S-1 1 ea135472-s1_bmtech.htm REGISTRATION STATEMENT

 

As filed with the Securities and Exchange Commission on February 12, 2021

Registration No. 333-               

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

BM Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   7389   82-310369
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

201 King of Prussia Road, Suite 350

Wayne, PA 19087

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

Luvleen Sidhu

Chief Executive Officer

201 King of Prussia Road, Suite 350

Wayne, PA 19087

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Jonathan H. Talcott

E. Peter Strand

Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue, NW, Suite 900

Washington, DC 20001

(202) 689-2806

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  Amount
to be
Registered(1)
   Proposed
Maximum
Offering Price
Per Share
   Proposed
Maximum
Aggregate
Offering Price(1)(2)
   Amount of
Registration Fee
 
Common Stock, par value $0.0001 per share   1,927,059   $13.96(2)  $26,901,744   $2,934.98 
Warrants to purchase common stock   6,945,778   $2.91(3)   (5)   (5)
Common Stock, par value $0.0001 per share, underlying the Warrants   6,945,778   $14.41(4)  $100,088,661   $10,919.67 
Common Stock, par value $0.0001 per share, underlying the Public Warrants   17,250,000   $11.50(6)  $198,375,000   $21,642.71 
Total                 $

35,497.37

 

 

(1)In the event of a stock split, stock dividend or other similar transaction involving the registrant’s common stock, in order to prevent dilution, the number of shares of common stock registered hereby shall be automatically increased to cover the additional common shares in accordance with Rule 416(a) under the Securities Act.
(2)Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act. The price per share and aggregate offering price are based on the average of the high and low prices of the Registrant’s common stock on February 10, 2021, as reported on the NYSE American Market.
(3)Estimated in accordance with Rule 457(c) under the Securities Act. The price per share is based on the average of the high and low prices of the Registrant’s warrants on February 10, 2021, as reported on the NYSE American Market.
(4)Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(i) under the Securities Act. The price per share is based upon (a) the exercise price per warrant of $11.50 per share plus (b) the average of the high and low prices of the Registrant’s warrants on February 10, 2021 as reported on the NYSE American Market.
(5)No separate fee due in accordance with Rule 457(i).
(6)Calculated pursuant to Rule 457(g) under the Securities Act, based on the exercise price of the warrants.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED February 12, 2021

 

 

BM Technologies, Inc.

 

Up to 8,872,837 Shares Common Stock

 

6,945,778 Warrants to Purchase Common Stock

 

 

 

The selling stockholders named in this prospectus (the “Selling Stockholders”) may offer and sell from time to time up to 8,872,837 shares of our common stock, par value $0.0001 per share, and warrants to purchase up to 6,945,778 shares of common stock, consisting of:

 

up to 1,927,059 shares of common stock issued in a private placement pursuant to subscription agreements entered into on August 5, 2020 (the “PIPE Shares”);

 

up to 6,945,778 warrants to purchase shares of common stock issued in a private placement to MFA Investor Holdings LLC (the “Sponsor”) and Chardan Capital Markets, LLC (the “Placement Warrants”), 1,311,501 of which were subsequently transferred to certain recipients of PIPE Shares; and

 

up to 6,945,778 shares of common stock issuable upon exercise of the Placement Warrants.

 

In addition, this prospectus relates to the offer and sale of up to 17,250,000 shares of common stock that are issuable by us upon the exercise of outstanding warrants that were previously registered (the “Public Warrants”).

 

The selling stockholders may offer, sell or distribute all or a portion of the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any of the proceeds from such sales of the shares of common stock or warrants, except with respect to amounts received by us upon the exercise of the warrants. We will bear all costs, expenses and fees in connection with the registration of these securities, including with regard to compliance with state securities or “blue sky” laws. The selling stockholders will bear all commissions and discounts, if any, attributable to their sale of shares of common stock or warrants. See “Plan of Distribution” beginning on page 104 of this prospectus.

 

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and are subject to reduced public company reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

 

Our common stock and warrants are listed on the NYSE American under the symbols “BMTX” and “BMTX.W,” respectively. On February 10, 2021, the last reported sales price of our common stock was $13.62 per share and the last reported sales price of our warrants was $2.84 per warrant.

 

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 7 of this prospectus, and under similar headings in any amendment or supplements to this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of the disclosure in the prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is               , 2021

 

 

 

 

TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS ii
FORWARD-LOOKING STATEMENTS iii
SUMMARY 1
RISK FACTORS 5
USE OF PROCEEDS 22
DETERMINATION OF OFFERING PRICE 22
MARKET INFORMATION FOR COMMON STOCK AND DIVIDEND POLICY 22
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION 23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34
MANAGEMENT 61
EXECUTIVE COMPENSATION 67
BUSINESS 69
PRINCIPAL STOCKHOLDERS 82
SELLING STOCKHOLDERS 84
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 86
DESCRIPTION OF CAPITAL STOCK 90
U.S. FEDERAL INCOME TAX CONSIDERATIONS 96
PLAN OF DISTRIBUTION 100
LEGAL MATTERS 102
EXPERTS 102
WHERE YOU CAN FIND MORE INFORMATION 102
INDEX TO CONSOLIDATED FINANCIAL INFORMATION F-1

 

 

You should rely only on the information provided in this prospectus, as well as the information incorporated by reference into this prospectus and any applicable prospectus supplement. Neither we nor the Selling Stockholders have authorized anyone to provide you with different information. Neither we nor the Selling Stockholders are making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any applicable prospectus supplement is accurate as of any date other than the date of the applicable document. Since the date of this prospectus and the documents incorporated by reference into this prospectus, our business, financial condition, results of operations and prospects may have changed.

 

i

 

 

ABOUT THIS PROSPECTUS

 

This prospectus is part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”) using the “shelf” registration process. Under this shelf registration process, the Selling Stockholders may, from time to time, sell the securities offered by them described in this prospectus. We will not receive any proceeds from the sale by such Selling Stockholders of the securities offered by them described in this prospectus. This prospectus also relates to the issuance by us of the shares of common stock issuable upon the exercise of any Warrants. We will receive in cash the proceeds from any exercise of Warrants and issuance of such shares underlying the Warrants pursuant to this prospectus.

 

Neither we nor the Selling Stockholders have authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or any applicable prospectus supplement or any free writing prospectuses prepared by or on behalf of us or to which we have referred you. Neither we nor the Selling Stockholders take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we nor the Selling Stockholders will make an offer to sell these securities in any jurisdiction where the offer or sale is not permitted.

 

We may also provide a prospectus supplement or post-effective amendment to the registration statement to add information to, or update or change information contained in, this prospectus. You should read both this prospectus and any applicable prospectus supplement or post-effective amendment to the registration statement together with the additional information to which we refer you in the sections of this prospectus entitled “Where You Can Find More Information.”

 

On January 4, 2021, Megalith Financial Acquisition Corp. (“Megalith”), MFAC Merger Sub Inc., (“Merger Sub”) and BankMobile Technologies, Inc. (“BankMobile”) consummated the transactions contemplated by the Merger Agreement (as defined below) and completed a private sale of Megalith’s common stock in a PIPE Financing (collectively, the “Business Combination”), following the approval at the special meeting of the stockholders of Megalith held on December 21, 2020 (the “Special Meeting”). In connection with the closing of the Merger, the registrant changed its name from Megalith Financial Acquisition Corp. to BM Technologies, Inc.

 

Unless the context indicates otherwise, references in this prospectus to the “Company,” “BM Technologies,” “we,” “us,” “our” and similar terms refer to BM Technologies, Inc. and its consolidated subsidiaries. References to “Megalith” or “MFAC” refer to our predecessor company prior to the consummation of the Business Combination.

 

ii

 

 

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this prospectus include, but are not limited to, statements about our:

 

ability to recognize the benefits from the Business Combination, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth effectively;

 

financial performance following the Business Combination;

 

ability to maintain the listing of our common stock and the Public Warrants on NYSE American;

 

ability to grow and retain our client base and add new business partners;

 

ability to provide effective client support and induce our clients to renew and upgrade the technology offerings and services we provide for them;

 

ability to expand our sales organization to address effectively existing and new markets that we intend to target;

 

ability to forecast and maintain an adequate rate of revenue growth and appropriately plan our expenses;

 

expectations regarding future expenditures;

 

future mix of revenue and effect on gross margins;

 

attraction and retention of qualified employees and key personnel;

 

ability to compete effectively in a competitive industry;

 

ability to protect and enhance our corporate reputation and brand;

 

expectations concerning our relationships and actions with our technology and banking partners and other third parties;

 

ability to enter into new deposit servicing agreements or interchange arrangements prior to the expiration of the agreements with our current partner bank, on favorable terms;

 

impact from future regulatory, judicial, and legislative changes in our industry;

 

impact from general economic conditions and the effects of the COVID-19 pandemic and associated response;

 

ability to locate and acquire complementary technologies or services and integrate them into our business; and

 

future arrangements with, or investments in, other entities or associations.

 

The forward-looking statements contained in this prospectus are based on current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, some of which are beyond our control, or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section entitled “Risk Factors” and in our periodic filings with the SEC. Our SEC filings are available publicly on the SEC website at www.sec.gov. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Accordingly, forward-looking statements in this prospectus should not be relied upon as representing our views as of any subsequent date, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

iii

 

SUMMARY

 

This summary highlights selected information from this prospectus and does not contain all of the information that is important to you in making an investment decision. This summary is qualified in its entirety by the more detailed information included in this prospectus. Before making your investment decision with respect to our securities, you should carefully read this entire prospectus, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere in this prospectus.

 

Unless otherwise indicated or the context otherwise requires, references in this prospectus to “we,” “our,” the “Company,” “us,” and other similar terms refer to BM Technologies, Inc., a Delaware corporation, and its consolidated subsidiaries.

 

Overview

 

Recognizing the product delivery flexibility demanded by the changing needs of the U.S. population in general and the millennial generation in particular, and the low cost of non-traditional distribution channels, Customers Bancorp launched the BankMobile business as a key strategic initiative in January 2015. Today, we offer 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 branchless, nationwide, digital distribution channels.

 

We were established as the technology arm of Customers Bank (the “Bank”), a Pennsylvania-state chartered bank and wholly-owned subsidiary of Customers Bancorp, Inc. (NYSE: CUBI), a Pennsylvania corporation (“Customers Bancorp,” and together with the Bank, “Customers”) to facilitate deposits and banking services between a customer and an FDIC-insured partner bank. Today, we are one of the largest digital banking platforms in the country with over 2 million accounts serving middle income Americans, millennials and “digital natives” looking for a tech savvy banking experience. Our strategy is to generate sustainable revenue streams and “customers for life” through our technology platform and customer experience, which provide consumers with access to a full suite of banking products including checking, savings, personal loans, credit cards and student refinancing. We employ a customer centric approach with a focus on affordability, transparency and consumer friendly products. Our BaaS business model leverages well known partners’ existing students, customer and employee bases to achieve high volume, low cost customer acquisition relative to traditional banking models and provide deposit funding and loan sources to partner banks. Today we are employing this strategy in our Higher Education, White Label, and Workplace Banking businesses. Our digital banking platform includes modern cloud-based technology, proprietary onboarding screening, processing, and account servicing.

 

The Bank holds Company-serviced deposit accounts, deposit liabilities and related assets funded by the deposits held pursuant to applicable banking law, which requires that deposit accounts and liabilities are held by a chartered bank. We are not a bank, do not hold a bank charter, and do not have direct banking powers.

 

Company History

 

We are headquartered in Wayne, Pennsylvania. We were incorporated in May 2016 as a wholly-owned subsidiary of the Bank. In June 2016, Customers Bancorp acquired Higher One, Inc.’s Refund Management Disbursements Services business (the “Disbursement business”) and in December 2017 agreed to acquire the assets relating to the BlackboardPayTM financial aid credit balance disbursement solution from Blackboard Transact, Inc. On September 30, 2017, a portion of the operations, assets, and liabilities related to the BankMobile business were contributed by the Bank to us. On January 4, 2021, we became a publicly-listed company through our combination with Megalith Financial Acquisition Corporation, a Delaware special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses or assets.

1

 

Business Combination

 

On January 4, 2021, Megalith Financial Acquisition Corp. (“Megalith”), MFAC Merger Sub Inc., (“Merger Sub”) and BankMobile Technologies, Inc. (“BankMobile”) consummated the transactions contemplated by the Merger Agreement (as defined below) and completed a private sale of Megalith’s common stock in a PIPE Financing (collectively, the “Business Combination”), following the approval at the special meeting of the stockholders of Megalith held on December 21, 2020 (the “Special Meeting”). In connection with the closing of the Merger, the registrant changed its name from Megalith Financial Acquisition Corp. to BM Technologies, Inc.

 

In connection with the Business Combination, on August 5, 2020, Megalith entered into subscription agreements with investors (“PIPE Investors”) to purchase 1,927,058 shares of Class A Common Stock in a private placement for $10.38 per share, for aggregate gross proceeds of approximately $20,002,872 (the “PIPE Financing”). In connection with the PIPE Financing, pursuant to that certain Sponsor Share Letter between the Sponsor and Megalith, the Sponsor agreed to transfer an additional 178,496 aggregate shares to certain of the PIPE Investors.

 

The PIPE Financing closed on January 4, 2021, and the issuance of an aggregate 1,927,058 shares of Class A common stock occurred immediately prior to the Business Combination. The sale and issuance was made to accredited investors in reliance on Rule 506 of Regulation D under the Securities Act. No separate fees or commissions were paid to the placement agents other than payments made to such institutions for other services rendered in connection with the Megalith initial public offering and/or the Business Combination.

 

Summary of Principal Risk Factors

 

Investing in our securities involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 7 before making a decision to invest in our securities. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our securities would likely decline, and you may lose all or part of your investment. Set forth below is a summary of some of the principal risks we face:

 

We will be dependent on key individuals and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

 

We have a limited history operating as a separate entity and no history operating independently of Customers Bank, and our management team has limited experience managing us.

 

Our success depends in part on our ability to identify, recruit and retain skilled sales, management, and technical personnel.

 

Our business and future success may suffer if we are unable to continue to successfully implement our strategy.

 

We may not be able to grow adoption and retention rates.

 

Failure to manage future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.

 

Our growth strategy is based on assumptions, which may not be accurate; additionally, macro trends and key partner actions are not fully within our control.

 

Our partnership with T-Mobile may expose us to additional risks.

 

The private label agreement with respect to T-Mobile MONEY has been renewed for an additional term of three years and may only be renewed for an additional term of two years by T-Mobile; T-Mobile’s failure to renew after the second term could have a material adverse effect on us.

 

To date, on a historical pro forma basis, we have derived our revenue from a limited number of products and markets. Our efforts to expand market reach and product portfolio may not succeed and may reduce revenue growth.

 

The length and unpredictability of the sales cycle for signing potential higher education institutional clients and white label partners could delay new sales of our products and services, which could materially and adversely affect our business, financial condition, and results of operations.

 

Our operating results may suffer because of substantial and increasing competition in the industries in which we do business.

2

 

We depend on a strong brand and a failure to maintain and develop that brand in a cost-effective manner may hurt our ability to expand our customer base.

 

We may be liable to customers or lose customers if we provide poor service or if we experience systems or product failures, if any agreements that we maintain with colleges, universities and white label partners are terminated or if other performance triggers or other performance conditions are triggered.

 

Demand for our banking products and other services may decline if we do not continue to innovate or respond to evolving technological changes.

 

A change in the availability of student loans or financial aid, as well as budget constraints, could materially and adversely affect our financial performance by reducing demand for our services.

 

A change in regulations related to interchange or methods of payments could materially and adversely affect our financial performance.

 

Our business depends on steady enrollment in traditional (on-campus) and non-traditional (online) institutions of higher education. The current COVID situation is creating uncertainty with individuals applying for the benefit of higher education.

 

Global economic and other conditions may adversely affect trends in consumer spending and demand for our products and services, which could materially and adversely affect our business, financial condition, and results of operations.

 

Our disbursement business depends in part on the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions.

 

Breaches of security measures, unauthorized access to or disclosure of data relating to clients, fraudulent activity, and infrastructure failures could materially and adversely affect our reputation or harm our financial condition and results of operations.

 

If we are unable to protect or enforce our intellectual property rights, we may lose a competitive advantage and incur significant expenses.

 

We may be subject to claims that our services or solutions violate the patents or other intellectual property of others, which would be costly and time-consuming to defend. If our services and solutions are found to infringe the patents or other intellectual property rights of others, we may be required to change our business practices or pay significant costs and monetary penalties.

 

Termination of, or changes to, the MasterCard association registration could materially and adversely affect our business, financial condition, and results of operations.

 

We capitalize certain development costs related to internal software development; this capitalized asset could become impaired if there are changes in our business model that impact the expected use of that software.

 

We are subject to risks associated with our line of credit and the terms of our line of credit may contractually limit our ability to incur additional indebtedness. 

 

The fees that we will generate are subject to competitive pressures and are subject to change, which may materially and adversely affect our revenue and profitability.

 

We outsource critical operations, which will expose us to risks related to our third-party vendors.

 

Our ability to limit our liabilities by contract or through insurance may be ineffective or insufficient to cover future liabilities.

 

Failure to maintain an effective system of disclosure controls and internal control over financial reporting could affect our ability to produce timely and accurate financial statements or comply with applicable laws and regulations.

 

We are subject to various regulations related to higher education and disbursements.

 

Our bank partners are subject to extensive regulation as banks, which could limit or restrict our activities.

 

We will incur increased costs as a result of becoming a public company.

 

Our management team has limited experience in managing a public company and the business and financing activities of an organization of our size, which could impair our ability to comply with legal and regulatory requirements.

3

 

An active, liquid trading market for our common stock may not develop.

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our common stock, the price of our common stock could decline.

 

Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Provisions in our charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.

 

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

 

We may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.

 

Our Warrants become exercisable upon effectiveness of the Registration Statement to which this prospectus is a part, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.

 

Emerging Growth Company

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.

 

We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of Monocle’s initial public offering of units, the base offering of which closed on February 2019, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the prior June 30th; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

4

 

 

RISK FACTORS

 

Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this prospectus or any prospectus supplement are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business. The following discussion should be read in conjunction with the financial statements and notes to the financial statements included herein.

 

Risks Related to Our Business and Industry

 

We will be dependent on key individuals and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

 

Our success will depend on our ability to retain key individuals and other management personnel. Members of our senior management, including Ms. Luvleen Sidhu, our Chief Executive Officer, Robert Diegel, our Chief Operating Officer, Bob Ramsey, our Chief Financial Officer, and Andrew Crawford, our Chief Commercial Officer, have been integral in building our digital banking platform and developing and growing our disbursement business and white label banking program. In addition, several members of our senior management who had been employed by Higher One, Inc. prior to its acquisition by Customers Bancorp, have unique and valuable business experience, relationships and knowledge of the higher education disbursement business. We have entered into employment agreements with Ms. Luvleen Sidhu, Mr. Diegel and Mr. Crawford. However, the continued service of these individuals cannot be assured, and if we lose the services of any of these individuals, they would be difficult to replace, and Our business and development could be materially and adversely affected.

 

We have a limited history operating as a separate entity and no history operating independently of Customers Bank, and our management team has limited experience managing us.

 

We are a relatively new legal entity and have a limited operating history and no history operating independently of Customers Bank. An integral portion of our business was acquired by Customers Bancorp from Higher One in June 2016, and our business had been operating primarily as a division of Customers Bank, and since September 2017, a wholly-owned subsidiary of Customers Bank. Additionally, in response to regulatory requirements and market pressures, we recently made significant changes to our business, including the types and amounts of fees it charges to our customers, resulting in a material shift from our historical revenues. Although we entered into a Transition Services Agreement with Customers Bancorp, there may be additional risks and expenses that come from no longer operating as a division or wholly-owned subsidiary of a bank, such as increased compliance costs and licensing requirements. In addition, we have no history of managing cash, liquidity, financial obligations and resources, and other operational needs independent of Customers Bank. Because of our limited operating history, there are only limited historical results of operations for you to review and consider in evaluating our results of operations, and our prospects. We will be subject to the business risks and uncertainties associated with recently formed entities with limited operating history, including the risk that it will not achieve our strategic plan.

 

Our success depends in part on our ability to identify, recruit and retain skilled sales, management, and technical personnel.

 

Our future success depends upon our continued ability to identify, attract, hire, and retain highly qualified personnel, including skilled technical, management, product, technology, and sales and marketing personnel, all of whom are in high demand and are often subject to competing offers. Competition for qualified personnel in the technology industry is intense and there can be no assurance that we will be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or that we will be able to do so at salary, benefit and other compensation costs that are acceptable. A loss of a substantial number of qualified employees, or an inability to attract, retain, and motivate additional highly skilled employees required for the expansion of our business, could have a material adverse effect on our business and growth prospects.

 

5

 

 

Our business and future success may suffer if we are unable to continue to successfully implement our strategy.

 

Our future success will depend, in part, on our ability to generate revenues by providing financial transaction services to higher education institutions and their students directly and through our referral partners, including TouchNet, and our ability to implement and grow our white label banking and Workplace businesses, including the growth and implementation of T-Mobile MONEY and our Google partnership. The market for these services has only recently developed and our viability and profitability is therefore unproven. Our business will be materially and adversely affected if we are unable to develop and market products and services that achieve and maintain market acceptance. Outsourcing disbursement services may not become as widespread in the higher education industry as anticipated, and our products and services may not achieve continued commercial success. In addition, higher education institutional clients could discontinue using our services and return to in-house disbursement and payment solutions. If outsourcing disbursement services does not become widespread, or if institutional clients return to their prior methods of disbursement, our growth prospects, business, financial condition, and results of operations could be materially and adversely affected.

