MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2023
As used in this management’s discussion and analysis ("MD&A"), unless the context indicates or requires otherwise, all references to the "Company", "Lightspeed", "we", "us" or "our" refer to Lightspeed Commerce Inc. together with our subsidiaries, on a consolidated basis as constituted on June 30, 2023.
This MD&A dated August 3, 2023, for the three months ended June 30, 2023, should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and the notes related thereto for the three months ended June 30, 2023, as well as with our audited annual consolidated financial statements and the notes related thereto for the year ended March 31, 2023. The financial information presented in this MD&A is derived from the Company’s unaudited condensed interim consolidated financial statements for the three months ended June 30, 2023, which has been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim financial statements, including International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"). All amounts are in U.S. dollars except where otherwise indicated.
We have prepared this MD&A with reference to National Instrument 51-102 "Continuous Disclosure Obligations" of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, we are permitted to prepare this MD&A in accordance with Canadian disclosure requirements, which requirements are different than those of the United States.
Additional information relating to Lightspeed, including our most recently completed Annual Information Form and our Annual Report on Form 40-F for the fiscal year ended March 31, 2023, is available on our website at investors.lightspeedhq.com and can be found on SEDAR at www.sedar.com and EDGAR at www.sec.gov.
Forward-looking Information
This MD&A contains "forward-looking information" and "forward-looking statements" (collectively, "forward-looking information") within the meaning of applicable securities laws. Forward-looking information may relate to our financial outlook and anticipated events or results and may include information regarding our financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding our expectations of future results, performance, achievements, prospects or opportunities or the markets in which we operate; macroeconomic conditions such as increasing inflationary pressures, interest rates, instability in the banking sector and global economic uncertainty; our expectations regarding the costs, timing and impact of our cost reduction initiatives; events such as the Russian invasion of Ukraine; and expectations regarding industry and consumer spending trends, our growth rates, the achievement of advances in and expansion of our platform, our revenue and the revenue generation potential of our payment-related and other solutions, the impact of our decision to sell our POS and payments solutions as one unified platform, our gross margins and future profitability, acquisition outcomes and synergies, the impact of pending and threatened litigation, the impact of foreign currency fluctuations on our results of operations, our business plans and strategies and our competitive position in our industry is forward-looking information.
In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates" or "does not anticipate", "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might", "will", "will be taken", "occur" or "be achieved", the negative of these terms and similar terminology. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances.
This forward-looking information and other forward-looking information are based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances as at the date of the forward-looking information. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying opinions, estimates and assumptions will prove to be correct. Certain assumptions made in respect of our ability to build our market share and enter new markets and industry verticals; our ability to attract, develop and retain key personnel; our ability to manage supply chain risk and the impact of shortages in the supply chain on our customers; our ability to maintain and expand geographic scope; our ability to execute on our expansion plans; our ability to execute on our cost reduction initiatives;
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our ability to continue investing in infrastructure and implement scalable controls, systems and processes to support our growth; our ability to prevent and manage information security breaches or other cyber-security threats; our ability to protect our intellectual property rights and the risk of claims by third parties of intellectual property infringement; the impact of class actions and other pending and threatened litigation; the pricing of our offerings; our ability to successfully sell our POS and payments solutions as one unified platform to both new and existing customers; our ability to successfully integrate the companies we have acquired and to derive the benefits we expect from the acquisition thereof; our ability to obtain and maintain existing financing on acceptable terms; currency exchange and interest rates, including inflation; seasonality in our business and in the business of our customers; the impact of competition; the changes and trends in our industry or the global economy, including changes in consumer spending; goodwill impairments and the possibility of future impairments; and the changes in laws, rules, regulations, and global standards are material factors in preparing forward-looking information and management’s expectations.
Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that we considered appropriate and reasonable as of the date such statements are made, is subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in the "Summary of Factors Affecting our Performance" section of this MD&A, in the "Risk Factors" section of our Annual Information Form dated May 18, 2023, and in our other filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission, all of which are available under our profiles on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
If any of these risks or uncertainties materialize, or if the opinions, estimates or assumptions underlying the forward-looking information prove incorrect, actual results or future events might vary materially from those anticipated in the forward-looking information. The opinions, estimates or assumptions referred to above and described in greater detail in this MD&A should be considered carefully by prospective investors.
Although we have attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other risk factors not presently known to us or that we presently believe are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking information. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. No forward-looking information is a guarantee of future results. Accordingly, you should not place undue reliance on forward-looking information, which speaks only as of the date made. The forward-looking information contained in this MD&A represents our expectations as of the date hereof or as of the date it is otherwise stated to be made, as applicable, and is subject to change after such date. However, we disclaim any intention or obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws.
All of the forward-looking information contained in this MD&A is expressly qualified by the foregoing cautionary statements.
This MD&A includes certain trademarks, including "Lightspeed", "NuORDER" and other trademarks, which are protected under applicable intellectual property laws and are our property. Solely for convenience, our trademarks referred to in this MD&A may appear without the ® or ™ symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks.
Additional information relating to Lightspeed, including our most recently completed Annual Information Form, can be found on SEDAR at www.sedar.com and EDGAR at www.sec.gov.
Overview
Lightspeed offers a cloud-based commerce platform that connects suppliers, merchants and consumers while enabling omni-channel experiences. Our software platform provides our customers with the critical functionality they need to engage with consumers, manage their operations, accept payments, and grow their businesses. We serve customers globally, empowering single- and multi-location retailers, restaurants, golf course operators and other companies to compete successfully in an omni-channel market environment by engaging with consumers across online, mobile, social, and physical channels. We primarily target small and medium-sized businesses ("SMBs") with our easy to use and cost efficient solutions. The majority of our revenue is recurring or reoccurring and we have a track-record of growing revenue per customer over time.
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Our cloud platform is designed around three interrelated elements: omni-channel consumer experience, a comprehensive back-office operations management suite to improve our customers’ efficiency and insight, and the facilitation of payments. Key functionalities of our platform include full omni-channel capabilities, point of sale ("POS"), product and menu management, employee and inventory management (including ordering), analytics and reporting, multi-location connectivity, order-ahead and curbside pickup functionality, loyalty, customer management and tailored financial solutions such as Lightspeed Payments and Lightspeed Capital. By delivering our solutions through the cloud, we enable merchants to reduce dependency on the brick and mortar channel and interact with customers anywhere (in store, online, mobile and social), gain a deeper understanding of their customers and operations by tracking activity and key metrics across all channels, and update inventory, run analytics, change menus, send promotions and otherwise manage their business operations from any location.
Our flagship solutions include Lightspeed Restaurant, a unified hospitality commerce offering, and Lightspeed Retail, a groundbreaking retail commerce offering that unites advanced POS, payments, and eCommerce into one cohesive and powerful solution. In addition, Lightspeed eCommerce allows merchants to enhance omnichannel reach and increase selling flexibility, including through social media platforms and digital marketplaces. Our new flagship solutions are seeing strong reception from customers globally. NuORDER by Lightspeed, once fully integrated, will provide customers with greater supplier access and inventory visibility, automate manual ordering, consolidate supplier portals into the POS, streamline omni-channel operations by making it easy to import product details and photos into the POS, and ensure use of supplier approved brand names and images. Going deep into verticals will also create opportunities for us to monetize our data up and down the supply chain. In the fiscal year ended March 31, 2023, we announced the initial launch of Lightspeed B2B, our B2B offering, to several key North American verticals: fashion, outdoor, bikes and sporting goods. We believe our continued investment in Lightspeed B2B represents an opportunity for us to distinguish ourselves from competitors.
Being the commerce platform puts us in a prime position for payment processing and allows us to collect transaction-related data insights. Our transaction-based revenue was $121.0 million for the three months ended June 30, 2023, an increase of 32% from the $91.5 million in transaction-based revenue for the three months ended June 30, 2022. This was primarily driven by increased customer adoption of our payments solutions resulting in an increase of 56% in GPV1 compared to the three months ended June 30, 2022. As of the beginning of the fiscal year ending March 31, 2024 ("Fiscal 2024"), we are now selling our POS and payments solutions together as one unified offering. We believe embedded payments results in the best experience for customers by improving consistency and reliability, streamlining support and billing, and enhancing opportunities for them to avail themselves of innovative product functionality. We are helping our customers by offering free hardware and implementation, helping with contract buy-outs and offering competitive rates. As a result of this initiative, we will require our eligible new and existing customers to adopt our payments solutions. We believe processing additional GTV for new and existing customers through our payments solutions will help advance our growth strategies and enable us to reduce complexity in our business. In addition, this initiative will help reduce the costs of supporting a variety of third party payment processors.
Our platform is built to scale with our customers, supporting them as they open new locations, and offering increasingly sophisticated solutions as their business requirements become more complex. Our platform helps SMBs avoid having to piece together multiple, and often disjointed, applications from various providers to leverage the technology they need to run and grow their businesses. Our ecosystem of development, channel and installation partners further reinforces the scalability of our solutions, making them customizable and extensible. We work alongside our customers through their business journey by providing industry-leading onboarding and support services, and fundamentally believe that our success is directly connected to their success. Excluding the Ecwid eCommerce standalone product, our monthly ARPU1 was approximately $383 as at June 30, 2023 as compared to approximately $320 as at June 30, 2022.
To further complement our core cloud solutions, we offer a merchant cash advance program called Lightspeed Capital. This program provides cash advances to eligible merchants and is designed to help them with overall business growth and cash management. Merchants use these cash advances to manage their cash flows, to buy inventory, and to invest in marketing, amongst other things.
We sell our solutions primarily through our direct sales force in North America, Europe, the UK, Australia and New Zealand, supplemented by indirect channels in other countries around the world. Our platform is well-suited for various types of SMBs, particularly single- and multi-location retailers with complex operations, such as those with a high product count, diverse inventory needs or a service component, golf course operators and hospitality customers.
We remain focused on attracting the right customer profile, particularly customers with a higher GTV and more complex needs, merchants which we believe are ideally suited for our industry-leading solutions. For the three months ended June 30, 2023, GPV
1 Refer to the section entitled "Key Performance Indicators".
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was $5.1 billion compared to $3.3 billion for the three months ended June 30, 2022, representing growth of 56%. For the three months ended June 30, 2023, our cloud-based software-as-a-service platform processed GTV1 of $23.4 billion, which represents growth of 6% relative to $22.1 billion of GTV processed during the three months ended June 30, 2022.
For the three months ended June 30, 2023 compared to the three months ended June 30, 2022, our omni-channel retail GTV growth was 5% and our hospitality GTV growth was 7%. All growth for the three months ended June 30, 2023 was organic as no acquisitions had occurred since the beginning of the prior comparable period.
