BTRS HOLDINGS INC. You should read this section in conjunction with the Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K. Unless otherwise stated or as the context otherwise requires, references to "the Company," "we," "us," "our," "it," and similar references refer toBTRS Holdings Inc. , aDelaware corporation, and its consolidated subsidiaries. References to the "Merger" have the meaning defined in Note 1 - Organization and Nature of Business in our Notes to Condensed Consolidated Financial Statements. Certain figures, such as interest rates and other percentages, in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our Condensed Consolidated Financial Statements or Notes to Condensed Consolidated Financial Statements. Certain other amounts that appear in this section may similarly not sum due to rounding. Forward Looking Statements This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are identified by words such as "believe," "may," "could," "will," "estimate," "continue," "anticipate," "intend," "seek," "plan," "expect," "should," "would," "potentially," or the negative of these terms or similar expressions in this Quarterly Report on Form 10-Q. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions, and financial performance and the assumptions that underlie these statements, and our ability to secure the required regulatory and stockholder approvals for the Merger and meet the applicable closing conditions of the Merger and the time therefor, if at all. These forward-looking statements are subject to certain risks and uncertainties that could cause a difference include, but are not limited to, those discussed under the caption "Risk Factors" in Part I. Item 1A of our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. Forward -looking statements are based on management's current beliefs and assumptions and based on information currently available. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law. Business Overview We are a leading provider of cloud-based software and integrated payment processing solutions that simplify and automate business-to-business ("B2B") commerce. For businesses around the world, there is a high degree of cost, risk, and complexity in timely receiving cash and recognizing revenue; We solve these problems by addressing both sides of the payment equation, delivering an order-to-cash platform that spans credit-to-cash application and collection, integrated with an open network connecting the B2B payments ecosystem. Our solution is at the forefront of the ongoing digital transformation of accounts receivable ("AR"), providing mission-critical solutions that span credit decisioning and monitoring, online ordering, invoicing, cash application, and collections. Our Business Payments Network ("BPN") connects B2B buyers and sellers to a community of banks, FinTechs, and card brands.Billtrust automates payments from digital lockbox to final posting in an ERP, bridging receivables with buyers' payment processes so sellers can manage cash flow more strategically and make it easier for customers to do business with them. Customers use our software as a service ("SaaS") platform to transition from expensive paper invoicing and check acceptance to efficient electronic billing and payments, simplifying and accelerating transactions. Our scalable platform lets our customers maximize straight-through processing of invoicing, payments, and cash application while also reducing headcount. The machine learning capabilities and rules engine within our SaaS platform continuously evolve to solve order-to-cash challenges and deliver a higher rate of touchless transactions. We work with industry-leading security partners and take proactive steps to keep data secure from threats. Collectively our platform reduces the complexity of B2B commerce for our customers. 40 -------------------------------------------------------------------------------- Our secure, proprietary platform offers customers multiple ways to present invoices (online, email, AP portal, and print/mail) and receive payments (credit card, automated clearing house ("ACH"), email, phone and paper check). Our electronic solutions ("eSolutions") team works closely with our customers to transition their users from paper invoices and payments to electronic, which results in accelerated savings, faster realization of cash, a reduced environmental footprint, and a better user experience. In turn, we benefit from margin expansion and incremental revenue through the monetization of electronic payments. We help customers prioritize which problems to solve, regularly assess ROI, optimize the impact of digitization across processes, and drive more value for their companies, allowing AR teams to play a more strategic role in moving a business forward. We have expanded our product reach and customer base over the past years and scaled our business operations in recent periods. Our total revenues were$146.3 million and$123.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively. As a result of our focus on product development and sales and marketing, we have generated net losses of$65.4 million and$44.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
Proposed Merger
OnSeptember 28, 2022 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withBullseye FinCo, Inc. , aDelaware corporation ("Parent"), andBullseye Merger Sub, Inc. , aDelaware corporation and a direct, wholly owned subsidiary of Parent ("Merger Sub" and, together with Parent, the "Acquiring Parties"), pursuant to which Merger Sub will, upon the terms and subject to the conditions set forth in the Merger Agreement, merge with and into us, and we will survive such merger as a wholly-owned subsidiary of Parent (the "Merger") Parent and Merger Sub are each affiliated with theEQT X Fund . Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each share of our Class 1 common stock,$0.0001 par value, and Class 2 common stock,$0.0001 par value (other than shares rolled over in accordance with the Merger Agreement, and shares of our common stock held by us as treasury stock), issued and outstanding immediately prior to the Effective Time (other than dissenting shares) will be cancelled and immediately converted into the right to receive$9.50 in cash, without interest and less any applicable withholding taxes. The completion of the Merger is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the approval of our stockholders, the expiration or termination of applicable waiting periods and the receipt of applicable approvals or consents under antitrust and competition laws and foreign investment laws of certain jurisdictions. Assuming the satisfaction of the remaining outstanding conditions set forth in the Merger Agreement, the Merger is currently expected to close in the fourth quarter of 2022 or first quarter of 2023. However, we cannot assure completion of the Merger by any particular date, if at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement. If the Merger is consummated, our securities will be de-listed from the Nasdaq Global Select Market and de-registered under the Securities Exchange Act of 1934 as soon as practicable following the Effective Time. Under the terms of the Merger Agreement, we may be required to pay Parent a termination fee of$50.2 million if the Merger Agreement is terminated under certain specified circumstances, including us terminating the Merger Agreement to enter into a definitive written agreement with respect to a superior proposal that did not result from a breach of the non-solicitation provisions. The Merger Agreement additionally provides that Parent pay us a termination fee of$100.5 million under certain specified circumstances.
Business Combination with
OnOctober 18, 2020 , as amended onDecember 13, 2020 ,South Mountain ,BT Merger Sub I, Inc. , aDelaware corporation and a direct, wholly owned subsidiary ofSouth Mountain ("First Merger Sub"),BT Merger Sub II, LLC , aDelaware limited liability company and a direct, wholly owned subsidiary ofSouth Mountain ("Second Merger Sub") andFactor Systems, Inc ("Legacy Billtrust"), entered into a Business Combination Agreement (the "BCA"), pursuant to which (i) First Merger Sub was merged with and into Legacy Billtrust (the "First BCA Merger"), with Legacy Billtrust surviving the First Merger as a wholly owned subsidiary ofSouth Mountain ("Surviving Corporation") and (ii) theSurviving Corporation merged with and into Second Merger Sub (the "Second BCA Merger", and together with the First BCA Merger, the "BCA Mergers"), with Second Merger Sub surviving the Second Merger as a wholly owned subsidiary ofSouth Mountain , (such BCA Mergers, collectively with the other transactions described in the BCA, the "Business Combination"). 41 -------------------------------------------------------------------------------- In connection with the execution of the Business Combination, onOctober 18, 2020 ,South Mountain entered into separate subscription agreements ("Subscription Agreements") with a number of investors ("PIPE Investors "), pursuant to which thePIPE Investors agreed to purchase, andSouth Mountain sold to thePIPE Investors , an aggregate of 20.0 million shares ofSouth Mountain Class A common stock, for a purchase price of$10.00 per share and at an aggregate purchase price of$200.0 million , in a private placement ("PIPE Financing"). The Business Combination and PIPE Financing closed onJanuary 12, 2021 (the "BCA Closing Date"). The Business Combination was accounted for as a reverse recapitalization in accordance with the generally accepted accounting principles inthe United States of America ("U.S. GAAP"). Under this method of accounting,South Mountain was treated as the "acquired" company for financial reporting purposes. For accounting purposes, we were the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization ofBilltrust (i.e., a capital transaction involving the issuance of stock bySouth Mountain for the stock of Legacy Billtrust). Accordingly, the assets, liabilities, and results of operations of Legacy Billtrust became the historical financial statements of "New Billtrust," which was renamedBTRS Holdings Inc. , andSouth Mountain's assets, liabilities, and results of operations were consolidated with Legacy Billtrust beginning on the BCA Closing Date. All amounts ofBTRS Holdings Inc. reflect the historical amounts of Legacy Billtrust carried over at book value with no step up in basis to fair value. After the Business Combination, our Class 1 common stock ("Common Stock") began trading on the Nasdaq Global Select Market under the ticker symbol "BTRS".
