MeridianLink(MLNK) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements MeridianLink's unaudited condensed consolidated financial statements, covering balance sheets, operations, cash flows, and detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Asset/Liability Category | Sep 30, 2021 | Dec 31, 2020 | | :---------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $93,029 | $37,739 | | Total current assets | $132,306 | $72,174 | | Intangible assets, net | $309,454 | $328,032 | | Goodwill | $565,048 | $542,965 | | Total assets | $1,020,166 | $963,705 | | Liabilities | | | | Total current liabilities | $44,386 | $152,801 | | Long-term debt, net | $419,890 | $516,877 | | Total liabilities | $464,778 | $670,221 | | Equity | | | | Total stockholders' equity/members' deficit | $555,388 | $(26,429) | - Total assets increased by $56.46 million (5.86%) from December 31, 2020, to September 30, 2021, primarily driven by an increase in cash and cash equivalents and goodwill[16] - Total liabilities decreased significantly by $205.44 million (30.65%), mainly due to a reduction in current liabilities and long-term debt, including the repayment of TazWorks, LLC purchase liability and related party liability[16] - Total stockholders' equity/members' deficit saw a substantial increase from a deficit of $(26.43) million to an equity of $555.39 million, largely due to the Initial Public Offering (IPO) and Corporate Conversion[16] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | YoY Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Revenues, net | $67,367 | $52,254 | 28.9% | $203,652 | $145,407 | 40.1% | | Total cost of revenues | $26,686 | $14,873 | 79.4% | $67,268 | $42,326 | 59.0% | | Gross profit | $40,681 | $37,381 | 8.8% | $136,384 | $103,081 | 32.3% | | Total operating expenses | $49,444 | $19,828 | 149.4% | $106,508 | $60,380 | 76.4% | | Operating income (loss) | $(8,763) | $17,553 | -149.9% | $29,876 | $42,701 | -30.0% | | Net income (loss) | $(21,446) | $7,018 | -405.6% | $(6,783) | $13,240 | -151.2% | | Net loss attributable to common stockholders | $(24,226) | $(1,715) | -1312.6% | $(27,727) | $(12,240) | -126.5% | | Net loss per share – basic and diluted | $(0.34) | $(0.03) | -1033.3% | $(0.47) | $(0.24) | -95.8% | - Revenues increased significantly for both the three-month (28.9%) and nine-month (40.1%) periods ended September 30, 2021, compared to the prior year[19] - Despite revenue growth, the company reported a net loss for both periods in 2021, primarily due to a substantial increase in total operating expenses (149.4% for three months, 76.4% for nine months) and a loss on debt repayment[19] Condensed Consolidated Statements of Preferred Units and Stockholders' Equity / Members' Deficit - The company underwent a Corporate Conversion on July 27, 2021, converting all Class A preferred units and Class B common units into common stock, leading to a significant reclassification of equity[22][34][166] - The Initial Public Offering (IPO) in July 2021 resulted in the issuance of 10 million new common shares and generated approximately $242.4 million in net proceeds, significantly increasing additional paid-in capital[22][35] - Total stockholders' equity/members' deficit shifted from a deficit of $(26.43) million at December 31, 2020, to $555.39 million at September 30, 2021, reflecting the impact of the Corporate Conversion and IPO[22] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change ($) | YoY Change (%) | | :----------------- | :-------------------------- | :-------------------------- | :------------- | :------------- | | Operating activities | $69,012 | $55,181 | $13,831 | 25% | | Investing activities | $(125,647) | $(5,566) | $(120,081) | 2157% | | Financing activities | $109,783 | $(6,347) | $116,130 | 1830% | | Net increase in cash, cash equivalents and restricted cash | $53,148 | $43,268 | $9,880 | 23% | - Net cash provided by operating activities increased by 25% to $69.0 million for the nine months ended September 30, 2021, driven by non-cash adjustments despite a net loss[27][304] - Net cash used in investing activities significantly increased by 2157% to $125.6 million, primarily due to acquisitions of TazWorks and Saylent Technologies[27][306] - Net cash provided by financing activities dramatically shifted from a net use of $6.3 million in 2020 to a net provision of $109.8 million in 2021, largely due to $247.2 million in IPO proceeds, partially offset by debt repayments[27][308] Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Organization and Description of Business - MeridianLink, Inc. provides secure, cloud-based digital solutions to financial institutions, primarily through a Software-as-a-Service (SaaS) model[31] - On July 27, 2021, the company completed a Corporate Conversion from a Delaware limited liability company to a Delaware corporation, reclassifying all preferred and common units into common stock[33][34] - The company completed its Initial Public Offering (IPO) on July 28, 2021, selling 10.0 million newly issued