ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our Management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8 “Consolidated Financial Statements and Supplementary Data” of this Form 10-K.
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BUSINESS OVERVIEW
BM Technologies, Inc. (“BMTX” or the “Company”) (formerly known as BankMobile) provides state-of-the-art high-tech digital banking and disbursement services to consumers and students nationwide through a full service fintech banking platform, accessible to customers anywhere and anytime through digital channels.
BankMobile Technologies, Inc. (“BankMobile”) was incorporated in May 2016 as a wholly-owned subsidiary of Customers Bank. On August 6, 2020, the Company entered into an Agreement and Plan of Merger, by and among Megalith Financial Acquisition Corporation, a special purpose acquisition company (“Megalith”), incorporated in Delaware in November 2017, MFAC Merger Sub Inc., a wholly-owned subsidiary of Megalith, BankMobile Technologies, Inc., and Customers Bank, the sole stockholder of BankMobile. On January 4, 2021, BankMobile became an independent company after the completion of a divestiture transaction and was rebranded BM Technologies, Inc.
BMTX’s fintech business model leverages Banking-as-a-Service (“BaaS”) partners’ and University partners’ existing customer bases to achieve high volume, low-cost customer acquisition in its Higher Education and BaaS businesses. BMTX has four primary revenue sources: interchange and card revenue, servicing fees, account fees, and university fees. The majority of revenues are driven by customer activity (deposits, spend, transactions, etc.) and may be paid or passed through by our Partner Banks, universities, or paid directly by customers.
BMTX facilitates deposits and banking services between a customer and our partner banks, Customers Bank and First Carolina Bank, (the “Partner Banks”), which are related parties and are Federal Deposit Insurance Corporation (“FDIC”) insured banks. The Partner Banks hold the FDIC insured deposits that BMTX sources and services and are the issuing banks on BMTX’s debit cards. The Partner Banks pay the Company a servicing fee for the deposits generated and pass through interchange income earned from transactions on debit cards and transaction-based account fees.
BMTX is not a bank, does not hold a bank charter, and does not provide banking services, and as a result, is not subject to direct banking regulation, except as a service provider to our Partner Banks. BMTX is also subject to the regulations of the ED, due to our student disbursements business, and is periodically examined by it. BMTX’s contracts with most of its Higher Education institution clients require it to comply with numerous laws and regulations, including, where applicable, regulations promulgated by the ED regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV of the Higher Education Act of 1965; the Family Educational Rights and Privacy Act of 1995; the Electronic Fund Transfer Act and Regulation E; the USA PATRIOT Act and related anti-money laundering requirements; and certain federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of the Gramm-Leach-Bliley Act. Other products and services offered by BMTX may also be subject to other federal and state laws and regulations.
BMTX’s Higher Education serviced deposits fluctuate throughout the year due primarily to the inflow of funds typically disbursed at the start of a semester. Serviced deposit balances typically experience seasonal lows in December and July and experience seasonal highs in September and January when individual account balances are generally at their peak. Debit spend follows a similar seasonal trend, but may slightly lag increases in balances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies that govern the application of U.S. GAAP and that are consistent with general practices within the fintech industry in the preparation of these financial statements. Our significant accounting policies are described in Note 2 - Basis of Presentation and Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein.
Certain accounting policies involve significant judgment and assumptions by us that have a material impact on the carrying value of certain assets. We consider these accounting policies to be critical accounting policies. An accounting estimate is considered to be critical if it meets both of the following criteria (i) the estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period, may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. As of, and for the twelve months ended December 31, 2023 and 2022, we did not identify any critical accounting estimates.
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The critical accounting policies that are both important to the portrayal of our financial condition and results of operations, and require complex, subjective judgments and are identified as critical accounting policies are share-based compensation, provision for operating losses, income taxes, goodwill and other intangibles, developed software, and accounting for public and private warrants.
Share-Based Compensation Expense
The Company uses share-based compensation, including stock, restricted stock units, and performance stock units, to provide long-term performance incentives for its employees and directors. Share-based compensation is recognized on a straight-line basis over the requisite service period of the award based on the grant-date fair value for service-based awards. Compensation related to performance-based awards is recognized over the period the performance obligation is expected to be satisfied. For compensation related to performance-based awards with milestones, upon the grant date, and at each subsequent reporting period, we reassess whether it is probable that we will achieve each operational milestone, and if so, the period when we expect to achieve that operational milestone. For compensation related to performance-based awards with a market condition, we use a Monte Carlo simulation to determine the fair value of the award on the grant date, and recognize the share-based compensation expense over the derived service period. Forfeitures are recognized as they occur. Share-based compensation expense is included in Salaries and employee benefits . In addition, holders of shares may elect to surrender a portion of their shares on the vesting date to cover their income tax obligations.
Provision for Operating Losses
The provision for operating losses represents our obligation for losses resulting from fraud transactions that have generally been disputed by our serviced deposit account holders, Regulation E card claim losses incurred by us, an estimated liability for fraud and Regulation E losses where such disputes have not been resolved as of the end of the reporting period, a provision for overdrawn serviced deposit accounts for which we are responsible, net of any related actual and expected recoveries.
Fraud losses are recognized when realized or incurred. Drivers include, but are not limited to, efforts by organized or unorganized fraudsters to target an account, customer complicity, customer lack of proper password safeguarding or other preventative measures, onboarding approval procedures, changes in account funds availability, in person vs. online transactions, macroeconomic conditions, changes in customer behavior, and regulatory changes. The main source of Regulation E losses is card holder claims of unauthorized use of their debit card. Drivers include, but are not limited to, transaction purchase volume, in person vs. online, macroeconomic conditions, changes in customer behavior, and regulatory changes. A customer has 60 days to dispute a charge. BMTX may decline the claim within 10 days or advance the funds to the account holder if the investigation is still pending. BMTX may continue to investigate transactions for 35 more days, before making its final decision. At conclusion of the investigation, the advance is reversed or is made permanent. BMTX’s loss includes closed disputes where the customer is entitled to keep the funds advanced, an expected loss on actual disputes that are pending investigation, which is based on historical experience, as well as an estimate of disputes incurred, but not yet disputed. The estimated liability for disputes incurred, but not yet disputed is determined by analyzing historical rates of transactions disputed and applying that experience rate to actual debit card volume in the period. This estimate of future disputes is then adjusted for our estimate of the amount disputed that we expect to result in a loss, which is estimated based on our historical experience. Serviced deposit accounts overdrawn for 30 or more days are fully reserved through an overdraft provision. Our estimation process is subject to risks and uncertainties, including that future performance may be different from our historical experience. Accordingly, our actual loss experience may not match expectations.
Income Taxes
BMTX accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. BMTX determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
In assessing the realizability of federal or state deferred tax assets, Management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and prudent, feasible, and permissible as well as available tax planning strategies in making this assessment.
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A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term upon examination includes resolution of the related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to Management’s judgment.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the identifiable net assets of businesses acquired through business combinations accounted for under the acquisition method. Goodwill is reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. A goodwill impairment charge represents the amount by which the reporting unit’s carrying amount exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. BMTX applies a qualitative assessment to determine if the Step 1 quantitative impairment test is necessary.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as university relationships, are subject to impairment testing. Intangible assets are amortized on a straight-line basis over twenty years. Other intangibles subject to amortization are reviewed for impairment under FASB ASC Topic 360, Property, Plant and Equipment , which requires that a long-lived asset or asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the Company determines that the carrying amount is impaired, the asset is written down to fair value. Fair value is determined based on discounted cash flows or Management’s estimates, depending on the nature of the assets.
As part of its qualitative assessment, BMTX reviews regional and national trends in current and expected economic conditions. BMTX also considers its own historical performance, expectations of future performance, indicative deal values, and other trends specific to its industry.
Developed Software
Developed software includes internally developed software and developed software acquired in the Higher One Disbursement business acquisition. Internally developed software and related capitalized work-in-process costs relate to the development of our fintech digital banking platform.
BMTX capitalizes certain internal and external costs incurred to develop internal-use software during the application development stage. BMTX also capitalizes the cost of specified upgrades and enhancements to internal-use software that result in additional functionality. Once a development project is substantially complete and the software is ready for its intended use, BMTX begins amortizing these costs on a straight-line basis over the internal-use software’s estimated useful life, which ranges from three to seven years.
The Higher One Disbursement business developed software is related to the disbursement business services to colleges and universities and delivering services to students. The Higher One Disbursement business developed software was recorded at the amount determined by a third-party valuation expert at acquisition date and was estimated based on expected revenue attributable to the software utilizing a discounted cash flow methodology, giving consideration to potential obsolescence. The estimated useful life of the Higher One Disbursement business developed software is 10 years.
At each reporting period, the Company performs an assessment to determine if any indicators of impairment are present. If indicators are present, the Company performs a recoverability test by measuring the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. If the Company determines that the carrying amount is impaired, the asset is written down to fair value. Fair value is determined based on discounted cash flows or Management’s estimates, depending on the nature of the assets.
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Public & Private Warrants
The Company has public and private warrants outstanding as a result of the merger transaction with Megalith that occurred on January 4, 2021. Each warrant entitles the registered holder to purchase one whole share of common stock at a price of $11.50 a share. The warrants expire January 4, 2026, or earlier upon redemption or liquidation and the Company has redemption rights if our common stock trades above $24.00 for 20 out of 30 days. The private warrants are identical to the public warrants except that the private warrants are non-redeemable and exercisable on a cashless basis so long as they are held by the sponsor and certain others. The private warrants and the public warrants are treated differently for accounting purposes.
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the private warrants are accounted for as liabilities and are marked-to-market each reporting period with the change recognized in earnings. In general, under the mark-to-market accounting model, as the Company’s stock price increases, the warrant liability increases, and the Company recognizes additional expense in its Consolidated Statements of Loss – the opposite when the stock price declines. Accordingly, the periodic revaluation of the private warrants could result in significant volatility in reported earnings.
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the public warrants are treated as equity instruments. Accordingly, the public warrants are not marked-to-market each reporting period, thus there is no impact to earnings. Any future exercises of the public warrants will be recorded as cash received and recorded in Cash and cash equivalents , with a corresponding offset to Additional paid-in capital in equity.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB has issued accounting standards that have not yet become effective and that may impact BMTX’s consolidated financial statements or its disclosures in future periods. Note 2 — Basis of Presentation and Significant Accounting Policies provides information regarding those accounting standards.
RESULTS OF OPERATIONS
The following discussion of our results of operations should be read in conjunction with our Consolidated Financial Statements, including the accompanying notes.
The following summarized tables set forth our operating results for the twelve months ended December 31, 2023 and December 31, 2022:
Twelve Months Ended
December 31,
Change
(dollars in thousands, except per share data)
Change
Operating revenues
Operating expenses
Loss from operations
Gain on fair value of private warrant liability
Loss before income tax expense (benefit)
Income tax expense (benefit)
Net loss
Basic loss per common share
Diluted loss per common share
NM refers to changes greater than 150%.
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For the twelve months ended December 31, 2023, Net loss increased $16.6 million as compared to the twelve months ended December 31, 2022, resulting in a Net loss of $17.3 million, which included a $5.4 million decrease in the Gain on fair value of private warrant liability as compared to the twelve months ended December 31, 2022 Loss from operations for the twelve months ended December 31, 2023 increased $10.7 million as compared to the twelve months ended December 31, 2022, resulting in a Loss from operations of $20.0 million. Operating revenues decreased by $28.3 million or 34%, and Operating expenses decreased by $17.6 million or 19%. Changes in operating revenues and expenses are discussed in greater detail below. Basic and diluted loss per share, which decreased to $(1.50) are both driven by the impact of the total net loss in the current year.