Recent Developments
Acquisition of Order2Cash
OnFebruary 14, 2022 , we acquired 100% of the outstanding shares ofAnachron Beheer BV and subsidiaries, d/b/a Order2Cash ("Order2Cash"), a privately-held company headquartered inAmsterdam, the Netherlands . Order2Cash is a European B2B order-to-cash platform provider. Their enterprise customer base, global interoperability capabilities, and established connections to over 70 B2B and business-to-government ("B2G") e-invoicing networks broaden the BPN's reach to deliver fully compliant and secure e-invoicing across multiple markets. The acquisition is part of our strategic plan to continue expanding our physical presence in the European market while also enhancing our global invoicing and payments capabilities. Pursuant to the terms of the purchase agreement, we paid$59.5 million , net of$0.4 million of acquired cash.
Impairment of Right of Use Assets and Restructuring Charges
During the first quarter of 2022, we approved a strategic plan to optimize our structure and costs related to our leased facilities and print operations. As part of the plan, we approved a formal work from anywhere policy for our employees due to high interest in allowing employees to work remotely and investments in our operating environments and technology enabling seamless day-to-day execution and increased productivity across a distributed workforce. Additionally, we closed one of our print locations due to the continued decline in customer print volumes and efficiencies gained through streamlining our print operations. The overall plan included vacating some or all of several of our leased office facilities and one of our leased print operations facilities and making them available for sublease. We ceased using all of the facility space outlined in the plan byMarch 31, 2022 . As a result, during the three months endedMarch 31, 2022 , we incurred$10.0 million of right of use ("ROU") asset impairments and$3.6 million of leasehold improvement and fixed asset impairments Subsequently, we approved an expansion of the strategic plan to further vacate an additional portion of our leased office space. BySeptember 30, 2022 , we ceased using the leased facility space under the expanded plan. As a result, during the three months endedSeptember 30, 2022 , we incurred$3.3 million of ROU asset impairments and$1.3 million of leasehold improvement and fixed asset impairments. In calculating the impairment amount, the fair value of each asset was determined using an income approach based on the present value of future cash flows from actual or estimated sublease income. In cases where a sublease has not yet been entered into, this approach required the use of certain estimates, including a discount rate, sublease rental rates, period of vacancy, and sublease incentives, which were based in part by local real estate industry data. For these subjective estimates based on unobservable inputs, the fair value of the assets have been classified in Level 3 of the fair value hierarchy (refer to Note 13 - Fair Value Measurements in the Notes to Condensed Consolidated Financial Statements). All impairment amounts were recorded in impairment and restructuring on the Condensed Consolidated Statements of Operations. 42 -------------------------------------------------------------------------------- Additionally, in accordance with ASC 420, Exit or Disposal Cost Obligations, we recognized exit obligation costs related to closing the print operations facility, including one-time employee severance benefits, contract termination costs, and other costs associated with exiting the facility. These costs were recorded in impairment and restructuring on the Condensed Consolidated Statements of Operations, and are allocated to our Print segment. Total costs recognized during the nine months endedSeptember 30, 2022 were not material.
In the future if we determine we no longer intend to utilize some or all of our remaining leased facility space, we may be required to record additional impairment or restructuring charges.
Impact of COVID-19 and Other Macroeconomic Events
During 2021 and nine months endedSeptember 30, 2022 , the COVID-19 pandemic did not adversely impact us, as evidenced by the continued growth in our subscription and transaction revenues. Our focus remains on investing in our products and supporting our long-term growth, including global expansion. Since the start of the pandemic, we have continued to operate despite the disruption to some of our customer's operations. The pandemic has served to increase awareness and urgency around accelerating the digital transformation of accounts receivable through our platform and offerings which has helped avoid significant business, bookings, or revenue disruptions thus far. Additionally, shifts from in-person buying and traditional payment methods (such as cash or check) towards e-commerce and digital payments, and the related increase in consumer and B2B demand for safer payment and delivery solutions, have benefited us as it has further ingrained our platform in our customers' critical day-to-day order-to-cash operations. In response to the pandemic, we have modified some of our business practices, such as enabling and encouraging our employees to work from anywhere and establishing health and safety protocols in our offices. We continue to monitor the situation and may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and partners. In addition, the spread of COVID-19 and its variants has contributed to a global slowdown of economic activity, increased unemployment, supply chain disruptions, higher rates of inflation, higher interest rates, increased volatility in foreign currency exchange rates, and increased volatility in the global capital markets, among other macroeconomic events. We are unable to predict the impact the COVID-19 pandemic or other macroeconomic events will have on our future results of operations, liquidity, financial condition, ability to access capital markets, and business practices due to numerous uncertainties, including the duration, severity, and spread of the virus and its variants, actions that may be taken by government authorities, the impact to our employees, customers, and partners, prolonged macroeconomic uncertainty, volatility, and disruption, and various other factors beyond our knowledge or control. We continue to monitor these situations and may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and partners.
Key Factors Affecting Our Performance
We believe our performance and future growth depends on a number of factors that present significant opportunities, but also pose risks and challenges, including those discussed below and Part I. Item 1A. "Risk Factors" in our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. For additional information related to key performance metrics we use to evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions, please see the section within this Quarterly Report on Form 10-Q titled "Key Performance Metrics". We believe the most significant factors affecting our results of operations include:
Investment in Technology
Our goal is to transform the way businesses send and capture payments in order
to be the leader in the order-to-cash process by digitizing areas including
credit decisioning, ordering, invoicing, payments, cash application, and
collections. We continue to invest in technology and the digitizing of our
platforms. Further, we continue to invest in certain internal initiatives
targeted at improving internal processes and enhancing the efficiency, security,
and scalability of our platforms. Our investment in technology is expected to
have a positive impact on our long-term profitability and operations. We also
intend to continue to evaluate strategic acquisitions and investments in
businesses and technologies to drive product and market expansion. Our future
success is dependent on our ability to successfully develop, market, and sell
existing and new products.