 

Our strategic growth plan depends, in part, on our ability to enter into new agreements with higher education institutions and new white label partners. These contracts can generally be terminated by the client at will and, therefore, there can be no assurance that we will be able to maintain these clients or maintain agreements with clients on terms and conditions acceptable to us. In addition, we may not be able to continue to establish new relationships with higher education institutional clients or new white label partners at our historical growth rate or at all. The termination of current client contracts or an inability to continue to attract new clients could have a material adverse effect on our business, financial condition, and results of operations.

 

Not only are establishing new client relationships and maintaining current ones critical to our business, they are also essential components of our strategy for maximizing student usage of our products and services and attracting new student customers as well as our graduate strategy. A reduction in enrollment, a failure to attract and maintain student customers, as well as any future demographic trends that reduce the number of higher education students could materially and adversely affect our capability for both revenue and cash generation and, as a result, could have a material adverse effect on our business, financial condition, and results of operations.

 

Our strategic growth plan relies on our ability to increase customers’ debit card spending and attract them to our new products. If we are unable to increase debit card usage through product education, marketing, promotions, and technological improvements, or if debit card usage drops as a result of trends, market perception, or new or competing products, our growth prospects, financial condition, and results of operations could be materially and adversely affected.

 

Finally, an integral part of our growth strategy is our ability to expand our disbursements expertise into new markets and product offerings, including white label banking partnerships and credit products. Our management team has only limited experience forming white label banking partnerships and running a credit products business. If we are unable to develop a credit card program or white label banking program, if we cannot gain market adoption of the credit products business or white label products due to competition, regulatory issues or constraints or otherwise, if large businesses pursue other alternatives to a white label banking partnership, or if the market for white label products and services is smaller than anticipated, our earnings and results of operations will be adversely affected and we may not grow at our projected rates.

 

We may not be able to grow adoption and retention rates.

 

Our growth strategy and business projections contemplate a significant increase in adoption and retention rates for our products. A significant component of our growth strategy is dependent on our ability to have students of our higher education institution clients, and customers of our white label banking services, including T-Mobile MONEY customers and employees with our workplace banking partners, select our services and become long-term users of our products. In particular, our growth strategy will depend on our ability to successfully cross-sell our core products and services to students after they leave college as well as growth in product usage from white label and workplace banking customers. We may not be successful in implementing this strategy because these students and customers may believe that our products and services are unnecessary or unattractive. In addition to a sensitivity to adoption rates, we are also sensitive to retention rates. As students leave college or customers leave a white label partner or change employers, we will face increasing competition from banks and other financial services providers. Our failure to attract and retain students, employees, and other customers could have a material adverse effect on our prospects, business, financial condition, and results of operations. Our projections and models assume a significant increase in both adoption and retention rates. If these rates do not increase as projected, our growth, revenues and results of operations may not meet our projections.

 

6

 

 

Failure to manage future growth effectively could have a material adverse effect on our business, financial condition, and results of operations.

 

The continued rapid expansion and development of our business may place a significant strain upon our management, administrative, operational and financial infrastructure. Our growth strategy contemplates further increasing the number of our higher education institutional clients and student banking customers. The rate at which we have been able to establish relationships with our customers in the past, however, may not be indicative of the rate at which we will be able to establish additional customer relationships in the future. Further, our growth contemplates an increase in white label banking, including significant growth of T-Mobile MONEY and the Google partnership, and new initiatives with additional white label partners.

 

Our success will depend, in part, upon the ability of our executive officers to manage growth effectively. Our ability to grow will also depend on our ability to successfully hire, train, supervise, and manage new employees, obtain financing for capital needs, expand our systems effectively, allocate human resources optimally, assure regulatory compliance, and address any regulatory issues, maintain clear lines of communication between our operational functions and our finance and accounting functions, and manage the pressures on management, administrative, operational and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations, or that we will be able to manage growth effectively or achieve further growth at all. If our business does not continue to grow, or if we fail to manage any future growth effectively, our business, financial condition, and results of operations could be materially and adversely affected.

 

Our growth strategy is based on assumptions, which may not be accurate; additionally, macro trends and key partner actions are not fully within our control.

 

Our growth strategy and business outlook are based on estimates our management believes to be reasonable, but there are many factors that may be outside of management’s control or may be difficult to predict. Some of these uncertainties include:

 

Our growth strategy is depending on adding additional white label partners. The timing, size, and partnership terms are not fully known today and could have a significant impact on our outlook and results of operations. Currently, T-Mobile is our only material white label partner.

 

Our current white label business is significantly dependent on our white label business with T-Mobile, and T-Mobile’s efforts to market the program and promote growth in accounts. If T-Mobile does not market the product as expected, or if there are changes in the economic relationship with T-Mobile or its investment appetite in the business, it could impact our financial projections and results of operations.

 

Workplace Banking is a new and relatively unproven strategy; our outlook is based on estimated penetration rates of large employers. Those employers may not market the product as effectively as projected or utilize our platform to the extent projected; other unknown factors in this new business, such as the rate of adoption, promotional costs, and costs of signing new employer partners, may cause results to materially differ from our estimates.

 

Macro industry trends may impact the amounts of student disbursements or the likelihood that students choose a BankMobile-serviced account. Department of Education regulation, industry competition, the rise of competing low-cost products, or other unknown shifts could impact the growth in the student business. The lasting impact of COVID-19 on the higher education industry is still largely unknown, but changes in enrollment at our client schools or changes in the amounts disbursed could negatively impact projections and results of operations.

 

Student revenue growth is dependent on our ability to charge the current level of fees, which could be negatively impacted by competition or changes in industry trends. Revenue growth is also dependent on interchange income rates, ATM visits, and other factors that may shift over time.

 

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Interest rates are unknown; higher rates of interest will increase the cost of our floating rate debt and may reduce the relative attractiveness of the deposit products we service for our partner banks. Interest rate changes may reduce the deposit servicing fee that is paid to us by our current partner bank or that we can charge to future partner banks.

 

Future bank partnerships will have individually negotiated terms; the economics of those partnerships may differ from the current arrangement. We have a commitment from our current bank partner through the end of 2022, but we may not be able to secure similar terms after that time.

 

Our partnership with T-Mobile may expose us to additional risks.

 

In February 2017, we entered into a significant strategic partnership with T-Mobile for the development and roll-out of a mobile banking platform, referred to as T-Mobile MONEY, which was publicly announced in the third quarter of 2018. The T-Mobile MONEY program was extended to the Sprint customers acquired by T-Mobile in August 2020. T-Mobile MONEY represents the most significant white label initiative undertaken by us to date. However, T-Mobile MONEY may not be as successful as currently expected for a variety of reasons, including customer adoption of the product, the level of marketing by T-Mobile, general economic conditions, competition and product alternatives and other factors. If T-Mobile MONEY does not reach the anticipated activity levels and deposit balances relating to T-Mobile MONEY customers are lower than expected, it could adversely affect our business, financial condition, and results of operations.

 

We have and will in the future create new products in connection with the T-Mobile MONEY offering, many of which will be complex, with possible conditional requirements, options, and variations, along with changes to terms that necessitate additional disclosures or actions to comply with legal and regulatory requirements. The offerings through T-Mobile MONEY may be marketed similar to retail products, with a variety of ancillary offerings, such as rewards programs, further increasing the inherent compliance risk. While we will have final authority on the design of products, some components of the product life cycle may be managed by T-Mobile, such as promotions of the product by T-Mobile. Since we will not have direct control over all aspects of the product life cycle, the relationship involves significant third party relationship management requirements, indicating a significant level of inherent compliance risk.

 

Demographically, the T-Mobile MONEY product seeks to serve a broader and more diverse population than traditional banking. The white label financial product market is very competitive, requiring products, channels, and services to be recalibrated often to remain attractive to potential customers and white label partners. As such, the level and maturity of new product approval processes, change management and the robustness of strategic planning must be sophisticated enough to respond to competitive demands with timely and meaningful evaluation of compliance risk.

 

Our agreements with white-label partners, such as T-Mobile, may expose us to additional compliance risk. For example, employees of the white label partner may be incentivized to promote the white label product under a discretionary compensation program to promote financial products to customers, thus increasing exposure to compliance risk. White-label partnerships may also expose us to issues in connection with privacy-related regulations based on the partner receiving certain data regarding the accountholders and their use of the program, which may also be used for marketing purposes. Opt-out and notice may be required in connection with these disclosures.

 

SMS text messaging will be used extensively in carrying out service-related communications and possibly marketing-related communications as well. Since express consent is required for service-related communications to wireless subscribers, it will be critical to ensure that the language in disclosures and the account agreement indicate this consent. Moreover, the consumer must have the right to revoke all of these communications to their wireless numbers. Failure to comply with the Telephone Consumer Protection Act of 1991, enforced by the Federal Communications Commission (“FCC”), could result in significant fines to T-Mobile and/or to us.

 

8

 

 

The private label agreement with respect to T-Mobile MONEY has been renewed for an additional term of three years and may only be renewed for an additional term of two years by T-Mobile; T-Mobile’s failure to renew after the second term could have a material adverse effect on us.

 

The private label agreement between Customers Bancorp, Inc. and T-Mobile that governs T-Mobile MONEY has an initial term of three years. Recently, the term was extended an additional three years to February 2023. The renewal term may be renewed for an additional term of two years at the option of T-Mobile. We will have the option to terminate at each renewal of the agreement. T-Mobile has no obligation to renew the agreement. T-Mobile’s failure to renew the agreement may have a material adverse effect on our business. Further, T-Mobile may renew the agreement on terms that are different or less favorable to us.

 

To date, on a historical pro forma basis, we have derived our revenue from a limited number of products and markets. Our efforts to expand market reach and product portfolio may not succeed and may reduce revenue growth.

 

While we will offer a digital banking platform and disbursements services to our customers, the lending products and services historically offered to non-enrolled students and other customers through our business have been limited. Many competitors offer a more diverse set of products and services to customers and operate in additional markets. While we intend to eventually broaden the scope of products offered to customers with our banking partners through our Banking as a Service (“BaaS”) strategy and mobile banking product offerings, there can be no assurance that these efforts will be successful. Our failure to broaden the scope of the products we offer to potential customers may inhibit the growth of repeat business from customers and harm our operating results of operation. There also can be no guarantee that we will be successful with respect to our expansion through our mobile banking platform with new partners and into new markets where we currently do not operate, which could also inhibit the growth of our business and results of operations.

 

The length and unpredictability of the sales cycle for signing potential higher education institutional clients and white label partners could delay new sales of our products and services, which could materially and adversely affect our business, financial condition, and results of operations.

 

The sales cycle between our business’ initial contact with potential higher education institutional clients, white label partners, and large employers and the signing of a contract with that client, partner or employer can be lengthy, as the individual agreements need to be negotiated and partnerships customized. As a result of this lengthy sales cycle, our ability to forecast accurately the timing of revenues associated with new sales is limited. The sales cycle will vary widely due to significant uncertainties, over which we have little or no control, including:

 

the individual decision-making processes of each higher education institutional client, white label partner or large employer, which typically include extensive and lengthy evaluations and will require spending substantial time, effort and money educating each client and partner about the value of our products and services;

 

the budgetary constraints and priorities and budget cycle of each higher education institutional client or partner;

 

the reluctance of higher education staff, white label partners or large employers to change or modify existing processes and procedures; and

 

the amount of customization and negotiation required for any given collaboration.

 

In addition, there is significant upfront time and expense required to develop relationships and there is no guarantee that a potential client will sign a contract with our business even after substantial time, effort and money has been spent on the potential client. A delay in our ability or a failure to enter into new contracts with potential higher education institutional clients could materially and adversely affect our business, financial condition, and results of operations.

 

9

 

 

Our operating results may suffer because of substantial and increasing competition in the industries in which we do business.

 

The market for our products and services is competitive, continually evolving and, in some cases, subject to rapid technological change. Our disbursement services compete against all forms of payment, including paper-based transactions (principally cash and checks), electronic transactions such as wire transfers and Automated Clearing House (“ACH”) payments and other electronic forms of payment, including card-based payment systems. Many competitors, including Blackboard, Heartland Payment Systems and Nelnet, Inc., provide payment software, products and services that compete with those us and our bank partners offer. In addition, the banking products and services offered on our platform will also compete with banks that focus on the higher education market, including U.S. Bancorp and Wells Fargo & Company. Future competitors may begin to focus on higher education institutions in a manner similar to us. We also face significant competition for our white label banking products and workplace banking services from other BaaS providers and digital consumer banking platforms such as Chime and Green Dot, as well as from traditional consumer banks. Many of our competitors will have substantially greater financial and other resources than we have, may in the future offer a wider range of products and services and may use advertising and marketing strategies that achieve broader brand recognition or acceptance. In addition, competitors may develop new products, services or technologies that render our products, services or technologies obsolete or less marketable. If we are unable to compete effectively against our competitors, our business, financial condition, and results of operations will be materially and adversely affected.

 

We depend on a strong brand and a failure to maintain and develop that brand in a cost-effective manner may hurt our ability to expand our customer base.

 

Maintaining and developing the “BankMobile,” “BankMobile’s Student Banking” and “BankMobile’s Disbursements” brands will be critical to expanding and maintaining our base of higher education institution clients, students and other accountholders. We believe the importance of brand recognition will increase as competition in our market further intensifies. Maintaining and developing our brand will depend largely on our ability to continue to provide high-quality products and services at cost effective and competitive prices, as well as after-sale customer service. While we intend to continue investing in our brand, no assurance can be given as to the success of these investments. If we fail to maintain and enhance our brand, incur excessive expenses in this effort or our reputation is otherwise tainted, including by association with the wider financial services industry or because of data security breaches or negative press, we may be unable to maintain loyalty among our existing customers or attract new customers, which could materially and adversely affect our business, financial condition, and results of operations.

 

We may be liable to customers or lose customers if we provide poor service or if we experience systems or product failures, if any agreements that we maintain with colleges, universities and white label partners are terminated or if other performance triggers or other performance conditions are triggered.

 

We are required to fulfill our contractual obligations with respect to our products and services and our high quality service to meet the expectations of customers. Failure to meet these expectations or fulfill our contractual obligations could cause us to lose customers and bear additional liability.

 

Because of the large amount of data we collect and manage, hardware failures and errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain significant inaccuracies. For example, errors in our processing systems could delay disbursements or cause disbursements to be made in the wrong amounts or to the wrong person. Our systems may also experience service interruptions as a result of undetected errors or defects in software, fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism, accident or other similar reason, in which case we may experience delays in returning to full service, especially with regard to data centers and customer service call centers. If problems such as these occur, our customers may seek compensation, withhold payments, seek full or partial refunds, terminate their agreements or initiate litigation or other dispute resolution procedures. In addition, we may be subject to claims made by third parties also affected by any of these problems.

 

In addition, our agreements with colleges, universities, white label partners and large employers contain and will contain certain termination rights, performance triggers and other conditions which, if exercised or triggered, may result in penalties and/or early termination of such agreements, which could cause us to be liable to customers or lose customers, thereby materially impacting our operations.

 

10

 

 

Demand for our banking products and other services may decline if we do not continue to innovate or respond to evolving technological changes.

 

We operate in a dynamic industry characterized by rapidly evolving technology and frequent product introductions. We rely on proprietary technology to pass on cost savings to customers and make our platform convenient for customers to access. In addition, we may increasingly rely on technological innovation as we introduce new products, expand current products into new markets, and operate a full-service digital banking platform. The process of developing new technologies and products is complex, and if we are unable to successfully innovate and continue to deliver a superior customer experience, customers’ demand for our banking products and other services may decrease and our growth and operations may be harmed.

 

A change in the availability of student loans or financial aid, as well as budget constraints, could materially and adversely affect our financial performance by reducing demand for our services.

 

The higher education industry depends heavily upon the ability of students to obtain student loans and financial aid. As part of our contracts with higher education institutional clients that use our disbursements services, students’ financial aid and other refunds are sent to us for disbursement. The fees that we will charge most of our clients will be based on the number of financial aid disbursements made to students. In addition, our relationships with higher education institutional clients will provide us with a market for BankMobile Vibe accounts, from which we anticipate we will derive a significant proportion of our revenues. If the availability of student loans and financial aid were to decrease, the number of enrolled students could decrease and our addressable market for student disbursement services would shrink. Future legislative and executive branch efforts to reduce the U.S. federal budget deficit or worsening economic conditions may require the government to severely curtail its financial aid spending, which could materially and adversely affect our business, financial condition, and results of operations. Changes in the availability and cost of student loans could also affect enrollment, in turn affecting our business, financial condition and results of operations.

 

A change in regulations related to interchange or methods of payments could materially and adversely affect our financial performance.

 

Future federal, state or network regulations could be changed in a way that could negatively affect our business. Additionally, with the advent of creative money movement systems that bypass card networks, a large future proportionate share of “spend” could leverage a less income producing method. In turn, these events could significantly reduce our interchange income from which we currently expect to derive a significant proportion of our revenues, which could adversely affect our financial condition and results of operations.

 

Our business depends on steady enrollment in traditional (on-campus) and non-traditional (online) institutions of higher education. The current COVID situation is creating uncertainty with individuals applying for the benefit of higher education.

 

The COVID-19 pandemic and associated response has put the higher education industry into a period of unprecedented disruption. Many physical campuses are closed or only partially available. Students are displaced and learning at a distance. There is uncertainty as to whether schools will open their physical campuses in some parts of the country, and for many, the upcoming semester may be postponed or cancelled. It is uncertain how quickly the U.S. education system, the economy and human behavior returns to business-as-usual, if at all. A sustained disruption in the higher education industry could affect the demand for disbursements and the number of higher education accounts and the use of such accounts, which could adversely affect our revenues, financial condition and results of operations.

 

11

 

 

Global economic and other conditions may adversely affect trends in consumer spending and demand for our products and services, which could materially and adversely affect our business, financial condition, and results of operations.

 

A decrease in consumer confidence due to the weakening of the global economy, or disruptions to on-campus schooling or consumer spending resulting from the COVID-19 pandemic, may cause decreased spending among our student and graduate customers and may decrease the use of account and card products and services. For example, interchange and card revenue for the three months ended September 30, 2020 decreased $2.5 million as compared to the three months ended September 30, 2019, and decreased $5.0 million for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily resulting from lower interchange rates given shifts in consumer purchase categories, merchants, and larger average transaction sizes, mainly due to COVID-19. Increases in college tuition alongside stagnation or reduction in available financial aid may also restrict spending among college students and the size of disbursements, reducing the use of our account and card products and services and the demand for our disbursement services. Weakening economic conditions, such as decreases in consumer spending, increased consumer credit defaults and bankruptcies, inflation and rising unemployment, may also adversely affect the demand for and use of our white label products and workplace banking platform and associated products, which could materially and adversely affect our business, financial condition, and results of operations.

 

Our disbursement business depends in part on the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions.

 

In general, the U.S. federal government distributes financial aid to students through higher education institutions as intermediaries. Following the receipt of financial aid funds and the payment of tuition and other expenses, higher education institutions have typically processed refund disbursements to students by preparing and distributing paper checks. Our disbursements service provides higher education institutional clients with an electronic system for improving the administrative efficiency of this refund disbursement process. If the government, through legislation or regulatory action, restructured the existing financial aid regime in such a way that reduced or eliminated the intermediary role played by higher education financial institutions or limited or regulated the role played by service providers such as us, our business, results of operations and prospects for future growth could be materially and adversely affected.

 

Breaches of security measures, unauthorized access to or disclosure of data relating to clients, fraudulent activity, and infrastructure failures could materially and adversely affect our reputation or harm our financial condition and results of operations.

 

We will have access to certain “personally identifiable” information of customers, including student contact information, identification numbers and the amount of credit balances, which customers expect will be maintained confidentially. It is possible that hackers, customers or employees acting unlawfully or contrary to our policies or other individuals, could improperly access our or our vendors’ systems and obtain or disclose data about customers. Further, because customer data may also be collected, stored, or processed by third-party vendors, it is possible that these vendors could intentionally or negligently disclose data about our clients or customers. Data breaches could also occur at our bank partners, higher institution clients, white label partners and large employer partners, which could negatively affect our reputation, relationships with end users, and expose us and our clients and customers. Any such breaches or loss of data could negatively affect our business, growth prospects, financial condition, and results of operations.

 

We will rely to a large extent on sophisticated information technology systems, databases, and infrastructure, and will take reasonable steps to protect them. However, due to their size, complexity, content and integration with or reliance on third-party systems they are potentially vulnerable to breakdown, malicious intrusion, natural disaster and random attack, all of which pose a risk that sensitive data may be exposed to unauthorized persons or to the public. A breach of our information systems could lead to fraudulent activity, including with respect to our cards, such as identity theft, losses on the part of banking customers, additional security costs, negative publicity and damage to our reputation and brand. In addition, our customers could be subject to scams that may result in the release of sufficient information concerning the customer or our accounts to allow others unauthorized access to our accounts or our systems (e.g., “phishing” and “smishing”). Claims for compensatory or other damages may be brought against us as a result of a breach of our systems or fraudulent activity. If we are unsuccessful in defending against any resulting claims, we may be forced to pay damages, which could materially and adversely affect our profitability.