Operating Revenues
Twelve Months Ended
December 31,
Change
Change
(dollars in thousands)
Revenues:
Interchange and card revenue
Servicing fees
Account fees
University fees
Other revenue
Total operating revenues
Total Operating revenues decreased $28.3 million or 34% in the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. This decrease is primarily attributable to a $13.1 million or 29% decrease in Servicing fees driven by a 47% reduction in average serviced deposits, most significantly within our BaaS vertical which has experienced continued runoff of highly interest rate sensitive accounts throughout 2023 and 2022, offset in part by higher deposit yields beginning in the second quarter of 2023 under the new deposit processing services agreements; a $12.9 million or 58% decrease in Interchange and card revenue driven primarily by the loss of Durbin-exempt rates from changes in the deposit processing services agreements; and a $1.4 million or 72% decrease in Other revenue due to lower current year development revenues.
Operating Expenses
Twelve Months Ended
December 31,
Change
(dollars in thousands)
Change
Technology, communication, and processing
Salaries and employee benefits
Professional services
Provision for operating losses
Occupancy
Customer related supplies
Advertising and promotion
Restructuring, merger, and acquisition related expenses
Other expense
Total operating expenses
NM refers to changes greater than 150%.
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Total operating expenses decreased $17.6 million or 19% in the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. This decrease is primarily attributable to a $17.4 million or 44% decrease in Salaries and employee benefits, which included a $9.8 million reduction attributable primarily to the effect of the PEP initiatives and a $9.4 million reduction in share-based compensation expenses due primarily to the full vesting of the January 4, 2021 Share-Based Compensation Award and current year forfeitures of unvested RSU grants offset by $1.6 million lower capitalization and client reimbursement of labor expenses. In addition, there was a $1.4 million or 5% decrease in Technology, communication, and processing due to lower variable core processing expenses and a $1.0 million or 97% decrease in Occupancy due to the physical office closures in 2022. These decreases were offset in part by a $1.5 million or 22% increase in Provision for operating losses, which included higher current year fraud and overdraft losses and $0.6 million of increased Restructuring, merger, and acquisition related expenses incurred in order to execute the PEP cost saving initiatives.
Income Tax Expense (Benefit)
The Company’s effective tax rate was (0.1)% and 34.5% for the twelve months ended December 31, 2023 and December 31, 2022, respectively.
The Company’s effective tax rate for the twelve months ended December 31, 2023 differs from the Company’s federal statutory rate of 21.0% primarily due to the Company being in a taxable loss position and having a full valuation allowance established. The only tax expense recorded is related to minimum taxes in various state jurisdictions.
The Company’s effective tax rate for the twelve months ended December 31, 2022 differs from the Company’s federal statutory rate of 21.0% primarily due to the non-taxable fair value adjustments related to the non-compensatory private warrant liability being recorded through earnings and available R&D tax credits, offset by nondeductible compensation related expense and the change in valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Our Cash and cash equivalents consist of non-interest bearing, highly-liquid demand deposits. We had $14.3 million of Cash and cash equivalents at December 31, 2023 as compared to $21.1 million of Cash and cash equivalents at December 31, 2022.
We finance our operations through cash flows provided primarily by operating activities. We intend to fund our ongoing operating activities with our existing cash and expected cash flows from future operations. However, should additional liquidity be necessary, the Company could consider equity or debt financing, but there are no assurances that additional capital would be available or on terms that are acceptable to us.
FASB ASC Topic 205-40, P resentation of Financial Statements - Going Concern , requires Management to assess an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. In each reporting period, including interim periods, an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date. Management has performed this required assessment as of April 5, 2024, and believes there are sufficient funds available to support its ongoing business operations and continue as a going concern for at least the next 12 months with projected liquidity of $10.0 million at April 5, 2025. Management’s assessment is subject to known and unknown risks, uncertainties, assumptions, and changes in circumstances, many of which are beyond our control including the impact of the macroeconomic environment, and that are difficult to predict as to timing, extent, likelihood, and degree of occurrence, and that could cause actual results to differ from estimates and forecasts, potentially materially.
The table below summarizes our cash flows for the periods indicated:
Twelve Months Ended
December 31,
Change
(dollars in thousands)
Change
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net decrease in cash and cash equivalents
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Cash Flows Provided by Operating Activities
Cash provided by operating activities was $1.5 million in the twelve months ended December 31, 2023 which is a $2.0 million net decrease in cash provided by operating activities as compared to the twelve months ended December 31, 2022.
The decrease in net cash provided by operating activities is driven primarily by a $19.7 million increase in cash Net loss , a $2.4 million decreased source of cash from Accounts receivable , and a $7.8 million increased use of cash for A ccounts payable and accrued liabilities , offset in part by a $14.7 million increased source of cash from Deferred revenue , a $11.0 million increased source of cash from Prepaid and other assets, a $1.8 million decreased use of cash for Taxes payabl e, and a $0.4 million decreased use of cash for Operating lease liabilities .
Cash Flows Used in Investing Activities
Cash used in investing activities increased $0.2 million as compared to the twelve months ended December 31, 2022. primarily due to increased development costs related to internal use software offset in part by decreased purchases of equipment.
Cash Flows Used in Financing Activities
Cash used in financing activities increased $0.1 million as compared to the twelve months ended December 31, 2022, primarily due to larger tax payments related to the net settlement of share-based compensation awards versus the private warrant repurchase transaction during the prior year.
CONTRACTUAL OBLIGATIONS
As of December 31, 2023, the Company had no material contractual debt obligations.
Off-Balance Sheet Arrangements
As of December 31, 2023, we did not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
We are exposed to various economic risks in the normal course of business including concentration of credit risk. Potential concentration of credit risk consists primarily of accounts receivable from our Partner Banks, BaaS partner, MasterCard, and Higher Education institution clients.
Historically, we have not experienced any material losses related to these balances and believe that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these balances.
At December 31, 2023 and December 31, 2022, Customers Bank accounted for 16% and 17% of our total Accounts receivable, net , respectively. At December 31, 2023 and December 31, 2022, a BaaS partner accounted for 48% and 60% of our total Accounts receivable, net, respectively. At December 31, 2023 and December 31, 2022, MasterCard accounted for 21% and 10% of our total Accounts receivable, net , respectively.
Financial instruments that potentially subject the Company to credit risk consist principally of cash held in the Company's operating account. Cash is maintained in accounts with Customers Bank, which, at times, may exceed the FDIC coverage limit of $250,000. At December 31, 2023, the Company has not experienced losses on these cash accounts and Management believes, based upon the quality of Customers Bank, that the credit risk with regard to these deposits is not significant.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Registered Public Accounting Firm ( KPMG, LLP ; Philadelphia, PA ; PCAOB ID# 185 )
Consolidated Balance Sheets
Consolidated Statements of Loss
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
BM Technologies, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BM Technologies, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company's auditor since 2022.
Philadelphia, Pennsylvania
April 5, 2024
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BM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
December 31,
December 31,
ASSETS
Cash and cash equivalents
Accounts receivable, net allowance for doubtful accounts of $ 1,100 and $ 305
Prepaid expenses and other assets
Total current assets
Premises and equipment, net
Developed software, net
Goodwill
Other intangibles, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities
Deferred revenue, current
Total current liabilities
Non-current liabilities:
Deferred revenue, non-current
Liability for private warrants
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note 7)
Shareholders’ equity:
Preferred stock: Par value $ 0.0001 per share; 10,000,000 shares authorized, zero shares issued or outstanding
Common stock: Par value $ 0.0001 per share; 1 billion shares authorized; 11,984,133 and 12,240,237 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements.
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BM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF LOSS
(amounts in thousands, except per share data)
Twelve Months Ended
December 31,
Operating revenues:
Interchange and card revenue
Servicing fees
Account fees
University fees
Other revenue
Total operating revenues
Operating expenses:
Technology, communication, and processing
Salaries and employee benefits
Professional services
Provision for operating losses
Occupancy
Customer related supplies
Advertising and promotion
Restructuring, merger, and acquisition related expenses
Other expense
Total operating expenses
Loss from operations
Non-operating income and expense:
Gain on fair value of private warrant liability
Loss before income tax expense (benefit)
Income tax expense (benefit)
Net loss
Weighted average number of shares outstanding - basic
Weighted average number of shares outstanding - diluted
Basic loss per common share
Diluted loss per common share
See accompanying notes to the consolidated financial statements.
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BM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Twelve Months Ended December 31, 2023 and 2022
(amounts in thousands, except share data)
Common Stock
Shares of
Common
Stock
Outstanding
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Balance at December 31, 2021
Net loss
Conversion of private warrants to public warrants
Issuance of common stock as compensation
Tax paid on behalf of employees related to net settlement of share-based awards
Issuance of common stock upon exercise of warrants
Share-based compensation expense
Balance at December 31, 2022
Net loss
Conversion of private warrants to public warrants
Tax paid on behalf of employees related to net settlement of share-based awards
Share-based compensation expense
Balance at December 31, 2023
See accompanying notes to the consolidated financial statements.
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BM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Twelve Months Ended
December 31,
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of premises and equipment
Loss on disposal of premises and equipment
Amortization of developed software
Amortization of other intangible assets
Amortization of leased assets
Provision for bad debt
Impairment of developed software
Share-based compensation expense
Gain on fair value of private warrant liability
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued liabilities
Taxes payable
Operating lease liabilities
Deferred revenue
Net Cash provided by Operating Activities
Cash Flows Used in Investing Activities:
Development of internal use software
Purchases of premises and equipment
Net Cash used in Investing Activities
Cash Flows Used in Financing Activities:
Proceeds from exercise of warrants
Repurchase of private warrants
Payments related to net settlement of share-based compensation awards
Net Cash used in Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning
Cash and Cash Equivalents – Ending
Supplementary Cash Flow Information:
Income taxes (refunded) paid, net
Noncash Operating, Investing, and Financing Activities:
Conversion of private warrants to public warrants
Contingent liability for acquired software
See accompanying notes to the consolidated financial statements.
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BM TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
BM Technologies, Inc. (“BMTX” or the “Company”) (formerly known as BankMobile) provides state-of-the-art high-tech digital banking and disbursement services to consumers and students nationwide through a full service fintech banking platform, accessible to customers anywhere and anytime through digital channels.
BankMobile Technologies, Inc. (“BankMobile”) was incorporated in May 2016 as a wholly-owned subsidiary of Customers Bank. On August 6, 2020, the Company entered into an Agreement and Plan of Merger, by and among Megalith Financial Acquisition Corporation, a special purpose acquisition company (“Megalith”), incorporated in Delaware in November 2017, MFAC Merger Sub Inc., a wholly-owned subsidiary of Megalith, BankMobile Technologies, Inc., and Customers Bank, the sole stockholder of BankMobile. On January 4, 2021, BankMobile became an independent company after the completion of a divestiture transaction and was rebranded BM Technologies, Inc.