As at June 30, 2023, we had Customer Locations in over 100 countries. Excluding Customer Locations attributable to the Ecwid eCommerce standalone product, our Customer Locations as at June 30, 2023 are located approximately 51% in North America and 49% across the rest of the world and the split of these Customer Locations between retail and hospitality represents approximately 63% and 37% of our total Customer Locations, respectively. Despite the Ecwid acquisition adding a significant number of lower ARPU Customer Locations to our overall customer base, our attention continues to be focused on serving the complex SMBs, particularly high GTV customers, to which our solutions are particularly well-suited and we believe that leveraging Ecwid's platform as our flagship eCommerce offering will enable these businesses to enhance their omnichannel reach and increase their selling flexibility.
We believe we have a distinct leadership position in SMB commerce given our scale, breadth of capabilities, and diversity of customers. We generate revenue primarily from the sale of cloud-based software subscriptions and our payments solutions. We offer pricing plans designed to meet the needs of our current and prospective customers that enable Lightspeed solutions to scale with SMBs as they grow. Our subscription plans vary from monthly plans to one-year and multi-year terms. We have also integrated our software with various third party payment processors who pay us a revenue share of the payment processing revenue for customers we refer to them. These arrangements generally predate the availability of our payments solutions in the various markets we serve.
Our total revenue has increased to $209.1 million for the three months ended June 30, 2023 from $173.9 million for the three months ended June 30, 2022, representing year-over-year growth of 20%. For the three months ended June 30, 2023, subscription revenue accounted for 38% of our total revenues (42% for the three months ended June 30, 2022), and transaction-based revenue accounted for 58% of our total revenues (53% for the three months ended June 30, 2022).
In addition, we offer a variety of hardware and other services to provide value-added support to our merchants and supplement our subscription and transaction-based revenue solutions. These revenues are generally one-time revenues associated with the sale of hardware with which our solutions integrate and the sale of professional services in support of the installation and implementation of our solutions. For the three months ended June 30, 2023, this revenue accounted for 4% of our total revenue (5% for the three months ended June 30, 2022).
We plan to continue making deliberate investments to drive future growth. We believe that our future success depends on a number of factors, including our ability to expand our market share, build on the successes of our payments and tailored financial solutions, add more solutions to our platform, expand our presence within verticals, and our ability to selectively pursue and to integrate value-enhancing acquisitions.
We believe that we have significant opportunity to continue to expand ARPU given the number of customers adopting more Lightspeed products over time and that our continued investments will increase our revenue base, improve the retention of this base and strengthen our ability to increase sales to our customers. We have not been profitable to date. If we are unable to successfully implement our growth strategies and cost reduction initiatives, we may not be able to achieve profitability. For the three months ended June 30, 2023 and the three months ended June 30, 2022, we incurred an operating loss of $58.2 million and $104.9 million, respectively. Our cash flows used in operating activities for the three months ended June 30, 2023 were $26.1 million, and our Adjusted Cash Flows Used in Operating Activities2 were $26.5 million compared to $33.4 million and $26.2 million, respectively, for the three months ended June 30, 2022.
Sustainability
Sustainability is embedded in our guiding principles, and we are working towards a sustainable future and a greener economy. As part of this commitment, we have taken steps to help our customers' reduce their carbon footprint. We partner with Sustainably Run on a Carbon Free Dining program. The partnership gives our customers' diners the ability to offset the carbon emissions associated with their purchase by planting trees and provides our customers with sustainable credits towards purchasing
2Refer to the section entitled "Non-IFRS Measures and Ratios and Reconciliation of Non-IFRS Measures and Ratios".
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Lightspeed products. The program has resulted in the planting of over 1.4 million trees. In addition to offsetting carbon emissions, these trees provide food, income and education for the communities sponsored to plant the trees. We also partner with TravelPerk to offset carbon emissions for our business travel by airplane, automobile, and train. We choose to partner with companies that are also environmentally conscientious. Most of our solutions are powered by Amazon Web Services ("AWS") and Google Cloud platforms. Google Cloud is 100% powered by renewable energy and AWS has committed to powering its operations with 100% renewable energy by 2025.
Lightspeed is also a place of diversity, equity and inclusion, and it has been since our Executive Chair Dax Dasilva founded the Company in Montreal’s Gay Village in 2005. The first four Lightspeed employees were all from the LGBTQ2S+ community and, based on the 2023 annual DEI engagement survey, 10% of our employees identify as LGBTQ2S+. Our commitment to a diverse and inclusive workplace can be seen at all levels of our Company, including our Employee-led Networks for women, LGBTQ2S+ community members and BIPOC community members. Furthermore, the board of directors has committed to a gender representation target of at least 37.5% women for its membership and is actively recruiting new members with this goal in mind. We believe in creating value across our ecosystem, including by ensuring meaningful wealth creation opportunities for all employees. All permanent employees are granted an equity stake in the Company upon hire, ensuring employees’ interests are aligned with those of our shareholders.
Macroeconomic Conditions
There continues to be uncertainty in the macroeconomic environment, including with respect to increasing inflationary pressures, changes in consumer spending, instability in the banking sector, exchange rate fluctuations and increases of interest rates. This macroeconomic uncertainty makes it difficult to assess the future impact these events and conditions will have on our customer base, the end markets we serve and the resulting effect on our business and operations, both in the short term and in the long term.
Despite these ongoing risks and uncertainties, we continue to believe there is an accelerated need for our solutions in the retail and hospitality industries as SMBs look to augment traditional in-person selling models with online and digital strategies, operate with fewer employees to manage labor shortages by automating time-consuming tasks, and find new efficiencies and insights into their business. A large portion of our market is currently served by legacy on-premise systems that are expensive, complicated, outdated, and poorly equipped to help SMBs adapt to this immediate need. This represents a significant opportunity for us to continue to fuel adoption of our solutions. We believe our growth, despite a challenging macroeconomic environment, is an ongoing indicator of this continued shift to cloud-based solutions. Lightspeed believes it is well-positioned to capitalize on this opportunity and will continue to leverage its privileged position at the point of sale to also seize our payments opportunity.
Seizing our payments opportunity means monetizing a larger portion of our customers’ GTV, which for the three months ended June 30, 2023 was $23.4 billion up 6% from the $22.1 billion we processed in the three months ended June 30, 2022. We expect changes in consumer spending or other macroeconomic conditions in the various geographies in which we operate to continue to cause variability in our GTV; however, we believe our diversity in customer verticals and geographies we serve will continue to be a strong asset of the business.
Additionally, the Russian invasion of Ukraine has created and is expected to continue to create further global economic uncertainty. We do not have any significant operations, customers or supplier relationships in Russia, Belarus or Ukraine, and have ceased our selling activities to new customers in Russia and Belarus. All of our intellectual property and customer data is located outside of the region. We do have personnel in Russia who were brought on via our acquisition of Ecwid, and as part of our business continuity plans have relocated many outside of Russia to mitigate any reliance on the region. The United States State Department has issued a warning that one of the potential escalations that may result in connection with the war in Ukraine and in response to the increased sanctions announced by many countries against Russia, could be an increased risk of cyber-security attacks to the networks and operations of companies operating from countries that have participated in sanctions against Russia. We take that concern very seriously and have increased our own efforts to monitor our networks and information technology infrastructure for any signs of such attacks. We will continue to monitor the situation closely, but to date we have not experienced any disruptions in our business operations as a result thereof.
We continue to monitor the impact of macroeconomic events and conditions on our business, financial condition and operations, as further discussed below. Refer to the section of this MD&A entitled "Summary of Factors Affecting Our Performance", to the "Risk Factors" section of our most recent Annual Information Form, and to our other filings with Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission, all of which can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov, for a discussion about the risks with which we are faced.
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Key Performance Indicators
We monitor the following key performance indicators to help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. These key performance indicators are also used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures and ratios. We also believe that securities analysts, investors and other interested parties frequently use industry metrics in the evaluation of issuers. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.
Average Revenue Per User. "Average Revenue Per User" or "ARPU" represents the total subscription revenue and transaction-based revenue of the Company in the period divided by the number of Customer Locations of the Company in the period. We use this measure as we believe it provides a helpful supplemental indicator of our progress in growing the revenue that we derive from our customer base. When excluding Customer Locations attributable to the Ecwid eCommerce standalone product, which Customer Locations carry a lower ARPU, the monthly ARPU of our Customer Locations increased by 20% to approximately $383 per Customer Location as at June 30, 2023 compared to approximately $320 per Customer Location as at June 30, 2022. For greater clarity, the number of Customer Locations of the Company in the period is calculated by taking the average number of Customer Locations throughout the period. Customer Location means a billing merchant location for which the term of services have not ended, or with which we are negotiating a renewal contract, and, in the case of NuORDER, a brand with a direct or indirect paid subscription for which the terms of services have not ended or in respect of which we are negotiating a subscription renewal. A single unique customer can have multiple Customer Locations including physical and eCommerce sites and in the case of NuORDER, multiple subscriptions. We use this measure as we believe that our ability to increase the number of Customer Locations with a high GTV per year served by our platform is an indicator of our success in terms of market penetration and growth of our business.
Gross Payment Volume. "Gross Payment Volume" or "GPV" means the total dollar value of transactions processed, excluding amounts processed through the NuORDER solution, in the period through our payments solutions in respect of which we act as the principal in the arrangement with the customer, net of refunds, inclusive of shipping and handling, duty and value-added taxes. We use this measure as we believe that growth in our GPV demonstrates the extent to which we have scaled our payments solutions. As the number of Customer Locations using our payments solutions grows, particularly those with a high GTV, we will generate more GPV and see higher transaction-based revenue. For the three months ended June 30, 2023, GPV was $5.1 billion compared to $3.3 billion for the three months ended June 30, 2022, representing growth of 56%. We have excluded amounts processed through the NuORDER solution from our GPV because they represent business-to-business volume rather than business-to-consumer volume and we do not currently have a robust payments solution for business-to-business volume.
Gross Transaction Volume. "Gross Transaction Volume" or "GTV" means the total dollar value of transactions processed through our cloud-based software-as-a-service platform, excluding amounts processed through the NuORDER solution, in the period, net of refunds, inclusive of shipping and handling, duty and value-added taxes. We use this measure as we believe GTV is an indicator of the success of our customers and the strength of our platform. GTV does not represent revenue earned by us. For the three months ended June 30, 2023, GTV was $23.4 billion compared to $22.1 billion for the three months ended June 30, 2022, representing growth of 6%. We have excluded amounts processed through the NuORDER solution from our GTV because they represent business-to-business volume rather than business-to-consumer volume and we do not currently have a robust payments solution for business-to-business volume.
Non-IFRS Measures and Ratios and Reconciliation of Non-IFRS Measures and Ratios
The information presented within this MD&A includes certain non-IFRS financial measures such as "Adjusted EBITDA", "Adjusted Loss", and "Adjusted Cash Flows Used in Operating Activities" and the non-IFRS ratio "Adjusted Loss per Share - Basic and Diluted". These measures and ratios are not recognized measures and ratios under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures and ratios presented by other companies. Rather, these measures and ratios are provided as additional information to complement those IFRS measures and ratios by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures and ratios should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. These non-IFRS measures and ratios are used to provide investors with supplemental measures and ratios of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures and ratios. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures and ratios in the evaluation of issuers. Our management also uses non-IFRS measures and ratios in order to facilitate
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operating performance comparisons from period to period, to prepare operating budgets and forecasts and to determine components of management compensation.