43
--------------------------------------------------------------------------------Acquisition of New Customers
We reach new customers through our proven go-to-market strategies, which include digital marketing campaigns, our direct sales force, and partnerships with financial institutions and other complementary companies. Our growth depends in part on our ability to acquire new customers. As ofSeptember 30, 2022 , we had customers across a wide variety of industries and geographies, including distributors of building materials, electrical, plumbing and technology equipment, healthcare, construction, and consumer products, primarily located inNorth America . We continue to invest in our sales, marketing, and go-to-market strategies in order to acquire customers in our target markets. Our marketing efforts are campaign and content driven and targeted depending on the size and industry of the customer. Marketing initiatives focus on demand generation and include promotional activity and with an emphasis on online digital marketing programs (e.g., webinars, virtual events). We believe there is a long-term opportunity to expand into large, new markets with compatible trends. Our ability to attract new customers depends on a number of factors, including the effectiveness and pricing of our products, our competitors' offerings, and successfully executing our marketing efforts. Our financial performance depends in large part on the overall demand for our platforms, and acquisition of new customers is expected to have a positive impact on our long-term profitability and operations.
Expansion of Relationships with Existing Customers
Our revenue growth depends on our customers' usage of our range of products. Our ability to monetize transactions and payments is an important part of our business model. As we solve customers' problems and become more integrated into their daily businesses, we see an increased opportunity to cross-sell to these existing customers. This strategy is achieved by driving adoption of an existing solution across different divisions and/or subsidiaries of an existing customer and then expanding the scope of service with additional solutions. Our ability to influence customers to process more transactions and payments on our platforms will have a direct impact on our revenue. Our revenue from existing customers is generally reliable due to both the pricing structure and the business-critical nature of the functions our products support for customers. We expand within our existing customer base by selling additional modules on our platform, adding divisions, increasing transactions per customer through proven e-solutions, as well as through effective pricing and packaging our services. Our ability to increase sales to existing customers depends on a number of factors, including our customers' satisfaction with our solutions, competition, pricing, and overall changes in our customers' spending levels with us. Key Performance Metrics
We monitor the following key metric to help us evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.
Total Payment Volume
Total Payment Volume ("TPV") is the dollar value of customer payment transactions that we process on our platform during a particular period. TPV is made up of the two payment categories:
•TPV - ACH/Wire - payments made via our software, portals, gateways, and our Business Payments Network that are processed via ACH or wire transfers.
•TPV - Card - payments through our software, portals, gateways, and third-party processors, and includes our payment facilitator ("PayFac") customers.
To grow payments revenue from customers, we must deliver software platforms that
both simplify the process of accepting electronic payments and streamline the
reconciliation of remittance data. Additionally, as we increase the digital
delivery of invoices, the probability increases that digitally delivered
invoices will be paid electronically by our customers' end customers. The more
customers use our software platforms, the more payments transactions they are
likely to process through our various products. TPV provides an important
indication of the dollar value of transactions that customers are completing on
our platform and is helpful to investors as an indicator of our ability to
generate revenue from our customers.
44
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in billions)
Total Payment Volume $ 28.3 $ 21.0 $ 76.5 $ 54.9
TPV - ACH/Wire 18.6 13.5 50.2 35.4
TPV - Card $ 9.7 $ 7.5 $ 26.3 $ 19.5
The increase in TPV for the three and nine months ended September 30, 2022
compared to the prior year periods was primarily due to the addition of new
customers on our PayFac platform, as well as an increase in existing customer
transactions on both our card and ACH/Wire platforms (including an expansion of
our product platforms for ACH transactions).
Components of Results of Operations
Revenues
We generate revenue from the following sources: (1) Subscription, (2) Transaction, (3) Professional Services, and (4) Reimbursable Costs.
Subscription Revenue
Subscription revenue primarily consists of contractually agreed upon fees to provide access to our cloud-based SaaS platform and modules that automate processes across the accounts receivable function (including electronic invoice presentment, payments solutions, credit decisioning and monitoring, cash application, collections automation, and e-commerce). Our subscription agreements do not provide a customer with the right to take possession of the software, are typically non-cancellable, and do not contain general rights of returns. Subscription agreements have an initial term of one to three years and are typically invoiced in annual installments in advance of each year. After the initial term, subscription agreements renew annually and are typically invoiced in advance of each renewal year. In some cases, subscriptions may be billed on a quarterly or monthly basis in advance. Subscription services are recognized ratably over the contractual term of the arrangement, beginning on the date the service is made available to the customer.
Transaction Revenue
Transaction revenue consists of per-item processing fees charged at contracted rates based on the number of envelopes, invoices delivered, payments processed, or basis points on the amount of credit card payments processed. Our transaction fees are billed monthly based on the volume of items processed each month, at the contractual rate per item processed. Transaction revenue is recognized at the same time as the transactions are processed.
Professional Services Revenue
Professional services revenue consists of implementation services for new customers, or implementations of new products for existing customers. It also includes separately contracted project services provided to customers after implementation.
Implementation services are typically sold on a time and materials basis and billed monthly based on actual hours incurred. When our implementation services are not capable of being distinct from the related subscription service, they are combined with the subscription service and recognized over the term of the agreement. In these cases, since the initial contract with a customer includes both the subscription and implementation fees, and is therefore higher than subscription renewal fees in subsequent years, the contract conveys a 'material right' to the customer (i.e., an option for the customer to renew the contract at a lower price in relation to the initial contract price). Material rights are treated separately and are recognized over the period which the right is expected to be exercised by a customer.
Project services are considered separate and distinct from other products or services purchased and are recognized at the same time as the services are provided.
45
--------------------------------------------------------------------------------Reimbursable Costs
Reimbursable costs revenue consists primarily of amounts charged to our customers for postage on printed and mailed invoices to their end customers. The related revenues are recorded on a gross basis, with an offsetting amount recorded as a cost of revenue.
Cost of Revenues
Costs of Subscription, Transaction, and Services
Cost of subscription, transaction, and services consists primarily of personnel-related costs, including stock-based compensation expense, for our customer success, professional services, file, and payment operations teams, print operations equipment costs, costs directly attributed to processing customers' transactions (such as the cost of printing and mailing invoices, excluding postage), expenses for processing payments (ACH and credit card), direct and amortized costs for implementing and integrating our cloud-based platforms with customers' systems, cloud hosting and related costs for the infrastructure directly associated with production platforms, rent and utilities expense for our leased print operations facilities, and allocated overhead costs. Cost of subscription, transaction, and services excludes depreciation and amortization. We expect that cost of subscription, transaction, and services will increase in absolute dollars, but may fluctuate as a percentage of total revenues from period to period as we continue to invest in growing our business.
Cost of Reimbursable Costs
Cost of reimbursable costs consists of fees for postage related costs, primarily paid to theUnited States Postal Service or third parties associated with printed and mailed invoice deliveries for our customers, and are recorded at no incremental margin on reimbursable costs revenues.