shares at $26.00 per share, generating approximately $242.4 million in net proceeds[35] - The COVID-19 pandemic has not significantly negatively impacted demand for subscription and services, but the company continues to evaluate potential future impacts[40][42] - The company is an emerging growth company and has elected to use the extended transition period for complying with new or revised financial accounting standards[43] Note 2 – Summary of Significant Accounting Policies - The company operates as a single operating and reportable segment, focusing on cloud-based digital solutions in the United States[48] Net Revenues by Solution Type (in thousands) | Solution Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Lending Software Solutions | $44,657 | $33,362 | $133,034 | $96,700 | | Data Verification Software Solutions | $22,710 | $18,892 | $70,618 | $48,707 | | Total | $67,367 | $52,254 | $203,652 | $145,407 | - Lending Software Solutions accounted for 66% and 64% of total revenues for the three months ended September 30, 2021 and 2020, respectively, and 65% and 67% for the nine months ended September 30, 2021 and 2020, respectively[49] - Revenue recognition is based on a five-step model, with subscription fees recognized ratably over the contract term and professional services recognized as performed[73][75][77] Net Revenues by Major Source (in thousands) | Major Source | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Subscription fees | $58,988 | $46,808 | $179,732 | $129,579 | | Professional services | $5,706 | $3,987 | $16,812 | $11,387 | | Other | $2,673 | $1,459 | $7,108 | $4,441 | | Total revenues | $67,367 | $52,254 | $203,652 | $145,407 | - The company early adopted ASU 2017-04 (simplifying goodwill impairment testing) effective January 1, 2021, with no material impact[109][110] - Upcoming accounting pronouncements include ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses), which the company intends to adopt in fiscal year 2022 and 2023, respectively, with anticipated significant impact on the balance sheet for leases[112][113][114][115] Note 3 – Balance Sheet Components Prepaid Expenses and Other Current Assets (in thousands) | Category | As of Sep 30, 2021 | As of Dec 31, 2020 | | :---------------------------- | :----------------- | :----------------- | | Prepaid expenses | $8,515 | $2,938 | | Contract cost assets – current | $2,004 | $1,256 | | Deferred offering costs | — | $995 | | Total | $10,712 | $5,812 | Property and Equipment, Net (in thousands) | Category | As of Sep 30, 2021 | As of Dec 31, 2020 | | :---------------------------- | :----------------- | :----------------- | | Computer equipment and software | $7,755 | $7,317 | | Total | $12,129 | $11,956 | | Less: Accumulated depreciation | $(5,829) | $(4,356) | | Property and equipment, net | $6,300 | $7,600 | - Property and equipment, net, decreased by $1.3 million from December 31, 2020, to September 30, 2021, primarily due to increased accumulated depreciation and disposal of office furniture[122][124] Intangible Assets, Net (in thousands) | Category | Gross Amount (Sep 30, 2021) | Accumulated Amortization (Sep 30, 2021) | Net Carrying Amount (Sep 30, 2021) | Net Carrying Amount (Dec 31, 2020) | | :---------------------- | :-------------------------- | :-------------------------------------- | :--------------------------------- | :--------------------------------- | | Customer relationships | $328,600 | $(91,152) | $237,448 | $256,050 | | Developed technology | $74,800 | $(26,681) | $48,119 | $49,725 | | Trademarks | $24,175 | $(6,807) | $17,368 | $18,038 | | Capitalized software | $9,520 | $(3,451) | $6,069 | $4,219 | | Total intangible assets, net | $437,695 | $(128,241) | $309,454 | $328,032 | - Intangible assets, net, decreased by $18.58 million from December 31, 2020, to September 30, 2021, primarily due to amortization, partially offset by additions from acquisitions[125] Amortization Expense Related to Intangible Assets (in thousands) | Category | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of sales | $3,219 | $2,213 | $9,190 | $6,417 | | General and administrative expense | $8,906 | $7,043 | $26,721 | $21,128 | | Total amortization expense | $12,125 | $9,256 | $35,911 | $27,545 | Accrued Liabilities (in thousands) | Category | As of Sep 30, 2021 | As of Dec 31, 2020 | | :-------------------------------- | :----------------- | :----------------- | | Accrued bonuses | $5,187 | $5,423 | | Accrued payroll and payroll-related expenses | $7,188 | $7,305 | | Sales tax liability from acquisitions | $2,939 | $2,739 | | Accrued costs of revenues | $2,829 | $1,988 | | Total accrued liabilities | $22,322 | $21,070 | Note 4 – Commitments and Contingencies - The company is involved in ordinary course legal matters but is not currently aware of any that would have a material adverse effect on its financial position[129] - The company leases office space under operating lease agreements expiring through December 2026, including one with a related party[130][131] - A lease termination