BMTX’s fintech business model leverages Banking-as-a-Service (“BaaS”) partners’ and University partners’ existing customer bases to achieve high volume, low-cost customer acquisition in its Higher Education and BaaS businesses. BMTX has four primary revenue sources: interchange and card revenue, servicing fees, account fees, and university fees. The majority of revenues are driven by customer activity (deposits, spend, transactions, etc.) and may be paid or passed through by our Partner Banks, universities, or paid directly by customers.
BMTX facilitates deposits and banking services between a customer and our partner banks, Customers Bank and First Carolina Bank, (the “Partner Banks”), which are related parties and are Federal Deposit Insurance Corporation (“FDIC”) insured banks. The Partner Banks hold the FDIC insured deposits that BMTX sources and services and are the issuing banks on BMTX’s debit cards. The Partner Banks pay the Company a servicing fee for the deposits generated and pass through interchange income earned from transactions on debit cards and transaction-based account fees.
BMTX is not a bank, does not hold a bank charter, and does not provide banking services, and as a result, is not subject to direct banking regulation, except as a service provider to our Partner Banks. BMTX is also subject to the regulations of the U.S. Department of Education (“ED”) due to our student disbursements business, and is periodically examined by it. BMTX’s contracts with most of its Higher Education institution clients require it to comply with numerous laws and regulations, including, where applicable, regulations promulgated by the ED regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV of the Higher Education Act of 1965; the Family Educational Rights and Privacy Act of 1995; the Electronic Fund Transfer Act and Regulation E; the USA PATRIOT Act and related anti-money laundering requirements; and certain federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of the Gramm-Leach-Bliley Act. Other products and services offered by BMTX may also be subject to other federal and state laws and regulations.
BMTX’s Higher Education serviced deposits fluctuate throughout the year due primarily to the inflow of funds typically disbursed at the start of a semester. Serviced deposit balances typically experience seasonal lows in December and July and experience seasonal highs in September and January when individual account balances are generally at their peak. Debit spend follows a similar seasonal trend, but may slightly lag increases in balances.
NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared in conformity with U.S. GAAP. Any reference to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
FASB ASC Topic 205-40, P resentation of Financial Statements - Going Concern , requires Management to assess an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. In each reporting period, including interim periods, an entity is required to assess conditions known and reasonably knowable as of the financial statement issuance date to determine whether it is probable an entity will not meet its financial obligations within one year from the financial statement issuance date.
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Management has performed this required assessment as of April 5, 2024, and believes there are sufficient funds available to support its ongoing business operations and continue as a going concern for at least the next 12 months with projected liquidity of $ 10.0 million at April 5, 2025.
Management’s assessment is subject to known and unknown risks, uncertainties, assumptions, and changes in circumstances, many of which are beyond our control including the impact of the macroeconomic environment, and that are difficult to predict as to timing, extent, likelihood, and degree of occurrence, and that could cause actual results to differ from estimates and forecasts, potentially materially.
Based upon the results of Management’s assessment, these consolidated financial statements have been prepared on a going concern basis. The consolidated financial statements do not include any adjustments that could result from the outcome of the aforementioned risks and uncertainties.
Consolidation Policy
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
These financial statements reflect all normal and recurring adjustments that are, in the opinion of Management, necessary to present a fair statement of the financial position and the results of operations and cash flows of BMTX for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include share-based compensation, provision for operating losses, valuation of deferred tax assets, valuation of the private warrants, internally developed software, and goodwill and other intangible asset impairment analysis. Actual results could differ from those estimates.
Segment Reporting
The Company conducts its operations through a single operating segment and, therefore, one reportable segment. Operating segments are revenue-generating components of a company for which separate financial information is internally produced for regular use by the Chief Operating Decision Maker (“CODM”) to allocate resources and assess the performance of the business. Our CODM, Luvleen Sidhu, our Chief Executive Officer (“CEO”), uses a variety of measures to assess the performance of the business; however, detailed profitability information of the nature that could be used to allocate resources and assess the performance of the business are managed and reviewed for the Company as a whole.
Customer and Vendor Concentrations
At December 31, 2023 and December 31, 2022, Customers Bank accounted for 16 % and 17 % of our total Accounts receivable, net , respectively. At December 31, 2023 and December 31, 2022, a BaaS partner accounted for 48 % and 60 % of our total Accounts receivable, net, respectively. At December 31, 2023 and December 31, 2022, MasterCard accounted for 21 % and 10 % of our total Accounts receivable, net , respectively.
For the twelve months ended December 31, 2023 and 2022, Customers Bank, through a Deposit Processing Services Agreement and Amendment thereof, accounted for 87 % and 89 % of our Total operating revenues , respectively. See Note 13 – Related Party Transactions for additional information. Certain of these revenues are paid directly by MasterCard or individual account holders to the Company.
For the twelve months ended December 31, 2023 and 2022, there is one vendor that accounted for 11 % and 12 % of our Total operating expenses , respectively.
Significant Accounting Policies
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised ASUs applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use the extended transition period under the JOBS Act.
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Business Combinations
Business combinations are accounted for by applying the acquisition method in accordance with FASB ASC Topic 805, Business Combinations . Under the acquisition method, identifiable assets acquired and liabilities assumed are measured at their fair values as of the date of acquisition, and are recognized separately from goodwill. Results of operations of the acquired entity are included in the statement of income from the date of acquisition. BMTX recognizes goodwill when the acquisition price exceeds the estimated fair value of the net assets acquired.
Cash and Cash Equivalents
Our cash is maintained at Customers Bank, with a large majority of our cash balances at December 31, 2023 exceeding the FDIC’s $250,000 insured limit per account. We have not experienced losses on cash balances exceeding the federally insured limits, but there can be no assurance that we will not experience such losses in the future.
Accounts Receivable
Accounts receivable primarily relate to billings for deposit processing services provided to our Partner Banks in addition to reimbursements to be received from a BaaS partner, as described in collaborative arrangements below, MasterCard incentive income, and uncollected university subscription and disbursement services fees. These amounts are recorded at face amounts less an allowance for doubtful accounts. Management evaluates accounts receivable and establishes the allowance for doubtful accounts based on historical experience, analysis of past due accounts, and other current available information. Accounts receivable deemed to be uncollectible are individually identified and are charged-off against the allowance for doubtful accounts.
Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation. Depreciation is charged to operations on a straight-line basis over the estimated useful lives of the assets or, in the case of leasehold improvements, the lease period, if shorter. Upon disposal or retirement of property and equipment, cost and related accumulated depreciation are removed from the accounts. Gains and losses from dispositions are credited or charged to operations. Expenditures for ordinary maintenance and repairs are charged to expense. Additions or betterments to property and equipment are capitalized at cost. The respective expenses are recorded in Technology, communication, and processing and Occupancy on the Consolidated Statements of Loss for the twelve months ended December 31, 2023 and 2022, respectively.
Developed Software
Developed software includes internally developed software and developed software acquired in the Higher One Disbursement business acquisition. Internally developed software and related capitalized work-in-process costs relate to the development of our fintech digital banking platform.
BMTX capitalizes certain internal and external costs incurred to develop internal-use software during the application development stage. BMTX also capitalizes the cost of specified upgrades and enhancements to internal-use software that result in additional functionality. Once a development project is substantially complete and the software is ready for its intended use, BMTX begins amortizing these costs on a straight-line basis over the internal-use software’s estimated useful life, which ranges from three to seven years . Amortization expense is recorded in Technology, communication, and processing on the Consolidated Statements of Loss.
The Higher One Disbursement business developed software is related to the disbursement business services to colleges and universities and delivering services to students. The Higher One Disbursement business developed software was recorded at the amount determined by a third-party valuation expert at acquisition date and was estimated based on expected revenue attributable to the software utilizing a discounted cash flow methodology, giving consideration to potential obsolescence. The estimated useful life of the Higher One Disbursement business developed software is 10 years. Amortization expense is recorded in Technology, communication, and processing on the Consolidated Statements of Loss.
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At each reporting period, the Company performs an assessment to determine if any indicators of impairment are present. If indicators are present, the Company performs a recoverability test by measuring the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. If the Company determines that the carrying amount is impaired, the asset is written down to fair value. Fair value is determined based on discounted cash flows or Management’s estimates, depending on the nature of the assets. Developed software impairment expense for the twelve months ended December 31, 2023 and 2022 totaled $ 0.6 million and zero , respectively. Impairment expense is recorded in Technology, communication, and processing on the Consolidated Statements of Loss.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the identifiable net assets of businesses acquired through business combinations accounted for under the acquisition method. Goodwill is reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. A goodwill impairment charge represents the amount by which the reporting unit’s carrying amount exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. BMTX applies a qualitative assessment to determine if the Step 1 quantitative impairment test is necessary.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as university relationships, are subject to impairment testing. Intangible assets are amortized on a straight-line basis over twenty years . Other intangibles subject to amortization are reviewed for impairment under FASB ASC Topic 360, Property, Plant and Equipment , which requires that a long-lived asset or asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the Company determines that the carrying amount is impaired, the asset is written down to fair value. Fair value is determined based on discounted cash flows or Management’s estimates, depending on the nature of the assets.
As part of its quantitative and qualitative assessment, BMTX reviews regional and national trends in current and expected economic conditions. BMTX also considers its own historical performance, expectations of future performance, indicative deal values, and other trends specific to its industry. Based on its quantitative and qualitative assessment, BMTX determined that there was no evidence of impairment of the balance of goodwill or other intangible assets. As of December 31, 2023 and 2022, Goodwill was $ 5.3 million and Other intangibles, net was $ 4.1 million and $ 4.4 million, respectively.
Leases
BMTX enters into lease agreements primarily for the use of office space, all which are classified as operating leases. At lease commencement date, BMTX recognizes right-of-use (“ROU”) assets and lease liabilities measured at the present value of lease payments over the lease term. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease expense for rental payments are recognized on a straight-line basis over the lease term and are included in Occupancy. In addition to rent, BMTX pays taxes and maintenance expenses, including an annual increase in operating expenses over the initial year’s expenses under certain leases as variable lease payments. For the twelve months ended December 31, 2023, the Company had one month to month short term office lease that qualified for the short-term lease exemption under FASB ASC Topic 842, Leases . and as such, did not require capitalization as a right of use asset or lease liability.
Insurance Premium Finance Obligations
The Company includes the obligation for its insurance premium financing in Accounts Payable and accrued liabilities on the Consolidated Balance Sheets . There were zero premium finance obligations outstanding at both December 31, 2023 and 2022.
Deferred Revenue
Deferred revenue consists of payments received from customers, most significantly from its Partner Banks, prior to the performance of services. Deferred revenue is recognized over the service period on a straight-line basis or when the contractual performance obligation has been satisfied. The Company classifies deferred revenue on the Consolidated Balance Sheets in Deferred revenue, current and Deferred revenue, non-current.
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Public & Private Warrants
The Company has public and private warrants outstanding as a result of the merger transaction with Megalith that occurred on January 4, 2021. Each warrant entitles the registered holder to purchase one whole share of common stock at a price of $ 11.50 a share. The warrants expire January 4, 2026, or earlier upon redemption or liquidation and the Company has redemption rights if our common stock trades above $ 24.00 for 20 out of 30 days. The private warrants are identical to the public warrants except that the private warrants are non-redeemable and exercisable on a cashless basis so long as they are held by the sponsor and certain others. The private warrants and the public warrants are treated differently for accounting purposes.