Operating Expenses
Research and Development
Research and development expense consists primarily of personnel-related expenses, including stock-based compensation expense, incurred in developing and engineering new products or enhancing existing products, quality assurance and testing of new and existing product technology, maintenance, and enhancement of our existing technology and infrastructure, and allocated overhead costs. We capitalize certain software development costs that are attributable to developing new products and adding incremental functionality to our platforms, and amortize such costs over the estimated life of the new product or incremental functionality, which is typically four years. In accordance withU.S. GAAP, we expense a substantial portion of research and development expenses as incurred. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of total revenues from period to period as we continue to expand our research and development team to develop new products and product enhancements, as well as to support our growing infrastructure.
Sales and Marketing
Sales and marketing expense consists primarily of personnel-related expenses, including stock-based compensation expense, sales commissions, marketing program expenses, travel-related expenses, and costs to market and promote our platforms through advertisements, marketing events, partnership arrangements, direct customer acquisition, and allocated overhead costs. Sales commissions that are incremental to obtaining customer contracts are deferred and amortized on a straight-line basis over the estimated period of the customer relationship, which is estimated to be four to five years.
Our sales and marketing efforts are focused on increasing revenue from the acquisition of new customers, the expansion of subscription revenue from existing customers, and from facilitating increased electronic adoption and resulting digital processing activity between our customers and their end customers. Sales and marketing expenses may fluctuate from period to period based on a variety of factors, including changes in the broader economic environment and our return on this spend.
46
--------------------------------------------------------------------------------General and Administrative
General and administrative expense consists of personnel-related expenses, including stock-based compensation expense, for our executive team, talent (human resources), finance, procurement, legal and compliance, and other administrative teams, facility costs (including rent and utilities expense for our leased office space, excluding those used in our print operations), contingent consideration from acquisitions recognized as compensation expense, and allocated overhead costs. To support the growth in our business, our general and administrative expenses will increase over time. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance, and reporting obligations pursuant to the rules and regulations of theSEC , as well as higher expenses for director and officer insurance, investor relations, and professional services. We also expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. A material portion of these expenses are payable by us whether or not the Merger is completed. As a result, we expect that our general and administrative expenses will increase in absolute dollars, but may fluctuate as a percentage of total revenues from period to period.
Depreciation and Amortization
Depreciation and amortization expense includes the costs associated with depreciating our owned furniture and fixtures, computer equipment, software, and technology assets, as well as amortization of leasehold improvements, capitalized software, and finite-lived intangible assets.
Impairment and Restructuring
Impairment and restructuring expense consists of asset impairments, including those related to ceasing use of leased facilities, costs associated with involuntary termination benefits provided to employees, certain contract termination costs, and other costs associated with exit or disposal activities.
Other Income (Expense)
Change in Fair Value of Financial Instruments
Change in fair value of financial instruments consists of changes in the fair value of equity instruments that do not meet the criteria to be classified as equity and contingent consideration from acquisitions (excluding arrangements recognized as compensation expense).
Interest Expense and Loss on Extinguishment of Debt
Interest expense and loss on extinguishment of debt consists of interest on any outstanding debt, amortization of associated debt issuance costs, payment of early termination fees, writing off unamortized debt discounts associated with repaying our outstanding debt facilities prior to maturity, and interest expense on finance leases.
Other Non-Operating Income (Expense)
Other non-operating income (expense) consists of interest income earned on our cash, cash equivalents, and marketable securities, foreign exchange gains (losses), and other non-operating income (expense).
Income Taxes
Income taxes consist primarily of income taxes related to federal, state, and foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on net deferred tax assets for ourU.S. federal taxes and certain foreign and state taxes as we have concluded that it is not more likely than not that the deferred assets will be utilized. 47 --------------------------------------------------------------------------------
Segments
Our operations are grouped into two reportable segments: (1) Software and
Payments, and (2) Print. Our Chief Operating Decision Maker ("CODM") is the
chief executive officer, who reviews discrete financial and other information
presented for print services and software and payment services for purposes of
allocating resources and evaluating our financial performance. The accounting
policies used by the reportable segments are the same as those used in our
Condensed Consolidated Financial Statements.
•Software and Payments - The Software and Payments segment primarily operates
using software and cloud based services, optimizes electronic invoice
presentment, electronic payments, credit decisioning, collections automation,
cash application and deduction management, and e-commerce of B2B customers.
•Print - The Print segment is primarily responsible for printing customer invoices and optimizing the amount of time and costs associated with billing customers via mail.
We evaluate segment performance and allocate resources based on revenues, cost of revenues, and gross profit. All of the revenues shown in the reportable segments is revenue from external customers; there is no revenue from transactions with other operating segments. Segment expenses include the direct expenses of each segment's operations and exclude sales and marketing expenses, research and development expenses, general and administrative expenses, depreciation and amortization, impairment and restructuring expense, stock-based compensation expense, other income (expense), and certain other identified costs that we do not allocate to the segments for purposes of evaluating their operational performance.
Given the nature of our business, the amount of assets does not provide meaningful insight into our operating performance. As a result, we do not identify or allocate assets by reportable segment and total assets are not included in our segment financial information.
48
--------------------------------------------------------------------------------Results of Operations
The following tables set forth select Condensed Consolidated Statements of Operations data, and such data as a percentage of total revenues, for each of the periods indicated (in thousands, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenues:
Subscription, transaction, and
services $ 42,508 83 % $ 32,732 79 % $ 120,157 82 % $ 97,440 79 %
Reimbursable costs 8,854 17 8,625 21 26,112 18 26,085 21
Total revenues 51,362 100 41,357 100 146,269 100 123,525 100
Cost of revenues:
Cost of subscription,
transaction, and services 11,255 22 9,368 23 32,729 22 27,981 23
Cost of reimbursable costs 8,854 17 8,625 21 26,112 18 26,085
21
Total cost of revenues, excluding depreciation and amortization 20,109 39 17,993 44 58,841 40 54,066 44 Operating expenses: Research and development 15,943 31 13,453 33 46,922 32 35,716 29 Sales and marketing 11,591 23 10,310 25 34,030 23 29,226 24 General and administrative 19,613 38 9,838 24 49,426 34 32,766
27
Depreciation and amortization 2,191 4 1,205 3 6,218 4 3,924
3
Impairment and restructuring 4,636 9 - - 18,520 13 -
-
Total operating expenses 53,974 105 34,806 84 155,116 106 101,632 82 Loss from operations (22,721) (44) (11,442) (28) (67,688) (46) (32,173) (26) Other income (expense): Change in fair value of financial instruments 360 1 - - 122 - (9,995) (8) Interest expense and loss on extinguishment of debt (15) - (2) - (22) - (2,947) (2) Other non-operating income 916 2 277 1 1,171 1 521
-
Total other income (expense) 1,261 2 275 1 1,271 1 (12,421) (10) Loss before income taxes (21,460) (42) (11,167) (27) (66,417) (45) (44,594) (36) Income tax expense (benefit) (251) - 27
- (970) (1) 130 -
Net loss $ (21,209) (41) % $ (11,194) (27) % $ (65,447) (45) % $ (44,724) (36) %
49-------------------------------------------------------------------------------- Comparison of Results of Operations for the Three Months EndedSeptember 30, 2022 and 2021 Total Revenues Three Months Ended September 30, Change 2022 2021 Amount % (in thousands)
Subscription and transaction fees
Services and other 3,249 2,356 893 38
Subscription, transaction, and services 42,508 32,732
9,776 30
Reimbursable costs 8,854 8,625 229 3
Total revenues $ 51,362 $ 41,357 $ 10,005 24 %
The increase in total revenues during the three months ended September 30, 2022
compared to the prior year period was primarily due to a $9.1 million increase
in subscription and transaction fees in the Software and Payments segment as a
result of contracting with new customers, existing customers purchasing
additional products, the acquisitions of iController BV ("iController") and
Order2Cash, and increased transaction volumes, primarily from payments. The
growth in transaction volumes was primarily related to the growth in variable
transactional fee revenue associated with card payments on our electronic
payments processing platforms. Additionally, total revenues increased $0.9
million from services and other revenues due to increases in consulting
engagements supporting the growth in new and existing customers, as well as
additional services revenue from the acquisition of Order2Cash.
