AvidXchange (AVDX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited statements show year-over-year revenue growth, a narrowed net loss, and a slight decrease in total assets Unaudited Consolidated Balance Sheets Total assets decreased to $2.12 billion, driven by a reduction in restricted funds held for customers Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $339,932 | $350,563 | | Restricted funds held for customers | $1,226,216 | $1,283,824 | | Total Assets | $2,120,798 | $2,211,996 | | Payment service obligations | $1,226,216 | $1,283,824 | | Total Liabilities | $1,472,395 | $1,554,552 | | Total Stockholders' Equity | $648,403 | $657,444 | Unaudited Consolidated Statements of Operations Revenues grew 19.7% in Q3 and 20.2% year-to-date, with a significant reduction in net loss for both periods Quarterly Statement of Operations (in thousands) | Metric | Q3 2023 | Q3 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $98,680 | $82,411 | +19.7% | | Loss from operations | $(9,629) | $(22,124) | N/A | | Net loss | $(8,091) | $(25,371) | N/A | | Net loss per share | $(0.04) | $(0.13) | N/A | Nine-Month Statement of Operations (in thousands) | Metric | YTD 2023 | YTD 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $276,656 | $230,175 | +20.2% | | Loss from operations | $(47,227) | $(63,693) | N/A | | Net loss | $(42,852) | $(76,255) | N/A | | Net loss per share | $(0.21) | $(0.39) | N/A | Unaudited Consolidated Statements of Cash Flows Net cash used in operations improved, while investing activities provided cash due to marketable securities timing Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,991) | $(29,864) | | Net cash provided by (used in) investing activities | $226 | $(124,659) | | Net cash used in financing activities | $(57,474) | $(311,816) | | Net decrease in cash, cash equivalents, and restricted funds | $(68,239) | $(466,339) | Notes to Unaudited Consolidated Financial Statements Notes detail revenue concentration with two service providers and costs related to a recent cybersecurity incident - The company has a significant revenue concentration, with two service providers for virtual commercial card (VCC) transactions accounting for 14% and 31% of total revenue in Q3 2023, respectively[20][22] - In April 2023, the company detected a cybersecurity incident and for the nine months ended Sep 30, 2023, it incurred $5.5 million in response costs and recorded an insurance recovery receivable of $1.2 million[84][85][86] Disaggregation of Revenue (in thousands) | Revenue Type | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Software revenue | $28,919 | $25,039 | $83,135 | $73,152 | | Payment revenue | $68,485 | $56,645 | $190,894 | $154,694 | | Services revenue | $1,276 | $727 | $2,627 | $2,329 | | Total revenues | $98,680 | $82,411 | $276,656 | $230,175 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by payment volume and interest rates, alongside macroeconomic and cybersecurity impacts - Macroeconomic factors like inflation and rising interest rates have had mixed effects, increasing payment revenue from interest on customer funds but also leading to more volatile and unpredictable sales cycles[95] - The company's principal sources of liquidity as of September 30, 2023, are $339.9 million in cash and cash equivalents, $100.6 million in marketable securities, and $30.0 million available under its revolving credit facility[129] Key Business Metrics | Metric | Q3 2023 | Q3 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Transactions Processed | 19,175,866 | 18,020,165 | +6.4% | | Transaction Yield | $5.15 | $4.57 | +12.7% | | Total Payment Volume (in millions) | $19,627 | $18,108 | +8.4% | Results of Operations Q3 revenue grew 19.7%, primarily from payment revenue boosted by interest income, leading to a narrowed net loss - Q3 2023 revenue growth was primarily driven by a 20.9% increase in payment revenue, which was positively impacted by a $7.9 million increase in interest earned on funds held for customers due to rising interest rates[118] - General and Administrative expenses in Q3 2023 included $1.9 million in costs related to the cybersecurity incident (offset by $1.2 million in insurance recoveries) and a $1.6 million loss contingency for a potential commercial dispute[119] Liquidity and Capital Resources The company maintains a strong liquidity position with sufficient cash, marketable securities, and credit facility availability - Net cash used in operating activities for the first nine months of 2023 improved to $11.0 million from $29.9 million in the prior year period, mainly due to higher revenue and an improved net loss[132] Outstanding Debt (in thousands) | Debt Component | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Term loan facility | $63,781 | $65,000 | | Promissory note payable | $18,700 | $18,700 | | Total principal due | $82,481 | $83,700 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations and concentration with key service providers - The company is sensitive to interest rate changes, as a hypothetical 100 basis point increase in the Federal Funds rate would have increased interest income on buyer funds by $8.1 million during the first nine months of 2023[143] - A substantial portion of revenue is derived from interchange fees processed by two VCC service providers, creating a concentration risk[148] Item 4. Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness in accounting personnel and expertise - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were not effective as of September 30, 2023[150] - A material weakness in internal control over financial reporting persists, specifically a lack of sufficient personnel with the appropriate level of accounting knowledge, training, and experience[151] - Remediation efforts are ongoing, including hiring a controller with public company experience, an experienced SEC reporting leader, and other technical accounting resources[152] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently party to any material legal proceedings - As of the reporting date, the company is not involved in any legal proceedings that are considered individually or in aggregate to be material[153][154] Item 1A. Risk Factors Risk factors were updated to address the potential material impact of the April 2023 cybersecurity incident - A new risk factor was added to address the cybersecurity incident from April 2023, acknowledging that data was exfiltrated and posted on the dark web, including personally identifiable information[156] - The company warns that the incident could lead to loss of customers, significant remediation expenses, and potential liability from governmental investigations or class action litigation[156] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and the planned use of IPO proceeds remains unchanged - The company reported no material changes to the planned use of proceeds from its IPO, which generated net proceeds of approximately $621.1 million[157][159] Item 5. Other Information The Board adopted a new clawback policy to comply with Nasdaq listing standards - The Board adopted a clawback policy for erroneously awarded compensation to comply with new Nasdaq listing standards[160]