Payoneer Global Inc. (PAYO) FY 2022 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 “Cautionary Statement 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 18 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 over 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 Payoneer Commercial Mastercard. 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 $61.3 billion, $56.7 billion and $44.4 billion in volume during the years ended December 31, 2022, 2021 and 2020, 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.
41
Table of Contents
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 Note 3 to our consolidated financial statements 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, 2021 and 2022, could have a disproportionate effect on our revenue results for the entire fiscal year.
Impact of the war in Ukraine
During 2022, a geopolitical and armed conflict between Ukraine and Russia, which developed into an ongoing war, resulted in economic sanctions on Russia, Belarus, and certain territories in Ukraine. Payoneer provides services to customers in Ukraine and in jurisdictions that are or may be impacted by these economic sanctions. We are continually acting to comply with imposed sanctions and are monitoring and assessing the impact the conflict may have on our results of operations. During 2022, we have ceased to provide services to customers in Russia and have been reducing our payment services to Belarus customers, while at the same time revenues in Ukraine have been better than our expectations. For the year ended December 31, 2022, Ukraine, Russia and Belarus, combined, accounted for slightly less than 10% of our revenue, of which Russia and Belarus, combined, accounted for less than 3% of our revenue. There was immaterial impact on revenue from Ukraine, Russia and Belarus during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Further escalation of the conflict may have a material effect on our results of operations.
Impact of the COVID-19 Pandemic
In early 2020, the COVID-19 pandemic impacted our teams, customers, and supply chains, and the world saw 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. During 2022, global travel and tourism increased as many travel restrictions were lifted, positively impacting our travel customer base. Additionally, during 2022 the U.S. Federal Reserve raised the benchmark interest rate by 425 basis points to combat continuing rising inflation, which is widely expected to slow economic growth and consumption globally. Subsequently, the interest rate was increased by 25 basis points in February 2023. Higher interest rates positively impact our interest income revenues associated with underlying customer accounts while slowing growth and consumption may negatively impact the sales growth of our customers and that resulting volume we generate. There are many uncertainties regarding the current trajectory of travel growth, interest rates, economic growth and other macroeconomic factors.
The COVID-19 pandemic drove a shift in buying patterns from brick and mortar to e-commerce, leading to an acceleration of digital commerce that created tailwinds which further strengthened our role in the global economy. 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, leading to accelerated digitalization and e-commerce trends. As economies have continued to reopen, coupled with recent inflation, supply chain disruptions and consumer purchasing behavior changes, e-commerce growth rates have been softening. These trends remain uncertain and may continue to impact our business.
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.
42
Table of Contents
Key Factors Affecting Our Performance
Continued Growth of Digital Commerce. Growth of digital commerce has accelerated due to the COVID-19 pandemic in 2021, shifting buying preferences to online from offline. As more economic activity moved to the digital world, we saw more businesses adapting and moving online, broadening the number of potential customers we can offer services. Since 2022, e-commerce growth rates have been softening due to economies’ continued reopening, rising inflation levels, supply chain disruptions and consumer purchasing behavior changes. For the years ended December 31, 2022, 2021 and 2020, total volume increased by 8%, 28% and 53% 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. We continue to innovate, to connect digital businesses and deliver new products and services for our customers, such as Merchant Services, and offer our existing products to new customer groups, such as Working Capital, 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 revenues, expenses, 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.
43
Table of Contents
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 war between Ukraine and Russia that developed during 2022 and the related economic sanctions imposed on Russia and certain territories in Ukraine, have and may continue to impact our services to customers in such countries. In addition, our banking partners ceased their operations in Russia, and subsequently we ceased to provide services to customers in Russia. It is not possible to predict the broader consequences of this conflict, but the continuation or escalation of the conflict, along with any expansion to the surrounding areas, 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.
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 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. We also generate revenues from interest earned on certain customer funds.
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 2q. 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 losses related to certain of our services, and expenses related to the outstanding balance associated with the Warehouse Facility (as described in greater detail under “— Liquidity”). 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, 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.
44
Table of Contents
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 shorter 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 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 and the corresponding mark-to-market adjustment is included in Financial Income, net.
