BM TECHNOLOGIES, INC.
The purpose of this Management's Discussion and Analysis ("MD&A") is to
facilitate an understanding of significant factors influencing the quarterly
operating results, financial condition and cash flows of BM Technologies, Inc.
("BMTX"). Additionally, this MD&A conveys our expectations of the potential
impact of known trends, events or uncertainties that may impact future results.
You should read this discussion in conjunction with our interim unaudited
consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q and our Annual Report for the year ended December 31, 2021 .
Historical results and percentage relationships are not necessarily indicative
of operating results for future periods. Unless the context otherwise requires,
for purposes of this Management's Discussion and Analysis, references to the
"Company," "we," "us" and "our" refer to the business and operations of BM
Technologies, Inc. ("BMTX") and its subsidiaries.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, expectations and intentions with respect to future operations, products and services; and other statements identified by words such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "believe," "intend," "plan," "projection," "outlook" or words of similar meaning. These forward-looking statements include, but are not limited to, statements regarding the Company's industry and market sizes, future opportunities for the Company and the Company's estimated future results. Such forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. Actual results and the timing of events may differ materially from the results anticipated in these forward-looking statements.
BUSINESS OVERVIEW
BM Technologies, Inc. ("BMTX" or "the Company") (formerly known as BankMobile) provides state-of-the-art high-tech digital banking and disbursement services to consumers and students nationwide through a full service fintech banking platform, accessible to customers anywhere and anytime through digital channels. BMTX facilitates deposits and banking services between a customer and ourPartner Bank , Customers Bank, ("Customers Bank "), aPennsylvania state-chartered bank, which is a related party and is aFederal Deposit Insurance Corporation ("FDIC") insured bank. BMTX's business model leverages partners' existing customer bases to achieve high volume, low-cost customer acquisition in its Higher Education Disbursement, Banking-as-a-Service ("BaaS"), and niche Direct to Consumer ("D2C") Banking businesses. BMTX has four primary revenue sources: interchange and card revenue, servicing fees fromBMTX's Partner Bank , account fees, and university fees. The majority of revenues are driven by customer activity (deposits, spend, transactions, etc.) but may be paid or passed through byBMTX's Partner Bank , universities, or paid directly by customers. BMTX is aDelaware corporation, originally incorporated asMegalith Financial Acquisition Corp ("Megalith") inNovember 2017 and renamedBM Technologies, Inc. inJanuary 2021 at the time of the merger betweenMegalith and BankMobile Technologies, Inc. UntilJanuary 4, 2021 ,BankMobile Technologies, Inc. was a wholly-owned subsidiary of Customers Bank, a wholly-owned subsidiary of Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp ").
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BMTX is not a bank, does not hold a bank charter, and does not provide banking
services, and as a result it is not subject to direct banking regulation, except
as a service provider to our Partner Bank . BMTX is also subject to the
regulations of the Department of Education ("ED"), due to its student
disbursements business, and is periodically examined by it. BMTX's contracts
with most of its higher education institutional clients require it to comply
with numerous laws and regulations, including, where applicable, regulations
promulgated by the ED regarding the handling of student financial aid funds
received by institutions on behalf of their students under Title IV of the
Higher Education Act of 1965; the Family Educational Rights and Privacy Act of
1995 ("FERPA"); the Electronic Fund Transfer Act and Regulation E; the USA
PATRIOT Act and related anti-money laundering requirements; and certain federal
rules regarding safeguarding personal information, including rules implementing
the privacy provisions of the Gramm-Leach-Bliley Act ("GLBA"). Other products
and services offered by BMTX may also be subject to other federal and state laws
and regulations.
BMTX's higher education serviced deposits fluctuate throughout the year due
primarily to the inflow of funds typically disbursed at the start of a semester.
Serviced deposit balances typically experience seasonal lows in December and
July and experience seasonal highs in September and January when individual
account balances are generally at their peak. Debit spend follows a similar
seasonal trend, but may slightly lag increases in balances.
On November 15, 2021 , the Company announced the signing of a definitive
agreement to merge with First Sound Bank (OTCPK: FSWA) ("FSB"), a Seattle,
Washington -based community business bank. BMTX will pay up to $7.22 in cash for
each share of FSB common stock or approximately $23 million in aggregate
consideration, subject to certain closing conditions and adjustments as outlined
in the definitive agreement. The combined company, to be named BMTX Bank , will
be a fintech-based bank focused on serving customers digitally nationwide,
supported by its community banking division that is expected to continue serving
the greater Seattle market. The transaction is subject to regulatory approvals
and other customary closing conditions and is still targeted to close in the
fourth quarter of 2022.