in July 2021 resulted in a total loss of $0.9 million, including termination fees and asset disposal, recorded in general and administrative expenses[134] Future Minimum Lease Payments (in thousands) | Years Ending December 31, | Related Party | Third Party | Sublease Receipts | Total | | :------------------------ | :------------ | :---------- | :---------------- | :---- | | 2021 (remaining 3 months) | $210 | $183 | $(80) | $313 | | 2022 | $875 | $736 | $(293) | $1,318 | | 2023 | — | $753 | — | $753 | | 2024 | — | $722 | — | $722 | | 2025 | — | $319 | — | $319 | | Thereafter | — | $244 | — | $244 | | Total | $1,085 | $2,957 | $(373) | $3,669 | Note 5 – Long-Term Debt Long-Term Debt (in thousands) | Debt Type | As of Sep 30, 2021 | As of Dec 31, 2020 | | :------------------------ | :----------------- | :----------------- | | First lien | $428,665 | $406,255 | | Second lien | — | $125,000 | | Paycheck Protection Program loan | — | $2,142 | | Total principal payments due | $428,665 | $533,397 | | Debt issuance costs | $(8,775) | $(13,565) | | Total debt, net | $419,890 | $519,832 | - In July 2021, the company repaid $75.0 million of the First Lien and fully repaid the $125.0 million Second Lien using IPO proceeds, significantly reducing total debt[139] - The First Lien term loan bears interest at LIBOR plus 3.75% (4.75% as of Sep 30, 2021) and matures on May 31, 2025; quarterly principal payments are no longer required after the July 2021 repayment[141] - A $100.0 million incremental term loan was borrowed in January 2021 to fund the TazWorks acquisition[142] - The company incurred a $4.4 million loss on debt repayment in July 2021 due to the removal of debt issuance costs associated with the repaid Second Lien and a portion of the First Lien[148] Future Principal Payments of Long-Term Debt (in thousands) | Years ending December 31, | Amount | | :------------------------ | :----- | | 2021 (remaining 3 months) | $— | | 2022 | $— | | 2023 | $— | | 2024 | $— | | 2025 | $428,665 | | Total | $428,665 | Note 6 – Preferred Units and Stockholders' Equity / Members' Deficit - Prior to the Corporate Conversion on July 27, 2021, the company had Class A Preferred Units and Class B Common Units, with Class A units having a cumulative preferred return and liquidation preference[156][159][160] - Upon Corporate Conversion, all outstanding Class A and Class B units were converted into common stock, with 16,607,235 shares from Class A units and 53,646,668 shares from Class B units[166] - As of September 30, 2021, there were 79,528,555 shares of common stock issued and outstanding, with no preferred stock outstanding[167] - Common stockholders have one vote per share and are entitled to dividends if declared, and liquidation distributions after debt and preferred stock (if any)[168][169][172] Note 7 – Stock/Unit-Based Compensation - The 2021 Stock Option and Incentive Plan (2021 Plan) replaced previous plans, reserving 13,171,588 shares for awards and allowing for annual increases[181][182] - Upon IPO, 1,498,455 stock options were granted at an exercise price of $26.00 per share, and outstanding Class B unit options were converted to common stock options under the 2021 Plan[186][187] Stock Option Activity (in thousands, except options and price per option) | Metric | Number of Options | Weighted Average Exercise Price | | :-------------------------- | :---------------- | :------------------------------ | | Outstanding – Jan 1, 2021 | 3,169,696 | $6.30 | | Granted | 1,539,226 | $25.81 | | Exercised | (213,408) | $6.17 | | Forfeited | (47,060) | $15.51 | | Outstanding – Sep 30, 2021 | 4,448,454 | $13.13 | | Exercisable at Sep 30, 2021 | 1,793,156 | $6.09 | - Total stock/unit-based compensation expense was $25.5 million for the three months and $26.8 million for the nine months ended September 30, 2021, a significant increase from 2020, largely due to accelerated vesting upon IPO[209][272] - As of September 30, 2021, $21.5 million of unrecognized stock-based compensation expense related to stock options is expected to be recognized over 2.62 years, and $26.0 million for RSUs over 3.3 years[194][202] Note 8 – Income Taxes Effective Tax Rate | Period | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Effective Tax Rate | (5.8)% | 21.0% | (349.5)% | 20.6% | - The company's effective tax rate for the nine months ended September 30, 2021, was significantly negative (-349.5%) due to a net loss before taxes and permanent differences from stock/unit-based compensation[211] - Gross unrecognized tax benefits for R&D credits were $1.7 million as of September 30, 2021, up from $1.3 million at December 31, 2020[212] Note 9 – Related Party Transactions - Rental expense from a related party property was $0.1 million for the three months and $0.3 million for the nine months ended September 30, 2021[214] - Management and advisory fees paid to Thoma Bravo were $0.2 million for the three months and $1.2 million for the nine months ended September 30, 2021. The Advisory Services Agreement was terminated