Income tax
We are in a taxable income position in the U.S. and in certain foreign jurisdictions, for which there are income taxes recorded. In addition, we record expenses associated with uncertain income tax positions.
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, are accounted for using the equity method of accounting. As of December 31, 2022, 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 comprehensive loss.
45
Table of Contents
Results of Operations
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, | | Increase (Decrease) | ||||||||||||
| (in thousands) | | 2022 | 2021 | 2020 | 2022 | | 2021 | | |||||||
| Revenues | | $ | 627,623 | | $ | 473,403 | | $ | 345,592 | 33 | % | 37 | % | ||
| Transaction costs (1) | | 110,165 | | 101,476 | | 97,040 | 9 | % | 5 | % | |||||
| Other operating expenses (Exclusive of items shown separately below) | | 149,199 | | 124,649 | | 81,976 | 20 | % | 52 | % | |||||
| Research and development expenses | | 115,041 | | 80,760 | | 52,301 | 42 | % | 54 | % | |||||
| Sales and marketing expenses | | 164,564 | | 114,331 | | 76,846 | 44 | % | 49 | % | |||||
| General and administrative expenses | | 90,010 | | 64,399 | | 37,629 | 40 | % | 71 | % | |||||
| Depreciation and amortization | | 20,858 | | 17,997 | | 17,095 | 16 | % | 5 | % | |||||
| Total operating expenses | | 649,837 | | 503,612 | | 362,887 | 29 | % | 39 | % | |||||
| Operating loss | | (22,214) | | (30,209) | | (17,295) | (26) | % | 75 | % | |||||
| Financial income (expense): | | | | | | | | | | | |||||
| Gain from change in fair value of Warrants | | | 33,963 | | | 11,824 | | | — | | ** | | | ** | |
| Other financial income (expense), net | | | (10,131) | | | (6,854) | | | 2,012 | | 48 | % | | ** | |
| Financial income, net | | | 23,832 | | | 4,970 | | | 2,012 | | ** | | | 147 | % |
| Income (loss) before taxes on income and share in losses of associated company | | 1,618 | | (25,239) | | (15,283) | (106) | % | 65 | % | |||||
| Taxes on income | | 13,586 | | 8,711 | | 8,320 | 56 | % | 5 | % | |||||
| Share in losses of associated company | | 2 | | 37 | | 143 | (95) | % | (74) | % | |||||
| Net loss | | $ | (11,970) | | $ | (33,987) | | $ | (23,746) | (65) | % | 43 | % |
** Not meaningful
(1) In 2022 and 2021, interest expense and fees associated with related party transaction was $1,491 and $220, respectively.
Year ended December 31, 2022 Compared to the year ended December 31, 2021
Revenues
Revenues were $627.6 million for the year ended December 31, 2022, an increase of $154.2 million, or 33%, compared to $473.4 million for the year ended December 31, 2021. Volume grew by $4.6 billion, or 8% compared to the year ended December 31, 2021. Revenues are driven in part by volume growth, and in addition, revenue growth outpaced volume growth in 2022 as a result of a greater mix of geographies, and products and services that have higher take rates (revenue as a percentage of volume), as well as increases in non-volume related service revenues and an increase in interest income due to the rise in interest rates and an increase in customer balances.
Transaction costs
Transaction costs were $110.2 million for the year ended December 31, 2022, an increase of $8.7 million, or 9%, compared to $101.5 million for the year ended December 31, 2021. This increase was driven by a decrease in payment network incentives of $3.4 million earned by achieving certain volume-related milestones, offset by a decrease in Capital Advance related costs of $1.8 million, primarily driven by specific advances with higher collection risks recognized in 2021 that did not reoccur during the current period. Excluding these drivers, transaction costs increased by $7.1 million or 7%, in line with volume increases of 8% during the year ended December 31, 2022, as compared to the same period in prior year.
Other operating expenses
Other operating expenses were $149.2 million for the year ended December 31, 2022, an increase of $24.6 million, or 20%, compared to $124.6 million for the year ended December 31, 2021. This increase was driven primarily by an increase of $18.5 million in employee compensation, benefits and other employee-related expenses partly as a result of an increase in headcount as well as an increase of $9.0 million in consultancy expenses and information technology expenses to support our growing volume and business
46
Table of Contents
requirements. This was offset by a $2.3 million reserve recorded by the company during 2021 relating to one of the Company’s issuing banks, which entered into a liquidation process and a $1.1 million regulatory settlement reached in 2021.
