Alkami(ALKT) - 2022 Q4 - Annual Report

PART I Item 1. Business Alkami delivers cloud-based digital banking solutions to financial institutions, expanding through new client acquisition, user growth, cross-selling, and strategic acquisitions Overview Alkami offers a cloud-based digital banking platform, with 2022 revenues of $204.3 million driven by 17.7% user growth to 14.5 million, despite continued net losses from growth investments - Alkami is a cloud-based digital banking solutions provider for FIs, offering its multi-tenant Alkami Platform to help them compete with larger banks[10] - The company has expanded its capabilities through strategic acquisitions: ACH Alert (fraud prevention) in 2020, MK Decisioning Systems (account opening/loan origination) in 2021, and Segmint (data analytics) in 2022[11] Key Performance Indicators (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $204.3M | $152.2M | $112.1M | | Revenue Growth (YoY) | 34.2% | 35.7% | N/A | | Live Registered Users | 14.5M | 12.4M | 9.7M | | User Growth (YoY) | 17.7% | 27.6% | N/A | | Net Loss | ($58.6M) | ($46.8M) | ($51.4M) | - As of December 31, 2022, Alkami served 199 FIs on its platform, up from 177 in 2021 and 151 in 2020[14] Our Industry The U.S. banking industry, with nearly $26 trillion in assets, is undergoing a technology-driven transformation, compelling financial institutions to invest in digital platforms to meet evolving user expectations and competitive pressures - The U.S. banking industry held almost $26 trillion in assets across over 9,500 FIs as of December 31, 2021, generating over $900 billion in gross income that year[18] - Key industry trends driving technology spend include: heightened user expectations, digital competition, a complex regulatory environment, and a shift to mobile and cloud-based solutions[19][20][22][23] - The four largest U.S. banks spent over $30 billion on technology in 2021, pressuring smaller FIs to partner with third-party digital platforms to compete[28][29] Our Platform and Value Proposition The Alkami Platform is a multi-tenant, cloud-based solution with over 280 integrations, offering a premier user experience, versatility, rapid innovation, and robust fraud mitigation - The Alkami Platform is a multi-tenant, single code base, continuous delivery platform built on a true cloud infrastructure[30] - As of December 31, 2022, the platform maintained over 280 integrations to more than 1,000 endpoints, enabling FIs to customize their digital offerings[31] - Key value propositions include a premier user experience, a versatile and scalable platform, rapid innovation velocity, and robust fraud mitigation capabilities[32][33][34][35] Our Growth Strategies Alkami's growth strategy involves deepening existing client relationships through cross-selling and increased penetration, winning new financial institution clients, broadening its product suite via R&D, and pursuing strategic acquisitions - Deepen existing client relationships: Focus on cross-selling more products (clients used an average of 10 out of 32 available products) and increasing customer penetration (currently at an estimated 75% of clients' total customers)[36][38] - Win new clients: Continue to gain market share from legacy solutions, with the 2022 new client cohort showing higher annual recurring revenue and revenue per user compared to the 2021 cohort[39] - Broaden and enhance product suite: Continue to invest heavily in R&D, which constituted 33.9% of revenues in 2022[39] - Pursue selective acquisitions: Strategically acquire companies to accelerate objectives, such as ACH Alert (2020), MK Decisioning Systems (2021), and Segmint (2022)[40] Our Solution The Alkami Platform provides a comprehensive digital banking solution with 32 products across eight categories and over 280 integrations, designed to help financial institutions onboard users, grow revenues, and prevent fraud - The Alkami Platform is a complete digital banking solution designed to help FIs onboard users, engage them, grow revenues, and guard against fraud[41] - As of December 31, 2022, the platform offered 32 products and over 280 integrations across eight categories, including Account Opening, Card Experience, Financial Wellness, Security, and Money Movement[43] - Recent acquisitions have enhanced specific product categories: MK Decisioning Systems bolstered Account Opening & Loan Origination, ACH Alert improved Security & Fraud Protection, and Segmint advanced Marketing & Analytics capabilities[43][45] Our Technology and Architecture Alkami's cloud-based platform, hosted on AWS with 99.9% uptime, leverages a multi-tenant, single code base, and continuous delivery architecture for rapid innovation and real-time data insights - The platform is entirely hosted on AWS, achieving an average of 99.9% uptime in the year ended December 31, 2022[49] - The architecture is differentiated by three pillars enabling speed-to-market: Multi-Tenant Architecture, Single Code Base, and Continuous Delivery Model[49][50] - The platform synchronizes data in real-time to create a data warehouse, enabling clients to derive actionable insights for marketing and strategic decision-making[51] Our Clients As of December 31, 2022, Alkami served 199 financial institution clients on its platform, targeting the top 2,000 FIs with long-term SaaS contracts averaging 70 months, and maintaining a diversified revenue base - As of December 31, 2022, Alkami served over 550 clients, including 199 FI clients on the Alkami Platform[54] - The target client base is the