upon IPO completion[217] - In June 2021, the company finalized payment of the remaining $30.0 million holdback liability to the sellers of MeridianLink, releasing $25.7 million net of claims[218] Note 10 – Net Loss Per Share Basic and Diluted Net Loss Per Share | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to common stockholders (in thousands) | $(24,226) | $(1,715) | $(27,727) | $(12,240) | | Weighted-average common stock outstanding | 71,697,083 | 51,283,143 | 58,495,073 | 51,111,568 | | Net loss per share – basic and diluted | $(0.34) | $(0.03) | $(0.47) | $(0.24) | - Net loss per share increased significantly to $(0.34) for the three months and $(0.47) for the nine months ended September 30, 2021, compared to the prior year, primarily due to higher net losses attributable to common stockholders[219] - Potentially dilutive securities, including stock options and restricted stock awards/units, were excluded from diluted EPS calculation as their impact would have been anti-dilutive due to net losses[219] Note 11 – Business Combinations - The company settled its remaining obligation for the TazWorks acquisition in April 2021, receiving approximately $0.2 million from sellers[220] - On April 1, 2021, the company acquired Saylent Technologies, Inc. for $38.5 million in cash, aiming to accelerate market availability of planned product investments in data analytics and marketing solutions[224] Saylent Technologies, Inc. Purchase Price Allocation (in thousands) | Assets Acquired / Liabilities Assumed | Amount | | :------------------------------------ | :----- | | Cash and cash equivalents | $2,451 | | Accounts receivable, net | $4,174 | | Goodwill | $22,036 | | Intangible assets | $13,700 | | Total assets acquired | $42,957 | | Total liabilities assumed | $4,451 | | Fair value of assets acquired and liabilities assumed | $38,506 | - Goodwill recognized from the Saylent acquisition was $22.0 million, attributable to an increased customer base and expanded service capabilities, and is not deductible for income tax purposes[228] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of MeridianLink's financial condition and results, highlighting revenue growth, IPO, acquisitions, expenses, and liquidity Overview - MeridianLink is a leading provider of cloud-based software solutions for financial institutions, supporting digital transformation with loan origination software, digital lending platforms, and data analytics[231] - The company primarily uses a SaaS model, generating revenue from subscription fees and volume-based transaction fees, with contracts typically having a three-year initial term and evergreen auto-renewal[234] - Recent acquisitions include TCI (November 2020), TazWorks (December 2020), and Saylent (April 2021), expanding its portfolio in loan origination, employment/tenant screening, and data analytics[240] - The Partner Marketplace allows third parties to access customers, generating one-time service fees and revenue share, and is a key strategy for market presence and monetization[241] Impact of the COVID-19 Pandemic - The company has operated effectively under a remote work model since March 2020 due to COVID-19, with no significant negative impact on demand for its subscription and services to date[243][405] - The long-term economic impact of COVID-19 remains highly uncertain, with potential effects on customer spending, labor markets, and supply chains[244][404] - The company continues to strategically invest across its organization to increase revenues and improve operating efficiencies, while assessing changes in physical facilities requirements for increased onsite operations[245][406] Registered Equity Offering - On July 28, 2021, the company completed a registered public offering of 14.4 million shares of common stock at $26.00 per share[246] - The company sold 10.0 million shares, generating net proceeds of approximately $242.4 million after deducting underwriting discounts, commissions, and offering costs[246] Components of Operating Results - Revenues are categorized into subscription fees (majority), professional services, and other revenues (referral/marketing agreements)[248][249][251][252] - Cost of revenues includes personnel costs for customer-facing teams, third-party service costs, cloud-based hosting, allocated overhead, and amortization of developed technology[253][254] - Gross margin was 60.4% for Q3 2021 (down from 71.5% in Q3 2020) and 67.0% for the nine months ended September 30, 2021 (down from 70.9% in 2020), expected to fluctuate based on revenue mix and investment levels[257] - Operating expenses (sales & marketing, R&D, G&A) are expected to increase in absolute dollars and as a percentage of revenue due to growth investments, acquisitions, and public company compliance costs[258][261][264][267] - Total other (income) expense, net, primarily consists of interest expense and loss on debt repayment[268] - The provision for income taxes reflects management's best estimate, with deferred tax assets recognized to the