Research and development expenses
Research and development expenses were $115.0 million for the year ended December 31, 2022, an increase of $34.2 million, or 42%, compared to $80.8 million for the year ended December 31, 2021. This increase was driven primarily by an increase of $25.1 million in employee compensation, benefits and other employee-related expenses as a result of an increase in headcount in our research and development groups. In addition, we experienced an increase of $8.7 million in third-party contractor expenses, consultancy expenses and information technology expenses incurred by research and development to support our growing volume and business requirements.
Sales and marketing expenses
Sales and marketing expenses were $164.6 million for the year ended December 31, 2022, an increase of $50.3 million, or 44%, compared to $114.3 million for the year ended December 31, 2021. This increase was driven mainly by an increase of $20.4 million in employee compensation, benefits and other employee-related expenses, partly as a result of an increase in headcount in our sales and marketing group. In addition, we experienced an increase of $16.6 million in marketing expenses to support our growing volume and business, an increase of $7.0 million in third party contractors, consultancy expenses and information technology expenses incurred by sales and marketing to support our growing volume and business requirements, and higher spending on marketing programs, and an increase of $3.7 million in third-party commissions which corresponds to our revenue growth.
General and administrative expenses
General and administrative expenses were $90.0 million for the year ended December 31, 2022, an increase of $25.6 million, or 40%, compared to $64.4 million for the year ended December 31, 2021. This increase was driven mainly by an increase of $12.6 million in compensation, benefits and other employee-related expenses partly as a result of an increase in headcount among corporate management, an increase of $4.9 million in consultant expenses to support business requirements, an increase of $3.6 million related to several charitable donations or funds, an increase of $1.6 million in insurance expenses mainly as a result of incremental D&O insurance incurred as well as increase in several administrative services to support our business needs as a public company which were individually immaterial. This was offset by transaction costs of $5.1 million incurred in 2021 related to the Reorganization.
Depreciation and amortization expenses
Depreciation and amortization expenses were $20.9 million for the year ended December 31, 2022, an increase of $2.9 million, or 16%, compared to $18.0 million for the year ended December 31, 2021. The increase was driven primarily by an increase in amortization of internal use software costs as well as an increase in depreciation of property, equipment and software.
Financial income, net
Financial income, net was $23.8 million for the year ended December 31, 2022, an increase of $18.9 million, or 380%, compared to $5.0 million for the year ended December 31, 2021. This increase was primarily driven by a change in fair value of warrants of $22.1 million, an increase of $5.1 million in interest income on corporate cash balances, partially offset by revaluation of foreign currency balances and bank fees.
Income tax
Income tax expense was $13.6 million for the year ended December 31, 2022, an increase of $4.9 million, or 56%, compared to an expense of $8.7 million for the year ended December 31, 2021. The increase was primarily driven by the result of income taxes associated with our foreign subsidiaries as well as U.S. federal income tax expense.
Net loss
For a discussion regarding our net loss position please refer to the Liquidity and Capital Resources section below.
47
Table of Contents
Year ended December 31, 2021 Compared to the year ended December 31, 2020
For a discussion of the 2021 Results of Operations, including a discussion of the financial results for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020, refer to Part I, Item 7 of our Form 10-K filed with the SEC on March 3, 2022.
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.
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 could request advances under a revolving line of credit. On September 14, 2021, we paid off the term loan and terminated the Loan and Security Agreement.
On October 28, 2021, Payoneer Early Payments Inc. (“PEPI”), a wholly-owned second tier subsidiary of the Company and its subsidiary (the “Borrower”) entered into a multi-party Receivables Loan and Security Agreement (the “Warehouse Facility”) with, inter alia, affiliates of Viola Ventures for the purpose of external financing of capital advance activity. See Note 11 and Note 21 to our audited consolidated financial statement included elsewhere in this Annual Report on Form 10-K.
The Warehouse Facility bears interest of the greater of 0.25% or LIBOR, plus 9% per annum 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%. In addition, pursuant to the Warehouse Facility, PEPI entered into an amendment on June 8, 2022, whereby creating a condition that the total interest rate shall not exceed 10.5% per annum for all outstanding balances.
