(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Forward Looking Statements The following discussion and other parts of this Quarterly Report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations. These statements are often identified by the use of words such as "believe," "may," "will," "estimate," "potential," "continue," "anticipate," "intend," "expect," "could," "would," "project," "plan," "target," and similar expressions or variations. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions, including those described in the Part II, Item 1A under the heading "Risk Factors." The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
You should read this Quarterly Report on Form 10-Q, and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
In this Quarterly Report on Form 10-Q, the words "we," "our," "us," "AvidXchange," and "our Company" refer to AvidXchange, Inc. prior to our reorganization, and to AvidXchange Holdings, Inc. and its consolidated subsidiaries following the reorganization, unless the context requires otherwise.
AvidXchange was founded in 2000 to serve the AP automation needs of the middle market. In 2012, in response to customer demand for more efficient payment methods, we launched the AvidPay Network. Since 2012, we have had substantial growth, both organic and through a series of strategic acquisitions allowing us to expand the vertical markets that we serve and enter new ones.
Our Business and Revenue Model
We sell our solutions through a hybrid go-to-market strategy that includes direct and indirect channels. Our direct sales force leverages their deep domain expertise in select verticals and over 120 referral relationships with integrated software providers, financial institutions and other partners to identify and attract buyers that would benefit from our AP software solutions and the AvidPay Network. Our indirect channel includes reseller partners and other strategic partnerships such as Mastercard, through MasterCard's B2B Hub, which includes Fifth Third Bank and Bank of America, and other financial institutions, such as KeyBank, and third-party software providers such as MRI Software, RealPage and SAP Concur. Our referral and indirect channel partnerships provide us greater reach across the market to access a variety of buyers.
One of the ways that we evaluate our revenue model is by looking at our net transactions processed retention rate. We calculate the net transactions processed retention rate for a current period by dividing the (i) number of total transactions processed for customers in the current period by (ii) the number of total transactions processed for the same customers in the comparable prior period. Accordingly, the net transactions processed retention rate is calculated solely based on transactions of prior period customers in the current period, regardless of whether or not the prior period customer remains a customer in the current period. Correspondingly, customers in the current period that were not customers in the prior period are excluded from the current period calculation of the net transactions processed retention rate. Net transactions processed retention rate, together with our key metric Transactions Processed (as described below in the section titled "Key Financial and Business Metrics"), enables us to both assess transaction volume attributable to retained customers in a period as well as determine transaction volume attributable to new customers during the same period. This annual metric allows us to quantify the activity of retained customers over time and illustrates both retention and expansion of the volume of total transactions processed for such customers. Our net transactions processed retention rate from 2018 to 2019 was 105%, from 2019 to 2020 it was 102%, and from 2020 to 2021 it was 107%.
We have a highly visible revenue model based on the durability of our buyer relationships and the recurring nature of the revenues we earn. Our revenues are derived from multiple sources, predominantly through software revenue from our buyers and revenue from payments made to their suppliers. The table below represents our revenues disaggregated by type of service performed (in thousands):
Three Months Ended March 31, Disaggregation of Revenue: 2022 2021 Software revenue $ 23,911 $ 20,415 Payment revenue 46,468 34,161 Services revenue 824 638 Total revenues $ 71,203 $ 55,214
Software revenue, payment revenue and services revenue are described below in the section titled "Components of Results of Operations."
Impact of Covid-19 Pandemic
Notwithstanding current vaccinations and the gradual re-opening of the U.S. economy, the global COVID-19 pandemic, including the emergence of recently discovered variants that are thought to be more contagious (such as the increasingly widespread "Delta" and "Omicron" variants), continues to adversely affect commercial activity and has contributed to significant volatility in the financial markets, which may continue.
In 2022, we have continued to see the impact of COVID-19 on our business and on our buyers and suppliers. We believe that, as a result of the uncertainty created by the pandemic, many buyers have been and may continue to be in the near term reluctant to invest in the purchase and implementation of our products and services, which has had a negative impact on new sales and has led to longer sales cycles. These trends have made it, and if they continue will make it, more difficult for us to acquire new buyers and have led to greater uncertainty around closing new sales opportunities, adversely impacting our future revenue.
Impact of Inflation
The U.S. economy is currently experiencing a higher than normal level of inflation. The long term impacts of inflation on the economy and our business are unclear. Our revenue could be positively impacted by inflation as the value of our customer's payments could rise, increasing our payment volume and the base on which we earn interchange revenue. Conversely, the impact of inflationary pressures on the macro economy could slow the spending of our customers and decrease payment volume. Inflation could also negatively impact our operating costs by increasing costs incurred by us to operate our business in terms of higher costs from our vendors and increased personnel costs.