Adjusted EBITDA
Adjusted EBITDA is defined as net loss excluding interest, taxes, depreciation and amortization, or EBITDA, as adjusted for share-based compensation and related payroll taxes, compensation expenses relating to acquisitions completed, foreign exchange gains and losses, transaction-related costs, restructuring, litigation provisions and goodwill impairment. We believe that Adjusted EBITDA provides a useful supplemental measure of the Company’s operating performance, as it helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that are not indicative of the core operating performance of our business. The following table reconciles net loss to Adjusted EBITDA for the periods indicated:
Three months ended June 30,
(In thousands of US dollars)
2023
2022
$
$
Net loss
(48,703)
(100,796)
Share-based compensation and related payroll taxes(1)
18,733
38,302
Depreciation and amortization(2)
28,192
29,144
Foreign exchange loss(3)
671
443
Net interest income(2)
(10,362)
(2,007)
Acquisition-related compensation(4)
2,545
17,103
Transaction-related costs(5)
609
2,174
Restructuring(6)
472
1,207
Litigation provisions(7)
9
918
Income tax expense (recovery)
823
(2,089)
Adjusted EBITDA
(7,011)
(15,601)
(1)These expenses represent non-cash expenditures recognized in connection with issued stock options and other awards under our equity incentive plans to our employees and directors, and cash related payroll taxes given that they are directly attributable to share-based compensation; they can include estimates and are therefore subject to change. For the three months ended June 30, 2023, share-based compensation expense was $17,823 (June 2022 - expense of $38,528), and related payroll taxes were an expense of $910 (June 2022 - recovery of $226). These amounts are included in direct cost of revenues, general and administrative expenses, research and development expenses and sales and marketing expenses (see note 6 of the unaudited condensed interim consolidated financial statements for additional details).
(2)In connection with the accounting standard IFRS 16 - Leases, for the three months ended June 30, 2023, net loss includes depreciation of $2,230 related to right-of-use assets, interest expense of $287 on lease liabilities, and excludes an amount of $2,066 relating to rent expense ($2,047, $271, and $2,092, respectively, for the three months ended June 30, 2022).
(3)These non-cash losses relate to foreign exchange translation.
(4)These costs represent a portion of the consideration paid to acquired businesses that is contingent upon the ongoing employment obligations for certain key personnel of such acquired businesses, and/or on certain performance criteria being achieved.
(5)These expenses relate to professional, legal, consulting, accounting, advisory, and other fees relating to our public offerings and acquisitions that would otherwise not have been incurred. These costs are included in general and administrative expenses and sales and marketing expenses.
(6)During the fiscal year ended March 31, 2023, certain functions and the associated management structure were reorganized to realize synergies and ensure organizational agility. The expenses associated with this reorganization were recorded as a restructuring charge.
(7)These amounts represent provisions taken and other costs, such as legal fees, incurred in respect of certain litigation matters, net of amounts covered by insurance and indemnifications. These amounts do not include provisions taken and other costs incurred in respect of litigation matters of a nature that we consider normal to our business. These amounts are included in general and administrative expenses.
Adjusted Loss and Adjusted Loss per Share - Basic and Diluted
Adjusted Loss is defined as net loss excluding amortization of intangibles, as adjusted for share-based compensation and related payroll taxes, compensation expenses relating to acquisitions completed, transaction-related costs, restructuring, litigation provisions, deferred income taxes and goodwill impairment. We use this measure as we believe excluding amortization of intangibles and certain other non-cash or non-operational expenditures provides a helpful supplementary indicator of our business
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performance as it allows for more accurate comparability across periods. Adjusted Loss per Share - Basic and Diluted is defined as Adjusted Loss divided by the weighted average number of common shares (basic and diluted). We use Adjusted Loss per Share - Basic and Diluted to provide a helpful supplemental indicator of the performance of our business on a per share (basic and diluted) basis. The following table reconciles net loss to Adjusted Loss for the periods indicated:
Three months ended June 30,
(In thousands of US dollars, except number of shares and per share amounts)
2023
2022
$
$
Net loss
(48,703)
(100,796)
Share-based compensation and related payroll taxes(1)
18,733
38,302
Amortization of intangible assets
24,505
25,876
Acquisition-related compensation(2)
2,545
17,103
Transaction-related costs(3)
609
2,174
Restructuring(4)
472
1,207
Litigation provisions(5)
9
918
Deferred income tax recovery
(392)
(2,353)
Adjusted Loss
(2,222)
(17,569)
Weighted average number of Common Shares – basic and diluted(6)
152,523,457
148,973,294
Net loss per share – basic and diluted
($0.32)
($0.68)
Adjusted Loss per Share – Basic and Diluted
($0.01)
($0.12)
(1)These expenses represent non-cash expenditures recognized in connection with issued stock options and other awards under our equity incentive plans to our employees and directors, and cash related payroll taxes given that they are directly attributable to share-based compensation; they can include estimates and are therefore subject to change. For the three months ended June 30, 2023, share-based compensation expense was $17,823 (June 2022 - expense of $38,528), and related payroll taxes were an expense of $910 (June 2022 - recovery of $226). These amounts are included in direct cost of revenues, general and administrative expenses, research and development expenses and sales and marketing expenses (see note 6 of the unaudited condensed interim consolidated financial statements for additional details).
(2)These costs represent a portion of the consideration paid to acquired businesses that is contingent upon the ongoing employment obligations for certain key personnel of such acquired businesses, and/or on certain performance criteria being achieved.
(3)These expenses relate to professional, legal, consulting, accounting, advisory, and other fees relating to our public offerings and acquisitions that would otherwise not have been incurred. These costs are included in general and administrative expenses and sales and marketing expenses.
(4)During the fiscal year ended March 31, 2023, certain functions and the associated management structure were reorganized to realize synergies and ensure organizational agility. The expenses associated with this reorganization were recorded as a restructuring charge.
(5)These amounts represent provisions taken and other costs, such as legal fees, incurred in respect of certain litigation matters, net of amounts covered by insurance and indemnifications. These amounts do not include provisions taken and other costs incurred in respect of litigation matters of a nature that we consider normal to our business. These amounts are included in general and administrative expenses.
(6)In periods where we reported an Adjusted Loss, as a result of the Adjusted Losses incurred, all potentially-dilutive shares have been excluded from the calculation of Adjusted Loss per Share - Diluted because including them would be anti-dilutive. Adjusted Loss per Share - Diluted is the same as Adjusted Loss per Share - Basic in these periods where we incurred an Adjusted Loss.
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Adjusted Cash Flows Used in Operating Activities
Adjusted Cash Flows Used in Operating Activities is defined as cash flows used in operating activities as adjusted for the payment of payroll taxes on share-based compensation, the payment of compensation expenses relating to acquisitions completed, the payment of transaction-related costs, the payment of restructuring costs, the payment of amounts related to litigation provisions net of amounts received as insurance and indemnification proceeds and the payment of amounts related to capitalized internal development costs. We use this measure as we believe including or excluding certain inflows and outflows provides a helpful supplemental indicator to investors on our business performance in regard to the Company's ability to generate cash flows. An explanation of the Adjusted Cash Flows Used in Operating Activities can be found in the "Liquidity and Capital Resources" section of this MD&A. The following table reconciles cash flows used in operating activities to Adjusted Cash Flows Used in Operating Activities for the periods indicated:
Three months ended June 30,
(In thousands of US dollars)
2023
2022
$
$
Cash flows used in operating activities
(26,090)
(33,414)
Payroll taxes related to share-based compensation(1)
334
73
Transaction-related costs(2)
680
5,044
Restructuring(3)
830
583
Litigation provisions(4)
76
2,159
Capitalized internal development costs(5)
(2,285)
(603)
Adjusted Cash Flows Used in Operating Activities
(26,455)
(26,158)
Adjusted Cash Flows Used in Operating Activities for the three months ended June 30, 2023 includes working capital movements of $11.1 million from merchant cash advances (June 2022 - $3.1 million).
(1)These amounts represent the cash inflow and outflow of payroll taxes on our issued stock options and other awards under our equity incentive plans to our employees and directors.
(2)These amounts represent the cash outflows, and inflows due to timing differences, related to professional, legal, consulting, accounting, advisory, and other fees relating to our public offerings and acquisitions that would otherwise not have been incurred.
(3)During the fiscal year ended March 31, 2023, certain functions and the associated management structure were reorganized to realize synergies and ensure organizational agility. The expenses associated with this reorganization were recorded as a restructuring charge.
(4)These amounts represent the cash inflow and outflow in respect of provisions taken, and other costs such as legal fees incurred, in respect of certain litigation matters, net of amounts received as insurance and indemnification proceeds. These cash inflows and outflows do not include cash inflows and outflows in respect of litigation matters of a nature that we consider normal to our business.
(5)These amounts represent the cash outflows associated with capitalized internal development costs. These amounts are included within the cash flows used in investing activities section of the unaudited condensed interim consolidated statements of cash flows. If these costs were not capitalized as an intangible asset, they would be part of our cash flows used in operating activities.
Outlook
A discussion of management's expectations as to the Company's outlook for the three months ending September 30, 2023 and fiscal year ending March 31, 2024 is contained in the Company's press release dated August 3, 2023 under the heading "Financial Outlook". The press release is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Information contained in, or otherwise accessed through, such press release is not deemed part of this MD&A and such press release and information is not incorporated by reference herein.
Summary of Factors Affecting our Performance
We believe that the growth and future success of our business depends on many factors, including those described below. While each of these factors presents significant opportunities for our business, they also pose important challenges, some of which are discussed below, in the "Risk Factors" section of our most recent Annual Information Form, and in our other filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission, all of which can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
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Market Adoption of our Platform
We intend to continue to drive adoption of our advanced commerce platform by scaling our solutions to meet the needs of both new and existing customers of all types and sizes, with our focus being on complex high GTV customers. We believe that there is significant potential to increase penetration of our total addressable market and attract new customers and that this potential has become even greater due to the accelerating need for SMBs to move away from legacy on-premise systems towards cloud-based omni-channel solutions. We plan to do this by further developing our products and services, embedding ourselves up and down the supply chain within the ecosystem of verticals as well as continuing to invest in marketing strategies tailored to attract new businesses to our platform, both in our existing geographies and new markets around the world. We also intend to selectively evaluate opportunities to offer our solutions to businesses operating in industry verticals that we do not currently serve. We plan to continue to invest in our platform to drive market adoption, particularly of our payments solutions, and our operating cash flows may fluctuate and our profitability may be impacted as we make these investments. Our market is large, evolving, highly-fragmented, competitive and has low barriers to entry in many of the countries in which we operate. Our competitors range from large, well-established vendors to smaller, earlier-stage ones. We expect competition to intensify in the future, particularly as industry consolidation occurs and as large, well-established vendors increasingly service more complex customers or shift their focus to in-person shopping and services. Our focus will be on selling our flagship products globally, as we believe two core offerings will reduce complexity, help improve go-to-market momentum and help deliver stronger performance.
