BM Technologies(BMTX) - 2023 Q4 - Annual Report

Part I Business BM Technologies, Inc. (BMTX) provides digital banking and disbursement services through a BaaS model and university partnerships - BMTX operates as a fintech company, not a bank, facilitating services between customers and partner banks (Customers Bank and First Carolina Bank)[186] - The business model focuses on low-cost customer acquisition through Banking-as-a-Service (BaaS) and Higher Education partnerships[186] - The company is classified as an "emerging growth company" under the JOBS Act, benefiting from reduced reporting requirements and an extended transition period for new accounting standards[188][225] - As of December 31, 2023, the company had approximately 200 full-time employees located in the United States[227] Risk Factors The company faces significant risks related to its business, regulatory environment, and common stock, including cybersecurity and market volatility Risks Related to our Business and Industry The company faces risks from partner dependence, intense competition, cybersecurity threats, and the need to execute its Profit Enhancement Plan - The company's BaaS business is significantly dependent on its partnership with T-Mobile, which can be terminated with 30 days' written notice despite renewal through February 2025[248][392] - On December 1, 2023, the company transitioned Higher Education deposits and accounts to First Carolina Bank (FCB), introducing integration and operational risks[393] - The company faces intense competition from other payment providers, traditional banks, and digital banking platforms[13] - Data breaches, cybersecurity incidents, and fraud are significant risks, compounded by reliance on third-party vendors like FIS and MasterCard[347][280] - As of December 31, 2023, developed software had a net carrying value of $16.2 million, representing approximately 30% of total consolidated assets, subject to impairment risk[12] - The company's Profit Enhancement Plan (PEP), announced January 26, 2023, aims for over $15 million in annualized cost reductions, but its success is not guaranteed[242] Risks Related to our Common Stock and Warrants Risks include illiquid trading, potential stock price depression from future sales or warrant exercise, warrant redemption risk, and anti-takeover provisions - As of December 31, 2023, 22,703,004 warrants were outstanding at $11.50 per share, potentially causing significant stockholder dilution[311] - The company can redeem public warrants at $0.01 per warrant if the stock price exceeds $24.00 for a specified period, potentially rendering unexercised warrants worthless[303][309] - Anti-takeover provisions, such as a staggered board, may discourage takeovers and entrench management[298] - The company's charter designates the Delaware Court of Chancery as the exclusive forum for certain stockholder litigation, potentially limiting forum choice[301][308] Regulatory Risks The company faces significant regulatory risks from banking laws, U.S. Department of Education Title IV rules, privacy laws, and potential future agency regulations - As a "third-party servicer" under Title IV, the company is jointly and severally liable with client institutions for Department of Education violations, potentially leading to material fines[307][314] - The company is subject to ED's cash management regulations, restricting marketing of financial products to students and fee types[316][317] - The company is subject to privacy regulations including FERPA and GLBA, governing student and customer data handling[325][327] - Partner Banks are subject to extensive banking regulations, including the Durbin Amendment, which limits interchange fees and indirectly impacts BMTX's revenue[323][320] Cybersecurity BMTX maintains a cybersecurity risk management program aligned with industry best practices, overseen by the Board, with no material incidents identified to date - The company has a cybersecurity risk management program integrated into its enterprise risk management to protect IT systems and confidential information[338][339] - The Board of Directors oversees the cybersecurity program as part of its risk oversight function, receiving regular updates[341] - The company has not identified any past cybersecurity incidents that have materially affected its business, operations, or financial condition[340] Properties The company's corporate headquarters in Wayne, PA, operates under a short-term lease, with current facilities deemed sufficient for its needs - The corporate headquarters is located in Wayne, PA, and operates under a short-term lease[342] Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to have a material effect on its financial condition or operations - As of the report date, the company is not involved in any legal proceedings expected to have a material