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the private warrants are accounted for as liabilities and are marked-to-market each reporting period with the change recognized in earnings. In general, under the mark-to-market accounting model, as the Company’s stock price increases, the warrant liability increases, and the Company recognizes additional expense in its Consolidated Statements of Loss – the opposite when the stock price declines. Accordingly, the periodic revaluation of the private warrants could result in significant volatility in reported earnings. For the twelve months ended December 31, 2023 and 2022, respectively, the Company recognized non-cash gains of $ 2.7 million and $ 8.1 million related to the mark-to-market accounting on its private warrants.
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the public warrants are treated as equity instruments. Accordingly, the public warrants are not marked-to-market each reporting period, thus there is no impact to earnings. Any future exercises of the public warrants will be recorded as cash received and recorded in Cash and cash equivalents , with a corresponding offset to Additional paid-in capital in equity.
Income Taxes
BMTX accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. BMTX determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
In assessing the realizability of federal or state deferred tax assets, Management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and prudent, feasible, and permissible as well as available tax planning strategies in making this assessment.
A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term upon examination includes resolution of the related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to Management’s judgment.
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Loss Contingencies
In the ordinary course of business, the Company is regularly subject to various claims, suits, regulatory inquiries, and investigations. The Company records a liability for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable, and the loss can be reasonably estimated. Management has also identified certain other legal matters where they believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against the Company, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the Company’s business, financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and Management’s view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company.
Revenue Recognition
BMTX’s revenues from interchange and card revenue, servicing fees, account fees, and university fees are within the scope of FASB ASC Topic 606, Revenue from Contracts with Customers . The Company recognizes revenue in accordance with FASB ASC Topic 606 when the performance obligations related to the transfer of services under the terms of a contract are satisfied. Some obligations are satisfied at a point in time while others are satisfied over a period of time. Revenue is recognized as the amount of consideration to which the Company expects to be entitled to in exchange for transferring services to a customer. The Company’s customer contracts do not contain terms that require significant judgment to determine the variability impacting the transaction price. A performance obligation is deemed satisfied when the control over services is transferred to the customer. Control is transferred to a customer either at a point in time or over time. To determine when control is transferred at a point in time, the Company considers indicators, including but not limited to, the right to payment, transfer of significant risk and rewards of ownership, and acceptance by the customer. When control is transferred over a period of time, the output method is used to measure progress for the transfer. The measure of progress used to assess completion of the performance obligation is based on time over the period of service. We assess our revenue arrangements against specific criteria in order to determine if we are acting as principal or agent. The Company determined that it is the agent in contracts for interchange and card revenue, and presents these revenues net of related expenses under FASB ASC Topic 606.
Interchange and card revenue
Interchange fees are earned whenever debit cards serviced by BMTX are processed through card payment networks. Interchange fees are recognized concurrent with the processing of the card transaction. Card revenue includes foreign ATM fees and MasterCard incentive income. ATM fees are recognized when the fee is deducted from the serviced account; MasterCard incentive income is primarily tied to debit spend volume and is recognized concurrent with spend.
Servicing fees
BMTX sources and services deposit accounts for its Partner Banks, and in exchange, is paid servicing fees. Servicing fees and terms are established by individually negotiated contractual agreements. A rate is applied to the daily average deposit balances. In all periods, servicing fees are recognized monthly based on average daily balances.
Account fees
BMTX earns account fees on BMTX serviced deposit accounts for transaction-based, account maintenance services. Account maintenance fees, which relate primarily to monthly maintenance fees for BMTX serviced accounts that do not meet minimum deposit balance requirements, are earned on a monthly basis representing the period over which BMTX satisfies its performance obligation. Transaction-based fees, which include services such as wire transfer fees, card replacement, and cash deposit via Green Dot network fees, are recognized at the time the transaction is completed. Service charges on deposit accounts are withdrawn from the depositor’s account balance.
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University fees
BMTX earns university fees from Higher Education clients in exchange for financial aid and other student refund disbursement services provided. BMTX facilitates the distribution of financial aid and other refunds to students, while simultaneously enhancing the ability of the higher education institutions to comply with the federal regulations applicable to financial aid transactions. For these services, Higher Education institution clients are charged an annual subscription fee and/or per-transaction fees (e.g., check issuance, new card, card replacement fees) for certain transactions. The annual subscription fee is recognized ratably over the period of service using the output method and the transaction fees are recognized when the transaction is completed. BMTX typically enters into long-term (generally three or five-year initial term) contracts with Higher Education institutions to provide these refund management disbursement services.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred.
Collaborative Arrangements
In the normal course of business, BMTX may enter into collaborative arrangements primarily to develop and commercialize banking products to its BaaS partners’ customers. Collaborative arrangements are contractual agreements with third-parties that involve a joint operating activity where both BMTX and the collaborating BaaS partner are active participants in the activity and are exposed to the significant risks and rewards of the activity. Collaborative activities typically include research and development, technology, product development, marketing, and day-to-day operations of the banking product. These agreements create contractual rights and do not represent an entity in which we have an equity interest. BMTX accounts for its rights and obligations under the specific requirements of the contracts. These arrangements often require the sharing of revenue and expense. BMTX’s expenses incurred pursuant to these arrangements are reported net of any payments due to or amounts due from BMTX’s BaaS partner, which are recognized at the time the BaaS partner becomes obligated to pay.
For the twelve months ended December 31, 2023 and 2022, BMTX recognized fee sharing from its BaaS partners of $ 3.9 million and $ 7.5 million, respectively, from collaborative arrangements. These net proceeds include $( 1.0 ) million and $ 1.4 million, respectively, in revenues (contra-revenues), recorded in Other revenue, Interchange and card revenue, and Servicing fees on the Consolidated Statements of Loss and $ 4.9 million and $ 6.1 million, respectively, in expense reimbursements, recorded in Technology, communication and processing, Salaries and employee benefits, and Professional services on the Consolidated Statements of Loss .
Share-Based Compensation Expense
The Company uses share-based compensation, including stock, restricted stock units, and performance stock units, to provide long-term performance incentives for its employees and directors. Share-based compensation is recognized on a straight-line basis over the requisite service period of the award based on the grant-date fair value for service-based awards. Compensation related to performance-based awards is recognized over the period the performance obligation is expected to be satisfied. For compensation related to performance-based awards with milestones, upon the grant date, and at each subsequent reporting period, we reassess whether it is probable that we will achieve each operational milestone, and if so, the period when we expect to achieve that operational milestone. For compensation related to performance-based awards with a market condition, we use a Monte Carlo simulation to determine the fair value of the award on the grant date, and recognize the share-based compensation expense over the derived service period. Forfeitures are recognized as they occur. Share-based compensation expense is included in Salaries and employee benefits . In addition, holders of shares may elect to surrender a portion of their shares on the vesting date to cover their income tax obligations.
401(k) Plan
On January 3, 2023, the Company implemented the BM Technologies, Inc. 401(k) Plan (the “401(k) Plan”) for the benefit of BMTX’s eligible employees. The 401(k) Plan permits eligible employees to make voluntary contributions combined with employer contributions, up to a maximum of $ 63.5 thousand per year, subject to certain limitations. The Company offers a matching contribution equal to 50 % of an eligible employee’s deferral election up to 3 % of their annual salary. The Company records its contributions to the 401(k) Plan in Salaries and employee benefits on the Consolidated Statements of Loss . The Company’s employer contribution to the 401(k) Plan for the twelve months ended December 31, 2023 totaled $ 0.6 million.
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Provision for Operating Losses
The provision for operating losses represents BMTX’s obligation for losses resulting from fraud transactions that have generally been disputed by our serviced deposit account holders, Regulation E card claim losses incurred by us, an estimated liability for fraud and Regulation E losses where such disputes have not been resolved as of the end of the reporting period, a provision for overdrawn serviced deposit accounts for which we are responsible, net of any related recoveries.
Fraud losses are recognized when realized or incurred. The main source of Regulation E losses is card holder claims of unauthorized use of their debit card. BMTX’s loss includes closed disputes where the customer is entitled to keep the funds advanced, an expected loss on actual disputes that are pending investigation, which is based on historical experience, as well as an estimate of disputes incurred, but not yet disputed. The estimated liability for disputes incurred, but not yet disputed is determined by analyzing historical rates of transactions disputed and applying that experience rate to actual debit card volume in the period. This estimate of future disputes is then adjusted for our estimate of the amount disputed that we expect to result in a loss, which is estimated based on our historical experience. The estimated liability totaled $ 1.3 million and $ 0.4 million as of December 31, 2023 and 2022, respectively; the changes period over period are presented within Provision for Operating Losses on the Consolidated Statements of Loss .
Restructuring, Merger and Acquisition Related Expenses
In connection with the Company’s Profit Enhancement Plan (the “PEP”), and previous unconsummated merger, BMTX incurred $ 0.9 million and $ 0.3 million in merger and acquisition expenses for the twelve months ended December 31, 2023 and 2022, respectively, which are recorded within Restructuring, merger and acquisition related expenses on the Consolidated Statements of Loss .
Recently Adopted Accounting Standards
As of December 31, 2023, there were no recently adopted accounting standards that had a material impact on the Company’s consolidated financial statements and related disclosures.
Accounting Standards Issued but Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB that are adopted by BMTX as of the required effective dates. ASUs not listed below were assessed and determined to be either not applicable or to not have a material impact on BMTX’s financial statements taken as a whole.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20 ) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in FASB ASC Topic 470-20, Debt: Debt with Conversion and Other Options , that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in FASB ASC Topic 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in FASB ASC Topic 260, Earnings Per Share , to require entities to calculate diluted earnings per share for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. As a smaller reporting company, ASU 2020-06 is effective for BMTX for fiscal years beginning after December 15, 2023. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has determined that ASU 2020-06 will not have a material impact on its consolidated financial statements and related disclosure.
In December 2023, the FASB issued ASU 2023-09, Income taxes (Topic 740): Improvements to Income Tax Disclosures , which is a final standard on improvement to income tax disclosures. This update applies to all entities subject to income taxes. As a public business entity, the new requirements will be effective for annual periods beginning after December 15, 2024. As of December 31, 2023, the Company is still evaluating the impact of this update to its financial statements for annual periods after December 15, 2024.
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NOTE 3 — ACCOUNTS RECEIVABLE
Accounts receivable, net primarily relate to billings for deposit processing services to our Partner Banks, MasterCard incentive income, uncollected university subscription and disbursement services fees, and receivables from our BaaS partner, and are recorded at face amounts less an allowance for doubtful accounts.
Management evaluates accounts receivable and establishes the allowance for doubtful accounts based on historical experience, analysis of past due accounts, and other current available information. Accounts receivable deemed to be uncollectible are individually identified and are charged-off against the allowance for doubtful accounts. The allowance for doubtful accounts was $ 1.1 million at December 31, 2023 and $ 0.3 million at December 31, 2022.
(amounts in thousands)
Beginning Balance
Additions
Reductions
Ending Balance
Allowance for doubtful accounts
Twelve months ended December 31, 2022
Twelve months ended December 31, 2023
NOTE 4 — PREMISES AND EQUIPMENT AND DEVELOPED SOFTWARE
Premises and equipment
The components of premises and equipment were as follows:
(amounts in thousands)
Expected Useful Life
December 31,
December 31,
IT equipment
3 to 5 years
Accumulated depreciation
Total
BMTX recorded depreciation expense of $ 0.3 million for the twelve months ended December 31, 2023 as a component of Technology, communication, and processing expense on the Consolidated Statements of Loss and $ 0.3 million for the twelve months ended December 31, 2022 as a component of Occupancy expense on the Consolidated Statements of Loss.