top 2,000 FIs by assets, excluding megabanks[54] - Contracts have an average life of approximately 70 months as of December 31, 2022, with no single client representing more than 5% of total revenues in 2022[55] Sales and Marketing Alkami's go-to-market strategy employs a structured sales team for new sales, cross-selling (contributing 37% of TCV in 2022), and client success, supported by marketing efforts in brand building and lead generation - The sales organization includes teams for new sales, cross-selling, and client success management[57] - Cross-selling is a significant growth driver, contributing 37% of total contract value (TCV) in 2022, an increase from 24% in 2021[58] - Marketing efforts focus on direct sales support, inbound lead generation, and brand building through various online and offline channels[59] Competition Alkami operates in a highly competitive market against established point solution and core processing vendors, differentiating itself through its unified cloud-based platform, innovation speed, user experience, and industry expertise - The market for digital financial solutions is highly competitive, with rivals including point solution vendors, core processing vendors, and internal FI solutions[62] - Direct competitors for the digital banking platform include NCR Corporation, Q2 Holdings, Inc., and Temenos AG, alongside core processing vendors like Fiserv, Jack Henry, and FIS[63] - Principal competitive factors include platform functionality, SaaS delivery model, open API integration capabilities, user experience design, security, and rapid innovation[65] Human Capital Resources As of December 31, 2022, Alkami had 851 employees, emphasizing a culture defined by six principles, embracing remote work, and receiving multiple workplace awards in 2022 - As of December 31, 2022, the company had 851 employees[67] - The company's culture is defined by six principles: Optimistic Perseverance, Courageous Innovation, Caring Collaboration, Transparent Communication, Trusted Accountability, and Real Fun[67] - In 2022, Alkami was recognized with multiple workplace awards, including "Best Place to Work in Financial Technology" and "Best Company for Career Growth"[68] Government Regulation Alkami, as a service provider to U.S. financial institutions, is subject to direct and indirect regulation by agencies like the OCC and FDIC, requiring its solutions to ensure client compliance with evolving laws such as GLBA and CCPA - Alkami is subject to examination by banking regulators (e.g., OCC, Federal Reserve, FDIC) under the Bank Service Company Act due to its role as a third-party service provider to FIs[69][70] - The company is registered as a credit union service organization (CUSO), subjecting it to NCUA reporting requirements[71] - Alkami's solutions must help clients comply with numerous laws, including the Dodd-Frank Act, Electronic Funds Transfer Act, GLBA, Fair Credit Reporting Act, and data privacy laws like the CCPA and CPRA[72][74] Item 1A. Risk Factors The company faces significant risks including rapid growth management, client retention, third-party reliance, cybersecurity threats, evolving data privacy regulations, intense competition, financial sector dependence, intellectual property protection, operating losses, and public company status Risk Factor Summary Principal risks encompass business operations, cybersecurity, industry dynamics, intellectual property, and financial structure, including managing growth, client retention, third-party reliance, data breaches, competition, and operating losses - Business risks include managing rapid growth, attracting and retaining clients, the long sales cycle, and dependence on third-party software and data centers[77][79][89] - Cybersecurity and privacy risks involve potential data breaches, compromises of third-party security, and compliance with increasing privacy laws and regulations[77] - Financial risks include a history of operating losses, fluctuation of quarterly results, the delayed revenue recognition model, and limitations from its credit agreement[77][78] Risks Relating to Our Business Business risks include managing rapid growth, long sales cycles, heavy reliance on third-party software and data centers like AWS, potential platform defects, and challenges in client satisfaction and acquisition integration - Rapid growth places significant demands on management and operational infrastructure, and failure to manage it could harm results[79][80] - The sales cycle is unpredictable and lengthy, typically lasting from three to 12 months, which can affect cost and revenue predictability[89][90] - The company depends on third-party data centers, principally Amazon Web Services (AWS), and any disruption could impair service delivery and harm the business[101][102] - The Alkami Platform is complex and may contain defects or errors, which could result in significant costs, damage to reputation, and potential client claims[106][107] - Future acquisitions may divert management's attention, result in dilution, and present integration challenges that could prevent the realization of expected benefits[116][117] Risks Relating to Cybersecurity or Data Privacy Alkami faces significant cybersecurity risks due to handling sensitive data, with potential breaches leading to operational disruptions and reputational harm, alongside complex compliance challenges from evolving data privacy laws like CCPA and GDPR - The company processes and stores sensitive personal information (PI), making it a target for cybersecurity