extent they are more likely than not to be realized[269][270] Results of Operations Consolidated Statements of Operations Data (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | YoY Change (%) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | YoY Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Revenues, net | $67,367 | $52,254 | 28.9% | $203,652 | $145,407 | 40.1% | | Total cost of revenues | $26,686 | $14,873 | 79.4% | $67,268 | $42,326 | 59.0% | | Gross profit | $40,681 | $37,381 | 8.8% | $136,384 | $103,081 | 32.3% | | Total operating expenses | $49,444 | $19,828 | 149.4% | $106,508 | $60,380 | 76.4% | | Operating income (loss) | $(8,763) | $17,553 | -149.9% | $29,876 | $42,701 | -30.0% | | Net income (loss) | $(21,446) | $7,018 | -405.6% | $(6,783) | $13,240 | -151.2% | - Revenues increased by 29% for the three months and 40% for the nine months ended September 30, 2021, primarily driven by acquisitions (TCI and TazWorks) and growth from existing and new customers in Lending Software Solutions[273][274] - Cost of revenues for subscription and services increased by 85% (three months) and 62% (nine months), largely due to $5.2 million (three months) and $5.4 million (nine months) in stock compensation expense from IPO-related vesting and new equity grants, and higher third-party costs[275][276] - Operating expenses, particularly General and Administrative, Research and Development, and Sales and Marketing, saw substantial increases (131%, 197%, 160% respectively for three months) due to significant stock/unit-based compensation expense from IPO-related vesting and new equity grants, increased headcount from acquisitions, and higher advisory/insurance costs[282][284][286] - Total other expense, net, increased by 33% (three months) and 21% (nine months), mainly due to a $4.4 million loss on debt repayment, partially offset by decreased interest expense from debt repayments[288][289] - The company experienced a net loss for both periods in 2021, primarily driven by the significant increase in operating expenses and the loss on debt repayment[272] Seasonality and Quarterly Results - Operating results fluctuate quarterly due to seasonality and investment timing; consumer loan activity is typically lower in the fourth calendar quarter[292] - Sales may be lower in the first quarter, and implementation timing can cause short-term quarterly variability in revenue recognition[293] Liquidity and Capital Resources - Primary liquidity sources are cash flows from operations, long-term debt, and IPO proceeds[295] - As of September 30, 2021, the company had $93.0 million in cash and cash equivalents and $35.0 million in unused revolving credit capacity[295] - Cash provided by operating activities was $69.0 million for the nine months ended September 30, 2021, an increase of 25% year-over-year[301][304] - Cash used in investing activities was $125.6 million, primarily for the acquisitions of TazWorks and Saylent[301][306] - Cash provided by financing activities was $109.8 million, driven by $247.2 million in IPO proceeds, partially offset by $202.6 million in long-term debt principal payments[301][308] Indemnification Agreements - The company enters into indemnification agreements with customers, vendors, and partners for various matters, including breach of agreements and intellectual property infringement[310] - Indemnification agreements are also in place with directors and officers, but no material demands or claims have been made to date[311] Off-Balance Sheet Arrangements - As of September 30, 2021, and December 31, 2020, the company had no off-balance sheet arrangements[312] Recent Accounting Pronouncements - Refer to Note 2 for a description of recent accounting pronouncements, including adoption dates and estimated effects[313] Emerging Growth Company Status - The company is an emerging growth company under the JOBS Act and has elected to use the extended transition period for adopting new or revised financial accounting standards[314] Critical Accounting Policies and Significant Judgments and Estimates - Critical accounting policies include revenue recognition, contract balances, accounts receivable, deferred revenues, fair value of financial instruments, R&D and capitalized software, stock/unit-based compensation, business combinations, goodwill and intangible assets, impairment of long-lived assets, and income taxes[315] - There have been no material changes to the critical accounting policies and estimates as compared to those disclosed in the company's Prospectus[316] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's exposure to market risks, primarily from interest rate and inflation fluctuations, and its non-derivative risk management approach Interest Rate Risk - The company's cash and cash equivalents of $93.0 million (Sep 30, 2021) and $37.7 million (Dec 31, 2020) consist of bank deposits and money market accounts, with no significant interest rate risk[318] - The First Lien Credit Agreement has a floating interest rate, but a 10% increase in