 

12

 

 

In addition, a significant incident of fraud or an increase in fraud levels generally involving our products, such as our cards, could result in reputational damage, which could reduce the use of our products and services. Such incidents of fraud could also lead to regulatory intervention, which could increase our compliance costs. Accordingly, account data breaches and related fraudulent activity could have a material adverse effect on our future growth prospects, business, financial condition, and results of operations.

 

If we are unable to protect or enforce our intellectual property rights, we may lose a competitive advantage and incur significant expenses.

 

Our business will depend on certain registered and unregistered intellectual property rights and proprietary information. We will rely on a combination of patent, copyright, trademark, service mark and trade secret laws, as well as nondisclosure agreements and technical measures (such as the password protection and encryption of our data and systems) to protect our technology and intellectual property rights, including our proprietary software. Existing laws will afford only limited protection for our intellectual property rights. Intellectual property rights or registrations granted to us may provide an inadequate competitive advantage or be too narrow to protect our products and services. Similarly, there is no guarantee that our pending applications for intellectual property protection will result in registrations or issued patents or sufficiently protect our rights. The protections outlined above may not be sufficient to prevent unauthorized use, misappropriation or disclosure of our intellectual property or technology and may not prevent competitors from copying, infringing, or misappropriating our products and services. We cannot be certain that others will not independently develop, design around or otherwise acquire equivalent or superior technology or intellectual property rights. If we are unable to adequately protect our intellectual property rights, our business and growth prospects could be materially and adversely affected.

 

One or more of the issued patents or pending patent applications relating to us may be categorized as so-called “business method” patents. The general validity of software patents and business method patents has been challenged in a number of jurisdictions, including the United States. Our patents may become less valuable or unenforceable if software or business methods are found to be a non-patentable subject matter or if additional requirements are imposed that our patents do not meet.

 

We also rely on numerous marks, trademarks and service marks, including “BankMobile,” “BankMobile Vibe” and “BankMobile Disbursements.” If the validity of these marks were challenged, our brand may be damaged or we may be required to face considerable expense defending or changing our marks.

 

We may incorporate open source software into our products. While the terms of many open source software licenses have not been interpreted by U.S. or foreign courts, such licenses could be construed in a manner that imposes conditions or restrictions on our ability to offer our products and services. In such event, we could be required to make the source code for certain of our proprietary software available to third parties, which may include competitors, to seek licenses from third-parties, to re-engineer, or to discontinue the offering of our products or services, or we could become subject to other consequences, any of which could adversely affect our business, revenues and operating expenses.

 

We may be subject to claims that our services or solutions violate the patents or other intellectual property of others, which would be costly and time-consuming to defend. If our services and solutions are found to infringe the patents or other intellectual property rights of others, we may be required to change our business practices or pay significant costs and monetary penalties.

 

The services and solutions that we provide may infringe upon the patents or other intellectual property rights of others. The industry in which we operate is characterized by frequent claims of patent or other intellectual property infringement. We cannot be sure that our services and solutions, or the products of others that we use or offer to our clients, do not and will not infringe upon the patents or other intellectual property rights of third parties, and we may have infringement claims asserted against us or our clients. If others claim that we have infringed upon their patents or other intellectual property rights, we could be liable for significant damages and incur significant legal fees and expenses. In addition, we have agreed to indemnify many of our clients against claims that the services and solutions provided by us infringe upon the proprietary rights of others. In some instances, the potential amount of these indemnities may be greater than the revenues received from the client. Regardless of merit, any such claims could be time-consuming, result in costly litigation, be resolved on unfavorable terms, damage our reputation or require us to enter into royalty or licensing arrangements. Such results could limit our ability to provide a solution or service to clients and have a material adverse effect on our business, results of operations or financial condition.

 

13

 

 

Termination of, or changes to, the MasterCard association registration could materially and adversely affect our business, financial condition, and results of operations.

 

The student checking account debit cards issued in connection with our disbursement business and the consumer checking account debit cards issued in connection with white label programs and workplace programs are subject to MasterCard association rules that could subject us to a variety of fines or penalties that may be levied by MasterCard for acts or omissions by us or businesses that work with us. The termination of the card association registration held by us or any changes in card association or other network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost of doing business or limit our ability to provide products and services and could materially and adversely affect our business, financial condition, and results of operations.

 

We capitalize certain development costs related to internal software development; this capitalized asset could become impaired if there are changes in our business model that impact the expected use of that software.

 

At September 30, 2020 our net carrying value of developed software was $45.4 million, which made up 53% of our consolidated assets. This amount reflects the capitalized cost, net of accumulated depreciation, of software that we developed internally as well as the remaining value of the acquired Higher One Disbursement business developed software. Changes in technology, our internal processes, or our business strategies or those of our partners could impact our ability to realize the value of our developed software, which could result in a write-down of the asset.

 

We are subject to risks associated with our line of credit and the terms of our line of credit may contractually limit our ability to incur additional indebtedness. 

 

We have a line of credit with Customers Bank to borrow a principal amount of up to $10 million, subject to collateral requirements. The line of credit imposes certain conditions that may limit our operations. Under the line of credit, we are generally restricted from incurring additional debt other than from Customers Bank. In addition, we are prohibited from making dividends or distributions to shareholders or acquiring any company. We are also required to apply 50% of any new capital raised by us toward reducing the principal of the Loan. These restrictions may restrict our operations or strategic options and adversely affect our business, financial conditions or prospects.

 

Availability of borrowings under the line of credit is linked to the valuation of the collateral pursuant to a borrowing base mechanism. As such, declines in the fair market value of our investments which are collateral to the line of credit may reduce availability under our line of credit.

 

Our line of credit matures January 4, 2022. After the loan’s maturity, there can be no guarantee that we will be able to obtain financing on similar terms or at all.

 

The fees that we will generate are subject to competitive pressures and are subject to change, which may materially and adversely affect our revenue and profitability.

 

We will generate revenue from, among other sources, agreements with bank partners to share the banking services fees charged to our accountholders, interchange fees related to purchases made through our debit cards, deposit servicing fees from bank partners, and fees charged to our higher education institution clients.

 

In an increasingly price-conscious and competitive market, it is possible that to maintain our competitive position with higher education institutions, white label partners, and large employers, we may have to decrease the fees charged for our services. Similarly, in order to maintain our competitive position with partner banks, we may need to reduce deposit servicing fees we charge to partner banks. In order to maintain our competitive position with accountholders, we and our bank partners may need to reduce banking service fees charged to accountholders.

 

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MasterCard could reduce the interchange rates, which it unilaterally sets and adjusts from time to time, which would negatively affect the interchange revenue that we share with our partner banks. In addition, accountholders may modify their spending habits and increase their use of ACH relative to their use of debit cards, as ACH payments are generally free, which could reduce the interchange fees remitted to us. If our fees are reduced as described above, our business, results of operations and prospects for future growth could be materially and adversely affected.

 

We have agreements in place with our current banking partner, Customers Bank, including a Transition Services Agreement, Deposit Processing Services Agreement and a License Agreement. The Transition Services Agreement will expire January 4, 2022, and the Deposit Processing Services Agreement will expire on December 31, 2022, and will automatically renew for three year terms unless either party elects not to renew. If we are unable to enter into deposit servicing agreements with new partner banks on favorable terms or at all, it could affect our revenues, results of operations and financial condition. In addition, upon the expiration of the Deposit Processing Services Agreement, the amount of interchange revenues we may earn will be dependent on entering into agreements with qualifying partner banks. See “— Our bank partners are subject to extensive regulation as banks, which could limit or restrict our activities.

 

We outsource critical operations, which will expose us to risks related to our third-party vendors.

 

We have entered into contracts with third-party vendors to provide critical services, technology and software in our operations. These outsourcing partners include, among others: FIS, which provides back-end account and transaction data processing as well as web and application hosting services in secure data centers; MasterCard, which provides the payment network for our cards, as well as for certain other transactions; and Ubiquity Global Services, which provides customer care services.

 

Accordingly, we depend, in part, on the services, technology and software of these and other third-party service providers. In the event that these service providers fail to maintain adequate levels of support, do not provide high quality service, discontinue their lines of business, terminate our contractual arrangements or cease or reduce operations, we may be required to pursue new third-party relationships, which could materially disrupt our operations and could divert management’s time and resources. We may also be unable to establish comparable new third-party relationships on as favorable terms or at all, which could materially and adversely affect our business, financial condition, and results of operations.

 

Even if we are able to obtain replacement technology, software or services there may be a disruption or delay in our ability to operate our business or to provide products and services, and the replacement technology, software or services might be more expensive than those we have currently. The process of transitioning services and data from one provider to another can be complicated, time consuming and may lead to significant disruptions in our business. In addition, any failure by third-party service providers to maintain adequate internal controls could negatively affect our internal control over financial reporting, which could impact the preparation and quality of our financial statements.

 

Our ability to limit our liabilities by contract or through insurance may be ineffective or insufficient to cover future liabilities.

 

We will attempt to limit, by contract, our liability for damages arising from negligence, errors, mistakes or security breaches. Contractual limitations on liability, however, may not be enforceable or may otherwise not provide sufficient protection to us from liability for damages. We will maintain liability insurance coverage, including coverage for errors and omissions. It is possible, however, that claims could exceed the amount of applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay market acceptance of our products and services, any of which could materially and adversely affect our reputation and business.

 

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Failure to maintain an effective system of disclosure controls and internal control over financial reporting could affect our ability to produce timely and accurate financial statements or comply with applicable laws and regulations.

 

As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal controls over financial reporting. Although management will be required to disclose changes made in internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of internal controls over financial reporting pursuant to Section 404 until the later of (i) the year following our first annual report required to be filed with the SEC or (ii) the date we do not qualify as an emerging growth company. This assessment will need to include disclosure of any material weaknesses identified by management in internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of internal control over financial reporting, provided that the independent registered public accounting firm will not be required to attest to the effectiveness of internal control over financial reporting until the first annual report required to be filed with the Securities and Exchange Commission, or SEC, following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date that we do not qualify as an emerging growth company, as defined in the JOBS Act.

 

For the three year period ended December 31, 2019, our management and our independent registered public accounting firm identified a material weakness in control over financial reporting, which we have subsequently remediated. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. This material weakness related to the processing of a single vendor invoice that resulted in a material adjustment to the 2019 financial statements. Management corrected the misstatement in our financial statements and has remediated the control deficiency that caused the error by performing an extensive review of the contractual amounts due from this significant vendor and by implementing an effective review control over the completeness and accuracy of accounts receivable.

 

If we identify future material weaknesses in our internal control over financial reporting or fail to maintain effective internal controls and procedures or meet the demands that will be placed upon us as a public company, including the applicable requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act, as applicable to us, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weaknesses, our reputation, financial condition and operating results could suffer.

 

We are subject to various regulations related to higher education and disbursements.

 

Third-Party Servicer.

 

Because we provide services to some higher education institutions that involve handling federal student financial aid funds, we are considered a “third-party servicer” under Title IV, which governs the administration of federal student financial aid programs. Those regulations require a third-party servicer annually to submit a compliance audit conducted by outside independent auditors that cover the servicer’s Title IV activities. Each year we are and will be required to submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the United States Department of Education (“ED”), which includes a report by an independent audit firm. This yearly compliance audit submission to ED provides comfort to our higher education institution clients that we are in compliance with applicable third-party servicer regulations. We also provide and will provide this compliance audit report to clients upon request to help them fulfill their compliance audit obligations as Title IV participating institutions.

 

Under ED’s regulations, a third-party servicer that contracts with a Title IV institution acts in the nature of a fiduciary in the administration of Title IV programs. Among other requirements, the regulations provide that a third-party servicer is jointly and severally liable with its client institution for any liability to ED arising out of the servicer’s violation of Title IV or its implementing regulations, which could subject us to material fines related to acts or omissions of entities beyond our control. ED is also empowered to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil penalties on the violating servicer. We may enter into “Tier 1” arrangements with educational institutions, which are subject to more stringent regulations than certain other “Tier 2” or “non-covered” arrangements.

 

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Additionally, on behalf of our higher education institution clients, we are required to comply with ED’s cash management regulations regarding payment of financial aid credit balances to students and providing bank accounts to students that may be used for receiving such payments. In the event ED concludes that we have violated Title IV or its implementing regulations and should be subject to one or more sanctions, our business and results of operations could be materially and adversely affected. There is limited enforcement and interpretive history of Title IV regulations.

 

Final rules relating to Title IV Cash Management were published in the Federal Register on October 30, 2015. The Final Rules include, among others, provisions related to (i) restrictions on the ability of higher education institutions and third-party servicers like us to market financial products to students including sending unsolicited debit cards to students, (ii) prohibitions on the assessment of certain types of account fees on student accountholders, and (iii) requirements related to ATM access for student accountholders that became effective as of July 1, 2016. These regulations also require institutions to: offer students additional choices regarding how to receive their student aid funds (including prohibiting an institution from requiring students to open an account into which their credit balances must be deposited); provide a list of account options from which a student may choose to receive credit balance funds electronically, where each option is presented in a neutral manner and the student’s preexisting bank account is listed as the first and most prominent option with no account preselected; ensure electronic payments made to a student’s preexisting account are initiated in a manner as timely as, and no more onerous than, payments made to an account with the institution); include additional restrictions on the institution’s use of personally identifiable information; require that the terms of the contractual arrangements between institutions and schools be publicly disclosed; and require that schools establish and evaluate the contractual arrangements with institutions in light of the best financial interests of students. These regulations increase our compliance costs and could negatively affect our results of operations.

 

FERPA and GLBA.

 

Our higher education institution clients are subject to the Family Educational Rights and Privacy Act of 1995 (“FERPA”), which provides, with certain exceptions, that an educational institution that receives any federal funding under a program administered by ED may not have a policy or practice of disclosing education records or “personally identifiable information” from education records, other than directory information, to third parties without the student’s or parent’s written consent. Our higher education institution clients disclose to us certain non-directory information concerning their students, including contact information, student identification numbers and the amount of students’ credit balances. We believe that our higher education institution clients are and will be able to disclose this information without the students’ or their parents’ consent pursuant to one or more exceptions under FERPA. However, if ED asserts that we do not fall into one of these exceptions or if future changes to legislation or regulations require student consent before our higher education institution clients can disclose this information, a sizable number of students may cease using our products and services, which could materially and adversely affect our business, financial condition, and results of operations.

 

Additionally, as we are indirectly subject to FERPA, we cannot permit the transfer of any personally identifiable information to another party other than in a manner in which a higher education institution may disclose it. In the event that we re-disclose student information in violation of this requirement, FERPA requires our clients to suspend our access to any such information for a period of five years. Any such suspension could have a material adverse effect on our business, financial condition, and results of operations.

 

We also are and will be subject to certain other federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or GLBA.

 

State Laws.

 

We may also become subject to similar state laws and regulations, including those that restrict higher education institutions from disclosing certain personally identifiable information of students. State attorneys general and other enforcement agencies may monitor our compliance with state and federal laws and regulations that affect our business, including those pertaining to higher education and banking, and conduct investigations of our business that are time consuming and expensive and could result in fines and penalties that have a material adverse effect on our business, financial condition, and results of operations.

 

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Additionally, individual state legislatures may propose and enact new laws that will restrict or otherwise affect our ability to offer our products and services, which could have a material adverse effect on our business, financial condition, and results of operations.

 

In addition, regulations related to higher education change frequently, and new or additional regulations in the future may increase compliance costs, limit our business and prospects and adversely affect our results of operations.

 

Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our businesses may increase costs, which could materially and adversely affect our business, financial condition, and results of operations. If we do not devote sufficient resources to additional compliance personnel and systems commensurate with our anticipated growth, we could be subject to fines, regulatory scrutiny or adverse public reception to our products and services.

 

Our bank partners are subject to extensive regulation as banks, which could limit or restrict our activities.

 

Banking is a highly regulated industry and our bank partners will be subject to examination, supervision, and comprehensive regulation by various regulatory agencies. As a service provider, we will be required to comply with many of these regulations on behalf of our bank partners, which will be costly and restrict certain of our activities, including loans and interest rates charged and interest rates paid on deposits.

 

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our bank partners, and our own business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks, our cost of compliance could adversely affect our ability to operate profitably.

 

The Dodd-Frank Act Wall Street Reform and Consumer Protection Act, enacted in July 2010, which we refer to as the Dodd-Frank Act, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. The “Durbin Amendment” of the Dodd-Frank Act limits the amount of interchange fees chargeable by a bank with over $10 billion in assets. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect our revenues, business and operations in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on our bank partners, and by extension, a negative impact on us. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our bank partners and on our own business, financial condition, and results of operations. Customers Bank, our current banking partner, is now over $10 billion in assets and subject to the Durbin Amendment, which could have an adverse effect on our business. Pursuant to the Deposit Processing Services Agreement between us and Customers Bank, Customers Bank will reimburse us for a portion of the interchange fee lost as a result of the effects of Customers Bank being subject to the Durbin Amendment. However, we may not be able to find another banking partner that is not subject to the Durbin Amendment in future or at all, or on terms that are attractive to us, and having a banking partner that is subject to the Durbin Amendment could reduce interchange revenue and negatively affect our prospects and results of operations.

 

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Risk Related to our Common Stock

 

We will incur increased costs as a result of becoming a public company.

 

As a public company, we have incurred and will continue to incur significant legal, accounting, insurance, and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC. The expenses incurred by public companies for reporting and corporate governance purposes generally have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees, or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, and other regulatory action and potentially civil litigation.

 

Our management team has limited experience in managing a public company and the business and financing activities of an organization of our size, which could impair our ability to comply with legal and regulatory requirements.

 

Our management team has had limited public company management experience or responsibilities, and has limited experience managing a business and related financing activities of our size. This could impair our ability to comply with various legal and regulatory requirements, such as public company compliance and filing required reports and other information required on a timely basis. It may be expensive to develop, implement and maintain programs and policies in an effective and timely manner that adequately respond to increased legal, regulatory compliance and reporting obligations imposed by such laws and regulations, and we may not have the resources to do so. Any failure to comply with such laws and regulations could lead to the imposition of fines and penalties and further result in the deterioration of our business.

An active, liquid trading market for our common stock may not develop.

 

There has not been a public sustained market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the further development of a trading market on NYSE American or otherwise in the future or how active and liquid that market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock. Among other things, in the absence of a liquid public trading market:

 

you may not be able to liquidate your investment in shares of common stock;

 

you may not be able to resell your shares of common stock at or above the price attributed to them in the business combination;

 

the market price of shares of common stock may experience significant price volatility; and

 

there may be less efficiency in carrying out your purchase and sale orders.

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock could be negatively affected. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our common stock could decline. If one or more of these analysts cease to cover our common stock, we could lose visibility in the market for our stock, which in turn could cause our common stock price to decline.

 

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Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Certain shares of our common stock are freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers, and other affiliates, as that term is defined in the Securities Act, which are restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Certain of our stockholders and members of our management have rights, subject to certain conditions, to require us to file registration statements covering shares of our common stock or to include shares in registration statements that we may file for ourselves or other stockholders. Any such sales, including sales of a substantial number of shares or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We may also issue shares of our common stock or securities convertible into our common stock from time to time in connection with financings, acquisitions, investments, or otherwise. Any such issuance could result in ownership dilution to you as a stockholder and cause the trading price of our common stock to decline.

 

Provisions in our charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.

 

Our amended and restated certificate of incorporation and bylaws contain provisions to limit the ability of others to acquire control of the Company or cause us to engage in change-of-control transactions, including, among other things:

 

provisions that authorize our board of directors, without action by our stockholders, to authorize by resolution the issuance of shares of preferred stock and to establish the number of shares to be included in such series, along with the preferential rights determined by our board of directors; provided that, our board of directors may also, subject to the rights of the holders of preferred stock, authorize shares of preferred stock to be increased or decreased by the approval of the board of directors and the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the corporation;

 

provisions that impose advance notice requirements, minimum shareholding periods and ownership thresholds, and other requirements and limitations on the ability of stockholders to propose matters for consideration at stockholder meetings; and

 

a staggered board whereby our directors are divided into three classes, with each class subject to retirement and reelection once every three years on a rotating basis.

 

These provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our business in a tender offer or similar transaction. With our staggered board of directors, at least two annual meetings of stockholders will generally be required in order to effect a change in a majority of our directors. Our staggered board of directors can discourage proxy contests for the election of directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to gain control of our board of directors in a relatively short period of time.

 

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

 

Our amended and restated certificate of incorporation will require, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.

 

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This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

 

We may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.

 

We will have the ability to redeem outstanding warrants (excluding any placement warrants held by our Sponsor or its permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific trading day) of our common stock equals or exceeds $24.00 per share for any 20 trading days within a 30 trading-day period ending on the third business day prior to the date we send proper notice of such redemption, provided that on the date it gives notice of redemption and during the entire period thereafter until the time it redeems the warrants, we have an effective registration statement under the Securities Act covering the shares of our common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. If and when the warrants become redeemable by us, it may exercise its redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force a warrant holder: (i) to exercise your warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, will be substantially less than the market value of your warrants.

 

Our Warrants become exercisable upon effectiveness of the Registration Statement to which this prospectus is a part, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.