Cost of Revenues
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Cost of subscription, transaction, and
services $ 11,255 $ 9,368 $ 1,887 20 %
Cost of reimbursable costs 8,854 8,625 229 3
Total cost of revenues, excluding
depreciation and amortization $ 20,109 $ 17,993 $ 2,116 12 %
The increase in total cost of revenues during the three months ended September
30, 2022 compared to the prior year period was primarily due to (1) a $0.6
million increase in compensation, benefits, and other personnel-related costs
due to increased headcount and (2) a $1.4 million increase from the acquisitions
of iController and Order2Cash.
Research and Development
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Research and development $ 15,943 $ 13,453 $ 2,490 19 %
The increase in research and development expenses during the three months ended
September 30, 2022 compared to the prior year period was primarily due to (1) a
$0.8 million increase in compensation, benefits, and other personnel-related
costs, and increased headcount, (2) a $0.3 million increase in stock-based
compensation expense, (3) a $0.3 million increase in software expenses directly
related to product development activities, and (4) a $0.6 million increase due
to the acquisitions of iController and Order2Cash.
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Sales and Marketing
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Sales and marketing $ 11,591 $ 10,310 $ 1,281 12 %
The increase in sales and marketing expenses during the three months ended
September 30, 2022 compared to the prior year period was primarily due to (1) a
$0.5 million increase in compensation, benefits, and other personnel-related
costs, and increased headcount, (2) a $0.4 million increase in sales and
marketing initiatives spend related to promoting our products and product
enhancements, including consulting and professional fees, and (3) a $0.5 million
increase due to the acquisitions of iController and Order2Cash. These increases
were partially offset by a $0.3 million decrease in stock-based compensation
expense related to forfeitures.
General and Administrative
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
General and administrative $ 19,613 $ 9,838 $ 9,775 99 %
The increase in general and administrative expenses during the three months
ended September 30, 2022 compared to the prior year period was primarily due to
(1) a $5.8 million increase in Merger related costs, primarily consisting of
investment banking, legal, accounting, and other professional advisory fees,
filing fees, regulatory fees, and other related costs, (2) a $1.0 million
increase in stock-based compensation expense, (3) a $0.9 million increase
compensation, benefits, and other personnel-related costs, and increased
headcount, (4) a $0.7 million increase in acquisition and integration expenses,
and (5) a $1.2 million increase due to the acquisitions of iController and
Order2Cash.
Depreciation and Amortization
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Depreciation and amortization $ 2,191 $ 1,205 $ 986 82 %
The increase in depreciation and amortization during the three months ended
September 30, 2022 compared to the prior year period was primarily due to the
amortization of intangible assets from the acquisitions of iController and
Order2Cash.
Impairment and Restructuring
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Impairment and restructuring $ 4,636 $ - The increase in impairment and restructuring expense during the three months endedSeptember 30, 2022 compared to the prior year period was due to impairments of operating lease ROU assets, leasehold improvements, and fixed assets incurred as a result of vacating several leased office and print facilities. 51 --------------------------------------------------------------------------------
Total Other Income (Expense)
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Total other income (expense) $ 1,261 $ 275 $ 986 (359) %
The increase in other income (expense) during the three months ended September
30, 2022 compared to the prior year period was primarily due to (1) a $0.6
million increase in interest income, and (2) a $0.4 million decrease in the fair
value of the contingent consideration related to the iController acquisition.
Income Tax Expense (Benefit)
Three Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Income tax expense (benefit) $ (251) $ 27 The change from income tax expense to income tax benefit during the three months endedSeptember 30, 2022 was primarily due to a decrease in the deferred tax liability related to foreign acquisitions and the ability to utilize certain tax losses in the future. Overall, our effective tax rate is low due to ourU.S. net operating loss position. We maintain a valuation allowance on ourU.S. deferred taxes. Comparison of Results of Operations for the Nine Months EndedSeptember 30, 2022 and 2021 Total Revenues Nine Months Ended September 30, Change 2022 2021 Amount % (in thousands)
Subscription and transaction fees
Services and other 9,179 7,809 1,370 18 %
Subscription, transaction, and services 120,157 97,440
22,717 23 %
Reimbursable costs 26,112 26,085 27 - %
Total revenues $ 146,269 $ 123,525 $ 22,744 18 %
The increase in total revenues during the nine months ended September 30, 2022
compared to the prior year period was primarily due to (1) a $22.0 million
increase in subscription and transaction fees in the Software and Payments
segment as a result of contracting with new customers, existing customers
purchasing additional products, the acquisitions of iController and Order2Cash,
and increased transaction volumes, primarily from payments. The growth in
transaction volumes was primarily related to the growth in variable
transactional fee revenue associated with card payments on our electronic
payments processing platforms. Additionally, total revenues increased $1.4
million from services and other revenues due to increases in consulting
engagements supporting the growth in new and existing customers, as well as
additional services revenue from the acquisition of Order2Cash.
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Cost of Revenues
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Cost of subscription, transaction, and
services $ 32,729 $ 27,981 $ 4,748 17 %
Cost of reimbursable costs 26,112 26,085 27 - %
Total cost of revenues, excluding
depreciation and amortization $ 58,841 $ 54,066 $ 4,775 9 %
The increase in total cost of revenues during the nine months ended September
30, 2022 compared to the prior year period was primarily due to (1) a $1.2
million increase in compensation, benefits, and other personnel-related costs,
and increased headcount and (2) a $4.0 million increase due to the acquisitions
of iController and Order2Cash. These increases were partially offset by a $0.4
million decrease in print related costs resulting from efficiencies in our
operations and lower print transactional volumes as a result of converting
existing customers to electronic invoicing.
Research and Development
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Research and development $ 46,922 $ 35,716 $ 11,206 31 %
The increase in research and development expenses during the nine months ended
September 30, 2022 compared to the prior year period was primarily due to (1) a
$6.3 million increase in compensation, benefits, and other personnel-related
costs, and increased headcount, (2) a $0.9 million increase in software expenses
directly related to product development activities, (3) a $0.7 million increase
in stock-based compensation expense, (4) a $0.6 million increase in amortized
software development costs, (5) a $0.4 million increase in integration expenses,
and (6) a $2.1 million increase due to the acquisitions of iController and
Order2Cash.