Key Financial and Business Metrics
We regularly review several financial and business metrics to measure our performance, identify trends affecting our business, prepare financial projections, and make strategic decisions. We believe that these key business metrics provide meaningful supplemental information for management and investors in assessing our historical and future operating performance. The calculation of the key metrics and other measures discussed below may differ from other similarly-titled metrics used by other companies, securities analysts or investors.
Three Months Ended March 31, 2022 2021 Percentage Change Transactions Processed 16,852,489 14,581,241 15.6 % Transaction Yield $ 4.23 $ 3.79 11.6 % Total Payment Volume (in millions) $ 15,197 $ 10,814 40.5 %
Total payment volume
Components of Results of Operations
We generate revenue from the following sources: (i) software, (ii) payments, and
Our electronic payment solutions currently include VCC and an enhanced ACH payment product, or AvidPay Direct, which eliminate paper checks and increase the speed to payment for the supplier. AvidPay Direct also provides suppliers with enhanced remittance data allowing the supplier to reconcile the payment and the underlying invoice. VCC revenues result from interchange fees applied to the spend processed and are recorded net of fees and incentives. AvidPay Direct revenue is based on a per transaction fee that we charge to suppliers that generally includes a cap and is based on the spend per payment and is recorded net of incentives.
Our invoice factoring product, Invoice Accelerator, provides certain suppliers with the opportunity to better manage cash flows and receive payments even faster by allowing suppliers to receive advance payment on qualifying invoices. Revenues are generated on a per transaction basis for each payment that is advanced. We currently fund the purchase of invoices from our balance sheet.
Interest income represents interest received from buyer deposits held during the payment clearing process. We receive interest on funds held through our contractual relationship with our buyers.
Our media payments business includes customers that are involved in political advertising in the U.S. Revenue from these customers is cyclical as it is connected to U.S. election advertising spend which tends to increase during significant election years such as mid-term and presidential elections.
Cost of Revenues and Operating Expenses
Cost of Revenues
Cost of revenues also includes external expenses that are directly attributed to the processing of invoice and payment transactions. These expenses include the cost of scanning and indexing invoices, printing checks, postage for mailing checks, expenses for processing payments (ACH, check, and wires), bank fees associated with buyer deposits held during the payment clearing process, and other transaction execution costs. Additionally, cost of revenues includes fees paid to third parties for the
use of their technology, data hosting services, and customer relationship management tools in the delivery of our services or in supporting the delivery infrastructure and adjustments to the allowance for uncollectible advancements processed through Invoice Accelerator. Lastly, cost of revenues includes estimates for treasury losses that occur in treasury operations. Treasury losses include various unrecoverable internal payment processing errors that occur in the ordinary course of business, such as duplicate payments, overpayments, payments to the wrong party and reconciliation errors.
We have elected to exclude amortization expense of capitalized developed software and acquired technology, as well as allocations of fixed asset depreciation expense and facility expenses from cost of revenues.
We expect our cost of revenues as a percentage of revenue to decrease as we continue to realize operational efficiencies and shift more of our transactions to electronic payments.
Sales and Marketing
Personnel costs include salaries, wages, direct and amortized sales commissions, fringe benefits, short- and long-term incentive plans and stock-based compensation expense. Most of the commissions paid to the direct sales force are incremental based upon invoice and payment volume from the acquisition of a new buyer and are deferred and amortized ratably over an estimated benefit period of five years.
The partner ecosystem consists of reseller, referral and accounting system partners. Compensation paid to referral and accounting system partners in exchange for the referral and marketing efforts of the partner is classified as sales and marketing expense.
In addition, we focus on generating awareness of our platform and products through a variety of sponsorships, user conferences, trade shows, and integrated marketing campaigns. Costs associated with these efforts, including travel expenses, external consulting services, and various technology applications are included in sales and marketing as well.
We expect our sales and marketing expenses to increase in absolute dollars while remaining fairly consistent as a percentage of revenue as we continue to expand our market presence, grow our customer base, and continue to develop new offerings to sell to our buyers and suppliers. We are focused on the efficient deployment of marketing resources to drive our sales efforts and expect to continue to increase marketing activities over the coming periods.
Research and Development
The main contributors of research and development costs are (i) personnel related expenses, including fringe benefits, short- and long-term incentive plans and stock-based compensation expense, and (ii) fees for outsourced professional services. We capitalize certain internal and external development costs that are attributable to new products or new functionality of existing products and amortize such costs to depreciation and amortization on a straight-line basis over an estimated useful life, which is generally three years.