 

Outstanding warrants to purchase an aggregate of 24,195,778 shares of our common stock will become exercisable upon effectiveness of the Registration Statement to which this prospectus is a part. These warrants consist of 17,250,000 warrants originally included in the units issued in Megalith’s IPO and 6,945,778 private placement warrants. Each warrant entitles its holder to purchase one share of our common stock at an exercise price of $11.50 per share and will generally expire at 5:00 p.m., New York time, on January 4, 2026 or earlier upon redemption of our common stock. To the extent warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to our then existing stockholders and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could depress the market price of our common stock.

 

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USE OF PROCEEDS

 

All of the shares of common stock and Warrants offered by the Selling Stockholders will be sold by them for their respective accounts. We will not receive any of the proceeds from these sales.

 

The Selling Stockholders will pay any underwriting fees, discounts, selling commissions, stock transfer taxes and certain legal expenses incurred by such Selling Shareholders in disposing of their shares of common stock and Warrants, and we will bear all other costs, fees and expenses incurred in effecting the registration of such securities covered by this prospectus, including, without limitation, all registration and filing fees, NYSE American listing fees and fees and expenses of our counsel and our independent registered public accountants.

 

We will receive proceeds from the exercise of the Warrants for cash, but not from the sale of the shares of common stock issuable upon such exercise. We will use any such proceeds for working capital and general corporate purposes.

 

DETERMINATION OF OFFERING PRICE

 

Our Common Stock and Warrants are listed on NYSE American Market under the symbols “BMTX” and “BMTX.W,” respectively. The offering price of the shares of common stock underlying the Warrants offered hereby is determined by reference to the exercise price of the Warrants of $11.50 per share. The actual offering price by the Selling Stockholders of the shares of Common Stock and the Warrants covered by this prospectus will be determined by prevailing market prices at the time of sale, by private transactions negotiated by the Selling Stockholders or as otherwise described in the section entitled “Plan of Distribution.”

 

MARKET INFORMATION FOR COMMON STOCK AND DIVIDEND POLICY

 

Market Information

 

Our common stock and Warrants are currently listed on the NYSE American under the symbols “BMTX” and “BMTX.W,” respectively. Prior to the consummation of the Business Combination, our common stock and our Warrants were listed on the NYSE American under the symbols “MFAC,” and “MFAC.W,” respectively. As of February 10, 2021, following the completion of the Business Combination, there were 502 holders of record of our common stock and 10 holders of record of our Warrants.

 

Dividend Policy

 

We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends prior to the completion of its initial business combination. The payment of cash dividends by the Company in the future will be dependent upon the Company’s revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of the board of directors of the Company. Further, the Company’s term loan agreement with Customers Bank prohibits the Company from issuing any dividends or making any distributions to shareholders.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

The following unaudited pro forma consolidated financial information is prepared in accordance with Article 11 of Regulation S-X to give effect to the acquisition of BankMobile by Megalith. The unaudited pro forma condensed combined financial information presents the pro forma effects of the reverse recapitalization (as described below) between Megalith and BankMobile and the PIPE investment.

 

The following pro forma condensed combined balance sheet as of September 30, 2020 assumes that the merger occurred on September 30, 2020 and reflects all Megalith public shares redeemed subsequent to September 30, 2020. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 presents the pro forma effect of the Business Combination as if it had occurred on January 1, 2019 and the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2020 presents the pro forma effect of the business combination as if it had occurred on January 1, 2019 and reflects all Megalith public shares redeemed subsequent to September 30, 2020.

 

The pro forma combined financial statements do not necessarily reflect what BM Technologies financial condition or results of operations would have been had the merger occurred on the dates indicated. The pro forma combined financial information also may not be useful in predicting the future financial condition and results of operations of the post-combination entity. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

The assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma consolidated financial statements are described in the accompanying notes, which should be read in conjunction with, the following:

 

Megalith’s unaudited interim consolidated financial statements and related notes as of and for the nine months ended September 30, 2020 included elsewhere in this prospectus. Megalith’s historical financial information used for the pro forma reflects 543,390 Megalith public shares redeemed subsequent to September 30, 2020.

 

BankMobile’s unaudited interim financial statements and related notes as of and for the nine months ended September 30, 2020 included elsewhere in this prospectus.

 

Megalith’s audited financial statements and related notes for the year ended December 31, 2019 included elsewhere in this prospectus.

 

BankMobile’s audited financial statements and related notes for the year ended December 31, 2019 included elsewhere in this prospectus.

 

Megalith’s Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in the final proxy statement/prospectus relating to the Business Combination filed by us on December 11, 2020.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.

 

The merger between BankMobile and Megalith was accounted for as a reverse recapitalization for which BankMobile was determined to be the accounting acquirer based on the following factors:

 

  Customers held a voting interest of more than 50% in BM Technologies;

 

  BankMobile’s former management make up the new leadership team of BM Technologies; and

 

  BankMobile is the larger entity by revenue and net income (loss) and will largely drive the core operations of the combined entity.

 

In addition, two officers and one independent director of Customers Bancorp and Customers Bank are shareholders of Customers Bancorp and also own 559,787 of Megalith Founder shares or 4.7% of the equity share capitalization of BM Technologies. Their 4.7% ownership interest when combined with Customers Bancorp’s ownership interest in BM Technologies increased Customers Bancorp’s ownership interest to more than 50% at closing. Other factors were considered but they would not change the preponderance of factors indicating that BankMobile was the accounting acquirer.

 

23

 

 

The merger between BankMobile and Megalith was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. GAAP. Under this method of accounting, Megalith was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the reverse recapitalization was treated as the equivalent of BankMobile issuing stock for the net assets of Megalith, accompanied by a recapitalization. The net assets of Megalith is stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the reverse recapitalization are those of BankMobile.

 

Description of the Merger

 

Pursuant to the Merger Agreement, Megalith acquired all of the issued and outstanding equity interests of BankMobile in exchange for cash and equity. The initial purchase price was based on an enterprise value of BankMobile and consisted of $23.1 million of cash transferred to Customers Bank (subject to adjustments as defined in the Merger Agreement), and the remaining value was in the form of shares of BM Technologies Class A common stock.

 

The following summarizes the consideration issued at closing of the reverse recapitalization at a $10.38 share price:

 

Total Consideration (in thousands, except shares)  Amounts   Shares 
Share consideration - BankMobile  $64,617    6,225,135 
Cash consideration - BankMobile   23,125     
Total Merger Consideration  $87,742    6,225,135 

 

The equity share capitalization of BM Technologies at close is as follows:

 

Total capitalization (in thousands, except shares)  Amounts   Shares 
BM Technologies shares issued to Customers Bancorp’s shareholders and BM Technologies employees  $64,617    6,225,135 
Megalith public shareholders   27,669    2,651,614 
Megalith Founders shares   7,472    719,802 
Megalith Founders shares in PIPE investment   2,003    192,955 
Megalith shares issued in PIPE investment   19,853    1,912,599 
Megalith shares issued for deal related costs   2,606    198,197 
Total Merger Consideration  $124,220    11,900,302 

 

Megalith Investor Holdings, LLC also relinquished all Class B shares for 0.7 million Class A shares and additionally contributed capital to the Private Investment in Public Equity (“PIPE”) investment. BM Technologies has not included the impact of warrants vesting within its earnings per share calculations, as they were not dilutive at September 30, 2020. Excludes 300,000 Founders shares subject to vesting and forfeiture unless our stock price reaches $15 per share for 20 out of 30 days.

  

Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information.

 

24

 

 

Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2020

 

(amounts in thousands)  Historical
BankMobile
September 30,
2020
   Historical Megalith
September 30,
2020
   Pro Forma Adjustments   Notes  Pro Forma Combined Post Merger
September 30,
2020
 
ASSETS                   
Cash and cash equivalents  $16,776   $11   $11,727   A  $28,514 
Accounts receivable, net   8,382               8,382 
Receivable from Customers Bank   2,038               2,038 
Prepaid expenses and other current assets   353    75           428 
Total current assets   27,549    86    11,727       39,362 
Marketable securities held in Trust Account (1)       27,669    (27,669)  E    
Premises and equipment, net   436                 436 
Developed software, net   45,351               45,351 
Goodwill   5,259               5,259 
Other intangibles, net   5,150               5,150 
Other assets   1,690               1,690 
Total assets  $85,435   $27,755   $(15,942)     $97,248 
LIABILITIES AND SHAREHOLDERS’ EQUITY                       
Liabilities:                       
Accounts payable and accrued liabilities  $15,298   $982   $      $16,280 
Borrowings from Customers Bank   40,000        (8,834)  H   31,166 
Current portion of operating lease liabilities   701               701 
Deferred revenue   2,449               2,449 
Total current liabilities   58,448    982    (8,834)      50,596 
Operating lease liabilities   596               596 
Other liabilities   120    6,771    (6,771)  P   120 
Total liabilities  $59,164   $7,753   $(15,605)     $51,312 
                        
Commitments and contingencies:                       
Class A common stock subject to possible redemption (1)  $   $15,002   $(15,002)  K  $ 
Shareholders’ equity:                      
Class A common stock           1   B   1 
Class B common stock       1    (1)  L    
Additional paid in capital   62,209    2,655    20,323   C   85,187 
Retained earnings (accumulated deficit)   (35,938)   2,344    (5,658)  D   (39,252)
Total shareholders’ equity   26,271    5,000    14,665       45,936 
Total liabilities and shareholders’ equity  $85,435   $27,755   $(15,942)     $97,248 

 

(1)Reflects 543,390 Megalith public shares redeemed, for a total amount of $5.6 million, subsequent to September 30, 2020.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

25

 

 

Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2019

 

(amounts in thousands, except share and per share data)  Historical BankMobile December 31,
2019
   Historical Megalith December 31,
2019
   Pro Forma Adjustments   Notes  Pro Forma Combined Post-Merger December 31,
2019
 
                    
Operating revenues:                   
Interchange and card revenue  $28,124   $   $      $28,124 
Servicing fees from Customers Bank   27,425               27,425 
Account fees   10,937               10,937 
University fees   4,964               4,964 
Other   857               857 
Total revenues   72,307               72,307 
Operating expenses:                       
Technology, communication and processing   27,310               27,310 
Salaries and employee benefits   22,758               22,758 
Professional services   10,646    60           10,706 
Professional services with related party       200           200 
Provision for operating losses   9,367               9,367 
Occupancy   1,791               1,791 
Occupancy with related party       24            24 
Customer related supplies   1,538               1,538 
Advertising and promotion   1,354               1,354 
Merger and acquisition related expenses   100    159    (259)  AA    
Other   4,744    356           5,100 
Total expenses   79,608    799    (259)      80,148 
Loss from operations   (7,301)   (799)   259       (7,841)
Non-operating income (expenses):                       
Interest income on marketable securities held in Trust Account       3,951    (3,951)  BB    
Interest expense   (535)              (535)
(Loss) income before income tax expense   (7,836)   3,152    (3,692)      (8,376)
Income tax expense   27    788    (788)  CC   27 
Net (loss) income  $(7,863)  $2,364   $(2,904)     $(8,403)
                        
Weighted average shares outstanding of Class A common stock (1)   100    16,928,889            11,900,302 
Basic and diluted net income per share, Class A  $(78,630)  $0.18           $(0.71)
                        
Weighted average shares outstanding of Class B common stock   N/A    4,232,222             
Basic and diluted net income per share, Class B   N/A   $(0.14)           N/A 

 

(1)Pro forma assumptions reflect 543,390 Megalith public shares redeemed subsequent to September 30, 2020.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

26

 

 

Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 2020

 

(amounts in thousands, except share and per share data)  Historical BankMobile September 30,
2020
   Historical Megalith
September 30,
2020
   Pro Forma Adjustments   Notes  Pro Forma Combined Post-Merger September 30,
2020
 
                    
Operating revenues:                       
Interchange and card revenue  $16,813   $   $      $16,813 
Interchange fees from Customers Bank   3,240               3,240 
Servicing fees from Customers Bank   15,604               15,604 
Account fees   8,517               8,517 
University fees   4,028               4,028 
Other   1,326               1,326 
Total revenues   49,528               49,528 
Operating expenses:                       
Technology, communication and processing   20,586               20,586 
Salaries and employee benefits   19,796               19,796 
Professional services   7,286    45           7,331 
Professional services with related party       146           146 
Provision for operating losses   3,326               3,326 
Occupancy   1,240               1,240 
Occupancy with related party       18            18 
Customer related supplies   717               717 
Advertising and promotion   693               693 
Merger and acquisition related expenses   452    1,012    (1,464)  AAA    
Other   2,668    232           2,900 
Total expenses   56,764    1,453    (1,464)      56,753 
Loss from operations   (7,236)   (1,453)   1,464       (7,225)
Non-operating income (expenses):                       
Interest income on marketable securities held in Trust Account       1,404    (1,404)  BBB    
Interest expense   (1,146)              (1,146)
(Loss) income before income tax expense   (8,382)   (49)   60       (8,371)
Income tax expense   21    263    (263)  CCC   21 
Net (loss) income  $(8,403)  $(312)  $323      $(8,392)
                        
Weighted average shares outstanding of Class A common stock (1)   100    10,566,869            11,900,302 
Basic and diluted net income per share, Class A  $(84,030)  $0.09           $(0.71)
                        
Weighted average shares outstanding of Class B common stock   N/A    4,232,222             
Basic and diluted net income per share, Class B   N/A   $(0.31)           N/A 

 

(1)Pro forma assumptions reflect 543,390 Megalith public shares redeemed subsequent to September 30, 2020.

 

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

27

 

 

Notes to Unaudited Pro Forma Condensed Combined Financial Information

 

Note 1 - Basis of Presentation

 

The merger between a subsidiary of Megalith and BankMobile was accounted for as a Reverse Recapitalization in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Under this method of accounting, Megalith was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of BankMobile issuing stock for the net assets of Megalith, accompanied by a recapitalization. The net assets of Megalith are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization are those of BankMobile.

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2020 assumes that the merger occurred on September 30, 2020. The unaudited pro forma condensed combined statement of operations for the year ended December, 31, 2019 presents pro forma effect of the merger as if it had been completed on January 1, 2019 and the nine months ended September 30, 2020 presents the pro forma effect of the business combination as if it had occurred on January 1, 2019. These periods are presented on the basis of BankMobile being the accounting acquirer and reflect the redemption of 543,390 Megalith public shares subsequent to September 30, 2020.

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2020 was prepared using, and should be read in conjunction with, the following:

 

  Megalith’s unaudited balance sheet as of September 30, 2020 and the related notes for the period ended September 30, 2020, which are included in this prospectus; and

 

  BankMobile’s unaudited balance sheet as of September 30, 2020 and the related notes for the period ended September 30, 2020, which are included in this prospectus.

 

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 and nine months ended September 30, 2020 were prepared using, and should be read in conjunction with, the following:

 

  Megalith’s audited statement of operations for the year ended December 31, 2019 and the related notes, which are included in this prospectus;

 

  Megalith’s unaudited statement of operations for the three and nine months ended September 30, 2020 and the related notes, which is included in this prospectus;

 

  BankMobile’s audited statement of operations for the year ended December 31, 2019 and the related notes, which are included in this prospectus; and

 

  BankMobile’s unaudited statement of operations for the three and nine months ended September 30, 2020 and the related notes, which are included this prospectus.

 

Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

 

The unaudited pro forma condensed combined financial information also does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the merger.

 

The pro forma adjustments reflecting the completion of the merger are based on certain currently available information and certain assumptions and methodologies that BM Technologies believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and has been evaluated.

 

28

 

 

Note 2 - Adjustments to Unaudited Pro Forma Condensed Combined Financial Information

 

The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are directly attributable to the merger, factually supportable, and with respect to the statement of operations, are expected to have a continuing impact on the results of BM Technologies. The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change.

 

There were no intercompany balances or transactions between Megalith and BankMobile as of the dates and for the periods of these unaudited pro forma condensed combined financial statements. The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had the companies filed combined income tax returns for the periods presented. The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statement of operations are based upon the number of Megalith’s shares outstanding, assuming the merger occurred on January 1, 2019 for the year and nine months ended December 31, 2019 and September 30, 2020, respectively.

 

The following adjustments have been reflected in the unaudited pro forma condensed combined financial information.

 

Adjustments to the pro forma condensed combined balance sheet as of September 30, 2020 (amounts in thousands, except share and per share amounts)

 

  A. Represents the pro forma adjustments to the cash and cash equivalents balance to reflect the following:

 

Investments held in Megalith Trust Account  $27,669   E
Transaction costs   (2,293)  F
Funds from PIPE investment   20,003   G
Debt repayment   (8,834)  H
Cash consideration to Customers Bank, net of estimated transaction costs and deferred underwriters’ fees   (23,125)  I
Reflects cash portion of settlement of $6.8 million of deferred underwriters’ fees   (1,693)  P
   $11,727   A

 

  B. Represents the pro forma adjustments to the Class A common stock to reflect the following:

 

Funds from PIPE investment  $   G
Megalith Class A subject to redemption to permanent equity      K
Recapitalization of BankMobile equity and issuance of BM Technologies Class A common stock to Customers Bancorp’s shareholders   1   M
   $1   B

 

  C. Represents the pro forma adjustments to the additional paid in capital balance to reflect the following:

 

Funds from PIPE investment  $20,003   G
Cash consideration to Customers Bank   (23,125)  I
Megalith Class A subject to redemption to permanent equity   15,002   K
Relinquished Megalith Class B Shares   1   L
Recapitalization of BankMobile equity and issuance of BM Technologies Class A common stock to Customers Bancorp’s shareholders   (1)  M
Reclassification of Megalith’s historical retained earnings   2,344   N
Accelerated vesting of existing restricted stock units and stock options granted   1,021   O
Reflects renegotiation of settlement of $6.8 million of deferred underwriter fees   2,472   P
Reflects equity portion of settlement of $6.8 million of deferred underwriters’ fees   2,606   P
   $20,323   C

 

29

 

 

  D. Represents the pro forma adjustments to the accumulated deficit balance to reflect the following:

 

Estimated transaction costs  $(2,293)  F
Reclassification of Megalith’s historical retained earnings   (2,344)  N
Accelerated vesting of existing restricted stock units and stock options granted   (1,021)  O
   $(5,658)  D

 

  E. Reflects the reclassification of $27.7 million of marketable securities held in the Megalith Trust Account to cash and cash equivalents that became available for transaction consideration, transaction expenses, redemption of public shares, and operating activities of BM Technologies following the merger.
  F. Represents $2.3 million of transaction costs in consummating the merger.
  G. Represents proceeds of $20.0 million from issuance of 2.1 million shares in the PIPE investment and 0.7 million from initial Founders investment.
  H. Represents partial repayment of borrowing from Customers Bank of $8.8 million.
  I. Represents cash consideration paid to Customers Bank, net of estimated transaction costs and deferred underwriters’ fees, pursuant to the terms of the Merger Agreement of $23.1 million.
  J. Reserved.
  K. Reflects the reclassification of approximately $15.0 million of Megalith Class A common stock subject to possible redemption to permanent equity at a September 30, 2020 redemption price of $10.10.
  L. Reflects the relinquishment of Megalith Class B common stock. In connection with the merger, it is expected that all shares of Megalith Class B common stock are relinquished, along with all warrants.
  M. Represents recapitalization of BankMobile equity and issuance of 6.2 million of BM Technologies Class A common stock to Customers Bancorp’s shareholders as consideration for the Reverse Recapitalization.
  N. Reflects the reclassification of Megalith’s historical retained earnings.
  O. Reflects the amount of compensation cost related to the acceleration of the vesting for certain existing restricted stock units and stock options previously granted to certain of BankMobile employees.
  P. Reflects the settlement of $6.8 million of deferred underwriters’ fees.

 

Adjustments to the unaudited pro forma condensed statements of operations for the year ended December 31, 2019

 

AA.Reflects elimination of transaction-related costs incurred and recorded by Megalith and BankMobile.
BB.Reflects the elimination of interest income on the Trust Account.
CC.Reflects adjustments to income tax expenses as a result of the tax impact on the pro forma adjustments, which eliminates the tax expense associated with interest income on the Trust Account.

 

Adjustments to the unaudited pro forma condensed statements of operations for the nine months ended September 30, 2020

 

AAA. Reflects elimination of transaction-related costs incurred and recorded by Megalith and BankMobile.
BBB. Reflects the elimination of interest income on the Trust Account.
CCC. Reflects adjustments to income tax expenses as a result of the tax impact on the pro forma adjustments, which eliminates the tax expense associated with interest income on the Trust Account.

 

Note 3 - Loss per Share

 

Represents the net loss per share calculated using the historical weighted average shares outstanding and the issuance of additional shares in connection with the merger, assuming the shares were outstanding since January 1, 2019 for the year and nine months ended December 31, 2019 and September 30, 2020, respectively. As the merger is being reflected as if it had occurred at the beginning of the periods presented, the calculation of the weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable related to the merger have been outstanding for the entire periods presented and reflects the redemption of 543,390 Megalith public shares subsequent to September 30, 2020. For shares redeemed, this calculation retroactively adjusted to eliminate such shares for the entire periods.

 

(in thousands, except share and per share data)  For the Nine Months Ended September 30,
2020
   For the Year Ended
December 31,
2019
 
Pro forma net loss  $(8,392)  $(8,403)
Weighted average shares outstanding of Class A common stock (1)   11,900,302    11,900,302 
Net loss per share - basic and diluted  $(0.71)  $(0.71)

 

(1)Reflects 543,390 Megalith public shares redeemed subsequent to September 30, 2020.

