MeridianLink(US:MLNK)2022-08-09 20:33PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited financial statements show increased total assets and revenue, but decreased net income and operating cash flow for the first half of 2022 Condensed Consolidated Balance Sheets Total assets grew slightly to $1.06 billion, driven by accounts receivable, while total liabilities and stockholders' equity also increased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $100,259 | $113,645 | | Goodwill | $569,129 | $564,799 | | Intangible assets, net | $293,430 | $298,597 | | Total Assets | $1,058,959 | $1,025,893 | | Liabilities & Equity | | | | Long-term debt, net | $424,439 | $425,371 | | Total Liabilities | $482,642 | $469,615 | | Total stockholders' equity | $576,317 | $556,278 | | Total Liabilities & Equity | $1,058,959 | $1,025,893 | Condensed Consolidated Statements of Operations Revenue grew 7% for the first six months of 2022, but net income declined significantly due to higher operating expenses Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $72,987 | $68,474 | $145,741 | $136,285 | | Gross profit | $45,761 | $47,368 | $93,977 | $95,703 | | Operating income | $8,900 | $19,234 | $23,494 | $38,639 | | Net income | $2,172 | $7,432 | $9,651 | $14,663 | | Diluted EPS | $0.03 | $(0.03) | $0.12 | $(0.07) | Condensed Consolidated Statements of Cash Flows Operating cash flow slightly decreased, while significant cash was used for investing activities, resulting in a net decrease in cash for the period Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $47,670 | $49,909 | | Net cash used in investing activities | $(57,618) | $(124,147) | | Net cash provided by (used in) financing activities | $(3,438) | $65,814 | | Net decrease in cash | $(13,386) | $(8,424) | | Cash, beginning of period | $113,645 | $39,881 | | Cash, end of period | $100,259 | $31,457 | - Investing activities in H1 2022 included $23.1 million for the acquisition of StreetShares and a $30.0 million escrow deposit, compared to prior year acquisitions of TazWorks ($85.4 million) and Saylent ($36.0 million)18216217 Notes to Condensed Consolidated Financial Statements Notes detail the StreetShares acquisition, revenue disaggregation showing lending software growth, long-term debt, and a new stock repurchase program - On April 1, 2022, the Company acquired StreetShares, Inc for $27.9 million in cash consideration, plus a $30.0 million escrow for a contingent earnout, to accelerate its small business lending service capabilities125 Disaggregation of Revenue (in thousands) | Revenue Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Lending Software Solutions | $51,668 | $45,243 | $100,835 | $88,377 | | Data Verification Software Solutions | $21,319 | $23,231 | $44,906 | $47,908 | | Total | $72,987 | $68,474 | $145,741 | $136,285 | - The company's long-term debt consists of a 2021 Term Loan with a balance of $433.9 million as of June 30, 202286 - In May 2022, the Board of Directors authorized a stock repurchase program to acquire up to $75.0 million of common stock; during Q2 2022, 12,300 shares were repurchased for approximately $0.2 million9899 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by lending software, offset by declines in data verification, and attributes lower profitability to rising costs Overview The company provides cloud-based software solutions to financial institutions via a SaaS model, pursuing growth through customer expansion and strategic acquisitions - The company is a leading provider of cloud-based software solutions for financial institutions, focusing on loan origination software (LOS), digital lending platforms, and data analytics143 - The business model is primarily SaaS-based, with multi-year contracts (typically three years) that include annual base fees and volume-based fees for transactions processed146 - Recent acquisitions to expand the product portfolio include TCI (DecisionLender), TazWorks (CRA solutions), Saylent (data analytics), and StreetShares (small business lending technology)152 Results of Operations Revenue increased 7% in H1 2022, but gross profit decreased as higher cloud storage and share-based compensation costs outpaced revenue growth Revenue Change by Period (in thousands) | Period | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | $72,987 | $68,474 | $4,513 | 7% | | Six Months Ended June 30 | $145,741 | $136,285 | $9,456 | 7% | - Revenue growth was primarily from new and ramping customers in Lending Software Solutions, partially offset by a decline in Data Verification Software Solutions revenue due to lower mortgage refinance volumes186 - Subscription and services cost of revenues increased 29% for the six months ended June 30, 2022, due to higher cloud-based data storage costs ($1.9M), increased share-based compensation ($2.0M), and additional headcount188 - General and administrative expenses increased 14% for the six months ended June 30, 2022, driven by higher share-based compensation ($3.1M) and increased D&O insurance costs ($2.5M)194 Liquidity and Capital Resources The company's primary liquidity sources are its cash balance and an undrawn revolving credit facility, which are deemed sufficient for the next twelve months - As of June 30, 2022, principal sources of liquidity were cash and cash equivalents of $100.3 million and an unused revolving credit facility of $50.0 million206 - Net cash provided by operating activities for the six months ended June 30, 2022 was $47.7 million, a decrease from $49.9 million in the prior year period211214 - Primary uses of cash are funding operations, acquisitions, capital expenditures, debt payments, and stock repurchases207 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reports no significant changes in its