threats, which have increased in sophistication[123][124] - A security breach could result in operational disruptions, loss of client data, regulatory investigations, litigation, and significant financial and reputational harm[129] - The company is subject to numerous U.S. and international data privacy laws, including the Gramm-Leach-Bliley Act (GLBA), the California Consumer Privacy Act (CCPA), the California Privacy Rights Act (CPRA), and the EU's General Data Protection Regulation (GDPR)[133][136][137][139] - Failure to comply with evolving privacy laws could expose the company to costly litigation, significant fines (e.g., up to 4% of global annual revenues under GDPR), and could require changes to its business practices[135][139] Risks Relating to Our Industry Alkami faces intense competition and is vulnerable to financial services industry downturns, requiring continuous adaptation to rapid technological advancements and evolving regulatory requirements like ADA accessibility standards - The market for digital solutions for FIs is intensely competitive, with rivals having greater name recognition, larger client bases, and more substantial financial resources[143][144][145] - All revenues are derived from the financial services industry; any downturn, consolidation, or decrease in technology spending by FIs could materially harm the business[147][148] - The business is subject to extensive and evolving laws and regulations (e.g., FFIEC guidance, ADA accessibility standards); failure to provide compliant solutions could result in loss of clients, fines, and reputational damage[155][156][158] Risks Relating to Our Intellectual Property, Software and Third-Party Licenses Alkami's success relies on protecting its intellectual property, facing risks from insufficient patent protection, open-source software use, source code escrow requirements, and potential third-party infringement claims - The company's intellectual property is valuable, and any inability to protect it could reduce the value of its products and brand; as of Dec 31, 2022, it had 26 issued patents and 6 pending applications[160] - The use of open-source software poses risks, as some licenses could require public disclosure of proprietary source code or impose other unfavorable terms[167][168] - Some client agreements require source code to be placed in escrow, which could be released upon events like bankruptcy, potentially limiting IP protection[169][170] - The company may face claims of infringing on third-party IP rights, which could result in substantial costs, litigation, and the need to license technology or redesign products[171][172] Risks Relating to our Financial Results, Operating History and Capital Structure Financial risks include fluctuating results due to revenue recognition, a history of operating losses with uncertain future profitability, limitations on net operating loss carryforwards, and restrictive covenants from its credit agreement - Quarterly and annual results are likely to fluctuate due to timing of client subscriptions, renewals, and other factors outside of the company's control[182] - The company has a history of operating losses and may not achieve or maintain profitability in the future due to continued significant investment in growth[189] - The ability to use net operating loss (NOL) carryforwards is subject to limitations under Section 382 of the Internal Revenue Code due to past and potential future ownership changes[194] - The Amended Credit Agreement contains restrictive covenants, including minimum recurring revenue and liquidity levels, which could limit operational flexibility and require accelerated repayment if breached[196][198][199] Risks Related to Being a Newly Public Company As an "emerging growth company," Alkami benefits from reduced reporting requirements, which may affect comparability of financial statements and attractiveness to some investors, with this status expiring by December 31, 2026, or upon reaching $1.235 billion in revenue - The company is an "emerging growth company" and has elected to use the extended transition period for complying with new or revised accounting standards, which may make its financial statements not directly comparable to other public companies[202][203] - The company is exempt from certain reporting requirements, including the auditor attestation of internal controls required by Section 404 of the Sarbanes-Oxley Act, which may make its stock less attractive to some investors[204] Risks Related to Ownership of Our Common Stock Risks of common stock ownership include potential price depression from insider sales, reliance on stock appreciation due to no dividends, significant influence by principal stockholders, and anti-takeover provisions that could deter beneficial transactions - The company does not anticipate paying dividends in the foreseeable future; returns will depend on stock price appreciation[206][207] - As of December 31, 2022, directors, officers, and principal stockholders beneficially owned approximately 61% of outstanding shares, giving them significant influence over corporate actions[208] - Anti-takeover provisions, such as a classified board and a prohibition on stockholder action by written consent, could delay or prevent a change in control[209][211] - The company's charter designates the Court of Chancery of the State of Delaware as the exclusive forum for certain stockholder disputes and federal district courts for Securities Act claims, which could limit a stockholder's ability to choose a