Customer Adoption of our Payments Solutions
We believe that our payments solutions will continue to be an increasingly important part of our business as we continue to increase their availability throughout our customer base and across our core geographies. Our payments solutions are designed to be transparent and easy to understand, and we have priced our solutions at market competitive rates based on a percentage of GTV electronically processed through our platform. We continue to see increased adoption of our payment processing solutions, which are the largest driver of revenue growth for the Company. As an increasing proportion of our revenue is generated from our payments solutions, we believe that while our total revenues may grow, our gross margins will decrease over time due to the lower gross margin profile of our transaction-based revenue stream relative to the higher gross margin profile of our subscription revenue stream. As of the beginning of Fiscal 2024, we are now selling our POS and payments solutions together as one unified offering. We believe embedded payments results in the best experience for customers by improving consistency and reliability, streamlining support and billing, and enhancing opportunities for them to avail themselves of innovative product functionality. We are helping our customers by offering free hardware and implementation, helping with contract buy-outs and offering competitive rates. As a result of this initiative, we will require our eligible new and existing customers to adopt our payments solutions. We believe processing additional GTV for new and existing customers through our payments solutions will help advance our growth strategies and enable us to reduce complexity in our business. In addition, this initiative will help reduce the costs of supporting a variety of third party payment processors. We may be limited in our ability to switch certain customers to our embedded payments solution by virtue of the terms and conditions of partnerships we have with third party payments processors. Further, our third party partners have in the past and may in the future allege that we have improperly engaged with certain customers. Any such allegations could damage our reputation and brand and expose us to a risk of litigation or other liabilities, which would be costly, time consuming, distracting to management and adversely affect our ability to successfully sell our POS and payments solutions together as one unified offering.
Cross-selling and Up-selling with Existing Customers
Our existing customers represent a significant opportunity to cross-sell and up-sell products and services with significantly lower sales and marketing expense. We use a "land and expand" approach, with many of our customers initially deploying our platform for a specific use case. Once they realize the benefits and wide functionality of our platform, they can expand the number of use cases including services such as Lightspeed Advanced Insights, Lightspeed Payments and Lightspeed Capital. We plan to continually invest in product development, and in sales and marketing, to add more solutions to our platform and to increase the usage and awareness of our solutions. Such investments include integrating Lightspeed B2B to enable inventory ordering straight from our merchants’ POS, and to provide brands with data insights on consumers and trends to optimize manufacturing and distribution. We also plan to invest in and adopt innovative solutions and practices, including artificial intelligence tools in our software development lifecycle and customer support capabilities. Our future revenue growth and our ability to achieve and maintain profitability is dependent upon our ability to maintain existing customer relationships and to continue to expand our customers’ use of our comprehensive suite of solutions.
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Economic Conditions and Resulting Consumer Spending Trends
Our performance is subject to worldwide economic conditions and global events, including political, economic, social and environmental risks that may impact our operations or our customers’ operations. Such conditions and events may adversely affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. Deterioration in general economic conditions, including any rise in unemployment rates, inflation and increases in interest rates, have adversely affected in the past and may in the future adversely affect consumer spending, consumer debt levels and credit and debit card usage, and as a result, have in the past and may in the future adversely affected our financial performance by reducing the number of transactions or average purchase amount of transactions processed using our payments solutions. Deterioration in general economic conditions may also cause financial institutions to restrict credit lines to cardholders or limit the issuance of new cards to mitigate cardholder credit concerns, which could further reduce the number or average purchase amount of transactions processed using our payments solutions. Many of the customers that use our platform are SMBs and many are also in the entrepreneurial stage of their development. SMBs may be disproportionately affected by the aforementioned economic conditions or economic downturns, especially if they sell discretionary goods. SMBs may also be disproportionately affected by other economic conditions, including labor shortages and global supply chain issues. SMBs frequently have limited budgets and may choose to allocate their spending to items other than our platform, especially in times of economic uncertainty or recessions. Economic and geopolitical uncertainties, including those related to variants of the COVID-19 virus and Russia's invasion of Ukraine may further amplify such risks.
Economic downturns have and may continue to adversely impact retail and hospitality sales, which could result in us processing lower payments volumes and customers who use our platform going out of business or deciding to stop using our services in order to conserve cash. Moreover, our customers that run restaurants or customers in certain of our retail verticals operate in industries which are intensely competitive and subject to heightened exposure to economic conditions affecting consumer discretionary spending, resulting in overall risk and a rate of failure that are typically greater than for businesses generally.
Weakening economic conditions may also adversely affect third parties, including suppliers and partners, with whom we have entered into relationships and upon whom we depend in order to operate and grow our business. Uncertain and adverse economic conditions may also lead to increased write-offs of our trade receivables, and refunds and chargebacks or potential losses to our merchant cash advance program, any of which could adversely affect our business.
Scaling our Sales and Marketing Team
Our ability to achieve significant growth in future revenue will largely depend upon the effectiveness of our sales and marketing efforts, both domestically and internationally. The majority of our sales and marketing efforts are accomplished in-house, and we believe the strength of our sales and marketing team is critical to our success. We have invested and intend to continue to invest meaningfully in terms of expanding our sales force, and consequently, we anticipate that our headcount will continue to increase as a result of these investments. To complement this strategy, we invest in outbound-led lead generation, particularly in our U.S. markets and for complex merchants and restaurateurs with high annual GTV. In certain instances, we have supplemented this approach with field sales teams.
Retaining and Motivating Qualified Personnel
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. Our ability to identify, hire, develop, motivate and retain qualified personnel will directly affect our ability to maintain and grow our business, and such efforts will require significant time, expense and attention. Our ability to continue to attract and retain highly skilled personnel, specifically employees with technical and engineering skills and employees with high levels of experience in designing and developing software and internet-related services, will be critical to our future success and demand and competition for such talent is high. We are also substantially dependent on our direct sales force to obtain new customers and increase sales to existing customers. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining a sufficient number of sales personnel to support our growth. While we have in the past issued, and intend to continue to issue, options, restricted share units or other equity awards as key components of our overall compensation, employee attraction and retention efforts, we are required under IFRS to recognize shared-based compensation expense in our operating results for employee share-based compensation under our equity grant programs which may increase the pressure to limit share-based compensation. See the risk factor in our Annual Information Form titled "If we are unable to hire, retain and motivate qualified personnel, our business will suffer" for more information.
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International Sales
We believe that global demand for our platform will continue to increase as SMBs seek out end-to-end solutions with omni-channel capabilities to enable their businesses to thrive and succeed in an increasingly complex operating environment. Accordingly, we believe there is a significant opportunity to grow our international business. We have invested, and plan to continue to opportunistically invest, ahead of this potential demand in personnel and marketing, and to make selective acquisitions to support our international growth. For each new geography where we expand or seek to expand, we focus on understanding the needs of the local market and invest to develop relationships and our products, as well as understanding and complying with applicable local regulatory and compliance frameworks.
Seasonality
We believe our transaction-based revenues will continue to represent an increasing proportion of our overall revenue mix over time as a result of the continued customer adoption of our payments solutions, and we expect seasonality of our quarterly results to continue to increase. We expect our overall revenues to continue to become increasingly correlated with respect to the GTV processed by our customers through our platform.
Foreign Currency
Exchange rate fluctuations may negatively affect our results of operations. Our presentation and functional currency is the U.S. dollar. We derive the largest portion of our revenues in U.S. dollars and the largest proportion of our expenses in U.S. dollars. Exchange rate fluctuations have and may continue to negatively affect our revenue as our software subscriptions are generally billed in the local currency of the country in which the customer is located, and the underlying GPV (from which we earn transaction-based revenue) is also expected to be denominated in local currency. To the extent that we have significant revenues denominated in foreign currencies, any strengthening of the U.S. dollar would reduce our revenues as measured in U.S. dollars. Our head office and a significant portion of our employees are located in Canada, along with additional presence in Europe, Australia and New Zealand. A large amount of our expenses are incurred in Canadian dollars and Euros with a smaller proportion of expenses incurred in other foreign currencies. As a result, our expenses may be adversely impacted by a decrease in the value of the U.S. dollar relative to these currencies but primarily the Canadian dollar and the Euro.
We have a hedging program to mitigate the impact of foreign currency fluctuations on future cash flows and expenses by entering into foreign exchange forward contracts which we have designated as cash flow hedges. Our hedging program does not mitigate the impact of foreign currency fluctuations on our revenue. We do not have foreign exchange forward contracts in place with respect to all currencies in which we currently do business but may, from time to time, enter into additional foreign exchange forward contracts in respect of other foreign currencies. Currency hedging entails a risk of illiquidity and, to the extent the applicable foreign currency fluctuates in value against the U.S. dollar, the use of hedges could result in losses greater than if the hedging had not been used. There can be no assurance that our hedging strategies, if any, will be effective in the future or that we will be able to enter into foreign exchange forward contracts on satisfactory terms. See the "Risk Factors" section of our most recent Annual Information Form, which can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov, for a discussion on exchange rate fluctuations.
Selective Pursuit of Acquisitions
We have complemented our organic growth strategies by taking a targeted and opportunistic approach to acquisitions, identifying acquisition targets with a view to accelerating our product roadmap, increasing our market penetration, going deep into verticals and creating value for our shareholders. Throughout our history, we have accrued significant sales and marketing expertise, which we leverage to facilitate our continued global expansion both organically and in integrating the companies we acquire.
We believe that we remain well-positioned to continue to grow organically around the globe and to selectively pursue new acquisitions given our experience and scale. However, such acquisitions and investments could divert management’s attention, result in operating difficulties due to a lack of timely and proper completion or integration, or otherwise disrupt our operations and adversely affect our business, operating results or financial position, regardless of whether such acquisitions and investments are ultimately completed.
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Key Components of Results of Operations
Revenues
Subscription Revenue
We principally generate subscription-based revenue through the sale of subscriptions to our software solutions. We offer pricing plans designed to meet the needs of our current and prospective customers that enable our solutions to scale with customers as they grow. Our subscription plans are sold as monthly, one-year or multi-year plans. Subscription plans for our cloud-based solutions include maintenance and support. Customers purchase subscription plans directly from us or through our channel partners. In addition to the core subscriptions outlined above, customers can purchase add-on services such as Delivery, Advanced Insights, Accounting and Inventory, amongst others. In addition, we generate revenues through revenue sharing
agreements from our partners.