During the quarter ended June 30, 2022 , the Company achieved a key milestone
with the execution of agreements to provide technology to a new BaaS partner.
This new BaaS partner has global operations and tens of millions of U.S.
customers. BMTX was awarded this relationship through a competitive RFP process,
underscoring the competitiveness of our BaaS offering in the marketplace. With
the addition of this new partner, the Company will have expanded its roster of
large well-known brand-name partners. This relationship may become even more
valuable if the Company is able to vertically integrate this new partnership
with the addition of a banking charter. To protect this partner's launch
strategy, the Company will not identify the partner by name until commercial
launch, which is expected to occur in early 2023, but the Company began
development work with this partner during the quarter ended June 30, 2022 , and
expects to perform additional development work through the remainder of 2022.
Although this partnership could be of significant future benefit to the Company,
there can be no assurances that this relationship will be expanded to other
products or services, including those that would be possible with the potential
addition of a bank charter.
Merger with
OnJanuary 4, 2021 ,BankMobile Technologies, Inc. ("BankMobile"), Megalith, andMFAC Merger Sub Inc. , consummated the transaction contemplated by the merger agreement entered into onAugust 6, 2020 , as amended. In connection with the closing of the merger, Megalith changed its name toBM Technologies, Inc. EffectiveJanuary 6, 2021 , Megalith's units ceased trading, and the Company's common stock and warrants began trading on the NYSE American under the symbols "BMTX" and "BMTX-WT," respectively. The merger was accounted for as a reverse recapitalization in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). UnderU.S. GAAP, BankMobile was treated as the "acquirer" company for financial reporting purposes and as a result, the transaction was treated as the equivalent of BankMobile issuing stock for the net assets of Megalith, accompanied by a recapitalization. The excess of the fair value of the shares issued over the value of the net monetary assets of Megalith was recognized as an adjustment to shareholders' equity. There was no goodwill or other intangible assets recorded in the merger.
As a result of the merger transaction, BankMobile used proceeds from the
recapitalization transaction to pay down its
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--------------------------------------------------------------------------------COVID-19
InMarch 2020 , the outbreak of COVID-19 was recognized as a pandemic by theWorld Health Organization . The spread of COVID-19 created a global public health crisis that resulted in unprecedented uncertainty, economic volatility, and disruption in financial markets and in governmental, commercial, and consumer activity inthe United States and globally, including the markets that BMTX serves. In response to the pandemic, we enabled nearly all of our employees to work remotely and limited business travel. We are a "Remote First" company and most of our employees have no assigned work location or regular in-office work requirement. With the initial outbreak of COVID-19 in 2020, the Company experienced an initial decline in revenues as compared to the pre-COVID-19 period. OnMarch 27, 2020 , the "Coronavirus Aid, Relief, and Economic Security ("CARES") Act" was signed into law and contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic and stimulate the economy, including cash payments to taxpayers, increased unemployment benefits, and to support higher education through theHigher Education Emergency Relief Fund ("HEERF"). This stimulus resulted in increased serviced deposit balances, debit card spend, and revenues, a trend that continued into 2021; however, growth has slowed in 2022 as compared to the accelerated growth rate we experienced during early 2021. BUSINESS MEASUREMENTS
We believe that the following business measurements are important performance indicators for our business:
•Debit card POS spend (higher education and new business). Spend represents the dollar amount that our customers spend on their debit cards through a signature or PIN network. Spend is a key performance indicator, as the Company earns a small percentage of every dollar spent as interchange income and spend is the primary driver of our card revenues. •Serviced deposits (ending and average; higher education and new business). Serviced deposits represent the dollar amount of deposits that are in customer accounts serviced by our Company. Our deposit servicing fee is based on a contractual arrangement with ourPartner Bank and the average balance of serviced deposits is the primary driver of our deposit servicing fees. Average deposits have the strongest correlation to current period serviced deposits, but ending deposits provide information at a point in time and serve as the starting point for the following period. •Higher education retention. Retention is a key measure of our value proposition with higher education customers. We measure retention in terms of Signed Student Enrollments (SSEs), which represents the number of students enrolled at higher education institutions. Retention is calculated by subtracting lost SSEs from starting SSEs and taking that amount as a percentage of the starting SSEs. •Higher education financial aid refund disbursement. Represents the dollar amount of all funds that we process for a college or university partner, whether it is distributed by ACH, check, or into a BankMobile Vibe account. This is a measure of the business we process for our higher education partners in exchange for their subscription and other fees, as well as a measure of the potential that we have the opportunity to capture into our serviced accounts. •Higher education organic deposits. Organic deposits represent the dollar total of all deposits made into a higher education BankMobile Vibe account except for funds processed through a college or university partner. Because this includes funds that the account holder adds to the account and excludes the funds processed through the higher education institution, it is viewed as a strong indicator of traction with the customer.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For information regarding our critical accounting policies and estimates, please refer to our Annual Report on 10-K for the fiscal year endedDecember 31, 2021 . There have been no material changes to the critical accounting policies and estimates previously disclosed in that report.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB has issued accounting standards that have not yet become effective and
that may impact BMTX's interim unaudited consolidated financial statements or
its disclosures in future periods. Note 2 - Basis of Presentation and
Significant Accounting Policies provides information regarding those accounting
standards.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following discussion of our results of operations should be read in
conjunction with our interim unaudited consolidated financial statements,
including the accompanying notes. The following summarized tables set forth our
operating results for the three and six months ended
Three Months Ended
June 30, %
(dollars in thousands, except per share data) 2022 2021 Change Change
Operating revenues $ 23,008 $ 22,404 $ 604 3 %
Operating expenses 23,377 22,714 663 3 %
Loss from operations (369) (310) (59) 19 %
Gain (loss) on fair value of private warrant
liability 5,640 (3,056) 8,696 NM
Interest expense - (42) 42 (100) %
Income (loss) before income tax expense 5,271 (3,408) 8,679 NM
Income tax expense 909 1,382 (473) (34) %
Net income (loss) $ 4,362 $ (4,790) $ 9,152 NM
Basic earnings per share $ 0.37 $ (0.40) $ 0.77 NM
Diluted earnings per share $ 0.35 $ (0.40) $ 0.75 NM
NM refers to changes greater than 150%.
For the three months endedJune 30, 2022 , net income increased$9.2 million , which largely reflected a$8.7 million increase in the gain (loss) on fair value of the private warrant liability as compared to the three months endedJune 30, 2021 . Operating profitability remained generally consistent with the three months endedJune 30, 2021 . Operating revenues increased by$0.6 million or 3% and operating expenses increased by$0.7 million or 3%. Changes in quarterly operating revenues and expenses are discussed in greater detail below. Basic and diluted earnings per share, which increased to$0.37 and to$0.35 respectively, are both driven by the impact of the total net loss in the prior year on the earnings per share calculations. Six Months Ended June 30, % (dollars in thousands, except per share data) 2022 2021 Change Change Operating revenues$ 48,055 $ 46,606 $ 1,449 3 % Operating expenses 45,461 44,093 1,368 3 % Income from operations 2,594 2,513 81 3 %
Gain on fair value of private warrant liability 8,284 11,947
(3,663) (31) %
Interest expense - (96) 96 (100) %
Income before income tax expense 10,878 14,364 (3,486) (24) %
Income tax expense 2,552 3,095 (543) (18) %
Net income $ 8,326 $ 11,269 $ (2,943) (26) %
Basic earnings per share $ 0.70 $ 0.96 $ (0.26) (27) %
Diluted earnings per share $ 0.66 $ (0.05) $ 0.71 NM
NM refers to changes greater than 150%.