BMTX recorded no impairment expense for the twelve months ended December 31, 2023 and 2022.
Developed software
The components of developed software were as follows:
(amounts in thousands)
Expected Useful Life
December 31,
December 31,
Higher One Disbursement business developed software
10 years
Internally developed software
3 to 7 years
Work-in-process
Accumulated amortization
Total
BMTX recorded amortization expense of $ 11.6 million and $ 11.4 million for the twelve months ended December 31, 2023 and 2022, respectively, as a component of Technology, communication and processing expense on the Consolidated Statements of Loss .
BMTX recorded impairment expense of $ 0.6 million and zero for the twelve months ended December 31, 2023 and 2022, respectively, as a component of Technology, communication and processing expense on the Consolidated Statements of Loss .
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NOTE 5 — GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price over the identifiable net assets of the businesses acquired through business combinations accounted for under the acquisition method. Goodwill is reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. There was no goodwill impairment for the twelve months ended December 31, 2023 and 2022.
Other intangibles, net represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. We have one intangible asset which is being amortized on a straight-line basis over twenty years .
The components of Other intangibles, net as of December 31, 2023 and 2022 were as follows:
(amounts in thousands)
Expected Useful Life
December 31,
December 31,
Customer relationships – universities
20 years
Accumulated amortization
Total
Other intangibles, net includes assets subject to amortization that are reviewed for impairment under FASB ASC Topic 360, Property, Plant and Equipment . Amortization is recorded in Other expense on the Consolidated Statements of Loss . BMTX recorded amortization expense of $ 0.3 million and $ 0.3 million for the twelve months ended December 31, 2023 and 2022, respectively.
The customer relationships - universities will be amortized in future periods as follows:
After 2027
Total
There was no impairment for Other intangibles, net for the twelve months ended December 31, 2023 and 2022.
NOTE 6 — LEASES
At January 1, 2022, BMTX leased two offices under operating leases. On March 31, 2022, one of the two office leases matured and we exited our New Haven, CT office facility. On September 30, 2022, the second office lease matured at our Wayne, PA office. On October 1, 2022, the Company entered into a 3 -month short-term lease extension for this office under substantially identical terms and conditions as the original lease. At December 31, 2022, the 3 -month short-term lease extension expired and was not renewed. The Company’s corporate headquarters is currently operating under a month-to-month short-term lease.
Operating lease expenses are recorded in Occupancy on the Consolidated Statements of Loss . BMTX recorded lease expense of less than $ 0.1 million and $ 0.5 million, for the twelve months ended December 31, 2023 and 2022, respectively.
Cash paid pursuant to operating lease liabilities totaled zero and $ 0.4 million for the twelve months ended December 31, 2023 and 2022. These cash payments are reported as a component of cash flows provided by operating activities in the Consolidated Statements of Cash Flows .
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NOTE 7 — COMMITMENTS AND CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution may have a material adverse effect on BMTX’s results of operations for a particular period, and future changes in circumstances or additional information could result in accruals or resolution in excess of established accruals, which could adversely affect BMTX’s results of operations, potentially materially.
On June 5, 2023, the Company entered into an agreement to purchase certain software technology assets from a third-party. Purchase consideration was comprised of a cash payment of less than $ 0.1 million at closing and potential future contingent consideration of $ 0.5 million over the next three years if the technology is successfully and continuously deployed by the Company. The $ 0.5 million of contingent consideration is reported in Other non-current liabilities on the Consolidated Balance Sheets .
NOTE 8 — SHAREHOLDERS’ EQUITY AND PRIVATE WARRANT LIABILITY
Common Stock
The Company is authorized to issue 1,000,000,000 shares of common stock, par value $ 0.0001 per share. At December 31, 2023, there were 11,984,133 shares of common stock issued and outstanding, which includes the 300,000 performance shares discussed below. At December 31, 2022, there were 12,240,237 shares of common stock issued and outstanding, which includes the 300,000 performance shares discussed below.
Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder on all matters on which stockholders generally are entitled to vote. The holders of common stock do not have cumulative voting rights in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together as a single class.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, par value $ 0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board of Directors. As of December 31, 2023 and 2022, there were no shares of preferred stock issued or outstanding.
Performance Shares
The Company has 300,000 common shares, par value $ 0.0001 per share, issued and outstanding, that contain a restrictive legend, subject to release only if the vesting criteria are met before the seventh anniversary of the closing date of the merger with Megalith. If the vesting criteria are not met prior to the seven th anniversary of the closing date of the merger, the shares will be forfeited and cancelled. The vesting criteria are met when either (1) the volume weighted average price of the Company’s common stock on the principal exchange on which such securities are then listed or quoted shall have been at or above $ 15.00 for twenty ( 20 ) trading days (which need not be consecutive) over a thirty ( 30 ) trading day period; or (ii) the Company sells shares of its capital stock in a secondary offering for at least $ 15.00 per share, in each case subject to equitable adjustment for share splits, share dividends, reorganizations, combinations, recapitalizations, and similar transactions affecting the shares of the Company’s common stock after the merger, and possible reduction for certain dividends granted to the Company’s common stock, or (2) the Company undergoes certain change in control or sales transactions. None of the vesting criteria for the performance shares were met during the twelve months ended December 31, 2023 or 2022 and no expense has been recognized.
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Dividend Policy
We have not paid any cash dividends on our common stock to date, and have no present intention to pay cash dividends in the future. The payment of cash dividends by the Company in the future will be dependent upon the Company’s revenues and earnings, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of the Board of Directors of the Company.
January 4, 2021 Share-Based Compensation Award
In connection with its January 4, 2021 divestiture of the Company, Customers Bank, the Company’s former parent, granted 1,317,035 of the merger consideration shares of the Company it received to certain employees and executives of the Company. The share-based compensation award was subject to vesting conditions, including a required service condition from award recipients through January 3, 2023. The grant date fair value of the award, totaling $ 19.6 million, was recorded as share-based compensation expense in the Company’s Consolidated Statements of Loss on a straight-line basis over the two year post-grant vesting period, net of any actual forfeitures. The shares awarded were restricted until fully vested. The holders of restricted shares were provided an option to surrender a portion of their shares on the vesting date to cover their income tax obligations. On January 3, 2023, all restricted shares, net of prior forfeitures, vested.
The change in unvested shares under the January 4, 2021 Share-Based Compensation Award is shown below:
Number of Awards
Weighted-Average Grant-Date Fair Value Per Award
Balance as of December 31, 2021
Granted
Vested
Forfeited
Balance as of December 31, 2022
Granted
Vested
Net settlement of share-based awards for taxes
Balance as of December 31, 2023
BMTX recorded share-based compensation expense related to these awards of less than $ 0.1 million and $ 9.2 million for the twelve months ended December 31, 2023 and 2022, respectively.
Equity Incentive Plan
Our 2020 Equity Incentive Plan (the “2020 Equity Incentive Plan”) provides for the grant of incentive stock options, or ISOs, nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards, all which may be granted to employees, including officers, non-employee directors, and consultants of both the Company and its affiliates. Additionally, the 2020 Equity Incentive Plan provides for the grant of performance cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants.
On June 20, 2023, an amendment to the 2020 Equity Incentive Plan was approved by the Company’s stockholders. The amendment increased the total number of shares of common stocks authorized under the 2020 Equity Incentive Plan by 1,279,963 from 1,220,037 (the number of shares authorized under the original 2020 Equity Incentive Plan) to 2,500,000 .
Grants were made under the 2020 Equity Incentive Plan for the twelve months ended December 31, 2023 and 2022 as described within Restricted Stock Units and Performance - Based Restricted Stock Units below as well as the grants of unrestricted shares to directors which vest immediately.
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Restricted Stock Units
Restricted Stock Units (“RSUs”) granted under the 2020 Equity Incentive Plan, as amended, generally vest in three or four equal installments on each anniversary of the grant date. The RSUs that have been granted are all paid in stock upon vesting, and are thus classified as equity awards, which are measured using the grant date fair value of BMTX common stock and are not remeasured at the end of each reporting period. We recognize compensation cost starting from the grant date on a straight-line basis over the required vesting period in accordance with FASB ASC Topic 718, Compensation - Stock Compensation . We account for forfeitures as they occur and reverse any previously recognized compensation expense related to forfeited awards.
Performance - Based Restricted Stock Units
Performance - Based Restricted Stock Units (“PBRSUs”) granted under the 2020 Equity Incentive Plan, as amended, currently vest upon the later of: a) the third year of employment following the grant date or b) the achievement of the specified performance goals within the fifth year of the grant date. As defined by the 2020 Equity Incentive Plan, as amended, the Compensation Committee of the Board of Directors determines the number of PBRSUs a participant earns based on the extent to which the corresponding performance goals have been achieved over the five-year performance cycle. The PBRSUs that have been granted are paid in stock upon vesting, and are thus classified as equity awards, which are measured using the grant date fair value of BMTX common stock and are not remeasured at the end of each reporting period. We account for forfeitures as they occur and reverse any previously recognized compensation expense related to forfeited awards.
For PBRSUs with milestones, upon the grant date, and at each subsequent reporting period, we reassess whether it is probable that we will achieve each operational milestone, and if so, the period when we expect to achieve that operational milestone. If upon the grant date, we determine that achievement of an operational milestone is probable, we allocate the full share-based compensation expense over the period between the grant date and the expected vesting condition achievement date. If upon the grant date, achievement of the operational milestone is not probable, we do not recognize compensation expense. If after the grant date, we determine achievement of an operational milestone becomes probable, we will allocate the full share-based compensation expense over the period between the grant date and the expected vesting condition achievement date, and we will recognize a catch-up expense equal to the value of previously unrecognized expense from the grant date to the vesting condition achievement date.
For PBRSUs with a market condition, we used a Monte Carlo simulation to determine the fair value on the grant date, and recognize the share-based compensation expense over the derived service period.
The change in unvested RSUs and PBRSUs awarded is shown below:
Restricted Stock Units
Performance-Based Restricted Stock Units
Number of RSUs
Weighted-Average Grant-Date Fair Value Per RSU
Number of RSUs
Weighted-Average Grant-Date Fair Value Per RSU
Balance as of December 31, 2021
Granted
Vested
Forfeited
Balance as of December 31, 2022
Granted
Vested
Forfeited
Balance as of December 31, 2023
For the twelve months ended December 31, 2023 and 2022, the share-based compensation expense related to the RSU awards totaled $ 1.3 million and $ 1.0 million, respectively. At December 31, 2023, unrecognized compensation expense related to the unvested portion of the RSUs was approximately $ 1.5 million and is expected to be recognized over a term of 1.92 years.
For the twelve months ended December 31, 2023 and 2022, the share-based compensation expense related to the PBRSUs awards totaled $ 0.5 million and $ 1.0 million, respectively. At December 31, 2023, unrecognized compensation expense related to the unvested portion of the PBRSUs was approximately $ 0.9 million and is expected to be recognized over a term of 1.9 years.