When the LIBOR rate has either permanently or indefinitely ceased to be provided by the ICE Benchmark Administration or is announced by the Financial Conduct Authority pursuant to public statement or publication of information to be no longer representative, an alternative Benchmark Replacement (as defined in the Warehouse Facility) will be selected.
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, 2022, we had $543.3 million of cash and cash equivalents.
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. We may enter into agreements with third parties with respect to investments in, or acquisitions of, businesses or technologies, which could also require us to seek additional equity or debt financing.
48
Table of Contents
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) | | 2022 | 2021 | 2020 | |||||
| Net cash provided by operating activities | | $ | 83,960 | | $ | 20,015 | | $ | 9,526 |
| Net cash provided by (used in) investing activities | | 5,734 | | 10,156 | | (66,854) | |||
| Net cash provided by financing activities | | 1,461,312 | | 1,396,195 | | 1,673,464 | |||
| Effect of exchange rate changes on cash and cash equivalents | | (2,719) | | (1,222) | | 636 | |||
| Change in cash, cash equivalents, restricted cash and customer funds | | $ | 1,548,287 | | $ | 1,425,144 | | $ | 1,616,772 |
Operating Activities
Net cash provided by 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, 2022 was $12.0 million after considering non-cash charges primarily consisting of stock-based compensation of $52.1 million and $20.9 million in depreciation and amortization as well as other non-cash items offset by a $34.0 million gain from the change in fair value of Warrants.
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, $37.0 million in share-based compensation expenses as well as other non-cash items.
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.
Net cash provided by operating activities was $84.0 million for the year ended December 31, 2022, an increase of $64.0 million, compared to cash provided by operating activities of $20.0 million for the year ended December 31, 2021. Apart from the items highlighted above, this was driven primarily by an increase in trade payables of approximately $24.3 million and other payables of $16.6 as compared to changes of less than $1 million in the previous year. This was partially offset by fluctuations in various current asset and liability balances particularly within other assets 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 $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.
Investing Activities
Net cash provided by investing activities was $5.7 million for the year ended December 31, 2022, a decrease of $4.5 million, or 44%, compared to cash provided by investing activities $10.2 million for the year ended December 31, 2021. This was predominantly driven by the higher outflows related to purchasing of property, plant and equipment of $10.5 million in the current period compared to $6.9 million in the previous period as well as internal use software of $18.3 million in the current period when compared to $14.0 million in the previous period. This change was partially offset by a net inflow of customer funds in transit of $33.9 million for the year ended December 31, 2022 compared to a net inflow of customer funds in transit of $31.2 million for the year ended December 31, 2021.
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
49
Table of Contents
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.
Financing Activities
Net cash provided by financing activities was $1.46 billion for the year ended December 31, 2022, an increase of $0.06 billion, or 5%, compared to $1.40 billion for the year ended December 31, 2021. This predominantly relates to a $1.4 billion increase associated with customer balances during the period ending December 31, 2022 as compared to a $1.1 billion increase associated with customer balances during the year ended December 31, 2021.
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.
Lease Commitments
We have entered into various non-cancelable leases for certain offices and vehicles with contractual lease periods expiring between 2023 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 | | $ | 15,217 | | $ | 8,295 | | $ | 6,922 | | $ | — | | $ | — |
Off-Balance Sheet Arrangements
As of the balance sheet dates of December 31, 2022 and December 31, 2021, the Company has not engaged in any off-balance sheet arrangements, as defined by Regulation S-K, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations or cash flows.
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) | | 2022 | 2021 | 2020 | |||||
| Volume | | $ | 61,282 | | $ | 56,686 | | $ | 44,419 |
Volume grew 8% for the year ended December 31, 2022 compared to the year ended December 31, 2021 driven by a combination of growth in digital commerce, recovery of our travel marketplaces from the COVID-19 pandemic, customer acquisition, including growth in B2B AP/AR, and new marketplace partnerships.
50
Table of Contents
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 was still below the pre-COVID pandemic levels in the majority of markets around the world in 2021. 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.