 

30

 

 

Selected Historical Consolidated Financial Information of Megalith

 

(in thousands, except share and per share data)  For the Years Ended
December 31,
   For the Period from November 13, 2017 (Inception) through December 31,   For the Nine Months Ended
September 30,
 
Statement of Operations  2019   2018   2017   2020   2019 
Revenue  $   $   $   $   $ 
Total expenses   799    720    2    1,453    629 
Loss from operations   (799)   (720)   (2)   (1,453)   (629)
Non-operating income                         
Interest income on marketable securities held in Trust Account   3,951    1,232        1,404    3,063 
(Loss) income before income tax expense   3,152    512    (2)   (49)   2,434 
Income tax provision   788    217        263    610 
Net loss  $2,364   $295   $(2)  $(312)  $1,824 
Weighted average Class A common stock outstanding   16,928,889    16,571,111        10,566,869    16,928,889 
Basic and diluted net loss per share, Class A  $0.18   $0.05   $   $0.09   $0.14 
Weighted average Class B common stock outstanding   4,232,222    4,290,286    3,750,000    4,232,222    4,232,222 
Basic and diluted net loss per share, Class B  $(0.14)  $(0.12)  $   $(0.31)  $(0.11)
                          
Statement of Cash Flows                         
Net cash provided by (used in) operating activities  $(1,464)  $(358)  $(26)  $(1,537)  $(1,166)
Net cash provided by (used in) investing activities   754    (170,982)       143,637    659 
Net cash provided by (used in) financing activities       172,532    27    (142,572)    

 

   As of
September 30,
   As of December 31, 
Balance Sheet  2020   2019   2018 
Total assets  $33,264   $175,931   $173,479 
Total liabilities   7,753    7,536    7,447 
Total shareholders’ equity and Class A common shares subject to possible redemptions   25,511    168,395    166,032 

 

31

 

 

Selected Historical Consolidated Financial Information of BankMobile

 

(in thousands, except share and per share data)  For the Years Ended
December 31,
   For the Nine Months Ended
September 30,
 
Statement of Operations  2019   2018   2017   2020   2019 
Revenue  $72,307   $57,516   $12,542   $49,528   $54,706 
Total expenses   79,608    72,091    17,601    56,764    60,298 
Loss from operations   (7,301)   (14,575)   (5,059)   (7,236)   (5,592)
Non-operating expense                         
Interest expense   535            1,146    132 
(Loss) income before income tax expense   (7,836)   (14,575)   (5,059)   (8,382)   (5,724)
Income tax provision   27    28    10    21    21 
Net loss  $(7,863)  $(14,603)  $(5,069)  $(8,403)  $(5,745)
Weighted average common stock outstanding   100    100    100    100    100 
Basic and diluted net loss per share  $(78,630)  $(146,030)  $(50,690)  $(84,030)  $(57,450)
                          
Statement of Cash Flows                         
Net cash provided by (used in) operating activities  $1,952   $(11,960)  $(20,085)  $11,668   $1,772 
Net cash provided by (used in) investing activities   (8,055)   (19,384)   (4,348)   (3,152)   (6,949)
Net cash provided by (used in) financing activities   11,289    24,327    34,850    (326)   11,553 

 

   As of
September 30,
   As of December 31, 
Balance Sheet  2020   2019   2018 
Total assets  $85,435   $93,316   $79,357 
Total liabilities   59,164    58,686    8,670 
Total shareholders’ equity   26,271    34,630    70,687 

 

32

 

 

Summary Unaudited Pro Forma Condensed Financial Statements

 

    For the Year Ended
December 31,
2019
    For the Nine Months Ended
September 30,
 
(in thousands, except share and per share data)
Statement of Operations
  Pro Forma Combined     Pro Forma Combined  
Revenue   $ 72,307     $ 49,528  
Total expenses     80,148       56,753  
Loss from operations     (7,841 )     (7,225 )
Non-operating expense                
Interest expense     535       1,146  
(Loss) income before income tax expense     (8,376 )     (8,371 )
Income tax provision     27       21  
Net loss   $ (8,403 )   $ (8,392 )
Weighted average Class A common stock outstanding (1)     11,900,302       11,900,302  
Basic and diluted net loss per share   $ (0.71 )   $ (0.71 )

 

   As of
September 30,
2020
 
Balance Sheet  Pro Forma Combined 
Total assets (1)  $97,248 
Total liabilities   51,312 
Total shareholders’ equity (1)   45,936 

 

(1)Reflects 543,390 Megalith public shares redeemed subsequent to September 30, 2020.

 

33

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The discussion and analysis should also be read together with our unaudited pro forma financial information for the year ended December 31, 2019 and the nine months ended September 30, 2020. See the section entitled “Unaudited Pro Forma Condensed Financial Information.” This discussion contains forward-looking statements based upon our current expectations, estimates and projections that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements due to, among other considerations, the matters discussed under “Risk Factors” and “Forward-Looking Statements.”

 

Unless the context otherwise requires, for purposes of this Management’s Discussion and Analysis, references to the “Company,” “we,” “us” and “our” refer to the business and operations of BankMobile Technologies, Inc. and its subsidiaries and affiliates prior to the Business Combination and to BM Technologies, Inc. and its consolidated subsidiaries following the consummation of the Business Combination.

 

Overview

 

We are a financial technology company that facilitates deposits and banking services between a customer and an FDIC insured partner bank. We provide 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. Our Banking-as-a-Service business model leverages partners’ existing customer bases to achieve high volume, low cost customer acquisition in our Disbursement, White Label, and Workplace Banking businesses.

 

We are not a bank, do not hold a bank charter, and do not provide banking services. We are subject to the regulations of the Department of Education, due to our Disbursement business, and are periodically examined by them.

 

New Accounting Pronouncements

 

For information about the impact that recently adopted or issued accounting guidance will have on us, refer to NOTE 2—SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION in our unaudited interim financial statements as of and for the three and nine months ended September 30, 2020, and NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to our audited financial statements.

 

Critical Accounting Policies

 

We have adopted various accounting policies that govern the application of U.S. GAAP and that are consistent with general practices within the financial technology industry in the preparation of its financial statements. Our significant accounting policies are described in NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to BMT’s 2019 audited financial statements and updated in NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to BMT’s unaudited interim financial statements as of and for the three and nine months ended September 30, 2020 and 2019.

 

Certain accounting policies involve significant judgments 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. The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Due to the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of our assets.

 

The critical accounting policies that are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments are the accounting policies for the following: revenue recognition, collaborative arrangements, provision for operating losses, income taxes, goodwill and other intangibles, and developed software.

 

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Revenue Recognition

 

We recognize revenues when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

Our interchange and card revenue primarily relates to debit card fees earned from interchange and ATM fees. Fees are earned for the services based on a fee schedule and are recognized whenever a debit card we service is processed through a card payment network and are recognized concurrent with the processing of the debit transaction. Beginning on July 1, 2020, Customers Bank became subject to the Federal Reserve’s regulation limits on interchange fees for banks over $10 billion in assets. Customers Bank has agreed to pay us the difference between the regulated and unregulated interchange rates, which is recognized as interchange fees from Customers Bank in the same period as the processing of the debit transaction.

 

Our servicing fees primarily relate to the servicing of deposit accounts for partner banks, currently Customers Bank, in exchange for servicing fees. Servicing fees and terms are established by negotiated contractual agreements with Customers Bank which may differ in terms with future partner banks. In 2018, the servicing fee was calculated based on the daily average deposit balance multiplied by a rate determined using a fund transfer pricing methodology that considered the expected tenure of the deposit funding. Beginning in 2019, a fixed rate approach was applied to the daily average deposit balances. In all periods, servicing fees are recognized monthly based on average daily deposit balances.

 

Our account fees relate to service charges on our serviced deposit accounts for transaction-based account maintenance services, which include services such as monthly maintenance fees for accounts that do not meet minimum deposit balance criteria, wire transfer fees, card replacements, and cash deposit fees at certain merchants. Account maintenance fees, which relate primarily to monthly maintenance and account analysis fees, are earned on a monthly basis representing the period over which we satisfy our performance obligation. Transaction based fees are earned for services based on a fee schedule and are recognized at the time the transaction is executed. The revenues recognized at a point in time primarily consist of contracts with no specified terms, but which may be terminated at any time by the customer without penalty.

 

Our university fees represent revenues from higher education clients and are generated from fees charged for disbursement services provided. We facilitate the distribution of financial aid and other refunds to students through our platform, while simultaneously enhancing the ability of the higher education institution to comply with federal regulations applicable to financial aid transactions. For these services, higher education institutions are charged annual subscription fees and/or per transaction fees for certain transactions. We recognize annual subscription fees from higher education clients ratably over the period of service and transaction fees are recognized when the transaction is completed.

 

We report our revenues on either a gross or net basis based on our assessment of whether we act as a principal or an agent in the transaction. To the extent we act as a principal in the transaction, we report revenues on a gross basis. In concluding whether we act as a principal or an agent in a transaction, we evaluate whether we obtain control of the good or service prior to the good or service being transferred to the customer. Debit card interchange income is reported on a net basis, while all other revenues are recorded on a gross basis. Additionally, certain debit card interchange income, related to our white label partnership, is recorded in accordance with our collaborative arrangement policy on a net basis.

 

Collaborative Arrangements

 

Collaborative arrangements are contractual agreements with third parties that involve a joint operating activity where both we and the collaborating white label 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 arrangements often require the sharing of revenue and expense. Our expenses incurred pursuant to these arrangements are reported net of any payments due to or amounts due from our white label partner, which are recognized at the time the white label partner becomes obligated to pay.

 

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Provision for Operating Losses

 

The provision for operating losses represents our payments for losses resulting from fraud or theft-based transactions that have generally been disputed by our serviced deposit account holders and Regulation E card claim losses incurred by us, as well as estimated liability for such losses where such disputes have not been resolved as of the end of the reporting period. Fraud or theft-based related losses are recognized when realized or incurred and have no unresolved dispute balances as of December 31, 2019 and 2018, while an estimate based on historical cash advance rates and loss experience from settled disputes is made for Regulation E card claim losses. For the nine months ended September 30, 2020, Reg E claims made up approximately 85% of the losses. The remaining fraud or theft-based losses are mostly Check Fraud and ACH/Wire Fraud.

 

The main source of Reg 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. BMT may decline the claim within 10 days or advance the funds to the account holder if the investigation is still pending. BMT 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. BMT’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 not yet disputed. The estimated liability for disputes not yet disputed is created by applying historical rates of transactions disputed after the reporting period end date and applying that 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. 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.

 

Fraud or theft -based related losses are recognized when realized or incurred and has no unresolved dispute balances as of September 30, 2020 and December 31, 2019. 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.

 

Income Taxes

 

We account 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. We determine 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. A portion of the deferred tax assets represents hypothetical tax attributes (net operating losses and tax credits), which are generated as a result of stand-alone operations but which do not legally exist as the losses and credits were used in the filed consolidated tax returns of Customers Bancorp to offset income of other entities. These particular deferred tax assets would be derecognized if we were to leave the consolidated tax return filing group.

 

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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Goodwill and Other Intangible Assets

 

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. 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 and non-compete agreements, are amortized over their estimated useful lives and are subject to impairment testing.

 

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. If there is a goodwill impairment charge, it will be the amount by which our carrying amount exceeds our fair value; however, the loss recognized should not exceed the total amount of goodwill. We apply a qualitative assessment to determine if the one-step quantitative impairment test is necessary.

 

Intangible assets subject to amortization are reviewed for impairment, 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.

 

Developed Software

 

We capitalize certain internal and external costs incurred to develop internal-use software during the application development stage. We also capitalize 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, we begin amortizing these costs on a straight-line basis over the internal-use software’s estimated useful life, which range from three to five years.

 

The Disbursement business developed software is related to the Disbursement business services to colleges and universities facilitating payments to students. The Disbursement business developed software acquired from Higher One was recorded at the amount determined by a third party valuation expert 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 Disbursement business developed software is 10 years.

 

Results of Operations (Three and Nine Months ended September 30, 2020 and 2019)

 

The following discussion of our results of operations should be read in conjunction with our 2019 audited financial statements, including the accompanying notes. Please refer to Critical Accounting Policies in this Management’s Discussion and Analysis and NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to our 2019 audited financial statements for information concerning certain significant accounting policies and estimates applied in determining reported results of operations.

 

The following table sets forth the condensed statements of operations for the three and nine months ended September 30, 2020 and 2019:

 

   Three Months Ended
September 30,
       %   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change   2020   2019   Change   Change 
Operating revenues  $18,338   $17,900   $438    2.4%  $49,528   $54,706   $(5,178)   (9.5)%
Operating expenses   17,728    20,725    (2,997)   (14.5)%   56,764    60,298    (3,534)   (5.9)%
Interest expense   353    132    221    167.4%   1,146    132    1,014    768.2%
Income (loss) before income tax expense   257    (2,957)   3,214    (108.7)%   (8,382)   (5,724)   (2,658)   46.4%
Income tax expense   7    7        %   21    21        %
Net income (loss)  $250   $(2,964)  $3,214    (108.4)%  $(8,403)  $(5,745)  $(2,658)   46.3%

 

37

 

 

We reported a net income of $0.3 million and net loss of $8.4 million for the three and nine months ended September 30, 2020, respectively, compared to net loss of $3.0 million and $5.7 million for the three and nine months ended September 30, 2019, respectively. Factors contributing to the change in net income (loss) available to common shareholders for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 were as follows:

 

Operating revenues

 

The $0.4 million increase in operating revenues for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 resulted primarily from increases of $0.7 million in interchange and card revenue (including the interchange fees from Customers Bank), $0.7 million in other revenues and $0.1 million in university fees. These increases were partially offset by decreases of $0.8 million in servicing fees from Customers Bank, and $0.3 million in account fees. Revenues for the three months ended September 30, 2020 included approximately $2.9 million of revenue from the white label business, compared to $1.0 million for the three months ended September 30, 2019.

 

The $5.2 million decrease in operating revenues for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 resulted primarily from decreases of $5.0 million in servicing fees from Customers Bank and $1.8 in interchange and card revenue (including the interchange fees from Customers Bank). These decreases were partially offset by increases of $0.6 million in account fees, $0.6 million in other revenues, and $0.3 million in university fees. Revenues for the nine months ended September 30, 2020 included approximately $5.2 million of revenue from the white label business, compared to $1.8 million for the nine months ended September 30, 2019.

 

Operating expenses

 

The $3.0 million decrease in operating expenses for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from decreases of $2.5 million in provision for operating losses, $1.3 million in other non-interest expense, $0.8 million in professional services, $0.6 million in customers related supplies, $0.5 million in salaries and employee benefits, and $0.1 million in advertising and promotion. These decreases were offset in part by increases of $2.4 million in technology, communication, and processing and $0.4 million in merger and acquisition related expenses for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Increases in the provision for operating losses as well as salaries and benefit expenses were largely a result of our white label business. The three months ended September 30, 2020 included $141 thousand of referral bonus or bounty costs paid to a white label business compared to $143 thousand in the three months ended September 30, 2019, which were expensed as incurred.

 

The $3.5 million decrease in operating expenses for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from decreases of $4.6 million in provision for operating losses, $1.3 million in other non-interest expense, $1.0 million in customer related supplies, $0.6 million in technology, communication, and processing, and $0.3 million in advertising and promotion. These decreases were offset in part by increases of $3.8 million in salaries and employee benefits, $0.5 million in merger and acquisition related expenses, and $0.1 million in professional services for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Increases in the provision for operating losses, as well as salaries and benefit expenses, were largely a result of our white label business. The nine months ended September 30, 2020 included $315 thousand of referral bonus or bounty costs paid to a white label business compared to $350 thousand for the nine months ended September 30, 2019, which were expensed as incurred.

 

Interest expense

 

The $0.2 million increase in interest expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 resulted from a $40.0 million borrowing from Customers Bank in August 2019.

 

The $1.1 million increase in interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 resulted from a $40.0 million borrowing from Customers Bank in August 2019.

 

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Income tax expense

 

Income tax expense was less than $0.1 million for the three and nine months ended September 30, 2020 and 2019 resulting from a full valuation allowance recorded on the net deferred tax asset.

 

OPERATING REVENUES

 

The table below presents the components of operating revenues for the three and nine months ended September 30, 2020 and 2019.

 

   Three Months Ended
September 30,
       %   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change   2020   2019   Change   Change 
Interchange and card revenue  $4,137   $6,652   $(2,515)   (37.8)%  $16,813   $21,819   $(5,006)   (22.9)%
Interchange fees from Customers Bank   3,240        3,240    NM    3,240        3,240    NM 
Servicing fees from Customers Bank   5,814    6,663    (849)   (12.7)%   15,604    20,584    (4,980)   (24.2)%
Account fees   2,789    3,049    (260)   (8.5)%   8,517    7,873    644    8.2%
University fees   1,348    1,267    81    6.4%   4,028    3,737    291    7.8%
Other   1,010    269    741    275.5%   1,326    693    633    91.3%
Total operating revenues  $18,338   $17,900   $438    2.4%  $49,528   $54,706   $(5,178)   (9.5)%

 

 

 NM — Not meaningful

 

Interchange and card revenue (including the Interchange fees from Customers Bank)

 

The $0.7 million net increase in interchange and card revenue (including the interchange fees from Customers Bank) for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from a 24% increase in debit card purchase volume which was offset by lower interchange rates earned on spend, given shifts in consumer purchase categories, merchants, and larger average transaction sizes, which we attribute primarily to COVID-19, as well as a $0.3 million reduction in foreign ATM fees. Beginning on July 1, 2020, Customers Bank became subject to the Federal Reserve’s regulation limits on interchange fees for banks over $10 billion in assets. Customers Bank has agreed to pay us the difference between the regulated and unregulated interchange rates. For the three months ended September 30, 2020, we received $3.2 million for the difference between the regulated and unregulated interchange rates.

 

The $1.8 million net decrease in interchange and card revenue (including the interchange fees from Customers Bank) for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from a 16% increase in debit card purchase volume which was offset by lower interchange rates earned on spend, given shifts in consumer purchase categories, merchants, and larger average transaction sizes, which we attribute primarily to COVID-19, as well as a $1.0 million reduction in foreign ATM fees. Beginning on July 1, 2020, Customers Bank became subject to the Federal Reserve’s regulation limits on interchange fees for banks over $10 billion in assets. Customers Bank has agreed to pay us the difference between the regulated and unregulated interchange rates. For the nine months ended September 30, 2020, we received $3.2 million for the difference between the regulated and unregulated interchange rates.

 

Servicing fees from Customers Bank

 

The $0.8 million decrease in servicing fees from Customers Bank for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from changes in the negotiated servicing fee rate in 2020. Average Company serviced deposits increased 43%, which we attribute primarily to COVID-19 related stimulus payments into our accounts as well as growth in our White Label banking business.

 

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The $5.0 million decrease in servicing fees from Customers Bank for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from changes in the negotiated servicing fee rate in 2020. Average serviced deposits increased 25%, which we attribute primarily to COVID-19 related stimulus payments into our accounts as well as growth in our White Label banking business.

 

Account fees

 

The $0.3 million decrease in account fees for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from a lower activity volume. Our management does not believe COVID-19 had a material impact on account fees; in some instances stimulus payments reduced fees by trigger a fee waiver, but in other instances they enabled us to assess fees that would not have otherwise assessed since fees are not assessed in zero balance accounts.

 

The $0.6 million increase in account fees for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from an increase in service charges on certain Company serviced deposit accounts relating to a change in the fee structure during the three months ended March 31, 2019, partially offset by lower activity volumes. Our management does not believe COVID-19 had a material impact on account fees; in some instances stimulus payments reduced fees by trigger a fee waiver, but in other instances they enabled us to assess fees that would not have otherwise assessed since fees are not assessed in zero balance accounts.

 

University fees

 

The $0.1 million increase in university fees for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from an increase in university subscriptions. University fees benefited modestly from COVID-19 related services provided to new and existing higher education clients to facilitate certain CARES Act-related disbursements.

 

The $0.3 million increase in university fees for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from an increase in university subscriptions. University fees benefited modestly from COVID-19 related services provided to new and existing higher education clients to facilitate certain CARES Act-related disbursements.

 

Other operating revenues

 

The $0.7 million increase in other operating revenues for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from the white label business. Management does not believe COVID-19 had a material impact on other operating revenues.

 

The $0.6 million increase in other operating revenues for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from the white label business. Management does not believe COVID-19 had a material impact on other operating revenues.

 

OPERATING EXPENSES

 

The table below presents the components of operating expenses for three and nine months ended September 30, 2020 and 2019.

 

   Three Months Ended
September 30,
       %   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change   2020   2019   Change   Change 
Technology, communication and processing  $6,637   $4,221   $2,416    57.2%  $20,586   $21,229   $(643)   (3.0)%
Salaries and employee benefits   5,689    6,175    (486)   (7.9)%   19,796    16,012    3,784    23.6%
Professional services   2,159    2,910    (751)   (25.8)%   7,286    7,160    126    1.8%
Provision for operating losses   1,419    3,964    (2,545)   (64.2)%   3,326    7,953    (4,627)   (58.2)%
Occupancy   435    434    1    0.2%   1,240    1,280    (40)   (3.1)%
Customer related supplies   195    800    (605)   (75.6)%   717    1,695    (978)   (57.7)%
Advertising and promotion   266    375    (109)   (29.1)%   693    1,014    (321)   (31.7)%
Merger and acquisition related expenses   377        377    NM    452        452    NM 
Other   551    1,846    (1,295)   (70.2)%   2,668    3,955    (1,287)   (32.5)%
Total non-interest expense  $17,728   $20,725   $(2,997)   (14.5)%  $56,764   $60,298   $(3,534)   (5.9)%

  

 

NM — Not meaningful

 

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Technology, communications, and processing

 

The $2.4 million increase in technology, communications and processing expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from an increase in core processing cost and continued investment to improve and maintain our digital information technology infrastructure and support expanded products and services offered through our white label business.