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Directors Grants
The Company grants common shares to its Board of Directors on a discretionary basis. These shares vest immediately upon grant. During the twelve months ended December 31, 2023 and December 31, 2022 the Company granted zero and 1,000 shares of common stock to each of its Directors, for a total of zero and 6,000 shares with share-based compensation expense totaling zero and less than $ 0.1 million, respectively.
Employee Stock Purchase Plan (“ESPP”)
The Company has an ESPP (the “BM Technologies Inc. 2021 Employee Stock Purchase Plan”) which has an effective date of May 1, 2021. The purpose of the ESPP is to provide eligible employees with an incentive to advance the interests of the Company, by affording them an opportunity to purchase stock of the Company at a favorable price. As of December 31, 2023, there have been no shares purchased on behalf of employees under the ESPP, as the program has not yet been made available for employee participation.
Warrants
At December 31, 2023 and 2022, respectively, there were 22,703,004 warrants to purchase our common stock outstanding. The warrant totals for each period-end consist of 17,294,044 and 17,227,189 public warrants and 5,408,960 and 5,475,815 private warrants, as of December 31, 2023 and 2022, respectively.
Each whole warrant entitles the registered holder to purchase one whole share of common stock at a price of $ 11.50 per share. The warrants will expire five years after the completion of the merger with Megalith (January 4, 2026) or earlier upon redemption or liquidation; the Company has redemption rights if our common stock trades above $ 24.00 for 20 out of 30 days. The private warrants are identical to the public warrants except that the private warrants are non-redeemable and exercisable on a cashless basis so long as they are held by the sponsor and certain other original holders.
As of December 31, 2023, 1,600 of the Company’s outstanding public warrants have been exercised and 1,169,963 of the private warrants have been repurchased by the Company from related parties at $ 1.69 per warrant.
During the twelve months ended December 31, 2023, 66,855 of the private warrants were reclassified to public warrants based upon a sale of the private warrants by the original holders which resulted in a modification of terms that effect classification as public warrants. During the twelve months ended December 31, 2023, there were no public warrants exercised.
During the twelve months ended December 31, 2022, 300,000 of the private warrants were reclassified to public warrants based upon a sale of the private warrants by the original holders which resulted in a modification of terms that effect classification as public warrants. During the twelve months ended December 31, 2022, there were 100 public warrants exercised.
The private warrants and the public warrants are treated differently for accounting purposes, as follows:
Private Warrants
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the private warrants are accounted for as liabilities and are marked-to-market each reporting period with the change in fair value recognized in earnings. In general, under the mark-to-market accounting model, as our stock price increases, the private warrant liability increases, and we recognize additional expense in our Consolidated Statements of Loss – with the opposite when our stock price declines. Accordingly, the periodic revaluation of the private warrants could result in significant volatility in our reported earnings.
Opening Balance Sheet Impact: As of the date of our merger with Megalith on January 4, 2021, the $ 30.8 million fair value of the private warrants was recorded as a warrant liability on our Consolidated Balance Sheets in Liability for private warrants with a corresponding offset to Additional paid-in capital within equity. The fair value of the private warrants was estimated using a modified version of the Black-Scholes option pricing formula. We assumed a term for the private warrants equal to the contractual term from the merger date and then discounted the resulting value to the valuation date. Among the key inputs and assumptions used in the pricing formula at January 4, 2021: a term of 5.0 years; volatility of 20 %; a dividend yield of zero ; an underlying stock price of $ 14.76 ; a risk free interest rate of 0.38 %; and a closing price of the public warrants of $ 2.50 per share.
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Income Statement Impact : Subsequent to the close of the merger, any change in fair value of the private warrants is recognized in our Consolidated Statements of Loss below operating profit as Gain on fair value of private warrant liability with a corresponding amount recognized in the Liability for private warrants on our Consolidated Balance Sheets . For the twelve months ended December 31, 2023 and 2022, we recorded a gain of $ 2.7 million and $ 8.1 million, respectively, resulting from the revaluation of the private warrants.
Balance Sheet Impact : The private warrant liability is presented in the account Liability for private warrants in the long-term liabilities section of our Consolidated Balance Sheets . As noted above, the change in fair value of the underlying private warrants results in a corresponding change in the balance of the warrant liability on our Consolidated Balance Sheets . When warrants are exercised, the fair value of the liability is reclassified to Additional paid-in capital within equity. Cash received for the exercise of warrants is reflected in Cash and cash equivalents with a corresponding offset recorded in Common Stock and Additional paid-in capital within equity.
Cash Flow Impact : The impact of the change in fair value of the private warrants has no impact on our cash flows as it is a noncash adjustment. Cash received for the exercise of warrants is recorded in cash flows from financing activities. Cash paid for the repurchase of warrants is recorded in cash flows from financing activities. During the twelve months ended December 31, 2022, the Company repurchased private warrants from related parties for cash consideration totaling $ 2.0 million. No such transactions occurred during the twelve months ended December 31, 2023.
Shareholders’ Equity Impact : The impact to Additional paid-in capital as of the opening balance sheet is described above. Exercises of private warrants results in a reduction of the Liability for private warrants on the Consolidated Balance Sheets with a corresponding increase to Common Stock and Additional paid-in capital .
Public Warrants
In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the public warrants are treated as equity instruments under U.S. GAAP. The public warrants are not marked-to-market each reporting period, thus there is no impact to earnings. Exercises of the public warrants are recorded as cash is received and are recorded in Cash and cash equivalents , with a corresponding offset recorded in Common stoc k and Additional paid-in capital within equity. During the twelve months ended December 31, 2023, there were no exercises of public warrants. During the twelve months ended December 31, 2022, there were exercises of 100 public warrants with cash proceeds totaling less than $ 0.1 million.
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NOTE 9 — REVENUES
Revenues
BMTX recognizes operating revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers .
The following table presents BMTX’s revenues disaggregated by nature of the revenue stream and the pattern or timing of revenue recognition for the twelve months ended December 31, 2023 and 2022. The Company has one reportable segment and all revenues are earned in the U.S.
Twelve Months Ended
December 31,
(amounts in thousands)
Revenues:
Revenue recognized at point in time:
Interchange and card revenue
Servicing fees
Account fees
University fees - disbursement activity
Other revenue
Total revenue recognized at point in time
Revenue recognized over time:
University fees - subscriptions
Other revenue - maintenance and support
Total revenue recognized over time
Total revenues
Deferred Revenue
Deferred revenue consists of payments received from customers prior to the performance of services. Deferred revenue is recognized over the service period on a straight-line basis or when the contractual performance obligation has been satisfied.
The deferred revenue balances were as follows:
December 31,
(amounts in thousands)
Deferred revenue
During the twelve months ended December 31, 2023, the Company recognized revenue of approximately $ 6.6 million included in deferred revenue at the beginning of the period. During the twelve months ended December 31, 2022, the Company recognized revenue of approximately $ 15.4 million included in deferred revenue at the beginning of the period.
Unbilled receivables
The Company had $ 1.5 million of unbilled receivables, or amounts recognized as revenue for which invoices have not yet been issued, as of December 31, 2023, and $ 2.6 million as of December 31, 2022. Unbilled receivables are reported in Accounts receivable, net on the Consolidated Balance Sheets .
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NOTE 10 — INCOME TAXES
The components of income tax expense (benefit) were as follows:
Twelve Months Ended
December 31,
(amounts in thousands)
Current expense (benefit)
Federal
State
Total current expense (benefit)
Deferred expense (benefit)
Federal
State
Change in valuation allowance
Total deferred expense (benefit)
Total income tax expense (benefit)
Effective tax rates differ from the federal statutory rate of 21% due to the following:
Twelve months ended December 31,
(amounts in thousands)
Amount
% of pretax loss
Amount
% of pretax loss
Federal income tax at statutory rate
State taxes, net of federal benefit
Change in fair value of warrant liabilities
Change in valuation allowance
Nondeductible compensation
Tax credits
Other
Total
As of December 31, 2023 and 2022, the Company had no FASB ASC Topic 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company recognized interest and penalties on unrecognized tax benefits of less than $ 0.1 million for the twelve months ended December 31, 2023 and 2022 in Other expense on our Consolidated Statements of Loss .
As of December 31, 2023, the Company had $ 18.5 million of federal net operating loss carryforward and $ 19.1 million of state net operating loss carryforwards. As of December 31, 2022, the Company had $ 0.3 million of federal net operating loss carryforward and $ 0.3 million of state net operating loss carryforwards. The federal net operating loss carryforward does not have an expiration date. The state net operating loss carryforwards have differing expiration dates depending on the jurisdiction. As of December 31, 2023 there was $ 0.9 million of federal tax credit carryforwards and $ 0.1 million of state tax credit carryforwards. The federal tax credit carryforward begins to expire in 2042 and the state tax credit carryforwards have differing expiration dates depending on the jurisdiction.
Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes.
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The following represents the Company's deferred tax assets and liabilities as of December 31, 2023 and 2022:
(amounts in thousands)
December 31, 2023
December 31, 2022
Deferred tax assets:
Section 197 Intangibles
Nondeductible compensation
Accrued bonuses
Tax credits
Other
Less: Valuation Allowance
Total deferred tax assets
Deferred tax liabilities
Depreciation
Capitalized costs
Total deferred tax liabilities
Net deferred tax asset (liability)
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, Management considered the scheduled reversal of the deferred tax liabilities, the level of historical income, and the projected future taxable income over the periods in which the temporary difference comprising the deferred tax assets will be deductible. Based on its assessment, Management determined that a full valuation allowance is necessary as of December 31, 2023 and 2022.
The Company is subject to income tax examinations by federal, state, and local taxing authorities for tax periods ended after December 31, 2019.
NOTE 11 — LOSS PER SHARE
The following are the components and results of operations and loss per common share calculations for the periods presented:
Twelve Months Ended
December 31,
(amounts in thousands, except share and per share data)
Net loss available to common shareholders
Net loss used for EPS
Weighted-average number of common shares outstanding – basic
Weighted-average number of common shares outstanding – diluted
Basic loss per common share
Diluted loss per common share
For basic loss per share, the performance shares are subject to forfeiture and they are considered share-indexed instruments and not outstanding shares until they are vested. During the twelve months ended December 31, 2023 and 2022, the vesting criteria has not been met and they are not included.
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For the twelve months ended December 31, 2023, our performance shares, public warrants, and private warrants were excluded from the computation of diluted weighted average shares outstanding as the necessary conditions had not been achieved for the performance shares and the average stock price for the period was below the strike price for the warrants. The performance shares are only considered in the calculation for diluted loss per share if they are dilutive in nature. The performance shares are only dilutive when the average share price is greater than the strike price and when positive net income is reported. During the twelve months ended December 31, 2023, the average share price was below the strike price and these shares were not included in the diluted loss per share calculations. For the twelve months ended December 31, 2023, our performance-based RSUs were also excluded because the vesting is contingent upon the satisfaction of certain conditions which had not been achieved as of December 31, 2023. For the twelve months ended December 31, 2023, 445 of our service-based RSUs were also excluded as the effect would be antidilutive.