For the six months endedJune 30, 2022 , net income decreased$2.9 million , which largely reflected a$3.7 million decrease in the gain on fair value of the private warrant liability as compared to the six months endedJune 30, 2021 . Operating profitability remained generally consistent with the six months endedJune 30, 2021 . Operating revenues increased by$1.4 million or 3% and operating expenses increased by$1.4 million or 3%. Changes in year to date operating revenues and expenses are discussed in greater detail below. 25 -------------------------------------------------------------------------------- Basic and diluted earnings per share, which decreased to$0.70 and increased to$0.66 respectively, are both driven primarily by the impact of the private warrants adjustments on the earnings per share calculations. During the six months endedJune 30, 2022 , the average common stock share price was below the warrant strike price, and as a result, the warrants are not considered dilutive. During the six months endedJune 30, 2021 , the average common stock share price was greater than the warrant strike price resulting in the warrants being considered dilutive. Operating Revenues Three Months Ended June 30, % (dollars in thousands) 2022 2021 Change Change Revenues: Interchange and card revenue$ 5,315 $ 6,757 $ (1,442) (21) % Servicing fees from Partner Bank 13,295 10,579 2,716 26 % Account fees 2,207 2,618 (411) (16) % University fees 1,446 1,331 115 9 % Other revenue 745 1,119 (374) (33) % Total operating revenues$ 23,008 $ 22,404 $
604 3 %
Total revenues increased$0.6 million , or 3%, in the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . This increase is primarily attributable to a$2.7 million or 26% increase in Servicing fees fromPartner Bank and a$0.1 million , or 9%, increase in University fees. The increase in Servicing fees fromPartner Bank is due to a greater than 26% increase in average serviced deposit balances which increased to$2.0 billion for the three months endedJune 30, 2022 as compared to$1.6 billion for the three months endingJune 30, 2021 . These increases were partially offset by a$1.4 million or 21% decrease in Interchange and card revenue which was primarily driven by a 18% reduction in spend volume, as well as a$0.4 million , or 16%, decrease in Account fees, and a$0.4 million , or 33%, decrease in Other revenue due to a reduction in development projects for our BaaS partners which vary based on project status, contracts, and milestones. Six Months Ended June 30, % (dollars in thousands) 2022 2021 Change Change Revenues: Interchange and card revenue$ 11,958 $ 15,001 $ (3,043) (20) % Servicing fees from Partner Bank 27,487 19,951 7,536 38 % Account fees 4,762 5,279 (517) (10) % University fees 3,049 2,655 394 15 % Other revenue 799 3,720 (2,921) (79) % Total operating revenues$ 48,055 $ 46,606 $ 1,449 3 % Total revenues increased$1.4 million , or 3%, in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . This increase is primarily attributable to a$7.5 million , or 38%, increase in Servicing fees fromPartner Bank . The increase is due to an increase in average serviced deposit balances for the period which increased approximately 40% to$2.1 billion for the six months endedJune 30, 2022 as compared to$1.4 billion for the six months endingJune 30, 2021 . These increases were partially offset by a$3.0 million , or 20%, decrease in Interchange and card revenue as well as a$0.5 million , or 10%, decrease in Account fees, both of which are driven by lower spend volume, and a$2.9 million decrease in Other revenue due to a reduction in development projects for our BaaS partners which vary based on project status, contracts, and milestones. 26 --------------------------------------------------------------------------------
Operating Expenses
Three Months Ended
June 30, %
(dollars in thousands) 2022 2021 Change Change
Technology, communication, and processing $ 7,297 $ 8,399 $ (1,102) (13) %
Salaries and employee benefits 10,440 9,558 882 9 %
Professional services 2,420 2,126 294 14 %
Provision for operating losses 1,839 1,401 438 31 %
Occupancy 368 369 (1) - %
Customer related supplies 221 271 (50) (18) %
Advertising and promotion 84 125 (41) (33) %
Merger and acquisition related 1 - 1 100 %
Other expense 707 465 242 52 %
Total operating expenses $ 23,377 $ 22,714 $ 663 3 %
For the three months ended June 30, 2022 , operating expenses increased $0.7
million , or 3%, as compared to the three months ended June 30, 2021 . The
increase is primarily attributable to a $0.9 million increase in Salaries and
employee benefits, a $0.4 million increase in Provision for operating losses, a
$0.2 million increase in Other expense, and a $0.3 million increase in
Professional services. The increase in Salaries and employee benefits is driven
by an increase in average headcount, annual merit raises, and the vesting of
equity awards granted in September 2021 . The increase in Provision for operating
losses is driven by adverse fraud loss experience in the serviced deposit
accounts. The increase in Other expense is driven primarily by increased
insurance premium expense as compared to the prior year. The increase in
Professional services is driven by reduced reimbursable expenses from our BaaS
partners. These increases were partially offset by a $1.1 million decrease in
Technology, communication, and processing. The decrease in Technology,
communication, and processing is related to a renegotiation with a one of the
Company's primary vendors which took effect in the third quarter of 2021.
