(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 to BTRS Holdings Inc., a Delaware corporation, and its consolidated subsidiaries.
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
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.
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 $49.3 million and $40.2 million for the six months ended June 30, 2022 and 2021, respectively. As a result of our focus on product development and sales and marketing, we have generated net losses of $15.2 million and $10.7 million for the six months ended June 30, 2022 and 2021, respectively.
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 20.0 million 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 Class 1 common stock ("Common Stock") began trading on the Nasdaq Global Select Market under the ticker symbol "BTRS".
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 $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 by March 31, 2022.
As a result, during the three months ended March 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, which were recorded in impairment and restructuring on the Condensed Consolidated Statements of Operations. 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 estimated sublease income. 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. As these are 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).
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 six months ended June 30, 2022, which included estimates of future costs to be incurred under the plan, were not material.
During the second quarter of 2022, we approved an expansion of our strategic plan to further vacate an additional portion of our leased office space. Upon the cease-use date of this additional space, which is expected to occur in the third or fourth quarter of 2022, we will evaluate if an additional impairment charge is required.
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 six months ended June 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.
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 of June 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 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 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.
Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (in billions) Total Payment Volume $ 26.2 $ 18.8 $ 48.2 $ 33.9 TPV - ACH/Wire 17.4 12.2 31.7 21.9 TPV - Card $ 8.9 $ 6.6 $ 16.6 $ 12.0
The increase in TPV for the three and six months ended June 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
We generate revenue from the following sources: (1) Subscription, (2) Transaction, (3) Professional Services, and (4) Reimbursable Costs.
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 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.
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 the United 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.
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 . . .
Aug 09, 2022
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