Transaction-based Revenue
We generate transaction-based revenues by providing our customers with the functionality to accept payments from consumers. Such revenues come in the form of transaction fees and represent a percentage of GTV processed by our customers through our offered solutions. We generate transaction-based revenues from our payments solutions as well as our revenue sharing agreements with our integrated payment partners. The revenue sharing arrangements mainly predate the availability of Lightspeed Payments and are also the result of inherited revenue streams from some of our acquisitions. Since we do not act as the principal in these arrangements, we recognize revenue from these streams at the net amount retained by us in accordance with IFRS. It also means we generally earn inferior economics as a result when compared to payments solutions in respect of which we act as principal given that we have less control of the underlying customer relationship. We have, on multiple occasions, been able to leverage our increased scale to renegotiate our relationships with our payments partners resulting in better payments economics overall. In addition, we have contracted with a number of third-party vendors that sell products to the same customers as the Company. We refer customers to these vendors and earn a referral fee. We also earn revenues from Lightspeed Capital, a merchant cash advance program pursuant to which we purchase a designated amount of future receivables at a discount, and the customer remits a fixed percentage of their daily sales to us, until the outstanding balance has been fully remitted.
Our payments solutions allow our customers to accept electronic payments in-store, through connected terminals and online. Offering embedded payments functionality is highly complementary to the platform we offer our customers today and will allow us to monetize a greater portion of the $88.4 billion in GTV processed over the twelve months preceding June 30, 2023.
Hardware and Other Revenue
These revenues are generally one-time revenues associated with the sale of hardware with which our solutions integrate and the sale of professional services in support of the installation and implementation of our solutions. We generate revenues through the sale of POS peripheral hardware such as our tablets, customer facing display, receipt printers, networking hardware, cash drawers, payment terminals, servers, stands, bar-code scanners, and an assortment of accessories.
Although our software solutions are intended to be turnkey solutions that can be used by the customer as delivered, we provide professional services to our customers in some circumstances in the form of on-site installations and implementations. These implementation services are typically delivered through our internal integrations team or through a network of certified partners. Additionally, from time to time we earn one-time fees for integration work performed pursuant to certain strategic partnerships.
Direct Cost of Revenues
Subscription Cost of Revenue
Cost of subscription revenue primarily includes salaries and other employee related costs for a subset of the support team, costs associated with hosting infrastructure for our services and certain corporate overhead allocations. Significant expenses include costs of our support including total salaries and benefits, share-based compensation and related payroll taxes, data center capacity costs, professional fees and other third-party direct costs such as customer support and royalties and amounts paid to third-party cloud service providers.
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Transaction-based Cost of Revenue
Transaction-based cost of revenue primarily includes direct costs when transactions are processed using our payments solutions, direct costs related to our merchant cash advance program, salaries and other employee related costs, including share-based compensation and related payroll taxes, for a subset of the support team, and certain corporate overhead allocations. The direct costs include costs of interchange and network assessment fees, processing fees, and bank settlement fees to third-party payment processors and financial institutions involved in settlement.
Hardware and Other Cost of Revenue
Cost of these revenues primarily includes costs associated with our hardware solutions, such as the cost of acquiring the hardware inventory, including hardware purchase price, expenses associated with third-party fulfillment companies, shipping and handling and inventory adjustments, expenses related to costs of professional services provided to customers, salaries and other employee related costs, including share-based compensation and related payroll taxes, and other corporate overhead allocations.
Operating Expenses
General and Administrative
General and administrative expenses consist of salaries and other employee related costs, including share-based compensation and related payroll taxes, for finance, accounting, legal, administrative, human resources, as well as financial services. These expenses also consist of expenses related to information technology, information systems, information security, and corporate data employees which expenses are partially allocated to research and development, sales and marketing, and direct cost of revenues. General and administrative expenses also include other professional fees, transaction-related costs related to our acquisitions, litigation costs, costs associated with internal systems and general corporate expenses. As a public company in the United States, it is expensive for us to obtain director and officer liability insurance, and we have in the past and may in the future need to manage trade-offs between accepting reduced coverage or incurring higher costs to expand our coverage. In the longer term, we expect general and administrative expenses to decrease as a percentage of total revenues as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business.
Research and Development
Research and development expenses consist primarily of salaries and other employee related costs, including share-based compensation and related taxes, for product-related functions including product management, core development, data, product design and development and other corporate overhead allocations. We continue to invest our research and development efforts on developing added features and solutions, as well as increasing the functionality and enhancing the ease of use of our platform. These expenses give rise to tax credits primarily from the Canadian Federal Scientific Research and Experimental Development Program and the Tax Credit for the Development of e-business, or "SR&ED" and "e-business" tax credits, respectively. Although the Company's e-business tax credits are mostly refundable, a portion of e-business tax credits is non-refundable and is carried forward to reduce future Quebec income taxes payable and SR&ED tax credits are non-refundable and are carried forward to reduce future federal income taxes payable. Given the Company’s recent losses in Canada, these non-refundable SR&ED credits and e-business credits have not been recognized in the financial statements. Upon recognition, they will reduce research and development expenses. Although not immediately, given that we are still scaling our technology group in line with anticipated growth, we expect research and development expenses to decline in proportion to total revenue as we achieve additional economies of scale from our expansion. The Company recognizes internal development costs as intangible assets only when certain criteria are met (refer to note 3 of the audited annual consolidated financial statements for more details).
Sales and Marketing
Sales and marketing expenses consist primarily of selling and marketing costs and salaries and other employee related costs, including share-based compensation and related payroll taxes, for sales and business development and marketing. Other costs within sales and marketing include costs of acquisition of new customers, travel-related expenses and corporate overhead allocations. We plan to continue to expand sales and marketing efforts to attract new customers, retain existing customers and increase revenues from both new and existing customers. Over time, we expect sales and marketing expenses will decline as a percentage of total revenues as we achieve additional economies of scale from our expansion and as we sell more of our technology suite, including our payments solutions, to our existing customer base.
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Acquisition-related Compensation
Acquisition-related compensation expenses represent the portion of the consideration paid to acquired businesses which is contingent upon the ongoing employment or service obligations for certain key personnel of such acquired businesses, and/or on certain performance criteria being achieved. This portion of the purchase price is amortized over the related service period for those key personnel.
Results of Operations
The following table outlines our unaudited condensed interim consolidated statements of loss for the three months ended June 30, 2023 and 2022:
Three months ended June 30,
(In thousands of US dollars, except per share amounts)
2023
2022
$
$
Revenues
Subscription
78,727
73,560
Transaction-based
120,970
91,524
Hardware and other
9,389
8,798
Total revenues
209,086
173,882
Direct cost of revenues
Subscription
19,340
20,423
Transaction-based
89,019
62,901
Hardware and other
12,822
13,033
Total cost of revenues
121,181
96,357
Gross profit
87,905
77,525
Operating expenses
General and administrative
24,944
30,239
Research and development
34,035
35,636
Sales and marketing
55,288
68,645
Depreciation of property and equipment
1,457
1,221
Depreciation of right-of-use assets
2,230
2,047
Foreign exchange loss
671
443
Acquisition-related compensation
2,545
17,103
Amortization of intangible assets
24,505
25,876
Restructuring
472
1,207
Total operating expenses
146,147
182,417
Operating loss
(58,242)
(104,892)
Net interest income
10,362
2,007
Loss before income taxes
(47,880)
(102,885)
Income tax expense (recovery)
Current
1,215
264
Deferred
(392)
(2,353)
Total income tax expense (recovery)
823
(2,089)
Net loss
(48,703)
(100,796)
Net loss per share – basic and diluted
(0.32)
(0.68)
(15)
The following table outlines share-based compensation and the related payroll taxes associated with these expenses included in the results of operations for the three months ended June 30, 2023 and 2022:
Three months ended June 30,
(In thousands of US dollars)
2023
2022
$
$
Direct cost of revenues
1,853
2,246
General and administrative
6,181
10,085
Research and development
8,376
10,885
Sales and marketing
2,323
15,086
Total share-based compensation and related costs(1)
18,733
38,302
(1) For the three months ended June 30, 2023, the share-based compensation expense was $17,823 (June 2022 - expense of $38,528), and the related payroll taxes were an expense of $910 (June 2022 - recovery of $226).
The decrease in share-based compensation and related payroll taxes in the three months ended June 30, 2023 was primarily driven by a reduction in the quantity and fair value of stock options and awards issued throughout the past several quarters, as well as due to awards forfeited in the period and awards forfeited throughout the past several quarters, including awards forfeited during the three months ended March 31, 2023 due to the restructuring.
Results of Operations for the Three Months Ended June 30, 2023 and 2022
Revenues
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Revenues
Subscription
78,727
73,560
5,167
7.0
Transaction-based
120,970
91,524
29,446
32.2
Hardware and other
9,389
8,798
591
6.7
Total revenues
209,086
173,882
35,204
20.2
Percentage of total revenues
Subscription
37.7
%
42.3
%
Transaction-based
57.9
%
52.6
%
Hardware and other
4.4
%
5.1
%
Total
100
%
100
%
Subscription Revenue
Subscription revenue for the three months ended June 30, 2023 increased by $5.2 million or 7% as compared to the three months ended June 30, 2022. The increase was primarily due to adoption of our flagship solutions, new customers using our platform, and new and existing customers adopting additional modules of our platform.
Transaction-based Revenue
Transaction-based revenue for the three months ended June 30, 2023 increased by $29.4 million or 32% as compared to the three months ended June 30, 2022. The growth was primarily due to continued adoption of our payments solutions which was
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accelerated as a result of our initiative to offer our POS and payments solutions together as one unified offering. This increased adoption of our payments solutions led to an increase in GPV of 56% from $3.3 billion to $5.1 billion.
Hardware & Other Revenue
Hardware and other revenue for the three months ended June 30, 2023 increased by $0.6 million or 7% as compared to the three months ended June 30, 2022 due primarily to an increase in hardware provided to customers signing for both software and our payments solutions, offset by discounts and incentives provided during the three months ended June 30, 2023.
Direct Cost of Revenues
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Direct cost of revenues
Subscription
19,340
20,423
(1,083)
(5.3)
Transaction-based
89,019
62,901
26,118
41.5
Hardware and other
12,822
13,033
(211)
(1.6)
Total costs of revenues
121,181
96,357
24,824
25.8
Percentage of revenue
Subscription
24.6
%
27.8
%
Transaction-based
73.6
%
68.7
%
Hardware and other
136.6
%
148.1
%
Total
58.0
%
55.4
%
Subscription Cost of Revenue
Subscription cost of revenue for the three months ended June 30, 2023 decreased by $1.1 million or 5% as compared to the three months ended June 30, 2022. Included in subscription cost of revenue for the three months ended June 30, 2023 was $1.6 million in share-based compensation and related payroll taxes, compared to $1.8 million in the three months ended June 30, 2022. The remainder of the decrease of $0.8 million was primarily due to lower salary and other employee-related costs of $0.6 million, and lower hosting costs of $0.8 million primarily due to a volume rebate received in the quarter offset by higher royalties of $0.5 million and higher professional fees and other costs of $0.1 million.
