compensation expenses as well as other non-cash items.
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Our net loss for the year ended December 31, 2020 was $23.7 million after considering non-cash charges primarily consisting of $17.1 million in depreciation and amortization, $11.1 million in share-based compensation expenses as well as other non-cash items.
Our net loss for the year ended December 31, 2019 was $0.6 million after considering non-cash charges primarily consisting of $10.3 million in depreciation and amortization, $9.5 million in share-based compensation expenses as well as other non-cash items.
Net cash provided by operating activities was $20.0 million for the year ended December 31, 2021, an increase of $10.5 million, compared to cash provided by operating activities of $9.5 million for the year ended December 31, 2020. This was driven primarily by an increase in Capital Advances collections from our Working Capital offering of approximately $12.4 million on net basis during the year ended December 31, 2021 as compared to a net outflow driven by extensions related to the program the year ended December 31, 2020. This was partially offset by fluctuations in current asset and liability balances particularly within accounts receivable and other payables and long-term liabilities due to the timing of payments as well as other immaterial uses of cash.
Net cash provided by operating activities was $9.5 million for the year ended December 31, 2020, an increase of $23.8 million, compared to cash used in operating activities of $14.3 million for the year ended December 31, 2019. This was driven by fluctuations in current asset and liability balances particularly within prepaid taxes, accrued expenses and employee related compensation due to the timing of payments. This was partially offset by an increase in outstanding Capital Advances from our Working Capital offering of approximately $6.4 million net ($266.1 million customer advances extended to customers net of $259.8 million collected from customers) and other immaterial uses of cash.
Investment Activities
Net cash provided by investing activities was $10.2 million for the year ended December 31, 2021, an increase of $77.1 million, or 115%, compared to $66.9 million used for the year ended December 31, 2020. This was predominantly driven by the absence of $15.5 million used for the acquisition of optile, net of cash acquired, during the year ended December 31, 2020, as described within Note 3 of the consolidated financial statements, with no comparable activity during the year ended December 31, 2021. This change was also increased by a net outflow of customer funds in transit of $37.7 million for the year ended December 31, 2020 compared to a net inflow of customer funds in transit of $31.2 million for the year ended December 31, 2021.
Net cash used in investing activities was $66.9 million for the year ended December 31, 2020, an increase of $46.3 million, or 225%, compared to $20.6 million for the year ended December 31, 2019. This was predominantly related to an increase in customer funds in transit of approximately $37.7 million as well as an increase of $15.5 million used for the acquisition of optile, net of cash acquired, as described within Note 3 of the consolidated financial statements. Uses of cash also included increased capitalization of internal use software of approximately $9.0 million as well as purchases of property, plant and equipment of approximately $5.0 million.
Financing Activities
Net cash provided by financing activities was $1.4 billion for the year ended December 31, 2021, a decrease of $0.3 billion, or 18%, compared to $1.7 billion for the year ended December 31, 2020. This predominantly relates to a $1.1 billion increase associated with customer balances during the period ending December 31, 2021 as compared to a $1.7 billion increase associated with customer balances during the year ended December 31, 2020. This decrease was also attributable to the repayment of outstanding long-term debt of approximately $39.8 million during the year ended December 31, 2021. This overall decrease was offset by cash activity related to the closing of the Reverse Recapitalization transaction and corresponding PIPE financing, totaling approximately $388.8 million as described within Note 3 of the accompanying financials statements.
Net cash provided by financing activities was $1.7 billion for the year ended December 31, 2020, an increase of $1.3 billion, or 368%, compared to $353.7 million for the year ended December 31, 2019. The increase predominantly relates to cash associated with customer balances of approximately $1.7 billion as well as issuance of redeemable preferred stock and warrants for $32.6 million net of issuance costs, offset by repayments of long-term debt of $20.0 million.
Customer balances increased period over period as we moved from being a program manager to becoming the card issuer, and as such started recording customer balances on the face of the balance sheet and within financial activities on the cash flow statement.