We also incur research and development costs attributable to the use of software tools and technologies required to facilitate the research and development activities. Examples of such costs include fees paid to third parties to host lower technical environments and the associated virtual machine ware fees paid to support agile development efforts, and fees paid for software tools and licenses used in quality control testing and code deployment activities.
We expect our research and development expense to increase in absolute dollars, but to decrease as a percentage of revenue as we are able to efficiently deploy our development resources against a larger revenue base.
General and Administrative
We expect our general and administrative expenses to increase in both absolute dollars and as a percentage of revenue over the next two years, as we continue to build out our infrastructure to support our operations as a public company, and to support a greater customer base. After approximately two years we expect these expenses to decrease as a percentage of revenue as a large portion of this public company infrastructure investment is comprised of fixed costs.
Impairment and Write-Off of Intangible Assets Impairment and write-off of intangible assets is the reduction from carrying value to fair value for assets or asset groups whose carrying value is not recoverable and also includes charges determined based on our estimation of the amount of obsolescence of previously capitalized software development costs.
Depreciation and Amortization
Other Income (Expense)
Income Tax Expense (Benefit) Income tax expense (benefit) consists of federal and state income taxes. Results of Operations The following table sets forth our results of operations for the periods presented (in thousands, except share and per share data): Three Months Ended March 31, 2022 2021 Revenues $ 71,203 $ 55,214 Cost of revenues (exclusive of depreciation and amortization expense) 27,807 22,540 Operating expenses Sales and marketing 17,239 13,511 Research and development 20,072 13,933 General and administrative 18,688 14,164 Depreciation and amortization 7,718 7,077 Total operating expenses 63,717 48,685 Loss from operations (20,321 ) (16,011 ) Other income (expense) Interest income 220 132 Interest expense (4,977 ) (5,025 ) Change in fair value of derivative instrument - 946 Charge for amending financing advisory engagement letter - related party - (50,000 ) Other expenses (4,757 ) (53,947 ) Loss before income taxes (25,078 ) (69,958 ) Income tax expense 69 68 Net loss $ (25,147 ) $ (70,026 ) Accretion of convertible preferred stock - (4,602 ) Net loss attributable to common stockholders $ (25,147 ) $ (74,628 ) Net loss per share attributable to common stockholders, basic and diluted $ (0.13 ) $ (1.43 ) Weighted average number of common shares used to compute net loss per share attributable to common stockholders, basic and diluted 197,017,555 52,057,532
Comparison of the Three Months Ended March 31, 2022 and 2021 Revenues Three Months Ended March 31, Period-to-Period Change 2022 2021 Amount Percentage (in thousands) Revenues $ 71,203 $ 55,214 $ 15,989 29.0 %
The increase in revenues was comprised of an increase in software revenue of $3.5 million, or 17.1%, primarily driven by increased invoice and payment transaction volume from new and existing customers and the inclusion of $0.1 million of software
revenue associated with the acquisition of FastPay which closed in July 2021. Payment revenue increased by approximately $12.3 million, or 36.0%, driven primarily by increased electronic payments on the AvidPay Network with the addition of new buyer payment transaction volume and the inclusion of $3.4 million of payment revenue associated with the acquisition of FastPay and a customer list from PayClearly which closed in January 2022.
Cost of Revenues Three Months Ended March 31, 2022 2021 Percentage Percentage Period-to-Period Change Amount of Revenue Amount of Revenue Amount Percentage (in thousands) Cost of revenues (excluding depreciation and amortization expense) $ 27,807 39.1 % $ 22,540 40.8 % $ 5,267 23.4 %
The increase in cost of revenues (excluding depreciation and amortization expense) was due primarily to an increase in employee costs of $2.4 million, including an increase in stock-based compensation of $0.9 million. This increase is driven by hiring efforts to support the growth in our business as well as a $0.4 million impact related to headcount additions from our acquisition of FastPay, which closed in July 2021. The additional employees are supporting buyer and supplier experience services, SaaS product delivery and money movement. The remainder of the increase was primarily driven by increases in invoice and check processing fees of $0.9 million, increases in cloud hosting fees of $0.7 million related to a higher volume of transactions processed through our applications as well as our on-going transition of services to cloud hosting, and increases of $0.8 million for misdirected payments and reserve Invoice Accelerator purchased invoices as we changed our estimate for the recoverability of supplier advance receivables. An additional increase of $0.5 million is attributable to impact of deferred implementation costs as . . .
May 06, 2022
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