 

The $0.6 million decrease in technology, communications and processing expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from cost savings initiatives, partially offset by continued investment to improve and maintain our digital information technology infrastructure and support expanded products and services offered through our white label business.

 

Salaries and employee benefits

 

The $0.5 million decrease in salaries and employee benefits for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from reimbursements under collaborative agreements with a white label business.

 

The $3.8 million increase in salaries and employee benefits for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from an increase in average full-time equivalent team members, due to growth in our white label business, and annual merit increases.

 

Professional services

 

The $0.8 million decrease in professional services for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from management’s continued efforts to monitor and control expenses.

 

The $0.1 million increase in professional services for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from consulting services associated with supporting our white label business and digital transformation efforts, partially offset by management’s continued efforts to monitor and control expenses.

 

Provision for operating losses

 

The $2.5 million decrease in provision for operating losses for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from initiatives implemented by management to reduce internet-based fraudulent transactions during the three months ended September 30, 2020. Provision for operating losses for the three months ended September 30, 2020 also included funds advanced to the account holders for Regulation E card claims of $1.0 million and Regulation E card claim losses incurred by us of $1.1 million.

 

The $4.6 million decrease in provision for operating losses for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from initiatives to reduce internet-based fraudulent transactions during the nine months ended September 30, 2020. Provision for operating losses for the nine months ended September 30, 2020 also included funds advanced to the account holders for Regulation E card claims of $3.0 million and Regulation E card claim losses incurred by us of $3.0 million.

 

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Customer related supplies

 

The $0.6 million decrease in customer related supplies for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from a reduction in the volume of customer related supplies in the student business.

 

The $1.0 million decrease in customer related supplies for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from a reduction in the volume of customer related supplies in the student business.

 

Advertising and promotion

 

The $0.1 million decrease in advertising and promotion for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily resulted from a reduction in the promotion of digital banking products and service offerings.

 

The $0.3 million decrease in advertising and promotion for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily resulted from a reduction in the promotion of digital banking products and service offerings.

 

Merger and acquisition related expenses

 

Merger and acquisition related expenses for the three and nine months ended September 30, 2020 were $0.4 million and $0.5 million, respectively. These expenses related to the merger agreement with Megalith Financial Acquisition Corp. There were no merger and acquisition related expenses for the three and nine ended September 30, 2019.

 

Other non-interest expenses

 

The $1.3 million decrease in other non-interest expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily reflected $1.0 million of expense related to the U.S. Department of Education matter in 2019 compared to no expense in 2020. For further discussion of the U.S. Department of Education matter, please see NOTE 16 — LOSS CONTINGENCIES in our 2019 audited financial statements.

 

The $1.3 million decrease in other non-interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily reflected $1.0 million of expense related to the U.S. Department of Education matter in 2019 compared to no expense in 2020. For further discussion of the U.S. Department of Education matter, please see NOTE 16 — LOSS CONTINGENCIES in our 2019 audited financial statements.

 

INTEREST EXPENSE

 

The table below presents interest expense for three and nine months ended September 30, 2020 and 2019.

 

   Three Months Ended
September 30,
       %   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change   2020   2019   Change   Change 
Interest expense  $353   $132   $221    167.4%  $1,146   $132   $1,014    768.2%

 

The $0.2 million increase in interest expense for the three months ended September 30, 2020 compared to the three months ended December 31, 2019 resulted from a $40.0 million borrowing from Customers Bank in August 2019.

 

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The $1.0 million increase in interest expense for the nine months ended September 30, 2020 compared to the nine months ended December 31, 2019 resulted from a $40.0 million borrowing from Customers Bank in August 2019.

 

INCOME TAXES

 

The table below presents income tax expense and the effective tax rate for three and nine months ended September 30, 2020 and 2019.

 

   Three Months Ended
September 30,
       %   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change   2020   2019   Change   Change 
Income (loss) before income tax expense  $257   $(2,957)  $3,214    (108.7)%  $(8,382)  $(5,724)  $(2,658)   46.4%
Income tax expense   7    7        %   21    21        %
Effective tax rate   2.7%   (0.2)%             (0.3)%   (0.4)%          

 

Income tax expense was less than $0.1 million for the three and nine months ended September 30, 2020 and 2019 resulting from a full valuation allowance recorded on the net deferred tax asset.

 

FINANCIAL CONDITION

 

General

 

Our total assets were $85.4 million at September 30, 2020. This represented a $7.9 million decrease from total assets of $93.3 million at December 31, 2019. The decrease in total assets was primarily driven by decreases of $8.5 million in prepaid expenses and other current assets, $5.1 million in developed software, net, $2.1 million in accounts receivable, net, $0.8 million in other assets and $0.6 million in other intangibles, net, offset in part by an increase of $8.2 million in cash and cash equivalents and $1.2 million in receivable from Customers Bank.

 

Total liabilities were $59.2 million at September 30, 2020 as compared to $58.7 million at December 31, 2019. The changes in total liabilities included increases of $4.2 million in accounts payable and accrued liabilities and $0.5 million in deferred revenue, offset in part by decreases of $3.0 million in other liabilities and $1.2 million in operating lease liabilities.

 

The following table sets forth certain key condensed balance sheet data:

 

(dollars in thousands)  September 30,
2020
   December 31,
2019
   Change   %
Change
 
Cash and cash equivalents  $16,776   $8,586   $8,190    95.4%
Accounts receivable, net   8,382    10,490    (2,108)   (20.1)%
Receivable from Customers Bank   2,038    849    1,189    140.0%
Prepaid expenses and other current assets   353    8,804    (8,451)   (96.0)%
Premises and equipment, net   436    638    (202)   (31.7)%
Developed software, net   45,351    50,478    (5,127)   (10.2)%
Goodwill   5,259    5,259        %
Other intangibles, net   5,150    5,734    (584)   (10.2)%
Other assets   1,690    2,478    (788)   (31.8)%
Total assets   85,435    93,316    (7,881)   (8.4)%
Accounts payable and accrued liabilities   15,298    11,093    4,205    37.9%
Deferred revenue   2,449    1,938    511    26.4%
Borrowings from Customers Bank   40,000    40,000        %
Operating lease liabilities   1,297    2,537    (1,240)   (48.9)%
Other liabilities   120    3,118    (2,998)   (96.2)%
Total liabilities   59,164    58,686    478    0.8%
Total shareholders’ equity   26,271    34,630    (8,359)   (24.1)%
Total liabilities and shareholders’ equity  $85,435   $93,316   $(7,881)   (8.4)%

 

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Cash and Cash Equivalents

 

Cash and cash equivalents include restricted cash and non-interest earning deposits. In connection with the acquisition of the Disbursement business from Higher One that was contributed to us in 2017, we had $1.0 million in an escrow account at December 31, 2019 restricted in use with a third party. On June 30, 2020, Customers Bank assumed the remaining liability of $2.4 million and the related $1.0 million escrow account in connection with the U.S. Department of Education matter. As a result, we transferred $1.4 million of cash to Customers Bank to support the payment of the settlement amount. For further discussion of the U.S. Department of Education matter, please see NOTE 16 — LOSS CONTINGENCIES in our 2019 audited financial statements.

 

Non-interest earning deposits consist of cash deposited at Customers Bank and were $16.8 million and $7.6 million at September 30, 2020 and December 31, 2019, respectively. The balance of non-interest earning deposits varies from day to day based upon operational needs and strategic investment decisions.

 

Accounts Receivable, Net

 

Accounts receivable primarily relates to reimbursements to be received from a white label partner and uncollected university subscription and disbursement service fees. Accounts receivable are recorded at face amounts less an allowance for credit losses on accounts receivable. We had no allowance for credit losses on accounts receivable at September 30, 2020 and December 31, 2019. At September 30, 2020, accounts receivable totaled $8.4 million compared to $10.5 million at December 31, 2019. The decrease primarily resulted from payments received from a white label business.

 

Receivable from Customers Bank

 

The receivable from Customers Bank represents an intercompany due to/due from for ongoing operating activities and varies based upon operating activities and the timing of settlements between us and Customers Bank. At September 30, 2020, the receivable from Customers Bank totaled $2.0 million compared to $0.8 million at December 31, 2019.

 

Prepaid Expenses and Other Current Assets

 

At September 30, 2020, prepaid expenses and other current assets totaled $0.4 million compared to $8.8 million at December 31, 2019. The decrease in prepaid expenses and other current assets primarily resulted from the timing of prepayments to one technology service provider at September 30, 2020, when compared to December 31, 2019.

 

Premises and Equipment, Net

 

At September 30, 2020, premises and equipment, net of accumulated depreciation and amortization, totaled $0.4 million compared to $0.6 million at December 31, 2019. The decrease primarily resulted from depreciation and amortization expenses of $0.3 million, partially offset by purchases of $0.1 million.

 

Developed Software, Net

 

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 digital platforms for deposit accounts offered or to be offered to deposit customers of Customers Bank. The internally developed software and related capitalized work-in -process are reported on a cost basis and amortized over the software’s expected useful life, which ranges from 3 to 10 years. At September 30, 2020, developed software, net of amortization, totaled $45.4 million compared to $50.5 million at December 31, 2019. The decrease primarily resulted from amortization expense of $8.2 million, partially offset by purchases and development of software of $3.1 million related to our white label business.

 

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Goodwill

 

Goodwill of $5.3 million was recognized from the Higher One Disbursements business acquisition in 2016 and was contributed to us (among other assets and liabilities related to the Higher One Disbursement business) in 2017. At September 30, 2020 and December 31, 2019, goodwill totaled $5.3 million.

 

Other Intangibles

 

At September 30, 2020, other intangibles totaled $5.2 million compared to $5.7 million at December 31, 2019. The decrease resulted from amortization expense of $0.6 million.

 

Other Assets

 

At September 30, 2020, other assets totaled $1.7 million compared to $2.5 million at December 31, 2019. The decrease primarily resulted from amortization of right-of-use assets of $0.8 million.

 

Accounts Payable and Accrued Liabilities

 

At September 30, 2020, accounts payable and accrued liabilities totaled $15.3 million compared to $11.1 million at December 31, 2019. The increase primarily resulted from amounts associated with the white label business.

 

Deferred Revenue

 

Deferred revenue consists of amounts billed to or received from higher education clients prior to the performance of services. Deferred revenues are earned over the service period on a straight-line basis. At September 30, 2020, deferred revenue totaled $2.4 million compared to $1.9 million at December 31, 2019. The increase in deferred revenue primarily resulted from the timing of payments and performance of services as the academic year began at higher education clients during the three months ended September 30, 2020, when compared to December 31, 2019.

 

Borrowings from Customers Bank

 

During 2019, we entered into a $50 million non-negotiable promissory note and line of credit agreement with Customers Bank to meet operating needs. Under this revolving line of credit, we may borrow up to $50 million, due on demand from Customers Bank, and carries interest equal to 12-month LIBOR plus 204 basis points payable quarterly. At September 30, 2020 and December 31, 2019, we had $40.0 million in borrowings outstanding, which Customers Bank has agreed not to demand principal repayment prior to November 30, 2021, and accrued interest of $1.7 million and $0.5 million at September 30, 2020 and December 31, 2019, respectively, with Customers Bank included in accounts payable and accrued liabilities.

 

Operating Lease Liabilities

 

We lease two office space locations under operating leases, including one lease where Customers Bank is listed on the lease as a lessee. The operating leases consist of 5-year lease terms with options to renew the leases or extend the term annually or with mutual agreement.

 

At September 30, 2020, operating lease liabilities totaled $1.3 million compared to $2.5 million at December 31, 2019. The decrease in operating lease liabilities primarily resulted from $0.8 million in operating lease rental payments and less leased office spaces during the nine months ended September 30, 2020, when compared to December 31, 2019.

 

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Other Liabilities

 

At September 30, 2020, other liabilities totaled $0.1 million compared to $3.1 million at December 31, 2019. The decrease primarily resulted from the Customers Bank’s assumption of the $2.4 million liability for the settlement of the U.S. Department of Education matter during the three months ended June 30, 2020, which is discussed within NOTE 16 - LOSS CONTINGENCIES to our 2019 audited financial statements.

 

Shareholder’s Equity

 

At September 30, 2020, shareholder’s equity totaled $26.3 million compared to $34.6 million at December 31, 2019. The decrease primarily resulted from a net loss of $8.4 million for the nine months ended September 30, 2020.

 

CREDIT RISK

 

Potential concentration of credit risk consists primarily of accounts receivables from white label partners and higher education institution clients. At September 30, 2020 and December 31, 2019, a white label partner accounted for 73% and 74% of accounts receivable, respectively.

 

LIQUIDITY

 

During the nine months ended September 30, 2020, we financed our operations primarily through cash flows provided by operating activities. During the nine months ended September 30, 2019, we financed our operations primarily through cash flows provided by financing activities. At September 30, 2020, our primary source of liquidity was our non-interest earning deposit of $16.8 million and $40.0 million in borrowings under a line of credit from Customers Bank.

 

We use detailed budgets and forecasts to project future cash needs, making adjustments to the projections when needed. We believe that our current non-interest earning deposit, cash flows from operations and borrowing capacity under our borrowings from Customers Bank will be sufficient to meet our working capital, capital expenditure, and any other capital needs for at least the next 12 months. Additionally, Customers Bank has agreed not to demand principal repayment of the $40.0 million borrowing prior to November 30, 2021.

 

The table below summarizes our cash flows for the nine months ended September 30, 2020 and 2019.

 

   Nine Months Ended
September 30,
       % 
(dollars in thousands)  2020   2019   Change   Change 
Net cash provided by (used in) operating activities  $11,668   $1,772   $9,896    558.5%
Net cash provided by (used in) investing activities   (3,152)   (6,949)   3,797    (54.6)%
Net cash provided by (used in) financing activities   (326)   11,553    (11,879)   (102.8)%
Net increase (decrease) in cash and cash equivalents  $8,190   $6,376   $1,814    28.5%

 

Cash flows provided by (used in) operating activities

 

Cash provided by operating activities of $11.7 million for the nine months ended September 30, 2020 primarily resulted from change in operating assets and liabilities of $10.7 million and non-cash operating adjustments of $10.2 million, partially offset by a net loss of $8.4 million and operating lease rental payments of $0.8 million. Non-cash operating adjustments primarily consisted of depreciation and amortization of developed software. The change in operating assets and liabilities primarily consisted of an increase in accounts payable and accrued liabilities of $4.2 million and decreases in prepaid expenses and other current assets of $8.5 million and accounts receivable of $2.1 million, partially offset by decreases in other liabilities of $3.0 million and receivable from Customers Bank of $1.2 million.

 

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Cash provided by operating activities of $1.8 million for the nine months ended September 30, 2019 primarily resulted from non-cash operating adjustments of $7.4 million and change in operating assets and liabilities of $1.0 million, partially offset by a net loss of $5.7 million and operating lease rental payments of $0.8 million. Non-cash operating adjustments primarily consisted of depreciation and amortization of developed software. The change in operating assets and liabilities primarily consisted of a decrease in prepaid expenses and other current assets of $1.9 million and increases in accounts payable and accrued liabilities of $1.8 million, other liabilities of $1.1 million and deferred revenue of $0.5 million, partially offset by increases in receivable from Customers Bank of $2.3 million and accounts receivable of $2.2 million.

 

Cash flows provided by (used in) investing activities

 

Cash used in investing activities of $3.2 million for the nine months ended September 30, 2020 primarily resulted from purchases and development of software, related to our white label business, of $3.1 million.

 

Cash used in investing activities of $6.9 million for the nine months ended September 30, 2019 primarily resulted from purchases and development of software, related to our white label business, of $6.9 million.

 

Cash flows provided by (used in) financing activities

 

Cash used in financing activities of $0.3 million for the nine months ended September 30, 2020 resulted from capital distributions to Customers Bank, primarily for the settlement of net income tax benefit (expense) allocated to us by Customers Bank on a consolidated basis.

 

Cash provided by financing activities of $11.6 million for the nine months ended September 30, 2019 resulted from proceeds from borrowings from Customers Bank of $40.0 million and capital contributions from Customers Bank of $11.6 million, partially offset by a capital distribution to Customers Bank of $40.0 million.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2020.

 

Contractual cash obligations

 

(amounts in thousands)  Within
one year
   After one but
within three years
   After three but
within five years
   More than
five years
   Total 
On-balance sheet obligations                    
Operating leases  $      714   $600   $       —   $      —   $1,314 
Borrowings from Customers Bank       40,000            40,000 
Total on-balance sheet and contractual cash obligations  $714   $40,600   $   $   $41,314 

 

Results of Operations (Years ended December 31, 2019, 2018, and 2017)

 

The following discussion of our results of operations should be read in conjunction with our audited financial statements, including the accompanying notes. Please refer to Critical Accounting Policies in this Management’s Discussion and Analysis and NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to our audited financial statements for information concerning certain significant accounting policies and estimates applied in determining reported results of operations.

 

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The following table sets forth the condensed statements of operations for the years ended December 31, 2019 and 2018.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2019   2018   Change   Change 
Operating revenues  $72,307   $57,516   $14,791    25.7%
Operating expenses   79,608    72,091    7,517    10.4%
Interest expense   535        535    NM 
Loss before income tax expense   (7,836)   (14,575)   6,739    (46.2)%
Income tax expense   27    28    (1)   (3.6)%
Net loss  $(7,863)  $(14,603)  $6,740    (46.2)%

 

 

 NM — Not meaningful

 

The $14.8 million increase in operating revenues for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulted primarily from increases of $11.3 million in servicing fees from Customers Bank given an increase in the negotiated servicing fee, a $4.4 million increase in account fees given a new account fee structure implemented in the first half of 2019, a $0.7 million increase in other fees given growth in the Company’s White Label partnership, and a $0.2M increase in University Fees given an increase in college and university clients. These increases were mitigated by a $1.8M reduction in interchange and card revenue which reflected a $1.1M reduction in foreign ATM fees given fewer foreign ATM visits and a $1.6M reduction in interchange income given flat volume and a 7 bps reduction in the blended net rate of interchange earned on transaction volume, mitigated by a $0.9 million increase in MasterCard incentive income based updated terms in a revised agreement. Debit spend was $2.4 billion for each of the years ended December 31, 2019 and 2018. Debit spend for the nine months ended September 30, 2020 and 2019 was $2.1 billion and $1.8 billion, respectively.

 

Historically, the servicing fee has been set for each annual period. In 2018, our servicing fee was calculated using a fund transfer pricing methodology that compensated us based on serviced deposit balances, estimated life of deposits, and market rates; for 2018 this rate was approximately 3%. In 2019, our servicing fee was calculated at a fixed 5% of average serviced deposits. In 2020, our servicing fee was calculated at a fixed 3% of average serviced deposits plus reimbursement of any operating losses stemming from fraud-related transactions.

 

Effective upon the close of the business combination, we entered into a new agreement with Customers Bank, which is applicable through the end of 2022 and is on substantially the same terms as our previous 2020 intracompany servicing agreement. Accordingly, the servicing fee will remain consistent with 2020 at 3% plus the reimbursement of any operating losses stemming from fraud-related transactions.

 

Operating revenues

 

Revenues for the year ended December 31, 2019 included approximately $2.9 million of revenue from the White Label partnership, compared to $0.1M in 2018. Consistent with a business in an early startup phase, the increase in expenses was significantly higher than the growth in revenues. Of note, with our white label software placed in service, the amount of expense we capitalized in the year ended December 31, 2019 was $9.7 million lower than in the year ended December 31, 2018, and we began to depreciate the capitalized asset which was reflected in a $3.3 million increase in depreciation expense. Additionally, our White Label partnership was impacted by an increase in internet-based fraudulent transactions which targeted our serviced checking accounts with a cost of approximately $4.6 million in the year ended December 31, 2019, and a $0.4 million increase in referral bonus or bounty expense paid to a White Label partner which were expensed as occurred.

 

Operating expenses

 

The $7.5 million increase in operating expenses for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from increases of $8.2 million in salaries and employee benefits, $4.0 million in provision for operating losses, $2.3 million in professional services, and $0.8 million in advertising and promotion. These increases were offset in part by decreases of $4.0 million in merger and acquisition related expenses and $3.0 million in technology, communication, and processing for the year ended December 31, 2019 compared to the year ended December 31, 2018.

 

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Interest expense

 

The $0.5 million increase in interest expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulted from a $40.0 million borrowing from Customers Bank during the year ended December 31, 2019.

 

Income tax expense

 

Income tax expense was less than $0.1 million for the years ended December 31, 2019 and 2018 resulting from a full valuation allowance recorded on the net deferred tax asset.