impact[356] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and warrants trade on the NYSE American, with no cash dividends paid to date or planned, and no issuer equity purchases during the period - Common stock and warrants trade on the NYSE American under symbols "BMTX" and "BMTX-WT"[358] - As of April 1, 2024, there were 783 holders of record of common stock and 12 holders of record of warrants[359] - The company has not paid cash dividends and has no current plans to do so[30] Management's Discussion and Analysis of Financial Condition and Results of Operations BMTX reported a net loss of $17.3 million in 2023, driven by a 34% revenue decrease and a 19% expense reduction, with cash decreasing to $14.3 million Results of Operations Operating revenues decreased by 34% to $55.3 million in 2023, while expenses fell by 19% to $75.2 million, leading to a $20.0 million operating loss Operating Results Summary (in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Operating revenues | $55,252 | $83,597 | $(28,345) | (34)% | | Operating expenses | $75,232 | $92,853 | $(17,621) | (19)% | | Loss from operations | $(19,980) | $(9,256) | $(10,724) | 116% | | Gain on fair value of private warrant liability | $2,665 | $8,066 | $(5,401) | (67)% | | Net loss | $(17,331) | $(779) | $(16,552) | NM | | Basic/Diluted loss per share | $(1.50) | $(0.07) | $(1.43) | NM | Operating Revenues Breakdown (in thousands) | Revenue Source | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Interchange and card revenue | $9,447 | $22,318 | $(12,871) | (58)% | | Servicing fees | $31,460 | $44,581 | $(13,121) | (29)% | | Account fees | $8,099 | $8,992 | $(893) | (10)% | | University fees | $5,701 | $5,734 | $(33) | (1)% | | Other revenue | $545 | $1,972 | $(1,427) | (72)% | | Total operating revenues | $55,252 | $83,597 | $(28,345) | (34)% | Operating Expenses Breakdown (in thousands) | Expense Category | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Technology, communication, and processing | $27,775 | $29,176 | $(1,401) | (5)% | | Salaries and employee benefits | $22,489 | $39,926 | $(17,437) | (44)% | | Professional services | $11,257 | $10,747 | $510 | 5% | | Provision for operating losses | $8,311 | $6,798 | $1,513 | 22% | | Total operating expenses | $75,232 | $92,853 | $(17,621) | (19)% | Liquidity and Capital Resources Cash and cash equivalents decreased by $6.8 million to $14.3 million in 2023, primarily due to investing and financing activities, though management believes liquidity is sufficient for 12 months Cash and Cash Equivalents Position (in thousands) | Period | Amount | | :--- | :--- | | December 31, 2023 | $14,288 | | December 31, 2022 | $21,108 | Summary of Cash Flows (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,527 | $3,480 | | Net cash used in investing activities | $(5,873) | $(5,675) | | Net cash used in financing activities | $(2,474) | $(2,401) | | Net decrease in cash | $(6,820) | $(4,596) | - Management concluded the company has sufficient funds to support operations for at least the next 12 months from the financial statement issuance date[426][471] Quantitative and Qualitative Disclosures About Market Risk The company faces credit risk concentration from accounts receivable with key partners and cash deposits exceeding FDIC limits, though management deems the risk not significant Accounts Receivable Concentration | Partner | % of Total A/R, Net (Dec 31, 2023) | % of Total A/R, Net (Dec 31, 2022) | | :--- | :--- | :--- | | BaaS Partner | 48% | 60% | | MasterCard | 21% | 10% | | Customers Bank | 16% | 17% | - The company holds cash at Customers Bank that may exceed the $250,000 FDIC coverage limit, creating credit risk, though management deems it not significant[441] Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023 and 2022, including balance sheets, statements of loss, equity, and cash flows, along with detailed accounting notes - KPMG LLP issued an unqualified audit opinion on the consolidated financial statements[439][443] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $54,640 | $71,036 | | Cash and cash equivalents | $14,288 | $21,108 | | Developed software, net | $16,173 | $22,324 | | Total Liabilities | $23,668 | $22,178 | | Total Shareholders' Equity | $30,972 | $48,858 | Consolidated Statement of Loss Highlights (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total operating revenues | $55,252 | $83,597 | | Total operating expenses | $75,232 | $92,853 | | Loss from operations | $(19,980) | $(9,256) | | Net loss | $(17,331) | $(779) | NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Financial statements are prepared under U.S. GAAP on a going concern basis, with key policies covering revenue recognition, developed software, warrants, and share-based compensation, utilizing emerging growth company provisions - Management concluded funds are sufficient to support operations for at least 12 months from