market risk exposures since year-end 2021 - There have been no significant changes in the company's exposures to market risk since December 31, 2021223 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Based on an evaluation as of the end of the period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level225 - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls226 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not party to any material litigation but is subject to ordinary course legal matters - The company is not currently a party to any litigation or claims that, if determined adversely, would have a material adverse effect on its business, operating results, financial condition, or cash flows229 Item 1A. Risk Factors Key risks include customer retention, economic downturns, security breaches, high indebtedness, and the controlling influence of its majority stockholder Risks Related to Our Strategy and Industry The company faces risks from intense competition, challenges in integrating acquisitions, and susceptibility to economic factors affecting the financial services industry - Failure to attract and retain customers, or expand offerings, could limit growth and profitability in a highly-fragmented and competitive landscape234237 - The mortgage lending market and financial services industry are subject to economic factors, such as rising interest rates, which could lower loan volumes and adversely affect performance234254255 - The business depends on deriving all revenues from the financial services industry, making it vulnerable to downturns, consolidation, or decreased technology spending in that sector259 Risks Related to Our Business and Operations Operational risks include potential security breaches, reliance on third-party data centers, and revenue volatility from usage-based pricing models - A breach or compromise of security measures could lead to unauthorized access to customer data, causing reputational harm and potential liability234266 - The business depends on data centers and third-party internet hosting providers, and any disruption could adversely affect service delivery272 - The seasonal and cyclical nature of the business, combined with usage and volume-based pricing, could result in volatile operating results234286 Risks Related to Legal and Regulatory Matters The company faces significant risks from data privacy regulations and the need to ensure its solutions help customers maintain their own regulatory compliance - Failures in data protection, privacy, and information security could critically impair offerings, with evolving regulations like CCPA and CPRA requiring ongoing compliance efforts235308 - The company must provide solutions that assist customers in complying with their own regulatory requirements, and failure to do so could lead to customer loss and reputational harm235311 - The inability to protect intellectual property through patents, copyrights, and trade secrets could adversely affect the company's competitive advantage301 Risks Related to Finance and Accounting Financial risks include fluctuating quarterly results, limitations from high indebtedness, and the potential for goodwill impairment - High levels of indebtedness and restrictive covenants in debt agreements may limit operational flexibility and the ability to fund future needs236331332 - A significant amount of goodwill ($569.1 million) and other intangibles ($293.4 million) are on the balance sheet, which could be impaired, leading to a significant charge to earnings329 - Quarterly results may fluctuate significantly due to factors like transaction volumes, seasonality, and the timing of customer activations, and may not fully reflect underlying business performance323 Risks Related to Potential Conflicts of Interests and Related Parties The primary risk stems from Thoma Bravo's controlling stake, which exempts the company from certain governance rules and may lead to conflicts of interest - Thoma Bravo holds a controlling stake (approximately 50.1% as of August 5, 2022), making MeridianLink a 'controlled company' under NYSE rules and exempt from certain corporate governance requirements236339340 - Thoma Bravo's interests may conflict with those of other stockholders, and it may pursue corporate opportunities independently of the company343344 Risks Related to Our Common Stock and Governance Structure Stock-related risks include price volatility, a no-dividend policy, and reduced disclosure requirements as an 'emerging growth company' - The trading price of the common stock could be volatile, and the company does not intend to pay dividends, making stockholder returns dependent on stock price appreciation345353 - The stock repurchase program of up to $75.0 million is not guaranteed to be fully consummated and could increase stock price volatility or diminish cash reserves354 - As an 'emerging growth company,' the company is exempt from certain public company requirements, which may result in less information for investors349 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no material change in the use of IPO proceeds and details its Q2 2022 stock repurchase activity - There has been no material change in the use of proceeds from the company's IPO361 Stock Repurchase Activity (Q2 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining Under Program (in thousands) | | :--- | :--- | :--- | :--- | | June 1 to June 30, 2022 | 12,300 | $15.66 | $74,807 | Item 6. Exhibits This section provides an index of all exhibits filed with the Form 10-Q, including corporate documents and officer certifications - The Exhibit Index lists documents filed with the report, including the Certificate of Incorporation, Bylaws, employment agreements, and officer certifications367