favorable judicial forum[212][213] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[214] Item 2. Properties Alkami's principal executive offices are located in Plano, Texas, leasing approximately 125,000 square feet of office space under a lease expiring August 31, 2028 - The company's corporate headquarters are in Plano, Texas, under a lease for approximately 125,000 square feet of office space[214] - The current lease expires on August 31, 2028, with options to extend for two five-year terms or one ten-year term[214] Item 3. Legal Proceedings Management believes there are no pending legal claims or actions that would materially impact the company's business or financial condition - Management believes there are no pending legal claims or actions that would have a material impact on the company's business, financial condition, or cash flows[215] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[215] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alkami's common stock has traded on Nasdaq under "ALKT" since its April 2021 IPO at $30.00 per share, with no cash dividends paid or anticipated, and net IPO proceeds of $192.8 million - Common stock is listed on Nasdaq under the symbol "ALKT" since its IPO on April 15, 2021, at a price of $30.00 per share[217] - The company has never paid cash dividends and does not anticipate paying them in the foreseeable future[218] - The IPO resulted in net proceeds of $192.8 million; a portion, approximately $5.0 million, was used to pay accumulated dividends on previously outstanding Series B redeemable convertible preferred stock[219] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[222] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Alkami's revenue grew 34.2% to $204.3 million, driven by user and RPU growth, though net loss widened to $58.6 million due to investments, while Adjusted EBITDA improved to a $17.6 million loss, maintaining strong liquidity Key Business Metrics Key business metrics for 2022 show Annual Recurring Revenue grew 33.8% to $226.1 million, registered users increased 17.7% to 14.5 million, and Adjusted EBITDA improved to a $17.6 million loss Key Business Metrics (as of December 31) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Annual Recurring Revenue (ARR) | $226.1M | $169.0M | $128.0M | | Registered Users | 14.5M | 12.4M | 9.7M | | Revenue per Registered User (RPU) | $15.55 | $13.68 | $13.22 | | Adjusted EBITDA | ($17.6M) | ($22.0M) | ($23.4M) | Results of Operations In 2022, revenues increased 34.2% to $204.3 million, but gross margin declined to 53.0%, and operating expenses rose 31.0% to $166.0 million, leading to a wider net loss of $58.6 million despite a gain from acquisition-related revaluation Comparison of Results of Operations (2022 vs. 2021) | Line Item ($ in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | 204,270 | 152,159 | 52,111 | 34.2% | | Cost of Revenues | 95,946 | 68,352 | 27,594 | 40.4% | | Gross Profit | 108,324 | 83,807 | 24,517 | 29.3% | | Research and Development | 69,329 | 48,800 | 20,529 | 42.1% | | Sales and Marketing | 36,811 | 24,174 | 12,637 | 52.3% | | General and Administrative | 71,247 | 50,398 | 20,849 | 41.4% | | Acquisition-related expenses, net | (12,529) | 2,983 | (15,512) | (520.0)% | | Loss from Operations | (57,689) | (42,916) | (14,773) | 34.4% | | Net Loss | (58,600) | (46,822) | (11,778) | 25.2% | - The 34.2% revenue increase was driven by 2.2 million new registered users and a 13.7% growth in RPU, which was boosted by cross-sells and the Segmint acquisition[262] - Gross margin decreased from 55.1% to 53.0% due to increased personnel costs, higher third-party reseller costs, and costs related to the Segmint acquisition[264][265] - Acquisition-related expenses decreased by $15.5 million primarily due to a $15.5 million gain on the revaluation of contingent consideration related to the MK acquisition[270] Liquidity and Capital Resources As of December 31, 2022, Alkami held $196.4 million in cash and marketable securities, supported by $192.8 million IPO proceeds and an $85.0 million term loan, with net cash used in operations at $37.8 million, ensuring sufficient liquidity for the next 12 months - As of December 31, 2022, the company had $196.4 million in cash and cash equivalents and marketable securities[276] Cash Flow Summary (Year ended Dec 31) | Cash Flow Activity (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(37,788) | $(28,959) | | Net cash used in investing activities | $(224,008) | $(22,023) | | Net cash provided by financing activities | $61,179 | $192,273 | - In April 2022, the company entered into an Amended Credit Agreement providing an $85.0 million term loan and a $40.0 million revolving credit facility, maturing in April 2025[287] Critical Accounting Policies and Significant Judgments and Estimates Critical accounting policies involve significant judgments and estimates for Revenue Recognition, deferral and amortization of Sales Commissions and Implementation Costs, and fair value determination in Business Combinations - Revenue Recognition: Upfront implementation fees are determined not to be distinct and are deferred and recognized ratably over the client's initial agreement term along with the subscription revenue[299] - Deferred Costs: The company capitalizes incremental costs to obtain contracts (sales commissions) and fulfill contracts (implementation costs), amortizing them over the expected period of client benefit, which requires significant judgment[301][302] - Business Combinations: The company uses the acquisition