the April 5, 2024 issuance date, based on a going concern assessment[471] - The company recognizes revenue under ASC 606, presenting interchange and card revenue net of expenses as it acts as an agent[509] - Private warrants are accounted for as liabilities and marked-to-market, while public warrants are treated as equity instruments and not re-measured[501][502][503] - The provision for operating losses, including fraud and Regulation E claims, was estimated at $1.3 million at December 31, 2023, up from $0.4 million in 2022[523][524] NOTE 7 — COMMITMENTS AND CONTINGENCIES The company records loss contingencies when probable and estimable, with no unaccrued material matters, and acquired software technology in June 2023 with $0.5 million in contingent consideration - On June 5, 2023, the company acquired software technology assets, including $0.5 million of potential contingent consideration payable over three years upon successful deployment[2] NOTE 8 — SHAREHOLDERS' EQUITY AND PRIVATE WARRANT LIABILITY As of December 31, 2023, the company had 11.98 million common shares outstanding, 22.7 million warrants, and recognized $1.8 million in share-based compensation expense Common Stock Outstanding | Date | Shares Issued and Outstanding | | :--- | :--- | | Dec 31, 2023 | 11,984,133 | | Dec 31, 2022 | 12,240,237 | Warrants Outstanding | Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Public Warrants | 17,294,044 | 17,227,189 | | Private Warrants | 5,408,960 | 5,475,815 | | Total | 22,703,004 | 22,703,004 | - The 2020 Equity Incentive Plan was amended in June 2023, increasing total authorized shares from 1,220,037 to 2,500,000[35] - Share-based compensation expense for RSUs and PBRSUs totaled $1.8 million in 2023, compared to $2.0 million in 2022[52][53] - The company recorded a non-cash gain of $2.7 million in 2023 and $8.1 million in 2022 from the revaluation of its private warrant liability[62] NOTE 9 — REVENUES Total revenues decreased to $55.3 million in 2023, with most recognized at a point in time, and deferred revenue significantly increased to $12.4 million Revenues by Type (in thousands) | Revenue Type | 2023 | 2022 | | :--- | :--- | :--- | | Recognized at Point in Time | | | | Interchange and card revenue | $9,447 | $22,318 | | Servicing fees | $31,460 | $44,581 | | Account fees | $8,099 | $8,992 | | University fees - disbursement | $881 | $1,108 | | Recognized Over Time | | | | University fees - subscriptions | $4,820 | $4,626 | | Total Revenues | $55,252 | $83,597 | Deferred Revenue (in thousands) | Date | Amount | | :--- | :--- | | Dec 31, 2023 | $12,449 | | Dec 31, 2022 | $6,647 | NOTE 10 — INCOME TAXES The company recorded minimal income tax expense in 2023, maintains a full valuation allowance against deferred tax assets, and has $18.5 million in federal net operating loss carryforwards - A full valuation allowance was recorded against deferred tax assets at year-end 2023 and 2022, as realization is not more likely than not[75] - As of December 31, 2023, the company had $18.5 million of federal net operating loss (NOL) carryforwards that do not expire[268] Income Tax Expense (Benefit) (in thousands) | Component | 2023 | 2022 | | :--- | :--- | :--- | | Total current expense (benefit) | $16 | $(411) | | Total deferred expense (benefit) | $0 | $0 | | Total income tax expense (benefit) | $16 | $(411) | NOTE 11 — LOSS PER SHARE The company reported a basic and diluted loss per share of $1.50 in 2023, with potentially dilutive securities excluded due to the net loss Loss Per Share Calculation | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net loss (in thousands) | $(17,331) | $(779) | | Weighted-average shares - basic/diluted (in thousands) | 11,574 | 11,942 | | Basic/Diluted loss per common share | $(1.50) | $(0.07) | - For 2023, 23.9 million potentially dilutive shares were excluded from diluted loss per share calculation due to their antidilutive effect[84][85] NOTE 12 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The company uses a three-level fair value hierarchy, with private warrant liability as the only Level 3 instrument, valued at $0.2 million at year-end 2023 using a binomial lattice model - The private warrant liability is the primary financial instrument measured at fair value on a recurring basis, classified as Level 3 due to unobservable inputs[91][95] Fair Value of Private Warrant Liability (Level 3) | Date | Fair Value (in thousands) | | :--- | :--- | | Dec 31, 2023 | $162 | | Dec 31, 2022 | $2,847 | - The fair value of private warrants at December 31, 2023, was estimated using a binomial lattice model with a stock price of $2.05 and 58% volatility[89][90] NOTE 13 — RELATED PARTY TRANSACTIONS The company has significant related party transactions with partner banks, recognizing $48.3 million from Customers Bank and $3.4 million from First Carolina Bank in 2023, with a key