overall interest rates would not have materially affected interest expense during the periods presented[319] Inflation Risk - The company does not believe inflation has had a material effect on its business, financial condition, or results of operations[320] - The company monitors inflation and aims to mitigate its effects through pricing strategies, productivity improvements, and cost reductions[320] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective on September 30, 2021, with no material changes in internal control over financial reporting - As of September 30, 2021, the company's disclosure controls and procedures were deemed effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[322] - There were no changes in internal control over financial reporting during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[323] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 4 for details on material pending legal proceedings and commitments - For details on material pending legal proceedings, refer to Note 4, Commitments and Contingencies, in Part I, Item 1 of this Form 10-Q[325] Item 1A. Risk Factors Substantial risks associated with MeridianLink's common stock are outlined, covering financial position, business, intellectual property, operations, common stock ownership, and conflicts of interest Summary of Risk Factors - The company faces risks related to rapid subscription revenue growth, revenue fluctuation from usage/volume-based pricing, dependence on software demand, and the ability to develop and market solutions[328] - Key risks include challenges in customer acquisition and retention, intense competition, maintaining partner relationships, and the impact of the COVID-19 pandemic[328] - Financial risks include debt agreement restrictions, high leverage, and the potential impact of LIBOR phase-out on interest rates[328] - Operational risks involve protecting intellectual property, managing software defects, and complying with financial services regulations[328] Risks Related to Our Financial Position and Need for Additional Capital - The company's debt agreements impose significant operating and financial restrictions, limiting flexibility in areas like incurring additional debt, mergers, dividends, and acquisitions[331][332][334] - There is a risk of not securing sufficient additional financing on favorable terms to meet future capital needs, which could involve restrictive covenants[335] - The company is highly leveraged with approximately $419.9 million in indebtedness as of September 30, 2021, making it vulnerable to economic downturns and potentially limiting cash flow for future investments[336][339] - The phase-out of LIBOR could affect interest rates on variable-rate debt, potentially increasing borrowing costs and impacting future debt financing[341] Risks Related to Our Business and Industry - Failure to increase customer numbers or retain existing customers, especially due to competition or customer consolidation, could harm the business[342][343][344] - The company faces significant competition in a highly fragmented market, leading to potential pricing pressure, reduced profit margins, and loss of market share[346][348] - Future performance depends on the ability to grow revenues from new features and deeper adoption of software solutions, with no assurance that new solutions like MeridianLink One will achieve market acceptance[349] - Slow adoption of cloud-based solutions or unanticipated market changes could adversely affect sales and operations, as many potential customers are reluctant to switch from legacy systems[350] - Inability to accurately predict customer subscription renewal rates or facing pricing pressure could lead to declining revenues, as customers are not obligated to renew[351][352] - Downturns or consolidation in the financial services industry, or decreased technology spending, could adversely affect the company's business, as all revenues are derived from this sector[355] - Implementation challenges with complex customer requirements or delays in customer schedules can delay revenue recognition and harm business[359] - Dependence on key product partners means changes in their reliance on the company's system or inability to attract new partners could harm business[360] - The unpredictable, time-consuming, and costly sales cycle, involving extensive customer education and evaluation, can lead to less predictability in business and operating results[361] Risks Related to Regulation and Taxation - Evolving privacy, information security, and data protection regulations (e.g., CCPA, CPRA) pose risks of non-compliance, reputational harm, investigations, and substantial costs[362][363][365] - Failure to comply with laws applicable to technology providers in the highly regulated financial services industry (e.g., GLBA, FCRA) could adversely affect business, increase costs, and lead to fines[367][369][370] - Customer use of solutions in violation of regulatory requirements could damage the company's reputation and lead to