Sales and Marketing
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Sales and marketing $ 34,030 $ 29,226 $ 4,804 16 %
The increase in sales and marketing expenses during the nine months ended
September 30, 2022 compared to the prior year period was primarily due to (1) a
$2.0 million increase in compensation, benefits, and other personnel-related
costs, and increased headcount, (2) a $0.9 million increase in sales and
marketing initiatives spend related to promoting our products and product
enhancements, including consulting and professional fees, (3) a $0.6 million
increase in travel and entertainment expenses due to increased travel as a
result of loosening COVID-19 restrictions, and (4) a $2.0 million increase due
to the acquisitions of iController and Order2Cash. These increases were
partially offset by a $0.9 million decrease in stock-based compensation expense
related to forfeitures.
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General and Administrative
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
General and administrative $ 49,426 $ 32,766 $ 16,660 51 %
The increase in general and administrative expenses during the nine months ended
September 30, 2022 compared to the prior year period was primarily due to (1) a
$5.8 million increase in Merger related costs, primarily consisting of
investment banking, legal, accounting, and other professional advisory fees,
filing fees, regulatory fees, and other related costs, (2) a $3.5 million
increase in compensation, benefits, and other personnel-related costs, and
increased headcount, (3) a $2.3 million increase in insurance, professional, and
consulting fees for reporting, compliance, and other related requirements
supporting public company operating requirements and as a result of becoming a
large accelerated filer for fiscal year 2022, (4) a $1.6 million increase in
acquisition and integration costs, (5) a $1.2 million increase related to
contingent consideration payable pursuant to the Order2Cash acquisition
agreement, and (6) a $2.6 million increase due to the acquisitions of
iController and Order2Cash. These increases were partially offset by a $0.3
million decrease in stock-based compensation expense related to forfeitures.
Depreciation and Amortization
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Depreciation and amortization $ 6,218 $ 3,924 $ 2,294 58 %
The increase in depreciation and amortization during the nine months ended
September 30, 2022 compared to the prior year period was primarily due to the
amortization of intangible assets from the acquisitions of iController and
Order2Cash.
Impairment and Restructuring
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Impairment and restructuring $ 18,520 $ - The increase in impairment and restructuring expense during the nine months endedSeptember 30, 2022 compared to the prior year period was primarily due to impairments of operating lease ROU assets, leasehold improvements, and fixed assets incurred as a result of vacating several leased office and print facilities. Total Other Income (Expense) Nine Months Ended September 30, Change 2022 2021 Amount % (in thousands)
Total other income (expense) $ 1,271 $ (12,421) $ 13,692 (110) %
The decrease in other expenses during the nine months ended September 30, 2022
compared to the prior year period was primarily due to the following one-time
costs recorded in the first quarter of 2021 related to the Business Combination:
(1) a $10.0 million fair value adjustment from the increase in value of the
Earnout Shares and, (2) a $2.9 million loss on extinguishment of debt associated
with the early payment of all our outstanding borrowings. The remainder of the
decrease was primarily due to $0.7 million of additional interest income.
54
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Income Tax Expense (Benefit)
Nine Months Ended
September 30, Change
2022 2021 Amount %
(in thousands)
Income tax expense (benefit) $ (970) $ 130 $(1,100) (846) %
The change from income tax expense to income tax benefit during the nine months endedSeptember 30, 2022 was primarily due to a decrease in the deferred tax liability related to foreign acquisitions and the ability to utilize certain tax losses in the future. Overall, our effective tax rate is low due to ourU.S. net operating loss position. We maintain a valuation allowance on ourU.S. deferred taxes.
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents, and cash flows from financing activities including through a public offering of our equity securities. As ofSeptember 30, 2022 , we had cash and cash equivalents of$145.9 million . Our primary uses of liquidity are operating expenses, capital expenditures, and acquiring businesses. The acquisitions of iController and Order2Cash were both funded entirely with cash on hand. Pursuant to the Merger Agreement, while the Merger is pending, we are restricted or prohibited from certain capital expenditures without the consent of the Parent. Additionally, during that same time, we are subject to various restrictions under the Merger Agreement on raising additional capital, issuing additional equity or debt, and pursuing certain activities that could use significant amounts of our liquidity, including assuming or incurring additional debt, repurchasing equity, paying dividends, and entering into certain acquisition and disposition transactions, among other restrictions. We believe our current cash, cash equivalents, and cash flows from financing activities, including additional consideration payable within the next year, if any, related to our recent acquisitions, and incremental cash outlays for transaction costs related to the proposed Merger expected to be incurred whether or not the Merger is completed, are sufficient to meet our working capital and capital expenditure requirements for a period of at least 12 months from the date of this Quarterly Report on Form 10-Q. However, our anticipated results are subject to significant uncertainty and may be affected by events beyond our control, including the prevailing economic, financial, and industry conditions, including from the COVID-19 pandemic and continued volatility and disruption in the global financial markets.
The following table summarizes our cash flows for the periods presented (in thousands, except percentages):
Nine Months Ended
September 30, Change
2022 2021 Amount %
Net cash used in operating activities
(189) %
Net cash used in investing activities (15,703) (46,647) 30,944 66
Net cash provided by (used in)
financing activities (3,144) 282,945 (286,089) (101)
Effect of exchange rate changes on
cash, cash equivalents, and restricted
cash (125) - (125) -
Net increase (decrease) in cash, cash
equivalents, and restricted cash $ (47,339) $ 226,489 $ (273,828) (121) %
Operating Activities
Cash flows from operations have historically been negative as we continue to
invest in our product features and platform, develop new products, increase our
sales and marketing efforts to sign contracts with new customers, and expand the
product breadth within existing customers. We do not expect this trend to change
on an annual basis, although we do see quarterly shifts where cash flows from
operations may be positive, primarily associated with invoicing and collecting
subscription fees from customers which are typically payable in advance.
55
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For the nine months ended September 30, 2022 , cash used in operating activities
was $28.4 million compared to $9.8 million during the prior year period. The
increase was primarily due to higher net loss from continued investments in
sales and marketing and product development, acquisition and integration costs,
and an increase in the use of cash for working capital.
Investing Activities
During the nine months endedSeptember 30, 2022 cash used in investing activities was$15.7 million , which consisted primarily of$59.5 million for the purchase of Order2Cash, net of acquired cash, and was partially offset by$45.2 million of proceeds from the sale of marketable securities and$1.4 million for purchases of property and equipment.
During the nine months ended
Financing Activities
During the nine months ended
During the nine months endedSeptember 30, 2021 cash provided by financing activities was$282.9 million , which consisted primarily of$329.7 million of proceeds from the Business Combination and PIPE Financing, net of offering costs. These proceeds were offset by$46.2 million used to fully repay our outstanding borrowings, including debt extinguishment costs, pursuant to the Business Combination, and$1.3 million in proceeds from common stock issued.