 

The following table sets forth the condensed statements of operations for the years ended December 31, 2018 and 2017.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2018   2017   Change   Change 
Operating revenues  $57,516   $12,542   $44,974    358.6%
Operating expenses   72,091    17,601    54,490    309.6%
Loss before income tax expense   (14,575)   (5,059)   (9,516)   188.1%
Income tax expense   28    10    18    180.0%
Net loss  $(14,603)  $(5,069)  $(9,534)   188.1%

 

We reported a net loss of $14.6 million for the year ended December 31, 2018, compared to $5.1 million for the year ended December 31, 2017. Factors contributing to the change in net loss for the year ended December 31, 2018 compared to the year ended December 31, 2017 were as follows:

 

Operating revenues

 

The $45.0 million increase in operating revenues for the year ended December 31, 2018 compared to the year ended December 31, 2017 resulted primarily from increases of $20.4 million in interchange and card revenue, $16.1 million in servicing fees from Customers Bank, $4.7 million in account fees and $3.6 million in university fees. BankMobile Technologies, Inc. was formed in 2016 and a portion of the operations, assets, and liabilities of BankMobile were contributed by Customers Bank to BankMobile Technologies, Inc. on September 30, 2017. Prior to this contribution BankMobile Technologies, Inc. did not have any revenues while its total 2018 operating revenues reflects a full year of operations.

 

Operating expenses

 

The $54.5 million increase in operating expenses for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from increases of $20.4 million in technology, communication, and processing, $14.4 million in salaries and employee benefits, $4.6 million in professional services, $4.2 million in other expenses, $4.0 million in provision for operating losses, $3.7 million in merger and acquisition related expenses, $1.7 million in customer related supplies, and $1.2 million in occupancy. We were formed in 2016 and a portion of the operations, assets, and liabilities of BankMobile were contributed by Customers Bank to us on September 30, 2017. Prior to this contribution, our expenses included certain costs related to technology development, but excluded the majority of BankMobile’s operating costs. Our total 2018 operating expenses reflects a full year of operations, including increased investment in our white label partnership.

 

Income tax expense

 

Income tax expense was less than $0.1 million for the years ended December 31, 2018 and 2017 resulting from a full valuation allowance recorded on the net deferred tax asset.

 

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OPERATING REVENUES

 

The table below presents the components of operating revenues for the years ended December 31, 2019 and 2018.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2019   2018   Change   Change 
Interchange and card revenue  $28,124   $29,923   $(1,799)   (6.0)%
Servicing fees from Customers Bank   27,425    16,140    11,285    69.9%
Account fees   10,937    6,544    4,393    67.1%
University fees   4,964    4,720    244    5.2%
Other   857    189    668    353.4%
Total operating revenues  $72,307   $57,516   $14,791    25.7%

 

Interchange and card revenue

 

The $1.8 million decrease in interchange and card revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from lower activity volumes.

 

Servicing fees from Customers Bank

 

The $11.3 million increase in servicing fees from Customers Bank for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from an increase in the negotiated servicing fee from Customers Bank during the year ended December 31, 2019.

 

Account fees

 

The $4.4 million increase in account fees for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from an increase in service charges on certain Company serviced deposit accounts relating to a change in the fee structure during the year ended December 31, 2019.

 

University fees

 

The $0.2 million increase in university fees for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from an increase in new higher education clients.

 

Other operating revenues

 

The $0.7 million increase in other operating revenues for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from the white label partnership.

 

The table below presents the components of operating revenues for the years ended December 31, 2018 and 2017.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2018   2017   Change   Change 
Interchange and card revenue  $29,923   $9,560   $20,363    213.0%
Servicing fees from Customers Bank   16,140        16,140    100.0%
Account fees   6,544    1,827    4,717    258.2%
University fees   4,720    1,127    3,593    318.8%
Other   189    28    161    575.0%
Total operating revenues  $57,516   $12,542   $44,974    358.6%

 

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Interchange and card revenue

 

The $20.4 million increase in interchange and card revenue for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us.

 

Servicing fees from Customers Bank

 

The $16.1 million increase in servicing fees from Customers Bank for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from a negotiated servicing fee from Customers Bank during the year ended December 31, 2018. There was no similar servicing fee arrangement with Customers Bank during the year ended December 31, 2017.

 

Account fees

 

The $4.7 million increase in account fees for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us.

 

University fees

 

The $3.6 million increase in university fees for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us, as well as an increase in new higher education clients.

 

Other operating revenues

 

The $0.2 million increase in other operating revenues for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us.

 

OPERATING EXPENSES

 

The table below presents the components of operating expenses for the years ended December 31, 2019 and 2018.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2019   2018   Change   Change 
Technology, communication and processing  $27,310   $30,281   $(2,971)   (9.8)%
Salaries and employee benefits   22,758    14,607    8,151    55.8%
Professional services   10,646    8,301    2,345    28.2%
Provision for operating losses   9,367    5,417    3,950    72.9%
Occupancy   1,791    1,656    135    8.2%
Customer related supplies   1,538    2,117    (579)   (27.4)%
Advertising and promotion   1,354    557    797    143.1%
Merger and acquisition related expenses   100    4,090    (3,990)   (97.6)%
Other   4,744    5,065    (321)   (6.3)%
Total non-interest expense  $79,608   $72,091   $7,517    10.4%

 

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Technology, communications, and processing

 

The $3.0 million decrease in technology, communication and processing expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from successful concentrated cost savings initiatives, partially offset by continued investment to improve and maintain our digital information technology infrastructure and support expanded products and services offered through our white label partnership.

 

Salaries and employee benefits

 

The $8.2 million increase in salaries and employee benefits for the year ended December 31, 2019 compared to the year ended December 31, 2018 reflected a $4.4 million increase in gross compensation expense, a $3.1 million reduction in the application of payments under collaborative agreements applied against compensation expense, and a $0.6 million reduction in capitalization of compensation expense. The increase in gross compensation expense reflected an increase of approximately 44 average full-time equivalent team members, with approximately 94% of those roles attributable to expanded products and services offered through our white label partnership, and to a lesser degree to annual merit increases.

 

Professional services

 

The $2.3 million increase in professional services for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from consulting services associated with supporting our white label partnership and digital transformation efforts.

 

Provision for operating losses

 

The $4.0 million increase in provision for operating losses for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from losses due to an increase in internet-based fraudulent transactions which targeted our serviced checking accounts during the year ended December 31, 2019 and an increase in other disputed charges. Other disputed charges for the year ended December 31, 2019 included funds advanced to the account holders for Regulation E card claims of $4.9 million and Regulation E card claim losses incurred by us of $4.7 million.

 

The provision for operating losses is comprised of fraud losses and Reg-E card claims. Our focus reducing Reg-E card claim losses has yielded a $400 thousand to $600 thousand (approximately 10%) annual reduction in this expense since acquiring this business in 2016. Our management expects extensive training, system automation and improvements, stricter (and timelier) rules on card authorization, as well as augmenting team member talent with subject matter expertise in systems and controls to drive continued improvement in Reg-E card claim losses. In 2021, we will implement a TalkOff program for cardholders with merchant disputes at an estimated $300k annual savings. Eventually we expect improvements in Reg-E card claim losses to level off, and eventually increase given our expectation for increased card spend activity, which is the primary driver of claims.

 

The 2019 increase in reflected heightened losses surrounding the launch of a new product; the Company quickly reacted and implemented mitigants, including lengthened hold times and reporting to stop the fraud, identify future fraud early, and implement mitigants. Our run rates since October 2019, have been significantly lower. Under the terms of our current deposit servicing agreement, fraud related losses are reimbursed by our partner bank.

 

Customer related supplies

 

The $0.6 million decrease in customer related supplies for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from more favorable terms renegotiated with an existing supplier.

 

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Advertising and promotion

 

The $0.8 million increase in advertising and promotion expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from the promotion of digital banking products and service offerings available through our white label partnership.

 

Merger and acquisition related expenses

 

The $4.0 million decrease in merger and acquisition related expenses for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily resulted from the termination of the planned spin-off and merger with Flagship Community Bank in October 2018.

 

The table below presents the components of operating expenses for the years ended December 31, 2018 and 2017.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2018   2017   Change   Change 
Technology, communication and processing  $30,281   $9,914   $20,367    205.4%
Salaries and employee benefits   14,607    237    14,370    6,063.3%
Professional services   8,301    3,728    4,573    122.7%
Provision for operating losses   5,417    1,410    4,007    284.2%
Occupancy   1,656    496    1,160    233.9%
Customer related supplies   2,117    426    1,691    396.9%
Advertising and promotion   557    154    403    261.7%
Merger and acquisition related expenses   4,090    410    3,680    897.6%
Other   5,065    826    4,239    513.2%
Total non-interest expense  $72,091   $17,601   $54,490    309.6%

 

Technology, communications, and processing

 

The $20.4 million increase in technology, communication and processing expense for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations and assets of BankMobile to us, as well as increased investment in our digital information technology infrastructure to support expanded products and services offered through our white label partnership.

 

Salaries and employee benefits

 

The $14.4 million increase in salaries and employee benefits for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us, as well as an increase in average full-time equivalent team members, due to increased investment in products and services offered through our white label partnership.

 

Professional services

 

The $4.6 million increase in professional services for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us, as well as increased contractor services associated with investment in our digital information technology infrastructure to support expanded products and services offered through our white label partnership.

 

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Provision for operating losses

 

The $4.0 million increase in provision for operating losses for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us. Other disputed charges for the year ended December 31, 2018 included funds advanced to the account holders for Regulation E card claims of $5.4 million and Regulation E card claim losses incurred by us of $5.4 million.

 

Occupancy

 

The $1.2 million increase in occupancy for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations and assets of BankMobile to us.

 

Customer related supplies

 

The $1.7 million increase in customer related supplies for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us.

 

Advertising and promotion

 

The $0.4 million increase in advertising and promotion expense for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations of BankMobile to us.

 

Merger and acquisition related expenses

 

The $3.7 million increase in merger and acquisition related expenses for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the planned spin-off and merger with Flagship Community Bank, which was terminated in October 2018.

 

Other non-interest expenses

 

The $4.2 million increase in other non-interest expenses for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily resulted from the full year impact of the September 30, 2017 contribution by Customers Bank of a portion of the operations and assets of BankMobile to us.

 

INTEREST EXPENSE

 

The table below presents interest expense for the years ended December 31, 2019 and 2018.

 

   For the Years Ended 
December 31,
       %
(dollars in thousands)  2019   2018   Change   Change
Interest expense  $535   $   $535   NM

 

The $0.5 million increase in interest expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 resulted from a $40.0 million borrowing from Customers Bank during the year ended December 31, 2019. There were no interest expense for the years ended December 31, 2018 and 2017.

 

INCOME TAXES

 

The table below presents income tax expense and the effective tax rate for the years ended December 31, 2019 and 2018.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2019   2018   Change   Change 
Loss before income tax expense  $(7,836)  $(14,575)  $6,739    (46.2)%
Income tax expense   27    28    (1)   (3.6)%
Effective tax rate   (0.3)%   (0.2)%          

 

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The table below presents income tax expense and the effective tax rate for the years ended December 31, 2018 and 2017.

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2018   2017   Change   Change 
Loss before income tax expense  $(14,575)  $(5,059)  $(9,516)   188.1%
Income tax expense   28    10    18    180.0%
Effective tax rate   (0.2)%   (0.2)%          

 

Income tax expense was less than $0.1 million for the years ended December 31, 2019, 2018 and 2017 resulting from a full valuation allowance recorded on the net deferred tax asset.

 

FINANCIAL CONDITION

 

General

 

Our total assets were $93.3 million at December 31, 2019. This represented a $14.0 million increase from total assets of $79.4 million at December 31, 2018. The increase in total assets was primarily driven by increases of $5.8 million in prepaid expenses and other current assets, $5.2 million in cash and cash equivalents, $2.5 million in accounts receivable, net, and $2.2 million in other assets, offset in part by a decrease in other intangibles, net of $1.1 million.

 

Total liabilities were $58.7 million at December 31, 2019. This represented a $50.0 million increase from $8.7 million at December 31, 2018. The increase in total liabilities primarily resulted from increases of $40.0 million in borrowings from Customers Bank, $5.4 million in accounts payable and accrued liabilities, $2.5 million in operating lease liabilities, and $2.0 million in other liabilities.

 

The following table sets forth certain key condensed balance sheet data: 

 

   December 31,       % 
(dollars in thousands)  2019   2018   Change   Change 
Cash and cash equivalents  $8,586   $3,400   $5,186    152.5%
Accounts receivable, net   10,490    7,969    2,521    31.6%
Receivable from Customers Bank   849    1,418    (569)   (40.1)%
Prepaid expenses and other current assets   8,804    2,993    5,811    194.2%
Premises and equipment, net   638    852    (214)   (25.1)%
Developed software, net   50,478    50,415    63    0.1%
Goodwill   5,259    5,259        %
Other intangibles, net   5,734    6,804    (1,070)   (15.7)%
Other assets   2,478    247    2,231    903.2%
Total assets   93,316    79,357    13,959    17.6%
Accounts payable and accrued liabilities   11,093    5,707    5,386    94.4%
Operating lease liabilities   2,537        2,537    NM 
Deferred revenue   1,938    1,843    95    5.2%
Borrowings from Customers Bank   40,000        40,000    NM 
Other liabilities   3,118    1,120    1,998    178.4%
Total liabilities   58,686    8,670    50,016    576.9%
Total shareholders’ equity   34,630    70,687    (36,057)   (51.0)%
Total liabilities and shareholders’ equity  $93,316   $79,357   $13,959    17.6%

 

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Cash and Cash Equivalents

 

Cash and cash equivalents include restricted cash and non-interest earning deposits. In connection with Customers Bank’s acquisition of the Disbursement business from Higher One that was contributed to us in 2017, we had $1.0 million in an escrow account at December 31, 2019 and 2018 restricted in use with a third party. Non-interest earning deposits consist of cash deposited at Customers Bank and were $7.6 million and $2.4 million at December 31, 2019 and 2018, respectively. The balance of non-interest earning deposits varies from day to day based upon operational needs and strategic investment decisions.

 

Accounts Receivable, Net

 

Accounts receivable primarily relates to reimbursements to be received from a white label partner and uncollected university subscription and disbursement service fees. Accounts receivable are recorded at face amounts less an allowance for doubtful accounts. We had no allowance for doubtful accounts on receivables at December 31, 2019 and 2018. At December 31, 2019, accounts receivable totaled $10.5 million compared to $8.0 million at December 31, 2018. The increase primarily resulted from reimbursements to be received from a white label partner.

 

Receivable from Customers Bank

 

The receivable from Customers Bank represents an intercompany due to/due from for ongoing operating activities and varies based upon operating activities and the timing of settlements between us and Customers Bank. At December 31, 2019, the receivable from Customers Bank totaled $0.8 million compared to $1.4 million at December 31, 2018.

 

Prepaid Expenses and Other Current Assets

 

At December 31, 2019, prepaid expenses and other current assets totaled $8.8 million compared to $3.0 million at December 31, 2018. The increase in prepaid expenses and other current assets primarily resulted from the timing of prepayments to one technology service provider at December 31, 2019, when compared to December 31, 2018.

 

Premises and Equipment, Net

 

At December 31, 2019, bank premises and equipment, net of accumulated depreciation and amortization, totaled $0.6 million compared to $0.9 million at December 31, 2018. The decrease primarily resulted from depreciation and amortization expenses of $0.4 million, partially offset by purchases of bank premises and equipment of $0.1 million.

 

Developed Software, Net

 

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 digital platforms for deposit accounts offered or to be offered to deposit customers of Customers Bank. The internally developed software and related capitalized work-in-process are reported on a cost basis and amortized over the software’s expected useful life, which ranges from 3 to 10 years. At December 31, 2019, developed software, net of amortization, totaled $50.5 million compared to $50.4 million at December 31, 2018. The increase primarily resulted from purchases and development of software of $7.9 million, related to our white label partnership, partially offset by amortization expense of $7.8 million.

 

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Goodwill

 

Goodwill of $5.3 million was recognized from Customers’ acquisition of the Higher One Disbursement business in 2016 and was contributed to us (among other assets and liabilities related to the Higher One Disbursement business). At December 31, 2019 and 2018, goodwill totaled $5.3 million.

 

Other Intangibles

 

At December 31, 2019, other intangibles totaled $5.7 million compared to $6.8 million at December 31, 2018. The decrease primarily resulted from amortization expenses of $1.1 million.

 

Other Assets

 

At December 31, 2019, other assets totaled $2.5 million compared to $0.2 million at December 31, 2018. The increase primarily resulted from the adoption of ASC 842 — Leases on January 1, 2019, when we recognized a right-of-use asset of $3.5 million, partially offset by amortization of the right-of-use asset of $1.0 million.

 

Accounts Payable and Accrued Liabilities

 

At December 31, 2019, accounts payable and accrued liabilities totaled $11.1 million compared to $5.7 million at December 31, 2018. The increase primarily resulted from increases in technology related expense accruals, the accrued interest related to the borrowing from Customers Bank and the amounts associated with the white label partnership at December 31, 2019 compared to December 31, 2018. At December 31, 2019 and 2018, we had no accrued liability for losses associated with fraud or theft-based transactions that have generally been disputed by Company serviced deposit account holders and $147 thousand and $358 thousand for estimated Regulation E card claim losses, respectively.

 

Operating Lease Liabilities

 

We lease four office space locations under operating leases, including two leases where Customers Bank is listed on the lease as a lessee, and one lease with an affiliate of Megalith Financial Acquisition Corp. The operating leases consist of lease terms ranging between one and five years, with some leases containing options to renew the leases or extend the term annually or with mutual agreement. At December 31, 2019, operating lease liabilities totaled $2.5 million compared to no operating lease liabilities at December 31, 2018. The increase resulted from the adoption of ASC 842 — Leases on January 1, 2019, when we recognized operating lease liabilities of $3.5 million, partially offset by lease payments made during the year ended December 31, 2019.

 

Deferred Revenue

 

Deferred revenue consists of amounts received from clients prior to the performance of services. Deferred revenues are earned over the service period on a straight-line basis. At December 31, 2019, deferred revenue totaled $1.9 million compared to $1.8 million at December 31, 2018.

 

Borrowings from Customers Bank

 

During 2019, we entered into a $50 million non-negotiable promissory note and line of credit agreement with Customers Bank to meet operating needs. Under this revolving line of credit, we may borrow up to $50 million, due on demand from Customers Bank, and carries interest equal to 12-month LIBOR plus 204 basis points payable quarterly. At December 31, 2019, we had $40.0 million in borrowings outstanding, which Customers Bank has agreed not to demand principal repayment prior to October 31, 2021, and accrued interest of $0.5 million with Customers Bank included in accounts payable and accrued liabilities.

 

Other Liabilities

 

At December 31, 2019, other liabilities totaled $3.1 million compared to $1.1 million at December 31, 2018. The increase primarily resulted from a $2.0 million accrued liability for the settlement of the Department of Education matter, which is discussed within NOTE 16 — LOSS CONTINGENCIES to our audited financial statements.

 

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Shareholder’s Equity

 

At December 31, 2019, shareholder’s equity totaled $34.6 million compared to $70.7 million at December 31, 2018. The decrease primarily resulted from a capital distribution to Customers Bank of $40.0 million in conjunction with us obtaining a line of credit from Customers Bank and a net loss of $7.9 million, offset in part by capital contributions of $11.8 million from Customers Bank during the year ended December 31, 2019.

 

CREDIT RISK

 

Potential concentration of credit risk consists primarily of accounts receivables from white label partners and higher education institution clients. At December 31, 2019 and 2018, a white label partner accounted for 74% and 89% of accounts receivable, respectively.

 

LIQUIDITY

 

During the year ended December 31, 2019, we financed our operations primarily through cash flows provided by operating activities and financing activities. During the year ended December 31, 2018, we financed our operations primarily through cash flows provided by financing activities. At December 31, 2019, our primary source of liquidity was our non-interest earning deposit of $7.6 million and $40 million in borrowings under a line of credit from Customers Bank.

 

We use detailed budgets and forecasts to project future cash needs, making adjustments to the projections when needed. We believe that our current non-interest earning deposit, cash flows from operations and borrowing capacity under our borrowings from Customers Bank will be sufficient to meet our working capital, capital expenditure, and any other capital needs for at least the next 12 months.

 

The table below summarizes our cash flows for the years indicated:

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2019   2018   Change   Change 
Net cash provided by (used in) operating activities  $1,952   $(11,960)  $13,912    (116.3)%
Net cash provided by (used in) investing activities   (8,055)   (19,384)   11,329    (58.4)%
Net cash provided by (used in) financing activities   11,289    24,327    (13,038)   (53.6)%
Net increase (decrease) in cash and cash equivalents  $5,186   $(7,017)  $12,203    (173.9)%

 

Cash flows provided by (used in) operating activities

 

Cash provided by operating activities of $2.0 million for the year ended December 31, 2019 primarily resulted from non-cash operating adjustments of $10.8 million, partially offset by a net loss of $7.9 million and operating lease rental payments of $1.0 million. Non-cash operating adjustments consisted primarily of depreciation and amortization of developed software and other assets.

 

Cash used in operating activities of $12.0 million for the year ended December 31, 2018 primarily resulted from a net loss of $14.6 million and changes in operating assets and liabilities of $3.5 million, partially offset from non-cash operating adjustments of $6.1 million. Non-cash operating adjustments consisted primarily of depreciation and amortization of developed software and other assets.

 

Cash flows provided by (used in) investing activities

 

Cash used in investing activities of $8.1 million for the year ended December 31, 2019 primarily resulted from purchases and development of software, related to our white label partnership, of $7.8 million.