Transaction-based Cost of Revenue
Transaction-based cost of revenue for the three months ended June 30, 2023 increased by $26.1 million or 42% as compared to the three months ended June 30, 2022. The increase was primarily due to direct costs related to higher revenue from our payments solutions compared to the three months ended June 30, 2022.
Hardware and Other Cost of Revenue
Direct cost of hardware and other revenue for the three months ended June 30, 2023 decreased by $0.2 million or 2% as compared to the three months ended June 30, 2022 mainly due to lower salary and other employee-related costs of $0.2 million primarily consisting of savings from the restructuring announced during the three months ended March 31, 2023. The negative margins were due to discounts and incentives provided in order to encourage new business given the competitive nature of our industry and the free hardware provided to assist customers in transitioning to our unified Payments and POS offering.
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Gross Profit
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Gross profit
87,905
77,525
10,380
13.4
Percentage of total revenues
42.0
%
44.6
%
Gross profit for the three months ended June 30, 2023 increased by $10.4 million or 13% compared to the three months ended June 30, 2022. The increase was primarily due to growth in our subscription and transaction-based revenue as a result of customers adopting additional modules of our platform and continued adoption of our payments solutions which was accelerated as a result of our initiative to offer our POS and payments solutions together as one unified offering. A higher proportion of transaction-based revenue in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 reduced gross profit as a percentage of revenue.
Operating Expenses
General and Administrative
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
General and administrative
24,944
30,239
(5,295)
(17.5)
Percentage of total revenues
11.9
%
17.4
%
General and administrative expenses for the three months ended June 30, 2023 decreased by $5.3 million or 18% compared to the three months ended June 30, 2022. Included in general and administrative expenses for the three months ended June 30, 2023 is $6.2 million of share-based compensation expense and related payroll taxes, $0.6 million in transaction-related costs and nil in respect of provisions and other costs incurred in respect of certain litigation matters, net of amounts covered by insurance and indemnification proceeds, compared to $10.1 million, $1.9 million and $0.9 million, respectively, in the three months ended June 30, 2022. When excluding share-based compensation and related payroll taxes, transaction-related costs and provisions and other costs incurred in respect of certain litigation matters, net of amounts covered by insurance and indemnification proceeds, general and administrative expenses increased by $0.8 million driven by a $1.3 million increase in bad debt expense which is in line with our revenue growth and the increase in our merchant cash advance business, and an increase of $0.3 million in professional fees and other expenses. These increases were offset by lower salary and other employee-related costs of $0.1 million, and a $0.7 million decrease in D&O insurance. Our general and administrative expenses as a percentage of revenue decreased from 17% to 12% from the three months ended June 30, 2022 to the three months ended June 30, 2023.
Research and Development
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Research and development
34,035
35,636
(1,601)
(4.5)
Percentage of total revenues
16.3
%
20.5
%
(18)
Research and development expenses for the three months ended June 30, 2023 decreased by $1.6 million or 4% compared to the three months ended June 30, 2022. Included in research and development expenses for the three months ended June 30, 2023 is $8.4 million of share-based compensation expense and related payroll taxes compared to $10.9 million in the three months ended June 30, 2022. When excluding share-based compensation and related payroll taxes, research and development expenses increased by $0.9 million driven by higher salary and other employee-related costs of $0.2 million, which includes $2.1 million in savings from the restructuring announced during the three months ended March 31, 2023, and $0.9 million related to an increase in professional fees and other expenses, offset by $0.2 million related to a decrease in hosting costs. Our research and development costs as a percentage of revenue decreased from 20% to 16% from the three months ended June 30, 2022 to the three months ended June 30, 2023.
Sales and Marketing
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Sales and marketing
55,288
68,645
(13,357)
(19.5)
Percentage of total revenues
26.4
%
39.5
%
Sales and marketing expenses for the three months ended June 30, 2023 decreased by $13.4 million or 19% as compared to the three months ended June 30, 2022. Included in sales and marketing expenses for the three months ended June 30, 2023 is $2.3 million of share-based compensation expense and related payroll taxes and nil in transaction-related costs compared to $15.1 million and $0.3 million, respectively, in the three months ended June 30, 2022. When excluding share-based compensation and related payroll taxes and transaction-related costs, sales and marketing expenses decreased by $0.3 million. This $0.3 million decrease consisted a $2.6 million decrease in other spend in sales and marketing as a result of our ongoing focus on prudent spend, including marketing acquisition and growth spend, reseller commissions and trade shows, offset by higher salary and other employee-related costs of $2.3 million, which includes $1.9 million in savings from the restructuring announced during the three months ended March 31, 2023, and a $0.1 million increase in other expenses. Our sales and marketing costs as a percentage of revenue decreased from 39% to 26% from the three months ended June 30, 2022 to the three months ended June 30, 2023.
Depreciation
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Depreciation of property and equipment
1,457
1,221
236
19.3
Depreciation of right-of-use assets
2,230
2,047
183
8.9
3,687
3,268
419
12.8
Percentage of total revenues
1.8
%
1.9
%
Depreciation of property and equipment expenses for the three months ended June 30, 2023 increased by $0.2 million or 19% as compared to the three months ended June 30, 2022. The increase in the depreciation of property and equipment results from additions to property and equipment made throughout the last 12 months. The increase in the depreciation of right-of-use assets of $0.2 million or 9% is mainly the result of new lease commitments offset by lease terminations in the last 12 months.
(19)
Foreign Exchange Loss
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Foreign exchange loss
671
443
228
51.5
Percentage of total revenues
0.3
%
0.3
%
Foreign exchange loss for the three months ended June 30, 2023 increased by $0.2 million or 51% as compared to the three months ended June 30, 2022. Foreign exchange losses arise as we have financial assets and liabilities outstanding in currencies other than the U.S. dollar, our functional currency. Items included in our results are measured in U.S. dollars and foreign currency transactions are translated into U.S. dollars using the exchange rates prevailing at the date of the transactions or when items are re-measured with resulting gains and losses subsequently recognized.
Acquisition-related Compensation
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Acquisition-related compensation
2,545
17,103
(14,558)
(85.1)
Percentage of total revenues
1.2
%
9.8
%
Acquisition-related compensation expense for the three months ended June 30, 2023 decreased by $14.6 million or 85% compared to the three months ended June 30, 2022. The decrease is due to lower deferred compensation from our acquisitions of NuORDER and Ecwid which have both been either partially or fully settled. The majority of this acquisition-related compensation is tied to ongoing employment obligations in connection with certain of our acquisitions. This acquisition-related compensation was not included in the total purchase consideration, but rather was treated as an acquisition-related compensation expense for post-combination services.
Amortization of Intangible Assets
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Amortization of intangible assets
24,505
25,876
(1,371)
(5.3)
Percentage of total revenues
11.7
%
14.9
%
Amortization of intangible assets for the three months ended June 30, 2023 decreased by $1.4 million or 5% as compared to the three months ended June 30, 2022. The decrease in amortization relates primarily to the Chronogolf customer relationships and the Chronogolf, Kounta and Gastrofix software technology intangible assets which are fully amortized as at June 30, 2023.
(20)
Restructuring
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Restructuring
472
1,207
(735)
(60.9)
Percentage of total revenues
0.2
%
0.7
%
During the fiscal year ended March 31, 2023, certain functions and the associated management structure were reorganized to realize synergies and ensure organizational agility. The expenses associated with this plan were recorded as a restructuring charge. The restructuring expense consists entirely of severance costs.
Other Income
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Net interest income
10,362
2,007
8,355
416.3
Percentage of total revenues
5.0
%
1.2
%
Net interest income for the three months ended June 30, 2023 increased by $8.4 million or 416% as compared to the three months ended June 30, 2022 due to an increase in interest income of $8.0 million related to higher interest earned on our cash and cash equivalents and a decrease in interest expense of $0.3 million due primarily to the full repayment of the balance of our stand-by acquisition term loan on July 6, 2022.
Income Taxes
Three months ended June 30,
(In thousands of US dollars, except percentages)
2023
2022
Change
Change
$
$
$
%
Income tax expense (recovery)
Current
1,215
264
951
360.2
Deferred
(392)
(2,353)
1,961
(83.3)
Total income tax expense (recovery)
823
(2,089)
2,912
(139.4)
Percentage of total revenues
Current
0.6
%
0.2
%
Deferred
(0.2)
%
(1.4)
%
Total
0.4
%
(1.2)
%
Income tax went from a recovery of $2.1 million for the three months ended June 30, 2022 to an expense of $0.8 million for the three months ended June 30, 2023. This is mainly due to a decrease in deferred income tax recovery of $2.0 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The deferred income tax recovery in the three months ended June 30, 2022 was primarily due to the amortization of acquired intangible assets and increases in loss carry-forwards during the period while the deferred income tax recovery in the three months ended June 30, 2023 relates primarily to the recognition of tax losses to cover the deferred tax on unrealized gains recognized in other comprehensive income.
(21)
Key Balance Sheet Information
(In thousands of US dollars)
June 30, 2023
March 31, 2023
$
$
Cash and cash equivalents
780,277
800,154
Total assets
2,628,740
2,668,732
Total liabilities
158,236
171,283
Total long-term liabilities
20,146
20,826
Total Assets
June 30, 2023 Compared to March 31, 2023
Total assets decreased by $40.0 million or 1% from March 31, 2023 to June 30, 2023 with cash and cash equivalents accounting for $19.9 million of the decrease primarily due to cash spent on operating activities. Goodwill decreased by $0.6 million due to foreign currency differences on translation of foreign operations. The lease right-of-use assets and intangibles accounted for $2.0 million and $22.3 million of the decrease respectively, primarily due to the depreciation and amortization taken during the period. A decrease in property and equipment accounted for $0.4 million of the decrease. There was also a decrease in trade and other receivables of $2.4 million which includes an increase in merchant cash advances of $11.1 million, offset by a decrease in net trade receivables of $7.6 million, a decrease in research and development tax credits receivable of $2.6 million and a decrease in indemnification receivables of $3.3 million. The decrease in total assets was offset by an increase in inventory of $1.8 million and an increase in other short term and long term assets of $2.3 million and $3.3 million, respectively, primarily related to an increase in commission and contract assets.
Total Liabilities
June 30, 2023 Compared to March 31, 2023
Total liabilities decreased by $13.0 million or 8% from March 31, 2023 to June 30, 2023 driven by a decrease in current liabilities of $12.4 million and a decrease in long-term liabilities of $0.7 million. The main drivers of the decrease in current liabilities were a decrease in accrued compensation and benefits of $5.5 million, a decrease in trade payables of $2.0 million, a decrease in income taxes payable of $3.8 million, a decrease in other payables of $1.0 million and a decrease in deferred revenue of $0.6 million, offset by an increase in accrued payroll taxes on share-based compensation of $0.5 million, an increase in lease liabilities of $0.2 million, and an increase in acquisition-related payables of $0.2 million. The main drivers of the decrease in long-term liabilities were a decrease in lease liabilities of $0.9 million offset by an increase of $0.1 million in deferred revenue.