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Lease Commitments
We have entered into various non-cancelable leases for certain offices and vehicles with contractual lease periods expiring between 2022 and 2025.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Payments due by period | ||||||||||||||
| | | | | | Less than | | | | | | | | More than | ||
| (in thousands) | | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||
| Operating leases | | $ | 13,496 | | $ | 9,406 | | $ | 4,006 | | $ | 84 | | $ | — |
Key Metrics and Non-GAAP Financial Measures
Our management uses a variety of financial and operating metrics to evaluate our business, analyze our performance, and make strategic decisions. We believe these metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as management. However, these measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for financial measures that have been calculated in accordance with GAAP. We primarily review the following key performance indicators and non-GAAP measures when assessing our performance:
Volume
Volume refers to the total dollar value of transactions successfully completed or enabled by our platform, not including orchestration transactions. For a customer that both receives and later sends payments, we count the volume only once, with certain limited exceptions where both received and sent payments are counted. Volume serves as a key metric for overall business activity, as growing volume is one of the primary drivers for our revenue growth.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in millions) | | 2021 | 2020 | 2019 | |||||
| Volume | | $ | 56,686 | | $ | 44,419 | | $ | 28,990 |
Note: we have updated our definition of volume to clarify that while we count volume only once for customers receiving payments and subsequently using those funds, there are certain limited exceptions, where both received and sent payments are counted. These exceptions have been consistently applied and are less than 3% of volume. The clarified definition has no impact on revenue and applies to all periods reflected in the table above.
Volume grew 28% for the year ended December 31, 2021 compared to the year ended December 31, 2020 as we experienced continued growth in digital commerce, further accelerated and amplified by the COVID-19 pandemic which led to a significant boost in eCommerce/seller volume as a result of rapid shift in consumer buying behavior towards eCommerce. Nonetheless, the COVID-19 pandemic has also adversely affected the business of our travel marketplaces as the volume associated with the travel customer base is still below the pre-COVID pandemic levels in the majority of markets around the world.
Volume grew 53% year over year in the year ended December 31, 2020 as a result of continued growth in digital commerce, concurrently with the adverse effect on the business of our customers’ travel marketplaces. Volume grew 35% year over year in 2019 as we saw a continued organic growth in the business.
Revenue
We generate revenues mainly from transaction fees, which vary based on the type of service the customer utilizes. Transaction fee revenue principally consists of revenue generated when customers use their funds, either to withdraw their funds from our platform or to use the funds to make payments. Some services, such as virtual commercial cards, typically generate higher transaction fees from a dollar of volume than if that same dollar was withdrawn to a customer’s bank account. Our revenues can be impacted by the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (i) | Mix in customer size, products, and services; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (ii) | Mix between domestic and cross-border transactions; |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (iii) | Geographic region or country in which a transaction occurs; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (iv) | Pricing and other market conditions. |
Management closely monitors volume and revenue to ensure that we continue to grow funds and business activity that enters the platform, expanding overall scale and reach of business.
Adjusted EBITDA
In addition to our financial results determined in accordance with GAAP, we believe Adjusted EBITDA, as a non-GAAP measure, is useful in evaluating our operating performance. We use Adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as a tool for comparison. A reconciliation is provided below for our non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in thousands) | | 2021 | 2020 | 2019 | |||||
| Net loss | | $ | (33,987) | | $ | (23,746) | | $ | (625) |
| Depreciation and amortization | | 17,997 | | 17,095 | | 10,341 | |||
| Taxes on income | | 8,711 | | 8,320 | | 4,709 | |||
| Other financial income (expense), net | | 6,854 | | (2,012) | | (524) | |||
| EBITDA | | (425) | | (343) | | 13,901 | |||
| Stock based compensation expenses(1) | | 37,012 | | 10,892 | | 9,535 | |||
| Reorganization related expenses(2) | | | 5,087 | | | — | | | — |
| Share in losses of associated company | | | 37 | | | 143 | | | 81 |
| Other non-recurring items(3) | | — | | (4,304) | | — | |||
| M&A related expenses(4) | | (1,721) | | — | | 1,098 | |||
| Gain from change in fair value of Warrants(5) | | | (11,824) | | | — | | | — |
| Adjusted EBITDA | | 28,166 | | 6,388 | | 24,615 |
| Column 1 | Column 2 |
|---|---|
| (1) | Represents non-cash charges associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. |
| Column 1 | Column 2 |
|---|---|
| (2) | Represents the non-recurring reorganizational costs that were not recorded as a reduction of additional paid in capital. The amounts relate to legal and professional services associated with the Reorganization. |
| Column 1 | Column 2 |
|---|---|
| (3) | Consists primarily of a non-recurring allowance outside of normal course of business due to recovery of previously written off amount relating to one of our bank providers and non-recurring provision in connection with executive separation. |
| Column 1 | Column 2 |
|---|---|
| (4) | Represents non-recurring fair value adjustment of a liability related to our 2020 acquisition of optile. The year ended December 31, 2019 represents M&A activity related costs, which include legal and professional services. |
| Column 1 | Column 2 |
|---|---|
| (5) | Changes in the estimated fair value of the warrants are recognized as gain or loss on the statements of operations. The impact is removed from EBITDA as it represents market conditions that are not in control of the Company |
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the report amounts of assets, liabilities, revenue, costs and expenses as well as related disclosures. On an ongoing basis, we evaluate these estimates and the assumptions used. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the critical accounting policies, which are summarized below and further described within Note 2 to the consolidated financial statements in accordance with U.S. GAAP, are critical to aid in understanding and evaluating the consolidated financial condition, results of operations and cash flows.