For the twelve months ended December 31, 2022, our performance shares, public warrants, and private warrants were excluded from the computation of diluted weighted average shares outstanding as the necessary conditions had not been achieved for the performance shares and the average stock price for the period was below the strike price for the warrants. The performance shares are only considered in the calculation for diluted loss per share if they are dilutive in nature. The performance shares are only dilutive when the average share price is greater than the strike price and when positive net income is reported. During the twelve months ended December 31, 2022, the average share price was below the strike price and these shares were not included in the diluted loss per share calculations. For the twelve months ended December 31, 2022, our performance-based RSUs were also excluded because the vesting is contingent upon the satisfaction of certain conditions which had not been achieved as of December 31, 2022. For the twelve months ended December 31, 2022, 309 of our service-based RSUs were also excluded as the effect would be antidilutive.
The following table presents the potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock:
Twelve Months Ended
December 31,
(amounts in thousands)
Performance based shares
Public warrants
Private warrants
Performance-based RSUs
Service-based RSUs
Total
NOTE 12 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
BMTX uses fair value measurements to determine and disclose the fair value of its financial instruments. FASB’s ASC Topic 825, Financial Instruments , requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For fair value disclosure purposes, BMTX utilized the fair value measurement criteria under FASB ASC Topic 820, Fair Value Measurements (“ASC 820”).
In accordance with FASB ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for BMTX’s financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
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The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair value of BMTX’s financial instruments as of December 31, 2023 and 2022:
Cash and cash equivalents
Cash and cash equivalents reported on the Consolidated Balance Sheets consists of non-interest bearing demand deposits, for which carrying value approximates fair value.
Accounts receivable, net
The carrying amount of accounts receivable approximates fair value because of the short-term nature of these items.
Liability for Private Warrants
The fair value of the private warrants was estimated using a modified version of the binomial lattice model incorporating the Cox-Ross-Rubenstein methodology as of December 31, 2023 and 2022. We assumed a term for the private warrants equal to the contractual term from the date of the merger with Megalith and then discounted the resulting value to the valuation date.
Among the key inputs and assumptions used in the pricing formula at December 31, 2023 were the following: a term of 2.02 years; volatility of 58 %; a dividend yield of zero ; an underlying stock price of $ 2.05 ; a risk free interest rate of 4.18 %; and a closing price of the public warrants of $ 0.03 per share.
Among the key inputs and assumptions used in the pricing model at December 31, 2022 were the following: a term of 3.01 years; volatility of 43 %; a dividend yield of zero ; an underlying stock price of $ 5.21 ; a risk free interest rate of 4.17 %; and a closing price of the public warrants of $ 0.52 per share.
As of December 31, 2023 and 2022, the warrant liability is classified as a Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.
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The estimated fair value of BMTX’s financial instruments at December 31, 2023 and December 31, 2022 were as follows:
Fair Value Measurements at December 31, 2023
(amounts in thousands)
Carrying Amount
Estimated Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents
Accounts receivable, net
Liabilities:
Liability for private warrants
Fair Value Measurements at December 31, 2022
(amounts in thousands)
Carrying Amount
Estimated Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents
Accounts receivable, net
Liabilities:
Liability for private warrants
NOTE 13 — RELATED PARTY TRANSACTIONS
The Company has several relationships with our Partner Banks, which are related parties of the Company. These relationships are described below.
Customers Bank
Cash management
All the Company’s cash and cash equivalents are on deposit with Customers Bank.
Servicing fees and interchange income
On January 4, 2021, the Company entered into a Deposit Processing Services Agreement with Customers Bank, which provided that Customers Bank would establish and maintain deposit accounts and other banking services in connection with customized products and services offered by the Company, and the Company would provide certain other related services in connection with the accounts. Customers Bank retained any and all revenue generated from the funds held in the deposit accounts, and in exchange, paid the Company a 3 % servicing fee based on average monthly deposit balances, subject to certain contractual adjustments, and a monthly interchange fee equal to all debit card interchange revenues on the demand deposit accounts, plus the difference between Durbin exempt and Durbin regulated interchange revenue.
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On June 29, 2022, the Company received written notice from Customers Bank that it did not intend to renew the Deposit Servicing Agreement with the Company. The 180 -day notice was given in accordance with the terms of the Deposit Servicing Agreement, as a result of which, the Deposit Servicing Agreement would terminate effective December 31, 2022.
On November 7, 2022, the Company and Customers Bank entered into the DPSA Amendment to extend the Deposit Servicing Agreement termination date to the earlier of the Company’s successful completion of the transfer of the Company’s serviced deposits to a new partner bank or June 30, 2023. The DPSA Amendment also removed Customers Bank’s obligation to pay the Company the difference between the Durbin exempt and Durbin regulated interchange revenues. The other terms of the Deposit Servicing Agreement remained in effect through the new termination date.
On March 22, 2023, the Company and Customers Bank entered into the DPSA Second Amendment. The DPSA Second Amendment, among other things, extended the termination date of the Deposit Processing Services Agreement until the earlier of (i) the transfer of the Company’s serviced deposits to a Durbin exempt sponsor bank; or (ii) June 30, 2024; and revised the fee structure of the Deposit Processing Services Agreement. The other terms of the Deposit Processing Services Agreement, as amended by the DPSA Amendment, remained in effect through the new termination date.
On August 18, 2023, the Company and Customers Bank entered into a third amendment to the Deposit Processing Services Agreement (the “DPSA Third Amendment”) for the Higher Education serviced deposit accounts. The DPSA Third Amendment extended the termination date of the Deposit Processing Services Agreement until the earlier of (i) the transfer of the Company’s Higher Education serviced deposits to a Durbin-exempt partner bank; or (ii) April 15, 2025.
On March 22, 2023, the Company and Customers Bank entered into the 2023 Deposit Servicing Agreement, under which, effective March 31, 2023, the Company will perform, on behalf of Customers Bank, Customer Bank’s services, duties, and obligations under the Private Label Banking Program Agreement (the “PLBPA”) by and between Customers Bank and T-Mobile USA, Inc. that are not required by Applicable Law (as defined in the 2023 Deposit Servicing Agreement) to be provided by an FDIC insured financial institution. The obligations of the Company and Customers Bank under the 2023 Deposit Servicing Agreement are similar to those under the Deposit Processing Services Agreement; provided, however, that (i) as of March 31, 2023, the 2023 Deposit Servicing Agreement and not the Deposit Processing Services Agreement shall govern the terms, conditions, roles, responsibilities, duties, and obligations of the Company and Customers Bank with respect to the PLBPA and the Depositor Accounts (as defined in the 2023 Deposit Servicing Agreement); (ii) the Deposit Processing Services Agreement is amended to the extent necessary or advisable to effect the same, including, without limitation, such that “Depositor” under the Deposit Processing Services Agreement shall not include any T-Mobile Customer (as defined in the PLBPA); and (iii) there is a different fee structure under the 2023 Deposit Servicing Agreement from that set forth in the Deposit Processing Services Agreement. The initial term of the 2023 Deposit Servicing Agreement continues until February 24, 2025, and will automatically renew for additional one year terms unless either party gives written notice of non-renewal at least 180 days prior to the expiration of the then-current term. The 2023 Deposit Servicing Agreement may be terminated early by either party upon material breach, upon notice of an uncured objection from a regulatory authority, or by the Company upon 120 days’ written notice upon the satisfaction of certain conditions.
As compensation under the 2023 Deposit Servicing Agreement, Customers Bank will retain any and all revenue generated from the funds held in the deposit accounts, and Customers Bank will pay the Company monthly servicing fees as set forth in the 2023 Deposit Servicing Agreement. In addition, the Company will have the right to retain all revenue generated by or from the Depositor Accounts (as defined in the 2023 Deposit Servicing Agreement), including, but not limited to, fees and all other miscellaneous revenues. The Company also shall retain all fees (including without limitation interchange fees), and charges generated by its ATMs and from its payment processing services. The Company will be solely liable for any and all fees, expenses, costs, reimbursements, and other amounts that are or may become due and payable under the PLBPA, including, without limitation, any Durbin-Exempt Interchange (as defined in the 2023 Deposit Servicing Agreement) fees payable to T-Mobile under the PLBPA. Customers Bank may set off any and all PLBPA Amounts against any compensation payable to the Company under the 2023 Deposit Servicing Agreement.
Transition Services Agreement
On January 4, 2021, we entered into a Transition Services Agreement with Customers Bank, pursuant to which each party agreed for a period of up to twelve months to provide certain transition services listed therein to the other party. A limited number of these transition services were subsequently extended through March 31, 2022. In consideration for the services, we paid Customers Bank a service fee of $ 12,500 per month, plus any expenses associated with the services.
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The Transition Services Agreement included a provision for providing the Company with assistance in the establishment and administration of a 401(k) plan for the benefit of Company employees. The Customers Bank 401(k) plan is a multi-employer plan, as defined by the U.S. Department of Labor in accordance with the Employee Retirement Income Security Act of 1974, and through December 31, 2022, the Customers Bank 401(k) covered both the full-time employees of Customers Bank and the Company. The Company records its contributions to the Customers Bank 401(k) Plan in Salaries and employee benefits on the Consolidated Statements of Loss . The Company’s employer contribution to the Customers Bank 401(k) Plan for the twelve months ended December 31, 2023 and 2022 totaled zero and $ 0.8 million, respectively.
Other
On January 4, 2021, the Company entered into a Software License Agreement with Customers Bank which provides it with a non-exclusive, non-transferable, royalty-free license to utilize our mobile banking technology for a period up to 10 years. The Software License Agreement is cancellable by Customers Bank at any time, without notice, and without penalty, and for any reason or no reason at all. To date, Customers Bank has not utilized the Company’s mobile banking technology and zero consideration has been paid or recognized under the Software License Agreement.
On January 4, 2021, the Company entered into a Non-Competition and Non-Solicitation Agreement with Customers Bank providing that Customers Bank will not, for a period of 4 years after the closing of the divestiture, directly or indirectly engage in the Company’s business in the territory (both as defined in the Non-Competition Agreement), except for white label digital banking services with previously identified parties and passive investments of no more than 2 % of a class of equity interests of a competitor that is publicly traded. Customers Bank also agreed not to directly or indirectly hire or solicit any employees of the Company.
On November 29, 2021, the Company entered into an agreement with Customers Bank which terminated the $ 10.0 million letter of credit and gave the Company the right to any shares that were forfeited as part of the January 4, 2021 Share-Based Compensation Award. During the twelve months ended December 31, 2023, zero forfeited shares were reacquired by the Company from Customers Bank. During the twelve months ended December 31, 2022, 26,500 forfeited shares were reacquired by the Company from Customers Bank and 19,000 forfeited shares prior to the execution of the agreement were returned to Customers Bank.
Both the President and Executive Chairman of the Board of Customers Bank are immediate family members of the Company’s CEO, and together with their spouses own less than 5.0 % of the Company’s outstanding common stock as of December 31, 2023 and 2022.
On March 1, 2022, the Company reached an agreement, with settlement on March 11, 2022, to reacquire 1,169,963 private warrants at a price of $ 1.69 per warrant, or a total cost of $ 2.0 million, from Ms. Sherry Sidhu and Mr. Samvir Sidhu, who are immediate family members of our CEO. The transaction price was established based on the range of market prices during the repurchase conversations and was approved by the Company’s Audit Committee.
On April 20, 2022, the Company entered into a Special Limited Agency Agreement (“SLA”) with Customers Bank that provides for marketing assistance from the Company for originating consumer installment loans funded by Customers Bank. In consideration for this marketing assistance, the Company receives certain fees specified within the SLA which are recorded as a component of Other revenue within the Consolidated Statements of Loss . During the twelve ended December 31, 2022, less than $ 0.1 million of revenue was realized under the SLA. The SLA expired on December 31, 2022.