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 fees for withdrawals and usage. In addition, the Company generates revenue from non-volume-based products and services which are based on a fixed fee. We believe that Revenue demonstrates our ability to monetize on volumes. 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; |
| 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, including interest rates. |
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.
51
Table of Contents
Adjusted EBITDA
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in thousands) | | 2022 | 2021 | 2020 | |||||
| Net loss | | $ | (11,970) | | $ | (33,987) | | $ | (23,746) |
| Depreciation and amortization | | 20,858 | | 17,997 | | 17,095 | |||
| Taxes on income | | 13,586 | | 8,711 | | 8,320 | |||
| Other financial income (expense), net | | 10,131 | | 6,854 | | (2,012) | |||
| EBITDA | | 32,605 | | (425) | | (343) | |||
| Stock based compensation expenses(1) | | 52,150 | | 37,012 | | 10,892 | |||
| Reorganization related expenses(2) | | | — | | | 5,087 | | | — |
| Share in losses of associated company | | | 2 | | | 37 | | | 143 |
| Other non-recurring items(3) | | — | | — | | (4,304) | |||
| M&A related expenses(4) | | (2,323) | | (1,721) | | — | |||
| Gain from change in fair value of Warrants(5) | | | (33,963) | | | (11,824) | | | — |
| Adjusted EBITDA | | 48,471 | | 28,166 | | 6,388 |
| 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. |
| 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 |
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 accounting estimates discussed in this section are critical based on the subjectivity and judgement involved in the underlying assumptions, and the materiality to our consolidated financial statements. Our significant accounting policies are described within Note 2 to the consolidated financial statements.
Allowance for Capital advance (CA) losses:
We have established an allowance for CA losses (ALCAL), which represents our estimate of current expected credit losses inherent in our portfolio. Since the adoption of ASC 326, Current Expected Credit Losses, as of January 1, 2022, we estimate ALCAL based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio, which is segmented by programs. Loss rates are generated using historical loss data for each portfolio and are applied to segments of each portfolio. We then apply macroeconomic factors such as market unemployment rate, current and forecasted GDP, S&P yield and inflation rate, which are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. Expected credit loss, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our CA receivables.
Determining appropriate current expected credit loss allowances for CA receivables is an inherently uncertain process and ultimate losses may vary from current estimates. We regularly update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to
52
Table of Contents
adequately provide for current expected credit losses at the balance sheet date after incorporating the impact of externally sourced macroeconomic forecasts.
Goodwill:
The valuation of assets acquired in a business combination require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill. Our estimates are based upon assumptions that we believe to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur.
Goodwill is tested annually for impairment at the reporting unit level in the third 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, which are inherently subject to estimation. 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, which requires us to estimate the fair value of our reporting units. The fair value of the reporting unit is estimated using a discounted cash flow method. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. Estimation is inherent in calculating the discount rate to apply and involves the use of third-party specialists.
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 customers 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:
Calculating our tax provision requires us to make estimates regarding the timing and amount of taxable and deductible items which will adjust pretax income earned in various tax jurisdictions. We are required to interpret complex tax legislation in the jurisdictions in which we operate, and although we believe that our estimates and judgments discussed herein are reasonable, actual results may be materially different than the estimated amounts.
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. Assessing the likelihood of realizing deferred tax assets involves significant judgement and assumption. 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.
We follow the guidance on accounting for uncertainty in income taxes in accordance with U.S. GAAP, which requires us to estimate whether 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.
In addition to aforementioned changes, the TCJA also included 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. taxation. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest most or all of these earnings, as
53
Table of Contents
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.
Stock-based compensation:
We measure compensation expense for all equity awards made to our employees and non-employees using the grant date fair value method. Stock-based compensation expense related to stock options with an exercise price is measured at fair value on the date of grant using the Black-Scholes pricing model. Stock-based compensation expense related to stock options, RSU’s with market conditions and purchase rights issued under our Employee Stock Purchase Plan (ESPP) is measured at fair value on the date of grant using the Monte-Carlo option-pricing model. Both models involve certain estimates and subjective assumptions regarding our stock price volatility, the expected life of the award, the term selected for the risk-free rate, the expected dividend yield, as well as the probability of achieving the relevant market conditions.
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 enforcements 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.
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.