(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of results of operations and financial condition should be read together with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those identified below, those discussed in the section titled "Note Regarding Forward-Looking Statements", and those discussed in the section titled "Risk Factors" under Part I, Item 1A in this Annual Report on Form 10-K. For the discussion of our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, refer to the final prospectus/offer to exchange dated December 16, 2021 filed with the SEC pursuant to Rule 424(b) of the Securities Act. Unless otherwise stated or as the context otherwise requires, references to "the Company", "Billtrust", "we", "us", "our", "it", and similar references refer to BTRS Holdings Inc., a Delaware corporation, and its consolidated subsidiaries.
Certain figures, such as interest rates and other percentages, included 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 Consolidated Financial Statements or Notes to Consolidated Financial Statements. Certain other amounts that appear in this section may similarly not sum due to rounding.
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 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.
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.
Segments and Financial Summary
Our operations are grouped into two reportable segments: (1) Print, and (2) Software and Payments. Our Chief Operating Decision Maker ("CODM") is the Chief Executive Officer ("CEO"), who reviews discrete financial and other information presented for print services and software and payment services for purposes of allocating resources and evaluating the Company's financial performance. The accounting policies used by the reportable segments are the same as those used in our Consolidated Financial Statements.
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.
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.
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 expense, stock-based compensation 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.
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 $166.4 million and $145.7 million for the years ended December 31, 2021 and 2020. respectively. As a result of our continued expenditures for product development, sales and marketing, and the related requirements as a result of becoming a public company in 2021, we have generated net losses of $61.2 million and $17.0 million for the years ended December 31, 2021 and 2020, respectively.
Our Business Model
Our business model focuses on maximizing the lifetime value of a customer relationship by providing measurable efficiencies along the entire order-to-cash process, and we continue to make significant investments in order to grow our customer base. We target middle-market and enterprise companies that serve a wide variety of customers across a variety of industry verticals and have high-frequency sales with complicated AR processing requirements. The breadth of our platform enables us to market modules for digital transformation across the entire AR spectrum and also allows us to focus on particular customer pain points. This includes functional areas of credit, order, invoicing, payments, cash application and collection. In most cases, our new customer acquisitions are initially for one to two modules, including integrated payments. This creates a significant land-and-expand opportunity, which is a key underlying objective and value driver in our business.
We generate revenue from subscription and transaction models. These models includes subscription, transaction, and services from:
Subscription fees to provide our customers access to our cloud-based SaaS platform and modules that automate processes across the accounts receivable function;
Transaction fees consisting 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; and
Professional services revenue from contracted fees associated with implementation of new customers, implementations of new products for existing customers, as well as separately contracted project services provided to customers after implementation.
The profitability of any customer in a particular period depends upon the mix of revenue between the Software and Payments and Print segments, as well as, in part, upon the length of time they have been a customer. We believe that, over time, as our customer base grows and a relatively higher percentage of subscription, transaction, and services revenue are attributable to a mature customer base versus new customers or expansion of our offerings to existing customers, associated sales and marketing expenses and other allocated upfront costs as a percentage of revenues will decrease, subject to investments we plan to make in our business. Over the lifetime of the customer relationship, we also incur sales and marketing costs to manage the account or sell existing customers more modules on our platform. These costs, however, are significantly less than the costs initially incurred to acquire the customer. We calculate the lifetime value of our customers and associated customer acquisition costs for a particular fiscal year by comparing (1) estimated gross profit from contracted revenues in the period, multiplied by one divided by the estimated customer cancellation rate to (2) total sales and marketing expense for the same period. On this basis, we estimate that for the years ended December 31, 2021 and 2020, the calculated lifetime value of our customers exceeded six times the associated cost of acquiring them.
Business Combination with South Mountain
On October 18, 2020, as amended on December 13, 2020, South Mountain, BT Merger Sub I, Inc., a Delaware corporation and a direct, wholly owned subsidiary of South Mountain ("First Merger Sub"), BT Merger Sub II, LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of South Mountain ("Second Merger Sub") and Legacy Billtrust, entered into a Business Combination Agreement, pursuant to which (i) First Merger Sub was merged with and into Legacy Billtrust (the "First Merger"), with Legacy Billtrust surviving the First Merger as a wholly owned subsidiary of South Mountain ("Surviving Corporation") and (ii) the Surviving Corporation merged with and into Second Merger Sub (the "Second Merger", and together with the First Merger, the "Mergers"), with Second Merger Sub surviving the Second Merger as a wholly owned subsidiary of South Mountain.
In connection with the execution of the Business Combination, on October 18, 2020, South Mountain entered into separate subscription agreements ("Subscription Agreements") with a number of investors ("PIPE Investors"), pursuant to which the PIPE Investors agreed to purchase, and South Mountain sold to the PIPE Investors, an aggregate of 20,000,000 shares of South 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 on January 12, 2021 (the "BCA Closing Date"). The Business Combination was accounted for as a reverse recapitalization in accordance with the generally accepted accounting principles in the 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 of Billtrust (i.e., a capital transaction involving the issuance of stock by South 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 renamed BTRS Holdings Inc., and South Mountain's assets, liabilities, and results of operations were consolidated with Legacy Billtrust beginning on the BCA Closing Date. All amounts of BTRS 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 Common Stock began trading on the Nasdaq Global Select Market under the ticker symbol "BTRS".