Positions with Customers Bank are presented on our Consolidated Balance Sheets in Accounts receivable, net , Deferred revenue, current, and Accounts payable and accrued liabilities . The Accounts receivable balances related to Customers Bank as of December 31, 2023 and 2022 were $ 1.4 million and $ 1.4 million, respectively. The Deferred revenue balances related to Customers Bank as of December 31, 2023 and 2022 were $ 1.3 million and $ 3.8 million, respectively. The Accounts payable and accrued liabilities balances related to Customers Bank as of December 31, 2023 and 2022 were zero and $ 3.8 million, respectively.
The Company recognized $ 48.3 million and $ 74.7 million in revenues from Customers Bank for the twelve months ended December 31, 2023 and 2022, respectively. Of these amounts, $ 20.9 million and $ 22.5 million are paid directly by MasterCard or individual account holders to the Company for the twelve months ended December 31, 2023 and 2022, respectively. These amounts are presented on our Consolidated Statements of Loss in Total operating revenues .
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The Company recognized zero and less than $ 0.1 million of expenses from Customers Bank for the twelve months ended December 31, 2023 and 2022, respectively. These amounts are presented on our Consolidated Statements of Loss in Total operating expenses .
First Carolina Bank
Deposit Servicing Agreement for Higher Education
On March 16, 2023, the Company entered into a Deposit Servicing Agreement (the “FCB Deposit Servicing Agreement”) with a new partner bank, First Carolina Bank, a North Carolina chartered, non-member community bank (“FCB”), which provides that FCB will establish and maintain deposit accounts and other banking services in connection with customized products and services offered by the Company to its Higher Education institution clients, and the Company will provide certain other related services in connection with the accounts. FCB retains any and all revenue generated from the funds held in the deposit accounts, and in exchange, pays the Company a deposit servicing fee that is based on a calculation provided by the terms in the FCB Deposit Servicing Agreement, based on average monthly deposit balances and subject to certain contractual adjustments, and a monthly interchange fee equal to all debit card interchange revenues on the demand deposit accounts, minus an interchange share percentage.
On August 20, 2023, the Company and FCB entered into an amendment to the FCB Deposit Servicing Agreement (the “FCB DPSA First Amendment”). The FCB DPSA First Amendment, among other things, (i) extends the initial term from four years to five years after the effective date, (ii) provides that FCB will work with the Company and Customers Bank on the timely transfer of existing student depositor accounts on or before the effective date, and as agreed to by the parties, and (iii) amends the effective date to be the date on which FCB takes on deposits from the existing student depositor accounts.
The FCB Deposit Servicing Agreement and Amendment thereof may be terminated early by either party upon material breach, by either party upon notice that the continuation of the Depositor Program violates Applicable Law or Network Rules (as defined in the FCB Deposit Servicing Agreement); by FCB if a regulatory authority determined that the performance of its obligations under the FCB Deposit Servicing Agreement was not consistent with safe and sound banking practices; by either party upon the other party commencing or being subject to certain bankruptcy proceedings; and by the Company should it experience a change in control on or after March 16, 2026.
On December 1, 2023, the Company and FCB completed the transfer of existing student depositor accounts from Customers Bank to FCB.
Positions with FCB are presented on our Consolidated Balance Sheets in Accounts receivable, net , Deferred revenue, current, and Accounts payable and accrued liabilities . The Accounts receivable balance related to FCB as of December 31, 2023 was $ 0.2 million. The Deferred revenue balance related to FCB as of December 31, 2023 was $ 7.4 million. The Accounts payable and accrued liabilities balance related to FCB as of December 31, 2023 was zero .
The Company recognized $ 3.4 million in net revenues from FCB for the twelve months ended December 31, 2023, which is presented on our Consolidated Statements of Loss in Total operating revenues .
NOTE 14 — RESTRUCTURING ACTIVITIES
On January 26, 2023, and in connection with our previously announced near-term strategy to focus on being an innovative, efficient, risk oriented fintech with a partner bank model, the Company committed to a targeted Profit Enhancement Plan (the “PEP”) that is intended to reduce operating costs, improve operating margins, improve operating cash flow, and continue advancing the Company’s ongoing commitment to profitable growth and continued innovation, and direct the Company’s resources toward its best opportunities.
Included within the PEP was a targeted reduction of the Company’s 2023 employee workforce of approximately 25 % as compared to its headcount at December 31, 2022. This workforce reduction was in addition to targeted spend reduction and service provider rationalization.
The Company completed a workforce reduction of 58 employees during the twelve months ended December 31, 2023. The Company’s workforce reduction expenses, consisting of severance and other termination benefits for the twelve months ended December 31, 2023, totaled $ 1.0 million and are recorded in Restructuring, merger, and acquisition related expenses on the Consolidated Statements of Loss. $ 0.2 million of these expenses were incurred but not paid at December 31, 2023 and are included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets .
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NOTE 15 — IMMATERIAL CORRECTION OF PRIOR PERIOD ERROR
In accordance with FASB ASC Topic 606, Revenue from Contracts with Customers , the Company presents its interchange and card revenue net of related interchange expenses as it is deemed to be agent in these contracts. During the preparation of its December 31, 2023 consolidated financial statements, the Company identified an immaterial error in its accounting for certain of its interchange expenses for the three months ended March 31, 2023, three months ended June 30, 2023, and the three months ended September 30, 2023, reflecting the impacted revenues gross instead of net as required. The effect of these errors:
• Overstated Interchange and card revenue and Technology, communication, and processing expense by an equal and offsetting $ 0.1 million during the three months ended March 31, 2023,
• Overstated Interchange and card revenue and Technology, communication, and processing expense by an equal and offsetting $ 0.3 million during the three months ended June 30, 2023, and
• Overstated Interchange and card revenue and Technology, communication, and processing expense by an equal and offsetting $ 0.4 million during the three months ended September 30, 2023.
The impact of these errors had no effect on Net loss .
The Company assessed the materiality of these errors on the interim period consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” (ASC Topic 250, Accounting Changes and Error Corrections ). Based on this assessment, the Company concluded that these error corrections in its Consolidated Statements of Loss are not material to any previously presented consolidated financial statements. The correction had no impact on the Consolidated Balance Sheets , Consolidated Statements of Changes in Shareholders’ Equity , Consolidated Statements of Cash Flows , or Notes to the Consolidated Financial Statements , other than Note 9 - Revenues and Note 13 - Related Party Transactions , for any previously presented interim period. The financial reporting periods affected by this error include the Company’s previously reported interim consolidated financial statements for each of the year-to-date periods ended March 31, 2023, June 30, 2023, and September 30, 2023. In addition, the Company expects to present the corrected interim 2023 amounts in its 2024 interim consolidated financial statements upon the filing of each of its Quarterly Reports on Form 10-Q on a year-to-date basis as a correction to the applicable 2023 period.
NOTE 16 — SUBSEQUENT EVENTS
Changes to Executive Management
On February 5, 2024, James Dullinger, the Company’s current Chief Financial Officer, provided notice to, and the Company mutually agreed to not to renew Mr. Dullinger’s existing Employment Agreement dated January 26, 2023 (as amended, the “Dullinger Agreement”) upon its expiration on March 31, 2024.
On March 26, 2024, the Company’s Board of Directors approved the extension of Mr. Dullinger’s service as Chief Financial Officer and the Company and Mr. Dullinger executed a second amendment to Mr. Dullinger’s Employment Agreement providing for the extension of Mr. Dullinger’s employment as Chief Financial Officer of the Company through April 5, 2024, payment of an extension bonus, payment for earned paid time off, and deletion of non-compete restrictions (the “Dullinger Amendment”).
On February 5, 2024, the Company appointed Ajay Asija to serve as Deputy Chief Financial Officer effective February 5, 2024 for a transition period, and as Chief Financial Officer, effective April 1, 2024. In conjunction with the appointment, the Company and Mr. Asija entered into an employment agreement (the “Asija Agreement”) which provides for:
• An annual base salary of not less than $ 275,000 ;
• Potential for annual cash and equity incentive compensation in an amount, form, and at such time as provided in executive incentive plans as approved by the Board of Directors from time to time;
• Severance compensation for up to one year’s compensation based upon then-current base salary, plus average annual performance bonus over the preceding three years, together with vesting of certain awards in the event of a termination of Mr. Asija’s employment without cause or by Mr. Asija for good reason as those terms are defined in the Asia Employment Agreement;
• Automatic vesting of 50 % of equity awards if employment is terminated by Mr. Asija for good reason within the initial term of one ( 1 ) year; or if such termination occurs within 12 months of a change in control;
• Automatic vesting of all equity awards if employment is terminated by the Company without cause; of if employment is terminated by Mr. Asija for good reason after the initial term of one ( 1 ) year;
• Customary non-disclosure, non-compete, and non-disparagement provisions; and
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• A term of one ( 1 ) year commencing on February 5, 2024, and renewing automatically on each one ( 1 ) year anniversary for an additional term of one ( 1 ) year, unless either party delivers notice to the contrary to the other party at least sixty ( 60 ) days prior to such one ( 1 ) year anniversary.
In addition, and in connection with Mr. Asija’s appointment to Chief Financial Officer, the Company awarded Mr. Asija 300,000 restricted stock units under an Inducement Award Agreement (the “Inducement RSUs”) with a grant date of February 5, 2024. Of the Inducements RSUs, 50 % are service-based, one-fourth of which will vest on each anniversary of the vesting commencement date over a four-year period, in each case subject to Mr. Asija’s continued employment with the Company until such respective vesting date. The remaining 50 % are performance-based, based on the attainment of performance criteria as specified in the Inducement Award Agreement, and subject to a vesting schedule where shares are earned based on performance within the first three years , evaluated at each quarter-end following the grant date, provided no shares of Company common stock will be paid out until at least the third anniversary of the grant date.
In connection with the Dullinger Amendment, the Company and Mr. Asija entered into a first amendment (the “Asija Amendment”) to the Asija Agreement to modify the effective date on which Mr. Asija will assume the role as the Company's Chief Financial Officer, from April 1, 2024 to April 6, 2024.
Cancellation and Replacement of Performance-based Restricted Stock Units
On February 6, 2024, Luvleen Sidhu, the Company’s Chief Executive Officer, and Jamie Donahue, the Company’s President and Chief Technology Officer (collectively, the “Covered Executives”), entered into a letter agreement with the Company (the “RSU Cancellation Agreement”), pursuant to which each Covered Executive and the Company mutually agreed to the cancellation of the unvested performance-based restricted stock unit awards previously granted to the Covered Executives effective September 30, 2021.
The RSU Cancellation Agreement was entered into by the Covered Executives in consideration for their continued employment and for the Company’s issuance of new performance-based restricted stock units in such amounts as approved by the Compensation Committee of the Board of Directors with modified performance-based vesting criteria, in accordance with the terms of the 2020 Equity Incentive Plan, as amended.
On February 5, 2024, the Company granted service-based and performance-based restricted stock units under the Company’s 2020 Equity Incentive Plan, as amended, to certain officers of the Company, inclusive of the new performance-based restricted stock units issued to the Covered Executives in connection with the RSU Cancellation Agreement.
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