liability, even if the company relies on contractual compliance obligations[371] - Changes in legislation or new laws in the financial services industry could negatively impact customer business, decrease solution usage, or increase company costs for updates[372][373][374] - Non-compliance with anti-bribery, anti-corruption, anti-money laundering, export controls, and trade sanctions laws could result in penalties, investigations, and reputational damage, especially with international expansion[375][379] - Successful assertions by states or local jurisdictions regarding uncollected sales or use taxes could lead to additional liability and adversely affect operations[380] Risks Related to Our Reliance on Third Parties - Dependence on internal and third-party data centers and Internet hosting providers means any disruption (e.g., human error, cyberattacks, natural disasters) could interrupt service, cause data loss, and harm reputation[381][382] - Defects, errors, or performance problems in software solutions, including those from third-party technologies, could damage reputation, incur significant costs, and lead to customer claims or contract terminations[383][385] - Partnership agreements for reseller services may not lead to successful programs due to partners' resource constraints, strategic shifts, or competitive product development[386] - Shifting product development to India introduces risks such as less efficient communication, potential intellectual property misappropriation, quality issues, and exposure to India's economic/political instability[387][389][391] Risks Related to Intellectual Property - Inability to protect intellectual property (confidentiality, copyrights, trademarks, trade secrets) could lead to unauthorized use, copying, or independent development of competing solutions, incurring significant costs for enforcement or litigation[392][393][394] - Use of open source software in solutions carries risks of litigation, unanticipated license conditions, or requirements to disclose proprietary code, potentially harming competitive advantages[395][396] - Lawsuits for alleged infringement of third-party proprietary rights could result in significant expenses, substantial damages, or injunctions, especially given the company does not own patents[397][398][399] - Impairment of goodwill ($565.0 million) and other intangibles ($309.5 million) could require significant charges to earnings, adversely affecting financial condition and results of operations[400] Risks Related to Managing Our Business and Operations - Quarterly results may fluctuate significantly due to factors like customer retention, transaction volumes, macroeconomic conditions, and timing of expenses, making period-to-period comparisons unreliable[401][402] - Uncertain economic conditions, including the COVID-19 pandemic, may adversely affect customer spending, delay purchasing decisions, and impact demand for services, potentially harming results of operations[404][405][406] - A breach or compromise of security measures, or those of third-party providers, could lead to unauthorized access to customer data, operational disruptions, reputational harm, and significant financial and operational costs[407][408][409] - Future litigation could damage reputation, be costly, and divert management's attention, potentially impacting financial condition and results of operations[410] - Failure to develop, maintain, and enhance brands could adversely affect business expansion, operating results, and financial condition[411] - Forecasts may be inaccurate, and even if markets grow, the company's business may not grow at similar rates, impacting growth prospects[412] - Expected lower mortgage lending volumes in 2021 and 2022 due to economic factors, including anticipated interest rate increases, could adversely affect business, especially given the significant revenue contribution from this market[413][414][415][416][417] - Inaccuracies in key operating metrics, due to internal tools or third-party data, could harm reputation and negatively affect business strategies[418][419][420] - The business is vulnerable to natural catastrophic events (e.g., earthquakes, fires) and man-made problems (e.g., terrorism), which could cause damage or interruption to systems and operations[421] - Failure to meet service level commitments could lead to credits, refunds, or contract terminations, adversely affecting business and operating results[422] - Failure to respond to evolving technological requirements or introduce adequate enhancements could render software solutions obsolete or less competitive[423][424] - Acquisitions or investments in companies, such as Saylent, may divert management's attention, result in dilution, and pose integration challenges, potentially failing to achieve expected benefits[425][426][427][428] - Inability to effectively expand sales and marketing capabilities, including through partner relationships, could hinder customer base growth and market acceptance of software solutions[429][430] - Failure