(22)
Quarterly Results of Operations
The following table sets forth selected quarterly consolidated statements of operations data for each of the eight quarters ended June 30, 2023 in accordance with IFRS. This data should be read in conjunction with our audited annual consolidated financial statements and the notes related thereto. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.
Three months ended
(In thousands of US dollars, except per share amounts)
Sept. 30, 2021
Dec. 31, 2021
Mar. 31, 2022
Jun. 30, 2022
Sept. 30, 2022
Dec. 31, 2022
Mar. 31, 2023
Jun. 30, 2023
$
$
$
$
$
$
$
$
Revenues
133,218
152,676
146,558
173,882
183,699
188,697
184,228
209,086
Direct cost of revenues
68,272
73,675
76,905
96,357
102,230
102,691
97,267
121,181
Gross profit
64,946
79,001
69,653
77,525
81,469
86,006
86,961
87,905
Operating expenses
General and administrative
23,081
21,655
28,240
30,239
25,132
28,429
22,139
24,944
Research and development
30,092
32,005
36,837
35,636
36,596
37,405
30,805
34,035
Sales and marketing
51,693
55,308
67,388
68,645
64,337
60,505
56,884
55,288
Depreciation of property and equipment
1,020
1,315
1,789
1,221
1,188
1,327
1,735
1,457
Depreciation of right-of-use assets
2,008
2,078
2,032
2,047
2,063
2,109
2,025
2,230
Foreign exchange loss (gain)
6
327
29
443
29
(968)
297
671
Acquisition-related compensation
9,032
19,012
20,433
17,103
12,653
6,290
5,746
2,545
Amortization of intangible assets
22,797
25,851
26,151
25,876
25,684
25,366
24,620
24,505
Restructuring
—
—
606
1,207
603
1,324
25,549
472
Goodwill impairment
—
—
—
—
—
748,712
—
—
Total operating expenses
139,729
157,551
183,505
182,417
168,285
910,499
169,800
146,147
Operating loss
(74,783)
(78,550)
(113,852)
(104,892)
(86,816)
(824,493)
(82,839)
(58,242)
Net interest income
719
1,029
1,014
2,007
4,851
8,300
9,654
10,362
Loss before income taxes
(74,064)
(77,521)
(112,838)
(102,885)
(81,965)
(816,193)
(73,185)
(47,880)
Income tax expense (recovery)
Current
95
96
282
264
516
38
1,651
1,215
Deferred
(15,072)
(12,125)
1,397
(2,353)
(2,538)
(1,429)
(368)
(392)
Total income tax expense (recovery)
(14,977)
(12,029)
1,679
(2,089)
(2,022)
(1,391)
1,283
823
Net loss
(59,087)
(65,492)
(114,517)
(100,796)
(79,943)
(814,802)
(74,468)
(48,703)
Net loss per share – basic and diluted
(0.43)
(0.44)
(0.77)
(0.68)
(0.53)
(5.39)
(0.49)
(0.32)
Revenues
Our total quarterly revenue increased successively for all periods presented (except for the three month periods ended March 31, 2022 and March 31, 2023) mainly due to increases in subscription and transaction-based revenue from existing and new customers, including increased adoption of our payments solutions, our flagship solutions and other add-ons. The decrease in revenues in the three month periods ended March 31, 2022 and March 31, 2023 were primarily due to the impact of seasonality on our revenues as a result of the increased adoption of our payments solutions, and transaction-based revenues comprising an increasingly larger proportion of our revenue mix. The three months ended December 31 is historically our seasonally strongest quarter for transaction-based revenue due to the holiday season, while the three months ended March 31 is historically our weakest GTV quarter which caused a sequential decline in our revenues for the three months ended March 31, 2022 and the three months ended March 31, 2023 compared to the three months ended December 31, 2021 and the three months ended December 31, 2022, respectively.
(23)
Direct Cost of Revenues
Our total direct cost of revenues increased successively for all periods presented (except for the three months ended March 31, 2023). The aggregate increase within the periods presented was primarily due to increased costs associated with supporting an increase in the number of customers on our payments solutions given the higher direct costs associated with transaction-based revenues. The decrease in direct cost of revenues for the three months ended March 31, 2023 is aligned with the decrease in revenues within the period, and includes a decrease in share-based compensation and savings in salary and other employee-related costs as a result of the restructuring carried out in the quarter ended March 31, 2023. Direct cost of revenues for the three months ended June 30, 2023 increased primarily due to higher direct costs associated with transaction-based revenues given the increase in transaction-based revenues during the period, and includes $1.0 million in savings in salary and other employee-related costs as a result of the restructuring we announced during the three months ended March 31, 2023.
Gross Profit
Our total quarterly gross profit increased successively for all periods presented (except for the three months ended March 31, 2022) primarily due to an increase in the number of customers using our payments solutions and our flagship products, particularly high GTV customers. Our gross profit has declined as a percentage of revenue due to the success of our payments solutions as customers using these solutions carry higher direct costs compared to our subscription business. We expect this trend to continue in future periods, and to be partially offset by the increase in our Lightspeed Capital business that carries a significantly higher margin.
Operating Expenses
Our total operating expenses increased successively for the period ended September 31, 2021 to March 31, 2022 primarily due to higher sales and marketing and other costs to support a larger customer base, including those from our acquisition of Ecwid. The decrease in operating expenses in the three months ended September 30, 2022 was mainly due to lower share-based compensation, lower acquisition-related compensation as well as lower litigation costs. The increase in operating expenses in the three months ended December 31, 2022 was due to the goodwill impairment charge of $748.7 million in the quarter. The three months ended March 31, 2023 included a decrease in share-based compensation and salary costs due to the restructuring we executed during that quarter offset by severance and other restructuring charges, which caused a sequential decrease in operating expenses in the three months ended June 30, 2023. We note a portion of our operating expenses are incurred in foreign currencies which may impact the comparability of our quarterly and yearly trends.
See "Results of Operations" in this MD&A for a more detailed discussion of the year-over-year changes in revenues and net loss.
Liquidity and Capital Resources
Overview
The general objectives of our capital management strategy reside in the preservation of our capacity to continue operating, in providing benefits to our stakeholders and in providing an adequate return on investment to our shareholders by selling our services at a price commensurate with the level of operating risk assumed by us. We thus determine the total amount of capital required consistent with risk levels. This capital structure is adjusted on a timely basis depending on changes in the economic environment and risks of the underlying assets. We are not subject to any externally imposed capital requirements.
Working Capital
Our primary source of cash flow has been from raising capital totaling $2,193 million since the fiscal year ended March 31, 2016. Our approach to managing liquidity is to ensure, to the extent possible, that we always have sufficient liquidity to meet our liabilities as they become due. We do so by monitoring cash flows and performing budget-to-actual analysis on a regular basis. Our principal cash requirements are for working capital and acquisitions we may execute. Working capital surplus as at June 30, 2023 was $778.1 million. Given our existing cash and available financing, we believe there is sufficient liquidity to meet our current and short-term growth requirements in addition to our long-term strategic objectives.
(24)
Base Shelf Prospectus
In May 2023, pursuant to "well-known seasoned issuer" blanket orders of the Canadian Securities Administrators, we filed a new short form base shelf prospectus (the “Base Prospectus”) with the securities commissions in each of the provinces and territories of Canada and a corresponding shelf registration statement on Form F-10 with the U.S. Securities and Exchange Commission (the “Registration Statement”). The Base Prospectus and the Registration Statement allows Lightspeed and certain of its security holders to offer subordinate voting shares, preferred shares, debt securities, warrants, subscription receipts, units, or any combination thereof, in amounts, at prices and on terms to be set forth in one or more shelf prospectus supplements during the 25-month period that the Base Prospectus is effective.
Cash Flows
The following table presents cash and cash equivalents as at June 30, 2023 and 2022, and cash flows from or used in operating, investing, and financing activities for three months ended June 30, 2023 and 2022:
Three months ended June 30,
(In thousands of US dollars)
2023
2022
$
$
Cash and cash equivalents
780,277
914,789
Cash flows from (used in):
Operating activities
(26,090)
(33,414)
Investing activities
7,141
(2,192)
Financing activities
(925)
(1,810)
Effect of foreign exchange on cash and cash equivalents
(3)
(1,449)
Net decrease in cash and cash equivalents
(19,877)
(38,865)
Cash Flows used in Operating Activities
Cash flows used in operating activities for the three months ended June 30, 2023 were $26.1 million compared to $33.4 million for the three months ended June 30, 2022. For the three months ended June 30, 2023, Adjusted Cash Flows Used in Operating Activities3 were $26.5 million compared to $26.2 million for the three months ended June 30, 2022. This $0.3 million increase is primarily due to working capital movements including $8.0 million from merchant cash advances offset by $4.0 million from tax credits received and timing differences related to current receivables and payables.
Cash Flows from (used in) Investing Activities
Cash flows from investing activities for the three months ended June 30, 2023 were $7.1 million compared to cash flows used in investing activities of $2.2 million for the three months ended June 30, 2022. The movement in cash flows relating to investing activities was primarily due to an increase of $8.2 million in interest income received and a decrease in cash outflows associated with additions to property and equipment of $2.0 million offset by an increase of $1.7 million in cash outflows associated with capitalized internal development costs.
Cash Flows used in Financing Activities
Cash flows used in financing activities for the three months ended June 30, 2023 were $0.9 million compared to $1.8 million in the three months ended June 30, 2022. The movement in cash flows relating to financing activities was mainly due to an increase of $0.7 million in proceeds from the exercise of stock options under our equity incentive plans and a decrease in cash outflows from financing costs of $0.3 million.
We believe that our current cash balance, available financing, cash flows from operations and credit available under our credit facility are adequate for the Company’s future operating cash needs.
3 Refer to the section entitled "Non-IFRS Measures and Ratios and Reconciliation of Non-IFRS Measures and Ratios"
(25)
Contractual Obligations
Our commitments increased from those disclosed in our audited annual consolidated financial statements for the fiscal year ended March 31, 2023. We renegotiated certain contracts with payment processors which include commitments of $12,435 over the next five fiscal years.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than low value and short-term leases, and other purchase obligations as disclosed under "Contractual Obligations" in this MD&A and in our annual MD&A for the fiscal year ended March 31, 2023. From time to time, we may be contingently liable with respect to litigation and claims that arise in the normal course of operations.
Related Party Transactions
We have no material related party transactions, other than those noted in our unaudited condensed interim consolidated financial statements.
Financial Instruments and Other Instruments
Credit and Concentration Risk
Generally, the carrying amount of our financial assets in our consolidated balance sheet exposed to credit risk, net of any applicable provisions for losses, represents the maximum amount exposed to credit risk.
Our credit risk is primarily attributable to our cash and cash equivalents and trade and other receivables, including our merchant cash advances. We do not require guarantees from our customers. Credit risk with respect to cash and cash equivalents is managed by maintaining balances only with high credit quality financial institutions. We do not hold any collateral as security.