method, which requires estimating the fair value of identifiable assets, liabilities, and contingent consideration; these estimates are inherently uncertain and subject to refinement[303] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Alkami's primary market risk is interest rate fluctuation, stemming from its variable-rate credit agreement and short-term investments, with management assessing no material impact from a hypothetical 10% rate change - The primary market risk is interest rate risk associated with the variable-rate Amended Credit Agreement[308][309] - The company's cash, cash equivalents, and marketable securities also carry some interest rate risk, but due to their short-term maturities, the impact of rate changes on their value is not expected to be significant[309] Item 8. Financial Statements and Supplementary Data This section presents Alkami's consolidated financial statements for the three years ended December 31, 2022, along with Ernst & Young LLP's unqualified audit opinion confirming fair presentation in conformity with U.S. GAAP Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified audit opinion on Alkami's consolidated financial statements for the three years ended December 31, 2022, confirming fair presentation in conformity with U.S. GAAP - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022[314] - The audit was conducted in accordance with PCAOB standards; an opinion on the effectiveness of internal control over financial reporting was not expressed as the company is not required to have such an audit[316] Consolidated Financial Statements Consolidated financial statements show total assets of $488.9 million and liabilities of $154.8 million as of December 31, 2022, with 2022 revenues of $204.3 million and a net loss of $58.6 million, reflecting growth investments Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $242,165 | $345,161 | | Goodwill & Intangibles, net | $190,610 | $59,255 | | Total Assets | $488,885 | $436,510 | | Total Current Liabilities | $41,614 | $33,198 | | Long-term Debt, net | $81,392 | $23,053 | | Total Liabilities | $154,839 | $91,899 | | Total Stockholders' Equity | $334,046 | $344,611 | Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenues | $204,270 | $152,159 | | Gross Profit | $108,324 | $83,807 | | Loss from Operations | $(57,689) | $(42,916) | | Net Loss | $(58,600) | $(46,822) | | Net Loss per Share | $(0.64) | $(0.73) | Notes to the Consolidated Financial Statements Notes to the financial statements detail critical accounting policies, including business combinations (ACH Alert, MK, Segmint), revenue recognition, debt agreements, stockholders' equity, income taxes, and commitments and contingencies - Note 3 (Business Combinations): Details the acquisitions of ACH Alert (Oct 2020, ~$25 million cash), MK Decisioning Systems (Sep 2021, ~$20 million cash plus contingent consideration), and Segmint (Apr 2022, ~$135 million); a gain of $15.5 million was recorded in 2022 from reducing the fair value of the MK contingent earn-out to zero[399][400][402][405] - Note 5 (Revenues): Disaggregates revenue, showing SaaS subscription services as the primary source ($194.4 million in 2022); as of Dec 31, 2022, minimum contracted future subscription revenues totaled approximately $893.4 million[416][417] - Note 8 (Debt): As of Dec 31, 2022, the company had an $85.0 million term loan outstanding under its Amended Credit Agreement, which also provides a $40.0 million revolving facility; the company was in compliance with all covenants[426][430][432] - Note 9 (Stockholders' Equity): Details the 2021 Incentive Award Plan and the Employee Stock Purchase Plan (ESPP); as of Dec 31, 2022, total unrecognized stock-based compensation expense was $7.8 million for stock options and $91.0 million for RSUs[441][443][448] - Note 10 (Income Taxes): The company had federal net operating loss carryforwards of $316.9 million as of Dec 31, 2022; a valuation allowance of $96.3 million has been established against net deferred tax assets, as their realization is not considered more likely than not[456][458] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial disclosure - None[491] Item 9A. Controls and Procedures As of December 31, 2022, management concluded that both disclosure controls and internal control over financial reporting were effective, with no material changes during the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[491] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[492] Item 9B. Other Information The company reports no other information for this item - None[493] PART III Items 10-14 Information for Items 10 through 14, covering directors, executive officers, compensation, security ownership, and related transactions, is incorporated by reference from the company's definitive 2023 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[494][495] PART IV Item 15. Exhibit and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K, referencing consolidated financial statements under Item 8 and detailing key agreements in the Exhibit Index - The consolidated financial statements are included in Item 8 of this report[498] - No financial statement schedules have been filed because they are not required or applicable[499] - The Exhibit Index lists key agreements, including asset purchase agreements for acquisitions, the Amended and Restated Credit Agreement, and various employment and compensation plan documents[501][503] Item 16. Form 10-K Summary The company reports no information for this item - None[505]