Capital advance (CA) receivable, net:
We recognize revenues associated with these fees over the capital advance period, adjusting the amount to reflect an effective interest rate.
Capital advance receivable, net represents the aggregate amount of CA-related receivables owed by customers as of the consolidated balance sheet date, net of an allowance for potential uncollectible amounts in the event of merchant fraud, diversion or default. For the purchased receivables, we are generally exposed to advance losses related to uncollectibility, and similar to the allowance for transaction losses, we establish allowance for CA losses (ALCAL). We estimate the ALCAL based on an assessment of various factors, including historical experience, customers’ current processing volume, and other factors that may affect the customers’ ability to make future payments on the receivables. Changes to the ALCAL are reflected in transaction costs on the statements of income (loss), according to company’s charge-off methodology.
We have developed a risk-based methodology that is used to estimate future losses based on historical loss experience as well as the qualitative judgment when historical loss data is not available. For product offerings with sufficient historical loss experience, we develop loss estimates based on receivable balance attributes such as account payment status, percentage of collections per day, and length of time from advance to collection. Based on these attributes, a historical loss rate is applied to calculate the allowance for CA losses. For product offerings that do not have significant historical loss data to develop a historical loss percentage, we estimate losses by evaluating portfolio factors such as average balance outstanding by customer as well as creating specific identification provisions for known collection risks.
Leases:
We have early adopted the new guidance related to accounting for leases on January 1, 2021, using a modified retrospective basis and applied the optional practical expedients for lease classification, hindsight, and land easement related to the transition. The adoption resulted in an increase of approximately $19,280 for the right of use lease assets and $19,566 for lease liabilities associated with our operating leases upon adoption of which $8,636 was classified as short-term within Other payables and $10,930 was classified as long-term within Other long-term liabilities. In addition, we elected to apply the practical expedients related to reassessment of existing leases, utilization of hindsight in the determination of lease term and impairment of right-of-use assets and did not to recognize right-of-use assets and lease liabilities arising from short-term leases.
We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in right-of-use assets, and lease liabilities, which are included in other payable and other long-term liabilities on the consolidated balance sheets, respectively.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate; we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on either the ASC 842 transition date or commencement date in determining the present value of lease payments.
The ROU asset calculation includes lease payments to be made net of lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term. In certain instances, we may have lease
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agreements with lease and non-lease components. In these instances, we have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases. We apply a single portfolio approach to account for the ROU assets and lease liabilities.
Goodwill and other intangible assets:
Indefinite-lived intangible assets consist of goodwill, which represents the synergies expected to arise after the acquisition date. Finite-lived intangible assets consist of internal use software, developed technology and other intangible assets. Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis and estimated useful life of three years. Capitalized software includes internal and external costs incurred directly related to the design, development and testing phases of each capitalized software project. During the application development stage, which include costs to design the software, application configuration, interfaces, coding, installation, and testing. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software are expensed as incurred.