to effectively integrate software solutions with third-party systems or performance issues with such systems could impair functionality and adversely affect operations[431][432][433] - Usage and volume-based pricing, which is seasonal and cyclical, can cause revenue fluctuations and be negatively impacted by macroeconomic trends[434][435] Risks Related to Employee Matters - The company's future success depends on attracting and retaining highly skilled personnel, including executive officers, and the loss of key employees could harm business development and market perception[436][437] - Failure to offer high-quality customer support or if support becomes more expensive than anticipated could harm business and reputation, impacting customer retention and acquisition[438] - Growth places significant demands on management and infrastructure, requiring substantial financial, operational, and technical resources, with no assurance of corresponding business volume increase[439][440] Risks Related to Our Common Stock - The trading price of common stock could be volatile due to various factors, including market conditions, company announcements, and sales by large stockholders, potentially leading to investment losses[441][443][444] - Issuance of additional capital stock for financings, acquisitions, or stock incentive plans will dilute existing stockholders' ownership interests[445] - Sales of substantial amounts of common stock in the public markets, especially after lock-up agreement expirations (January 23, 2022), could reduce the market price[446][447][448] - The company does not intend to pay dividends, meaning returns on investment will depend solely on stock price appreciation[449] - The board can issue preferred stock with terms that could adversely affect the voting power or value of common stock[450] - Bylaws designate the Delaware Court of Chancery as the exclusive forum for certain litigation, potentially limiting stockholders' ability to choose a favorable judicial forum[451] Risks Related to Potential Conflicts of Interests and Related Parties - The company expects to remain a controlled company under NYSE rules, allowing it to rely on exemptions from certain corporate governance requirements, which may reduce protections for other stockholders[452][453] - Thoma Bravo, owning 50.3% of outstanding common stock, has controlling influence over stockholder approval matters, potentially delaying or preventing changes of control[454][457] - Thoma Bravo may pursue corporate opportunities independent of the company, which could present conflicts of interest[458][459] Risks Related to Operating as a Public Company - As an emerging growth company, the company is exempt from certain public company requirements (e.g., auditor attestation, executive compensation disclosures), which may make its stock less attractive to some investors[460][462] - Negative research or downgrades by securities analysts could harm the company's competitive position and cause its stock price and trading volume to decline[463] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details of the company's July 2021 IPO, including shares sold, net proceeds, and no material change in planned use of proceeds - The company's IPO became effective on July 27, 2021, with 13.2 million shares of common stock registered at $26.00 per share[464] - The company sold 10.0 million newly issued shares, generating approximately $242.4 million in net proceeds after deducting underwriting discounts and offering-related expenses[464] - Selling stockholders sold an aggregate of 4.4 million shares, from which the company received no proceeds[465] - There has been no material change in the planned use of proceeds from the IPO as described in the company's Prospectus[466] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reported period - There were no defaults upon senior securities[467] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the company[468] Item 5. Other Information No other information is reported in this section - No other information is reported in this section[469] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, stock certificates, and certifications Exhibit Index | Exhibit No. | Description | | :---------- | :---------- | | 3.1 | Certificate of Incorporation of the Registrant | | 3.2 | Bylaws of the Registrant | | 4.1 | Specimen Common Stock Certificate of the Registrant | | 4.2 | Registration Rights Agreement | | 31.1 | Certification of Principal Executive Officer | | 31.2 | Certification of Principal Financial Officer | | 32.1 † | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 | | 32.2 † | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 | | 101.INS | Inline XBRL Instance Document | | 104 | Cover Page Interactive Data File | Signatures This section contains the required signatures for the Form 10-Q, affirming its submission by the CEO and CFO - The report is signed by Nicolaas Vlok, Chief Executive Officer, and Chad Martin, Chief Financial Officer, on November 3, 2021[477]