Due to our diverse customer base, there is no particular concentration of credit risk related to our trade receivables. Moreover, balances for trade receivables are managed and analyzed on an ongoing basis to ensure our loss allowance is established and maintained at an appropriate amount.
We maintain a loss allowance for a portion of trade receivables when collection becomes doubtful on the basis described in note 3 of our audited annual consolidated financial statements. Our allowance for expected credit losses ("ECL") includes forward-looking factors specific to the debtors and the economic environment.
In the three months ended June 30, 2023, potential effects from uncertainty in the macroeconomic environment on our credit risk have been considered and have resulted in an increase to our allowance for ECLs from what the allowance would have been without factoring in these effects. We continue to monitor macroeconomic conditions and any resulting impacts on our credit risk.
Liquidity Risk
We are exposed to the risk of being unable to honor our financial commitments by the deadlines set, under the terms of such commitments and at a reasonable price. We manage our liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. We have $780.3 million of cash and cash equivalents as well as a credit facility available as at June 30, 2023, demonstrating our liquidity and ability to pay financial liabilities as they become due.
Foreign Exchange Risk
We are exposed to foreign exchange risk due to financial instruments denominated in foreign currencies. The main currencies which expose us to foreign exchange risk due to financial instruments denominated in foreign currencies include the Canadian dollar, the Euro, the British pound sterling, the Australian dollar, the Swiss franc and the New Zealand dollar. We have a policy to mitigate our exposure to foreign currency exchange risk by entering into derivative instruments. We have entered into multiple foreign exchange forward contracts. Our currency pair used for cash flow hedges is U.S. dollar / Canadian dollar. We do not use derivative instruments for speculative purposes. The notional principal of our foreign exchange contracts was approximately $79.8 million CAD as at June 30, 2023 (March 31, 2023 - $109.2 million CAD).
(26)
Interest Rate Risk
Interest rate risk is the risk that changes in interest rates will negatively impact earnings and cash flows. Certain of our cash earns interest. Our trade and other receivables, accounts payable and accrued liabilities, and lease liabilities do not bear interest. We are not exposed to material interest rate risk.
Share Price Risk
Accrued payroll taxes on share-based compensation (social costs) are payroll taxes associated with share-based compensation that we are subject to in various countries in which we operate. Social costs are accrued at each reporting period based on inputs including, but not limited to, the number of stock options and share awards outstanding, the vesting of the stock options and share awards, the exercise price, and our share price. Changes in the accrual are recognized in direct cost of revenues and operating expenses. An increase in share price will increase the accrual for social costs, and a decrease in share price will result in a decrease in the accrual for social costs, all other things being equal, including the number of stock options and share awards outstanding and exercise price remaining constant.
Inflation Risk
We are subject to inflation risk that could have a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. If inflation continues to increase, it will likely affect our expenses, including, but not limited to, increased costs to offer our solutions and employee compensation expenses. Furthermore, our customers are also subject to risks associated with inflationary pressures that have and may continue to impact their business and financial condition. Such risks include a reduction in consumer spending and credit or debit card usage, which would negatively impact our financial performance because the number of transactions processed using our payment solutions would decrease, as would the average purchase amount of each transaction.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We review these estimates on an ongoing basis based on management’s best knowledge of current events and actions that we may undertake in the future. Actual results could differ from these estimates. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Key estimates and assumptions are outlined below. Management has determined that we operate in a single operating and reportable segment.
Revenue Recognition
The identification of revenue-generating contracts with customers, the identification of performance obligations, the determination of the transaction price and allocations between identified performance obligations, the use of the appropriate revenue recognition method for each performance obligation and the measure of progress for performance obligations satisfied over time are the main aspects of the revenue recognition process, all of which require the exercise of judgment and use of assumptions. We follow the guidance provided in IFRS 15 – Appendix B, Principal versus Agent Considerations for determining whether revenue should be recognized based on the gross amount of consideration paid by the customer or the net amount of consideration retained by us. This determination is a matter of judgment that depends on the facts and circumstances of each arrangement.
Impairment of Non-financial Assets
Our impairment test for goodwill is based on internal estimates of fair value less costs of disposal calculations and uses valuation models such as the discounted cash flow model. Key assumptions on which management has based its determination of fair value less costs of disposal include an estimated discount rate, terminal value multiple, and estimated revenue growth rate. These estimates, including the methodology used, the identification of cash-generating units and allocation of goodwill, can have a material impact on the respective values and ultimately the amount of any goodwill impairment. Whenever property and equipment, lease right-of-use assets, and intangible assets are tested for impairment, the determination of the assets’ recoverable amount involves the use of estimates by management and can have a material impact on the respective values and ultimately the amount of any impairment.
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If the carrying value of our Segment is below our recoverable amount in the future, we may have to recognize goodwill impairment losses in our results of operations in future periods. This could impair our ability to achieve profitability in the future. Goodwill is more susceptible to impairment risk if business operating results or economic conditions deteriorate. A reduction in the terminal value multiple, an increase in the discount rate or a decrease in the revenue growth rate could cause additional impairment in the future. We are required to perform our next annual goodwill impairment analysis on December 31, 2023, or earlier should there be a goodwill impairment trigger before then.
Business Combinations
We follow the acquisition method to account for business combinations. The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their estimated fair values on the date of a business acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Such valuations require management to make significant estimates, assumptions, and judgments, especially with respect to intangible assets and contingent consideration. For intangible assets, we develop the fair value by using appropriate valuation techniques which are generally based on a forecast of the total expected future net discounted cash flows, and key assumptions generally consist of the future performance of the related assets, the discount rate, the attrition rate, the royalty rates, and the payments attach rate. Contingent consideration is measured at fair value using a discounted cash flow model.
Recoverability of Deferred Tax Assets and Current and Deferred Income Taxes and Tax Credits
Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. We establish provisions based on reasonable estimates for possible consequences of audits by the tax authorities. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority.
Deferred income tax assets are recognized for unused tax losses and deductible temporary differences to the extent it is probable that taxable income will be available against which the losses and deductible temporary differences can be utilized. Management’s judgment is required to determine the amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with future tax planning strategies.
Share-Based Compensation
We measure the cost of equity-settled transactions with employees by reference to the fair value of the related instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant, which depends on the terms and conditions of the grant. This also requires making assumptions and determining the most appropriate inputs to the valuation model including the expected life of the option, volatility, interest rate and dividend yield.
Provisions
We are involved in litigation and claims from time to time. There can be no assurance that these litigations and claims will be resolved without costly litigation nor in a manner that does not adversely impact the financial position and operating results of the Company. Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. In determining the probability of a loss and consequently determining a reasonable estimate, management is required to use significant judgment. Assumptions applied reflect the most probable set of economic conditions and planned courses of action by the Company at the time, but these too may differ over time. Given the uncertainties associated with any litigation, the actual outcome can be different from our estimates and could adversely affect the financial position and operating results of the Company.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the IASB or other standards-setting bodies, and are adopted as of the specified effective date. No new accounting pronouncements are expected to materially impact Lightspeed as at June 30, 2023.
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New and Amended Standards Effective Within the Three Months Ended June 30, 2023
In May 2023, the IASB issued International Tax Reform—Pillar Two Model Rules, which amended IAS 12, Income Taxes, to introduce a temporary exception to the requirements to recognize and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes, and targeted disclosure requirements for affected entities. The relief is effective immediately upon issuance of the amendments and should be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, while the targeted disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2023, but not for any interim periods ending on or before December 31, 2023. We are currently assessing the impact of these amendments on the consolidated financial statements.
Outstanding Share Information
Lightspeed is a publicly traded company listed under the symbol "LSPD" on both the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE"). Our authorized share capital consists of (i) an unlimited number of Subordinate Voting Shares and (ii) an unlimited number of preferred shares, issuable in series, of which 152,185,121 Subordinate Voting Shares and no preferred shares were issued and outstanding as of August 1, 2023.
As of August 1, 2023, there were 273,673 options outstanding under the Company’s Amended and Restated 2012 Stock Option Plan, as amended (of which 273,673 were vested as of such date), 11,240,958 options outstanding under the Company’s Third Amended and Restated Omnibus Incentive Plan, as amended (the "Omnibus Plan") (of which 3,151,880 were vested as of such date) and 104,167 options outstanding which were issued in compliance with an allowance under the rules of the TSX as inducements for executive officers to enter into contracts of full-time employment with the Company ("Inducement Grants") (of which 104,167 were vested as of such date). Each such option is or will become exercisable for one Subordinate Voting Share.
As of August 1, 2023, there were 203,024 options outstanding under the ShopKeep Inc. Amended and Restated 2011 Stock Option and Grant Plan (of which 202,461 were vested as of such date), which plan the Company assumed on closing of its acquisition of ShopKeep on November 25, 2020. Each option is or will become exercisable for one Subordinate Voting Share.
As of August 1, 2023, there were 85,456 DSUs outstanding under the Company’s Omnibus Plan. Each such DSU will, upon the holder thereof ceasing to be a director, executive officer, employee or consultant of the Company in accordance with the Omnibus Plan, be settled at the discretion of the board through (a) the delivery of shares issued from treasury or purchased on the open market, (b) cash, or (c) a combination of cash and shares.
As of August 1, 2023, there were 6,492,343 RSUs outstanding under the Company’s Omnibus Plan (of which 1,050,555 were vested as of such date) and 273 RSUs outstanding which were Inducement Grants (of which 273 were vested as of such date). Each such RSU, upon vesting, may be settled at the discretion of the board through (a) the delivery of shares issued from treasury or purchased on the open market, (b) cash, or (c) a combination of cash and shares.
As of August 1, 2023, there were 95,328 PSUs outstanding under the Company’s Omnibus Plan (of which none were vested as of such date). Each such PSU, upon vesting, may be settled at the discretion of the board through (a) the delivery of shares issued from treasury or purchased on the open market, (b) cash, or (c) a combination of cash and shares.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with securities regulatory authorities are recorded, processed, summarized and reported in a timely fashion. The disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in such reports is then accumulated and communicated to the Company’s management to ensure timely decisions regarding required disclosure. Management regularly reviews disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud. The Chief Executive Officer and the Chief Financial Officer, along with management, have evaluated and concluded that the Company’s disclosure controls and procedures as at June 30, 2023 were effective.
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Internal Controls over Financial Reporting
The Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining internal controls over financial reporting. The Company’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Chief Executive Officer and Chief Financial Officer have been advised that the control framework that the Chief Executive Officer and the Chief Financial Officer used to design the Company’s internal controls over financial reporting is recognized by the Committee of Sponsoring Organizations of the Treadway Commission.
The Chief Executive Officer and the Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, whether or not there were changes to its internal controls over financial reporting during the period ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting. No such changes were identified through their evaluation.
Limitations of Controls and Procedures
Management, including the Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