Future Cash Obligations
In addition to the future cash obligations described below, we have other payables and liabilities that may be legally enforceable but are not considered contractual commitments. Refer to Note 15 - Accrued Expenses and Other Current Liabilities in the Notes to Condensed Consolidated Financial Statements for more information on our payables and liabilities.
Leases
We lease office space for our employees and facilities for our print operations under non-cancellable operating lease agreements (refer to Note 9 - Leases in the Notes to Condensed Consolidated Financial Statements, including a discussion of the impairment of certain facility leases no longer in use). The remaining duration of non-cancellable operating leases ranges from less than 1 year to 13 years. As ofSeptember 30, 2022 , remaining non-cancellable lease payments are due as follows:$1.3 million in 2022,$5.3 million in 2023,$4.9 million in 2024,$4.6 million in 2025,$4.3 million in 2026, and$24.7 million thereafter. For certain leased facility space that we have ceased occupying, we have entered into subleases under non-cancellable operating lease agreements. The remaining duration of these non-cancellable subleases ranges from 2 years to 8 years. As ofSeptember 30, 2022 , remaining non-cancellable sublease payments to be received are as follows:$0.3 million in 2022,$1.3 million in 2023,$1.1 million in 2024,$1.0 million in 2025,$1.1 million in 2026, and$1.6 million thereafter. Purchase Obligations We enter into purchase commitments with certain vendors to secure pricing for materials necessary for our print operations. As ofSeptember 30, 2022 , we had approximately$0.4 million remaining under such purchase commitments.
Contingent Consideration
Our acquisitions of Order2Cash and iController include contingent consideration arrangements with estimated fair values of$3.1 million and$4.5 million , respectively atSeptember 30, 2022 . These amounts are to be paid to the sellers based on the amount and timing of each acquired company's achievement of certain recurring revenue growth targets and other certain conditions over a three year period subsequent to each acquisition date. 56 --------------------------------------------------------------------------------
Deferred Purchase Price
Our acquisition of Order2Cash includes a deferred purchase with an estimated fair value atSeptember 30, 2022 of$0.5 million . This amount is payable within four years of the closing date upon achievement of certain conditions.
Letters of Credit
We have commitments under letters of credit for$2.5 million that are maintained pursuant to certain of our lease arrangements.$2.4 million of the letters of credit expire in 2024, and the remainder expire in greater than five years fromSeptember 30, 2022 . Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We present these non-GAAP measures to assist investors in understanding our financial performance from the perspective of management. We believe these measures provide an additional tool for investors to use in comparing our financial performance over multiple periods with other companies in our industry. While we believe the use of these non-GAAP measures provides useful information to investors and management in analyzing our financial performance, non-GAAP measures have inherent limitations in that they do not reflect all of the amounts and transactions that are included in our financial statements prepared in accordance withU.S. GAAP. Non-GAAP measures do not serve as an alternative toU.S. GAAP, nor do we consider our non-GAAP measures in isolation. Accordingly, we present non-GAAP financial measures only in connection withU.S. GAAP results. We urge investors to consider non-GAAP measures only in conjunction with ourU.S. GAAP financials and to review the reconciliation of our non-GAAP financial measures to the most comparableU.S. GAAP financial measures, as described below, included in this Quarterly Report on Form 10-Q. Net Revenue (non-GAAP) Net revenue (non-GAAP) is defined as total revenues less reimbursable costs revenue. Reimbursable costs revenue consists primarily of amounts charged to customers for postage (with an offsetting amount recorded as a cost of revenue) which we do not consider internally when monitoring operating performance. We believe net revenue (non-GAAP) allows investors to evaluate comparability with our past financial performance and facilitates period-to-period comparisons of core operations. The most directly comparableU.S. GAAP measure to net revenue (non-GAAP) is total revenues on our Condensed Consolidated Statements of Operations.
Adjusted Gross Profit (non-GAAP) & Adjusted Gross Margin (non-GAAP)
Adjusted gross profit (non-GAAP) is defined as total revenues less total cost of revenues, excluding depreciation and amortization, plus stock-based compensation expense included in total cost of revenues. Adjusted gross margin (non-GAAP) is defined as adjusted gross profit (non-GAAP) divided by total revenues less reimbursable costs revenue, or net revenue (non-GAAP). We believe adjusted gross profit (non-GAAP) and adjusted gross margin (non-GAAP) are useful financial measures to investors as they eliminate the impact of certain non-cash expenses and allow a more direct comparison of our cash operations and ongoing operating performance between periods. We expect adjusted gross margin (non-GAAP) to continue to improve over time to the extent that we are able to increase our scale by successfully growing revenues, both from cross-selling existing customers and upselling current and future offerings. However, our ability to improve adjusted gross margin (non-GAAP) over time is not guaranteed and will be impacted by the factors affecting our performance outlined in the Part I, Item 1a. "Risk Factors" of our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. The most directly comparableU.S. GAAP measure to adjusted gross profit (non-GAAP) and adjusted gross margin (non-GAAP) is total revenues on our Condensed Consolidated Statements of Operations. 57 -------------------------------------------------------------------------------- The following table presents a reconciliation of our net revenue (non-GAAP), adjusted gross profit (non-GAAP), and adjusted gross margin (non-GAAP) to their most directly comparableU.S. GAAP financial measures (in thousands, except percentages):
Reconciliation of Total Revenues to Net Revenue (non-GAAP), Adjusted Gross Profit (non-GAAP), and Adjusted Gross Margin (Non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Total revenues $ 51,362 $ 41,357 $ 146,269 $ 123,525
Less: Reimbursable costs revenue 8,854 8,625 26,112 26,085
Net revenue (non-GAAP) $ 42,508 $ 32,732 Total revenues$ 51,362 $ 41,357 $ 146,269 $ 123,525 Less: Cost of revenue, excluding depreciation and amortization 20,109 17,993 58,841 54,066 Gross profit, excluding depreciation and amortization 31,253 23,364 87,428 69,459 Add: Stock-based compensation expense 587 436 1,646 1,284
Adjusted gross profit (non-GAAP)
Gross margin, excluding depreciation and amortization 60.8 % 56.5 % 59.8 % 56.2 % Adjusted gross margin (non-GAAP) 74.9 % 72.7 % 74.1 % 72.6 %
Adjusted EBITDA (non-GAAP) & Adjusted EBITDA Margin (non-GAAP)
Adjusted EBITDA (non-GAAP) is defined as net loss, plus (1) income tax expense (benefit), (2) changes in the fair value of financial instruments that do not meet the criteria to be classified as equity, (3) interest expense and loss on extinguishment of debt, (4) depreciation and amortization, (5) stock-based compensation expense, (6) impairment, restructuring, and related facility costs, (7) acquisition and integration costs, (8) other capital structure transaction costs, and (9) other non-operating expense (income). Adjusted EBITDA margin (non-GAAP) is defined as adjusted EBITDA (non-GAAP) divided by total revenues less reimbursable costs revenue, or net revenue (non-GAAP). We believe adjusted EBITDA (non-GAAP) and adjusted EBITDA margin (non-GAAP) are key measures for us to understand and evaluate our operating performance, to establish budgets, and to develop operational and strategic goals. Adjusted EBITDA (non-GAAP) and adjusted EBITDA margin (non-GAAP) can provide a useful measure for period-to-period comparisons of our core operating performance and help identify underlying trends since the expenses we exclude may not directly correlate to our primary operating performance in any specific period. Excluded expenses are:
•Certain non-cash charges, such as stock-based compensation expense, depreciation and amortization, and changes in fair value of financial instruments;
•Certain items not related to our primary business activities, such as:
•Impairment, restructuring, and related facility costs associated with realigning our organization or cost structure, impairments of ROU assets and other long-lived assets from ceasing use of leased facility spaces, involuntary termination benefits, ongoing lease expense and related sublease income from facility spaces we have ceased using, and other related costs; and
•Other non-operating income.