Goodwill and indefinite-lived intangible assets are not amortized but tested annually for impairment at the reporting unit level in the fourth quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill utilizes a qualitative assessment to determine whether it is more likely than not that goodwill is impaired. The qualitative factors may include, but are not limited to, macroeconomic conditions, industry and market conditions, operating environment, financial performance and other relevant events. If it is determined that it is more likely than not that goodwill is impaired, then we are required to perform a quantitative goodwill impairment test. If the fair value of a reporting unit exceeds the carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value, limited to the amount of goodwill, is recognized as an impairment charge.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a quantitative assessment is required.
Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.
Impairment charges, if any, are recorded in general and administrative expenses on the consolidated statement of operations.
Revenue recognition:
Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants, which require judgment to determine whether the payments should be recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
Income taxes:
Income taxes are accounted for using an asset and liability approach as required under U.S. GAAP. The asset and liability approach require the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the relevant tax law; the effects of future changes in tax laws or rates are not anticipated. Deferred taxes have not been provided on the amount of unremitted earnings from foreign subsidiaries retained for reinvestment in us. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Valuation allowances are established for deferred tax assets when the likelihood of the deferred tax assets not being realized exceeds the more likely than not criterion. Deferred tax assets and liabilities, along with any related valuation allowance, are classified as non-current assets or non-current liabilities on the balance sheets.
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Deferred taxes as of December 31, 2021 were reduced by a valuation allowance relating to net operating losses and share-based compensation. In assessing the likelihood of realizing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the taxable loss in the United States, management believes it was more likely than not that the deferred tax assets will not be realized in the United States for the next few years.
We follow the guidance on accounting for uncertainty in income taxes in accordance with U.S. GAAP. The guidance provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under this guidance, a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position; otherwise no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties are classified as taxes on income in the consolidated financial statements.
Income tax expense includes U.S. (federal and state) and foreign income taxes. Tax legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued were subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest most or all of these earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.
Share-based compensation:
We apply Statement of ASC 718, “Share-based Payment.” ASC 718 requires awards classified as equity awards to be accounted for using the grant-date fair value method. The fair value of share-based payment transactions is recognized as expense over the requisite service period. Forfeitures are accounted as they occur.
We measure the compensation cost related to the options awarded on the grant date and recognize the cost on a straight-line method over the requisite service period of the awards, including awards with graded vesting and no additional conditions for vesting other than service conditions.
We measure the additional compensation cost of modified awards on the date of modification and recognize the cost (1) on the modification date for past service periods and (2) on a straight-line method over the future related service period.
We early adopted ASU 2018-07 for share-based payments with service providers. Fair value of the equity instrument issued to a non-employee should be measured as of the grant date. The fair value of the awards is recognized over the vesting period, which coincides with the period that the counter-party is providing services to us.
We recognize a benefit of share-based compensation in the consolidated statements of loss if an excess tax benefit is realized. If we are in a taxable loss position and the excess tax benefit added to a net operating loss carryforward, the excess tax benefit would not be recorded until that net operating loss is utilized.
Loss contingencies:
We are a party to certain legal and regulatory proceedings with respect to a variety of matters. We evaluate the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which we are a party and accrue a loss contingency when the loss is probable and reasonably estimable. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims, litigation, or other violations and may revise our estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may differ materially from the actual outcomes. Legal costs are expensed as incurred and recorded in general and administrative expenses on the consolidated statement of operations.
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Allowance for transaction losses:
We are exposed to potential transaction losses due to credit cards collections, Electronic Funds Transfer returns, negative balances and chargebacks, including charge-offs related to CA. These costs are included in transaction costs. We have established an allowance for estimated losses arising from processing customer transactions described above. This allowance represents an accumulation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date, including those for which we have not yet identified. The allowance is monitored quarterly and is updated based on actual claims data. The allowance is based on known facts and circumstances as well as internal factors and was included in other payables on our consolidated balance sheet.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, result of operations or cash flows is disclosed in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
JOBS Act
We are an emerging growth company under the JOBS Act. The JOBS Act provides that an emerging growth company can delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. The Company expects to become a large accelerated filer on the last day of its fiscal year 2022 and no longer qualify as an EGC.
Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of FTOC’s initial public offering or until Payoneer Global Inc. is no longer an “emerging growth company,” whichever is earlier.