account transfer completed December 1, 2023 - The company recognized $48.3 million in revenues from Customers Bank in 2023, down from $74.7 million in 2022[115] - On March 16, 2023, the company entered a Deposit Servicing Agreement with First Carolina Bank (FCB) for its Higher Education business, completing student account transfer on December 1, 2023[118][127] - The company recognized $3.4 million in net revenues from FCB for the twelve months ended December 31, 2023[128] - The President and Executive Chairman of Customers Bank are immediate family members of the Company's CEO[111] NOTE 14 — RESTRUCTURING ACTIVITIES In January 2023, the company initiated a Profit Enhancement Plan (PEP) including a 25% workforce reduction, resulting in $1.0 million in restructuring charges - On January 26, 2023, the company committed to a Profit Enhancement Plan (PEP), including a targeted 25% workforce reduction from year-end 2022 levels[129][121] - The company completed a workforce reduction of 58 employees in 2023, incurring $1.0 million in related restructuring expenses[130] NOTE 15 — IMMATERIAL CORRECTION OF PRIOR PERIOD ERROR An immaterial error in interim 2023 financial statements led to overstatement of interchange revenue and expenses, with no impact on net loss, balance sheet, or cash flows - An immaterial error was identified where certain interchange revenues were reported gross instead of net for the first three quarters of 2023[123] - The error overstated both revenue and an expense line item by equal amounts, having no effect on Net loss[133][132] NOTE 16 — SUBSEQUENT EVENTS Subsequent to year-end, the company announced CFO transition to Ajay Asija and modified performance-based RSU awards for the CEO and President - CFO James Dullinger's employment ended April 5, 2024, with Ajay Asija appointed as the new CFO effective April 6, 2024[135][137][141] - In February 2024, unvested performance-based RSUs for the CEO and President were cancelled and replaced with new awards with modified vesting criteria[142][143] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2023, due to a material weakness in controls over serviced deposit account balances and revenues, with a remediation plan underway - Management concluded disclosure controls and procedures were not effective as of December 31, 2023, due to a material weakness in internal control over financial reporting[148][286] - The material weakness related to inadequately designed controls over the accuracy of serviced deposit account balances and related revenues[151] - The material weakness did not result in a material misstatement of the annual or interim financial statements[152] - A remediation plan is underway, including hiring new personnel and enhancing policies, with anticipated completion by the end of Q3 2024[153][156] Other Information The company's Insider Trading Policy was updated in Q4 2023 to permit Rule 10b5-1 trading plans, though no directors or officers adopted or terminated such plans during the quarter - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the quarter ended December 31, 2023[192] Part III Directors, Executive Officers, and Corporate Governance Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information for this item is incorporated by reference from the 2024 Proxy Statement[195] Executive Compensation Information for this item, including Compensation Discussion and Analysis, is incorporated by reference from the 2024 Proxy Statement - Information for this item is incorporated by reference from the 2024 Proxy Statement[163] Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters Security ownership information is incorporated by reference from the 2024 Proxy Statement, detailing outstanding awards and shares available for future issuance under equity plans Equity Compensation Plan Information as of Dec 31, 2023 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 940,106 | N/A | 1,679,149 | | Total | 940,106 | N/A | 1,679,149 | Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the 2024 Proxy Statement under specific headings related to related party transactions and director independence - Information for this item is incorporated by reference from the 2024 Proxy Statement[199] Principal Accounting Fees and Services Information for this item is incorporated by reference from the 2024 Proxy Statement under the heading "Appointment of Independent Registered Public Accounting Firm" - Information for this item is incorporated by reference from the 2024 Proxy Statement[201] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, referencing financial statements and noting the omission of schedules, along with an index of exhibits - This item provides a list of financial statements and exhibits filed with the Form 10-K[206][207] Form 10-K Summary This report does not include a Form 10-K summary - The report indicates "None" for this item[208]