58
--------------------------------------------------------------------------------•Non-recurring items that are not expected to recur within the next two years or have not occurred within the prior two years, such as:
•Acquisition and integration expenses related to third-party costs associated with acquiring companies, internal direct costs associated with integrating acquired companies, employees, and their customers, and changes in the fair value of contingent compensation consideration payable to employees of acquired companies;
•Interest expense and loss on extinguishment of debt resulting from the prepayment penalty and associated costs of repaying all outstanding debt facilities as part of the Business Combination; and
•Other capital structure transaction costs related to third-party fees, including investment banking, legal, accounting, and other professional advisory fees associated with financing transactions, such as the proposed Merger (and one-time transaction to become a private company), the secondary offering of our Class 1 common stock completed inJuly 2021 (a one-time transaction between existing and new shareholders, with no new shares issued or offered by us), and the Warrant Exchange Offer (a one-time transaction to convert all outstanding warrants to Common Stock).
The most directly comparable
The following table presents a reconciliation of our adjusted EBITDA (non-GAAP) and adjusted EBITDA margin (non-GAAP) to its most directly comparable GAAP financial measure (in thousands):
Reconciliation of Net Loss to Adjusted EBITDA (non-GAAP) and Adjusted EBITDA Margin (non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Net loss $ (21,209) $ (11,194) $ (65,447) $ (44,724)
Income tax expense (benefit) (251) 27 (970) 130
Change in fair value of financial
instruments (360) - (122) 9,995
Interest expense and loss on
extinguishment of debt 15 2 22 2,947
Depreciation and amortization 2,191 1,205 6,218 3,924
Stock-based compensation expense 6,940 5,914 20,293 20,446
Impairment, restructuring, and related
facility costs 5,383 35 20,262 358
Acquisition and integration costs 702 257 3,900 257
Other capital structure transaction
costs 5,802 - 5,802 498
Other non-operating income (726) (277) (982) (521)
Adjusted EBITDA (non-GAAP) $ (1,513) $ (4,031) $ (11,024) $ (6,690)
Adjusted EBITDA margin (non-GAAP) (3.6) % (12.3) % (9.2) % (6.9) %
For the three months ended September 30, 2022 , adjusted EBITDA (non-GAAP)
increased $2.5 million compared to the prior year period primarily due to growth
in total revenues and higher expenses that are excluded from adjusted EBITDA
(non-GAAP), including (1) $5.8 million of other capital structure transaction
costs related to the proposed Merger, (2) $5.4 million in impairment charges
from ceasing use of additional leased facilities in the third quarter of 2022,
(3) a $1.0 million increase in stock-based compensation expense due to increased
headcount, and (4) a $1.0 million increased depreciation and amortization
primarily due to the amortization of intangible assets from the acquisitions of
iController and Order2Cash. These increases were partially offset by higher
operating expenses.
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For the nine months ended September 30, 2022 , adjusted EBITDA (non-GAAP)
decreased $4.3 million compared to the prior year period primarily due to higher
operating expenses, offset by expenses that are excluded from adjusted EBITDA
(non-GAAP), including (1) $20.3 million in impairment charges from ceasing use
of several leased facilities in 2022, (2) $5.8 million of other capital
structure transaction costs related to the proposed Merger, (3) $3.9 million in
acquisition and integration costs from the acquisitions of Order2Cash and
iController, and (4) a $2.3 million increase in depreciation and amortization
primarily due to the amortization of intangible assets from the acquisitions of
iController and Order2Cash. These increases in expenses, which led to a decrease
in adjusted EBITDA (non-GAAP), were partially offset by growth in total revenues
and decreases to one-time costs recorded in the prior year related to the
Business Combination: (1) a $10.0 million fair value adjustment from the
increase in value of the Earnout Shares and (2) a $2.9 million loss on
extinguishment of debt associated with the early payment of all our outstanding
borrowings.
Direct Card Revenue (non-GAAP)
Direct card revenue (non-GAAP) is a subset of our software and payments segment revenues and contains variable transactional fee revenue associated with card payments on our electronic payments processing platforms and related fees. Direct card revenue (non-GAAP) is defined as subscription, transaction, and services revenues, less revenues generated from segments other than software and payments (i.e., software and payments segment revenue), less software and payments segment transaction revenue unrelated to card processing and all subscription revenue. We believe direct card revenue (non-GAAP) allows investors to understand the revenue we earn from processing card payments and better comprehend underlying trends in our payments business. The most directly comparableU.S. GAAP measure to direct card revenue (non-GAAP) is subscription, transaction, and services revenue on the Condensed Consolidated Financial Statements.
The following table presents a reconciliation of our direct card revenue
(non-GAAP) to its most directly comparable
Reconciliation of Subscription, Transaction, and Services Revenues to Direct Card Revenue (non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Subscription, transaction, and services revenues
6,723 21,859 21,164
Software and payments segment revenue 35,153 26,009 98,298 76,276
Less: Software and payments segment revenue
excluding direct card revenue (non-GAAP) 28,659 21,784 81,079 65,431
Direct card revenue (non-GAAP) $ 6,494 $ 4,225 $ 17,219 $ 10,845
Free Cash Flow (non-GAAP)
Free cash flow (non-GAAP) is defined as net cash used in operating activities, less purchases of property and equipment (which includes capitalized internal-use software costs).
We believe free cash flow (non-GAAP) is an important liquidity measure of the
cash available for our operational expenses and investment in business growth.
It is useful to investors as a liquidity measure of our ability to generate, or
use cash to maintain, a strong balance sheet, and invest in future growth. The
most directly comparable GAAP measure to free cash flow (non-GAAP) is net cash
used in operating activities on the Condensed Consolidated Statements of Cash
Flows.
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--------------------------------------------------------------------------------The following table presents a reconciliation of free cash flow to the most directly comparable GAAP measure (in thousands):
Reconciliation ofNet Cash Used in Operating Activities to Free Cash Flow (non-GAAP) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (in thousands)
Net cash used in operating activities
Purchases of property and equipment (442) (450) (1,364) (1,570) Free cash flow (non-GAAP)$ (3,048) $ 562 $ (29,731) $ (11,379)
Critical Accounting Policies and Procedures
There have been no material changes to the critical accounting policies, significant judgments, or estimates included in our Annual Report on Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1 - Organization and Nature of Business in the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on our Condensed Consolidated Financial Statements.
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