Six Months Ended
June 30, %
(dollars in thousands) 2022 2021 Change Change
Technology, communication, and processing $ 14,215 $ 16,821 $ (2,606) (15) %
Salaries and employee benefits 19,922 18,116 1,806 10 %
Professional services 4,792 3,863 929 24 %
Provision for operating losses 3,441 2,730 711 26 %
Occupancy 675 678 (3) - %
Customer related supplies 451 646 (195) (30) %
Advertising and promotion 197 316 (119) (38) %
Merger and acquisition related 290 - 290 100 %
Other expense 1,478 923 555 60 %
Total operating expenses $ 45,461 $ 44,093 $ 1,368 3 %
For the six months ended June 30, 2022 , operating expenses increased
$1.4 million , or 3%, as compared to the six months ended June 30, 2021 . The
increase is primarily attributable to a $1.8 million increase in Salaries and
employee benefits, a $0.9 million increase in Professional services, a
$0.7 million increase in Provision for operating losses, and a $0.6 million
increase in Other expense. The increase in Salaries and employee benefits is
driven by an increase in average headcount, annual merit raises, and the vesting
of equity awards granted in September 2021 . The increase in Professional
services is driven by increases in legal, audit, and consulting costs associated
with the Company's restatement activities and the filing of its fiscal year 2021
Form 10-K. The increase in Provision for operating losses is driven by adverse
fraud loss experience in serviced deposit accounts. The increase in Other
expense is driven primarily by increased insurance premium expense as compared
to the prior year. These increases were partially offset by a $2.6 million
decrease in Technology, communication, and processing. The decrease in
Technology, communication, and processing is related to a renegotiation with a
one of the Company's primary vendors which took effect in the third quarter of
2021.
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--------------------------------------------------------------------------------Income Tax Expense
The Company's effective tax rate was 17.2% and (40.6)% for the three months endedJune 30, 2022 and 2021, respectively. The Company's effective tax rate was 23.5% and 21.5% for the six months endedJune 30, 2022 and 2021, respectively. The effective tax rate differs from the Company's marginal tax rate of 27.4% due to the non-taxable fair value adjustments related to the non-compensatory private warrant liability being recorded through earnings, offset by the tax associated with the estimated annual increase of the valuation allowance established against deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Our Cash and cash equivalents consist of non-interest bearing, highly-liquid demand deposits. We had$32.5 million of Cash and cash equivalents atJune 30, 2022 as compared to$25.7 million of Cash and cash equivalents atDecember 31, 2021 . We currently finance our operations through cash flows provided by operating activities. We continue to project positive operating cash flows for the 2022 fiscal year and we intend to fund our ongoing operating activities with our existing cash and expected cash flows from operations. However, should additional liquidity be necessary, the Company could consider equity or debt financing, but there are no assurances that additional capital would be available or on terms that are acceptable to us.
The table below summarizes our cash flows for the periods indicated:
Six Months Ended
June 30, %
(dollars in thousands) 2022 2021 Change Change
Net cash provided by operating activities $ 12,423 $ 20,906 $ (8,483) (41) %
Net cash used in investing activities (3,441) (194) (3,247) NM
Net cash used in financing activities (2,202) (4,112)
1,910 (46) %
Net increase in cash and cash equivalents
NM refers to changes greater than 150%.
Cash flows provided by operating activities
Cash provided by operating activities was$12.4 million in the six months endedJune 30, 2022 which is an$8.5 million decrease as compared to the six months endedJune 30 , 2021.The change in net cash used in operating assets and liabilities is driven primarily by an increased use in cash of$5.2 million for Prepaid expenses and other assets,$4.5 million for Deferred revenue,$3.5 million for Accounts payable and accrued liabilities, and$3.4 million for Taxes payable. These increased uses of cash were partially offset by an increased source of cash of$6.5 million from Accounts receivable, net and$0.4 million from Other assets. Cash flows used in investing activities Cash used in investing activities increased$3.2 million in the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 , primarily due to increased capitalization of development costs related to internal use software. Cash flows used in financing activities Cash used in financing activities in the six months endedJune 30, 2022 decreased$1.9 million as compared to the six months endedJune 30, 2021 , primarily due to the private warrant repurchase transaction during the current period versus the recapitalization transaction and payoff of borrowings in the prior period. CONTRACTUAL OBLIGATIONS
A summary of the Company's contractual lease obligations as of
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Payments Due by Period
Within 1 to 3 More than Total Amounts
(dollars in thousands) 1 year years 3 years Committed
Operating leases $ 56 $ - $ - $ 56
$ 56 $ - $ - $ 56
Off-Balance Sheet Arrangements
As of
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