Acquisition of iController BV
On October 7, 2021, we acquired 100% of the outstanding shares of iController BV ("iController"), a privately-held company based in Ghent, Belgium and Amsterdam, the Netherlands. iController is a B2B provider of SaaS intelligent solutions for collections management. Their SaaS offerings enable a wide range of users, from credit and collections managers to chief financial officers, to see payment and collections information and communication in real time, providing visibility into cash flow management. The acquisition is part of our strategic plan to expand our physical presence in the European market while enhancing our global collections capabilities. Pursuant to the terms of the purchase agreement, we paid $56.8 million in cash for the acquisition.
Acquisition of Order2Cash
On February 14, 2022, we acquired 100% of the outstanding shares of Anachron Beheer BV and subsidiaries, d/b/a Order2Cash ("Order2Cash"), a privately-held company headquartered in Amsterdam, 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 an initial amount of $58.2 million in cash at closing. Refer to Note 19 - Subsequent Events in the Notes to Consolidated Financial Statements for more information on the acquisition. As the acquisition of Order2Cash occurred after December 31, 2021, the following discussion and analysis of our financial condition and results of operations does not factor in the acquisition of Order2Cash, other than as explicitly indicated.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted in government authorities and businesses throughout the world implementing numerous measures intended to contain and limit the spread of COVID-19, including travel restrictions, border closures, quarantines, shelter-in-place and lock-down orders, mask and social distancing requirements, and business limitations and shutdowns. 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. While this helped avoid significant business, bookings, or revenue disruptions thus far, during the second quarter of 2020, the pandemic did cause a decrease in our transaction revenues for certain customers. This was a result of the pandemic's broader economic impact on some companies in heavily transaction-based industries and the related slowing of their business activity. These revenues rebounded in the second half of 2020. Throughout 2021, we remained focused on investing in our products and supporting our long-term growth, including global expansion. 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 Billtrust's platform in our customers' critical day-to-day order-to-cash operations. The impact of the pandemic in 2021 was not significant, as evidenced by the growth in revenues across our subscription and transactional offerings.
Further, the COVID-19 pandemic has caused us to modify our business practices, such as enabling and encouraging our workforce to work from anywhere, establishing strict health and safety protocols in our offices, restricting physical participation in meetings, events and conferences, and reducing employee travel. We continue to actively 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.
We are unable to predict the full impact the COVID-19 pandemic will have on our future results of operations, liquidity, financial condition, and business practices due to numerous uncertainties, including the duration, severity, and spread of the virus, actions that may be taken by government authorities, the impact to our employees, customers, and partners, and various other factors beyond our knowledge or control.
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 in the section titled "Part I, Item 1A. Risk Factors" contained in this Annual Report on Form 10-K. 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, see the section below 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.
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 largely depends on our ability to acquire new customers.
As of December 31, 2021, 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 in North 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 solutions. 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 has 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. For the year ended December 31, 2021 and 2020, 95% or more of our subscription and transaction fees revenue came from customers who had entered into contracts prior to the start of each such calendar year. 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 metrics 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 the platform and is helpful to investors as an indicator of our ability to generate revenue from our customers.
Year Ended December 31, 2021 2020 2019 (in billions) Total Payment Volume $ 77.7 $ 54.7 $ 43.9 TPV - ACH/Wire $ 50.2 $ 37.0 $ 30.9 TPV - Card $ 27.5 $ 17.7 $ 13.0
TPV for the year ended December 31, 2021 was $77.7 billion compared to $54.7 billion in 2020, an increase of 42% year over year. TPV - ACH/Wire for 2021 was $50.2 billion compared to $37.0 billion in 2020, an increase of 36% year over year. The growth in TPV was driven by the increase in TPV - ACH/Wire which was primarily due to the addition of new customers and an increase in existing customer transactions. TPV - Card for 2021 was $27.5 billion compared to $17.7 billion in 2020, an increase of 55% year over year, reflecting a higher absolute dollar growth, partially moderated by lower growth in the first half of the year.
Total Net Dollar Retention and Software and Payments Net Dollar Retention
Total net dollar retention is an annual measure of retention and growth of existing customers. Net dollar retention is an important indicator of customer satisfaction and usage of our platform, as well as an indicator of potential revenue for future periods. This metric is helpful for investors in evaluating our growth. We use this metric in evaluating performance of the our platform. Net dollar retention is calculated at the end of each period by taking the average of the retention rates for the trailing four quarters. For each quarter, a numerator consisting of revenues from subscription and transaction fees for all billing accounts that had subscription and transaction fees for the corresponding quarter of the prior year is divided by a denominator consisting of revenues from subscription and transaction fees for those same billing accounts in the given quarter of the prior year. The calculation includes additional solutions purchased, pricing changes, transaction volume changes, and cancellations, but excludes new billing accounts added between those periods.
Software and Payments net dollar retention is an annual measure of retention and growth of existing customers in the Software and Payments segment. We calculate Software and Payments net dollar retention at the end of each period by taking the average of the retention rates for the trailing four quarters for the segment. For each quarter, a numerator consisting of segment revenues from subscription and transaction fees for all billing accounts that had subscription and transaction fees in the corresponding quarter of the prior year is divided by a denominator consisting of segment revenues from subscription and transaction fees for those same billing accounts in the given quarter of the prior year. The calculation includes additional solutions purchased, pricing changes, transaction volume changes, and cancellations, but excludes new billing accounts added between those periods.
Year Ended December 31, 2021 2020 2019 Total Net Dollar Retention 115 % 104 % 106 % Software and Payments Net Dollar Retention 120 % 110 % 111 %
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Mar 09, 2022
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