 

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Cash used in investing activities of $19.4 million for the year ended December 31, 2018 primarily resulted from purchases and development of software, related to our white label partnership, of $17.6 million and the acquisition of a university relationship intangible asset of $1.5 million.

 

Cash flows provided by (used in) financing activities

 

Cash provided by financing activities of $11.3 million for the year ended December 31, 2019 resulted from proceeds from borrowings from Customers Bank of $40.0 million and capital contributions from Customers Bank of $11.3 million, partially offset by a capital distribution to Customers Bank of $40.0 million.

 

Cash provided by financing activities of $24.3 million for the year ended December 31, 2018 resulted from capital contributions from Customers Bank of $28.2 million, partially offset by a capital distribution to Customers Bank of $3.9 million.

 

The table below summarizes our cash flows for the years indicated:

 

   For the Years Ended 
December 31,
       % 
(dollars in thousands)  2018   2017   Change   Change 
Net cash provided by (used in) operating activities  $(11,960)  $(20,085)  $8,125    (40.5)%
Net cash provided by (used in) investing activities   (19,384)   (4,348)   (15,036)   345.8%
Net cash provided by (used in) financing activities   24,327    34,850    (10,523)   (30.2)%
Net increase (decrease) in cash and cash equivalents  $(7,017)  $10,417   $(17,434)   (167.4)%

 

Cash flows provided by (used in) operating activities

 

Cash used in operating activities of $12.0 million for the year ended December 31, 2018 primarily resulted from a net loss of $14.6 million and changes in operating assets and liabilities of $3.5 million, partially offset from non-cash operating adjustments of $6.1 million. Non-cash operating adjustments consisted primarily of depreciation and amortization of developed software and other assets.

 

Cash used in operating activities of $20.1 million for the year ended December 31, 2017 primarily resulted from a net loss of $5.1 million and changes in operating assets and liabilities of $17.3 million, partially offset from non-cash operating adjustments of $2.3 million. Non-cash operating adjustments consisted primarily of depreciation and amortization of developed software and other assets. Changes in operating assets and liabilities resulted from increased activity following the contribution by Customers Bank in September 2017 of a portion of the operations, assets, and liabilities of BankMobile to us. Please refer to NOTE 1 — DESCRIPTION OF THE BUSINESS to our audited financial statements for additional details related to this contribution.

 

Cash flows provided by (used in) investing activities

 

Cash used in investing activities of $19.4 million for the year ended December 31, 2018 primarily resulted from purchases and development of software, related to our white label partnership, of $17.6 million and the acquisition of a university relationship intangible asset of $1.5 million.

 

Cash used in investing activities of $4.3 million for the year ended December 31, 2017 primarily resulted from purchases and development of software, related to our white label partnership, of $4.2 million.

 

Cash flows provided by (used in) financing activities

 

Cash provided by financing activities of $24.3 million for the year ended December 31, 2018 resulted from capital contributions from Customers Bank of $28.2 million, partially offset by a capital distribution to Customers Bank of $3.9 million.

 

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Cash provided by financing activities of $34.9 million for the year ended December 31, 2017 resulted from capital contributions from Customers Bank of $34.9 million. In addition, Customers Bank contributed non-cash assets and transferred liabilities associated with BankMobile of $30.9 million, which is discussed within NOTE 1 — DESCRIPTION OF THE BUSINESS to our audited financial statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of December 31, 2019, we did not have any off-balance sheet arrangements. As of December 31, 2018, we had off-balance sheet operating lease obligations of $3.6 million.

 

CONTRACTUAL OBLIGATIONS

 

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2019.

 

Contractual cash obligations

 

(amounts in thousands)  Within one
year
   After one
but within
three year
   After three
but within
five years
   More than
five years
   Total 
On-balance sheet obligations                         
Operating leases  $1,061   $1,572   $       —   $      —   $2,633 
Borrowings from Customers Bank       40,000            40,000 
Total on-balance sheet and contractual cash obligations  $1,061   $41,572   $   $   $42,633 

 

 

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MANAGEMENT

 

Name   Age   Position
Luvleen Sidhu(6)   34   Chief Executive Officer; Chairman of the Board
Robert Diegel   58   Chief Operating Officer
Robert Ramsey   45   Chief Financial Officer
Pankaj Dinodia(1)(2)(4)   36   Director
Mike Gill(3)(5)   69   Director
Aaron Hodari(4)   34   Director
Brent Hurley(2)(3)(6)   41   Director
A.J. Dunklau(1)(5)   37   Director
Marcy Schwab(1)(5)   49   Director

 

 

(1)Member of the audit committee.
(2)Member of the compensation committee.
(3)Member of the nominating and corporate governance committee.
(4)Class I Director.
(5)Class II Director.
(6)Class III Director.

 

Officers, Directors and Key Employees

 

Luvleen Sidhu has served as BankMobile’s Chief Executive Officer and Director since 2019. From February 2014 to present, Ms. Luvleen Sidhu served as Chief Strategy Officer and President of BankMobile, which she helped found. Ms. Luvleen Sidhu earned her MBA from the Wharton School of Business of the University of Pennsylvania and her bachelor’s degree from Harvard University. After graduating from Harvard and Wharton she was a management consultant at Booz & co. in their financial services practice. Ms. Luvleen Sidhu is a recognized leader in the industry and was named one of Crain’s New York Business 2020 40 Under 40 and a “Rising Star in Banking & Finance” in 2020. She was previously named Fintech Woman of the Year by Lendit Fintech for 2019. Before attending business school at Wharton, she was an analyst at Neuberger Berman and also worked as a director of corporate development at Customers Bank. While at the company, Ms. Luvleen Sidhu introduced several growth projects, including partnering with a New York City-based start-up to improve the banking experience through innovative technology. Ms. Luvleen Sidhu has been featured regularly in the media including on CNBC, Bloomberg Radio, Yahoo Finance, Fox News Radio and in The Wall Street Journal, Forbes.com, American Banker, Crain’s New York, FoxNews.com, among others.

 

Bob Ramsey serves as our Chief Financial Officer. From January 2019 to present, Mr. Ramsey served as Chief Financial Officer of BankMobile, during which period he had a dual role and also served as Customers Bancorp’s Director of Investor Relations. From 2017 to 2019, Mr. Ramsey served as Director of Strategic Planning and Investor Relations at Customers Bancorp. Prior to joining Customers Bancorp, Mr. Ramsey served as senior equity research analyst and other roles at FBR Capital Markets for 13 years, where he covered community banks, regional banks, super-regional banks, consumer finance and fintech companies. He previously worked at Wachovia Securities. Mr. Ramsey has his MBA from the College of William and Mary and his bachelor’s degree from Hampden Sydney College.

 

Robert J. Diegel serves as our Chief Operating Officer. Mr. Diegel became Chief Operating Officer in October 2017 and Director of BankMobile Technologies, Inc. in 2017. From April 2014, Mr. Diegel served in a variety of roles in Customers Bank and BankMobile. Those roles include Director of Banking Operations and Deputy Chief Administrative Officer. Prior to joining Customers Bank, Mr. Diegel served as Senior Vice President — Director of Operations and Cash Management at Firstrust Bank, where he worked from 1990 through 2014 and was a Board member of FIS’ Strategic Payment Counsel from 2009 through 2014. Mr. Diegel earned his Bachelor of Science in accounting from LaSalle University in Philadelphia before attending Georgetown University’s Stonier Graduate School with the American Bankers Association.

 

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Pankaj Dinodia has served as our director since the Business Combination. Since June 2011, Mr. Dinodia has been Chief Executive Officer and founder of Dinodia Capital Advisors, a SEBI-registered financial advisory services firm based in New Delhi, which provides strategic and merger and acquisitions services and works closely with several family offices on global investments and asset allocation. Prior to that, Mr. Dinodia earned his MBA from the Harvard Business School. From July 2008 to July 2009, Mr. Dinodia worked for accounting firm S.R. Dinodia & Co., developing its M&A Advisory practice. From July 2007 to July 2008, Mr. Dinodia helped establish and run Goldman Sachs’ private equity business in India. Prior to that, Mr. Dinodia had served within the Investment Banking Division at Goldman Sachs in New York City since 2005, where he provided mergers and acquisition and investment advisory services to global banks, insurance and fintech companies. He has previously served as the Founder & President of the Wharton Alumni Delhi Chapter as well as on the Executive Board for the Harvard Business School Club of India. Mr. Dinodia graduated magna cum laude at the Wharton School, earning his BS Economics degree with a concentration in finance. He also earned his MBA at the Harvard Business School. We believe that Mr. Dinodia is qualified to serve as a member of the post-Business Combination company board of directors based on his experience in banking, investing and providing strategic advice and mergers and acquisitions advisory services, as well has his experience mentoring start-ups across industries, including those in fintech and consumer industries.

 

Mike Gill has served as our director since the Business Combination. Mr. Gill is a retired attorney who worked as Managing Director Global Complex Contracting at Accenture LLP from 2003 to October 2016. At Accenture LLP, Mr. Gill headed up a team of over 160 attorneys worldwide, specializing in technology, digital, outsourcing, and systems integration transactions and helping to negotiate and close large and complex customer-facing contracts across the world, including in the financial services industry. Prior to working at Accenture, Mr. Gill practiced as a transactional attorney for over 25 years in Kansas City, Missouri specializing in professional services providers, including consultants, accountants, architects and attorneys. Mr. Gill also has experience in commercial litigation, including malpractice and securities law defense. Mr. Gill earned his BS in Business from University of Missouri and his JD from University of Missouri School of Law. We believe that Mr. Gill is qualified to serve as a member of the post-Business Combination company board of directors based on his legal experience, experience within the financial services industry and significant experience structuring and negotiating complex transactions both domestically and globally.

 

Aaron Hodari has served as our director since the Business Combination. Mr. Hodari, a CFP and CIMA, is a Managing Director of Schechter. Aaron Hodari works with high net worth individuals, families, business owners, and their advisors to bring them institutional quality investment management and advanced financial planning solutions. Aaron heads the firm’s branch of Private Capital, including deal sourcing, due diligence, deal structuring, and market opportunity identification. He’s also instrumental in the development of correlated and non-correlated investment alternatives, helping identify investment allocations and manager selection. He is a sought-after speaker regarding the tax advantages for hedge funds within Private Placement Life Insurance (PPLI) and Private Placement Variable Annuity (PPVA). Prior to joining Schechter, Aaron worked at BlackRock Financial Management, New York, NY in the Institutional Account Management group where he managed relationships with institutional investors including pension funds, foundations & endowments, and family offices. While there, he specialized in customized fixed-income solutions, commodities, and hedge funds. Aaron graduated from the University of Michigan, where he majored in economics and played lacrosse. He currently sits on the school’s Dean’s Young Alumni Council and he is a member of the CAIS Advisory Council. We believe that Mr. Hodari is qualified to serve as a member of the post-Business Combination company board of directors based on his financial and investment management expertise.

 

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Brent Hurley has served as our director since the Business Combination. Since July 2016, Mr. Hurley has been a serial angel investor in various technology start-up companies and participated in multiple venture funds. Mr. Hurley has been a member of MFA Investor Holdings, the sponsor of MFAC, since 2018. From January 2015 to June 2016, Mr. Hurley was Chief Executive Officer and Co-founder of SayMore, a social network start-up company. From November 2011 to January 2015, Mr. Hurley served as Chief Financial Officer of MixBit, Inc. (previously AVOS Systems), a multinational consumer technology company backed by GV (formerly Google Ventures) and NEA. Prior to that, Mr. Hurley was a founding team member of YouTube for four years until its sale to Google, serving as Director of Finance and Operations from 2005 to 2007 and, following the sale to Google, Manager on the YouTube Strategic Partnerships Team. Prior to that, Mr. Hurley was a buyside securities trader and portfolio accountant at Fisher Investments. Mr. Hurley began his career as an intern at PayPal, Inc. when it had less than 25 employees. Mr. Hurley served on the board of directors of MixBit, a private company, from 2014 to 2018, and has served two 3-year terms on the Board of Trustees at Albright College, and one term on the Harvard Business School Alumni Board. Mr. Hurley earned his BS in Finance & Philosophy from Albright College and his MBA from Harvard Business School. We believe that Mr. Hurley is qualified to serve as a member of the post-Business Combination company board of directors based his extensive experience investing in and developing technology start-up companies and his finance and accounting experience.

 

A.J. Dunklau has served as our director since the Business Combination and until the Business Combination served as President of Megalith since its inception, and served Chief Executive Officer of Megalith since May 5, 2020. From 2011 through 2017, Mr. Dunklau was an executive at AGDATA, LP, a provider of payment facilitation, information services, and software, which was sold to Vista Equity Partners in 2014. From 2016 to 2017 Mr. Dunklau served as AGDATA’s Chief Strategy Officer and from 2014 to 2016 he served as its Head of Product Management. From 2012 to 2014, Mr. Dunklau served as AGDATA’s Executive Vice President and General Manager of Industry Platforms, and prior to that served as Director of Business Development. From 2005 to 2011, he worked as a management consultant at A.T. Kearney, where he consulted on global projects across a range of industries, including financial services. Mr. Dunklau received his Bachelors of Science in Business Administration from Washington University in St. Louis and an MBA from the Harvard Business School.

 

Marcy Schwab has served as our director since the Business Combination. Ms. Schwab is the President of Inspired Leadership, LLC, which she founded in 2012. Inspired Leadership, LLC provides consulting, leadership advisory, and executive coaching services to Fortune 500 companies, start-ups, federal, state and local agencies and not-for-profits. Ms. Schwab has also served as principal at thought LEADERS, LLC since 2016, and is a member at Forbes Coaches Counsel. From July 2019 to September 2020, Ms. Schwab served of chief of staff to the CEO of Reserve Trust Company part time, and served as Vice President of Retail Banking at Sallie Mae from 2010 to 2012. Ms. Schwab served in various roles at Capital One, including Senior Vice President, Consumer Segment Lending from 2008 to 2009, Vice President from 2007 to 2008, and Senior Business Director from 1998 to 2007. Ms. Schwab brings over 25 years of experience as a senior executive, consultant, facilitator, and leadership coach. Ms. Schwab earned an MBA from The Wharton School of Business and a Bachelor of Science in Engineering from the University of Pennsylvania. We believe that Ms. Schwab is qualified to serve as a member of the post-Business Combination company board of directors based on her experience as a senior leader at several consumer focused financial services companies.

 

Corporate Governance Guidelines and Code of Business Conduct

 

Our Board has adopted Corporate Governance Guidelines that address items such as the qualifications and responsibilities of its directors and director candidates and corporate governance policies and standards applicable. In addition, our Board has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our Corporate Governance Guidelines and our Code of Business Conduct and Ethics are posted on the Corporate Governance portion of the Company’s website. We will post amendments to our Code of Business Conduct and Ethics or waivers of our Code of Business Conduct and Ethics for directors and officers on the same website.

 

Board Composition

 

Our business affairs are managed under the direction of our Board. Our Board consists of seven members, at least a majority of whom qualify as independent within the meaning of the independent director guidelines of the NYSE American. Ms. Luvleen Sidhu and Mr. Hodari are not considered independent.

 

Our Board is divided into three staggered classes of directors. At each annual meeting of our stockholders, a class of directors will be elected for a three-year term to succeed the same class whose term is then expiring, as follows:

 

the Class I directors will be Aaron Hodari and Pankaj Dinodia, and their terms will expire at the annual meeting of stockholders to be held in 2021;

 

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the Class II directors will be A.J. Dunklau, Marcy Schwab, and Mike Gill, and their terms will expire at the annual meeting of stockholders to be held in 2022; and

 

the Class III directors will be Luvleen Sidhu and Brent Hurley, and their terms will expire at the annual meeting of stockholders to be held in 2023.

 

Our Charter provides that the Company Board will consist of one or more members, and the number of directors may be increased or decreased from time to time by a resolution of the Company Board. Each director’s term will continue until the election and qualification of his or her successor, or his or her earlier death, resignation, or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the Company Board may have the effect of delaying or preventing changes in control of the Company.

 

Each of the Company’s officers will serve at the discretion of the Company Board and will hold office until his or her successor is duly appointed and qualified or until his or her earlier resignation or removal. There are no family relationships among any of the persons expected to be directors or officers of the Company upon the consummation of the Business Combination. The Company Board has appointed Pankaj Dinodia as lead director to help management coordinate with the independent directors.

 

Director Independence

 

The Company’s Common Stock is listed on the NYSE American. Under the NYSE rules, independent directors must comprise a majority of a listed company’s board of directors. In addition, the NYSE rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent. Under the NYSE rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Audit committee members must also satisfy the additional independence criteria set forth in Rule 10A-3 under the Exchange Act and the rules of the NYSE. Compensation committee members must also satisfy the additional independence criteria set forth in Rule 10C-1 under the Exchange Act and the NYSE rules.

 

In order to be considered independent for purposes of Rule 10A-3 under the Exchange Act and under the rules of the NYSE, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

 

To be considered independent for purposes of Rule 10C-1 under the Exchange Act and under the rules of the NYSE, the board of directors must affirmatively determine that the member of the compensation committee is independent, including a consideration of all factors specifically relevant to determining whether the director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: (i) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and (ii) whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

 

Our Board has undertaken a review of the independence of each director and considered whether each director of the Company has a material relationship with the Company that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, we determined that Pankaj Dinodia, Mike Gill, Brent Hurley, A.J. Dunklau, and Marcy Schwab will be considered “independent directors” as defined under the listing requirements and rules of the NYSE and the applicable rules of the Exchange Act.

 

Board Leadership Structure

 

We believe that the structure of our Board and its committees will provide strong overall management of the Company.

 

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Committees of the Company Board

 

The Company Board has an audit committee, compensation committee and nominating and corporate governance committee. The composition and responsibilities of each of the committees of the Board of Directors is described below. Members serve on these committees until their resignation or until as otherwise determined by the Company Board.

 

Audit Committee

 

Each of the members of the Company’s audit committee satisfies the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and rules of the NYSE. The Company also determines that Ms. Schwab qualifies as an “audit committee financial expert” as defined in the SEC rules and satisfies the financial sophistication requirements of the NYSE. The Company’s audit committee is responsible for, among other things:

 

selecting a qualified firm to serve as the independent registered public accounting firm to audit the Company’s financial statements;

 

helping to ensure the independence and performance of the independent registered public accounting firm;

 

discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and the independent registered public accounting firm, the Company’s interim and year-end financial statements;

 

developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

reviewing the Company’s policies on and oversees risk assessment and risk management, including enterprise risk management;

 

reviewing the adequacy and effectiveness of internal control policies and procedures and the Company’s disclosure controls and procedures; and

 

approving or, as required, pre-approving, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

 

The Company Board has adopted a written charter for the audit committee which is available on the Company’s website.

 

Compensation Committee

 

Each of the members of the Company’s compensation committee meet the requirements for independence under the applicable rules and regulations of the SEC and rules of the NYSE. The Company’s compensation committee is responsible for, among other things:

 

reviewing, approving and determining the compensation of the Company’s officers and key employees;

 

reviewing, approving and determining compensation and benefits, including equity awards, to directors for service on the Company Board or any committee thereof;

 

administering the Company’s equity compensation plans;

 

reviewing, approving and making recommendations to the Company Board regarding incentive compensation and equity compensation plans; and

 

establishing and reviewing general policies relating to compensation and benefits of the Company’s employees.

 

The Company Board has adopted a written charter for the compensation committee which is available on the Company’s website.

 

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Nominating and Corporate Governance Committee

 

Each of the members of the nominating and corporate governance committee meet the requirements for independence under the applicable rules and regulations of the SEC and rules of the NYSE. The nominating and corporate governance committee is responsible for, among other things:

 

identifying, evaluating and selecting, or making recommendations to the Company Board regarding, nominees for election to our Board and its committees;

 

evaluating the performance of our Board and of individual directors;

 

considering, and making recommendations to the Company Board regarding, the composition of our Board and its committees;

 

reviewing developments in corporate governance practices;

 

evaluating the adequacy of the corporate governance practices and reporting;

 

reviewing related person transactions; and

 

developing, and making recommendations to the Company Board regarding, corporate governance guidelines and matters.

 

Our Board has adopted a written charter for the nominating and corporate governance committee, which is available on our website.

 

Code of Conduct and Ethics

 

We have posted our Code of Conduct and Ethics and expect to post any amendments to or any waivers from a provision of our Code of Conduct and Ethics on our website, and also intend to disclose any amendments to or waivers of certain provisions of our Code of Conduct and Ethics in a Form 8-K.

 

Compensation Committee Interlocks and Insider Participation

 

None of the Company’s officers currently serves, and in the past year has not served, (i) as a member of the compensation committee or the board of directors of another entity, one of whose officers served on the Company’s compensation committee, or (ii) as a member of the compensation committee of another entity, one of whose officers served on the Company Board.

 

Related Person Policy of the Company

 

The Company has adopted formal written policy providing that the Company’s officers, directors, nominees for election as directors, beneficial owners of more than 5% of any class of the Company’s capital stock, any member of the immediate family of any of the foregoing persons and any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest, are not permitted to enter into a related party transaction with the Company without the approval of the Company’s nominating and corporate governance committee, subject to the exceptions described below.

 

A related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which the Company and any related person are, were or will be participants in which the amount involves exceeds $120,000. Transactions involving compensation for services provided to the Company as an employee or director are not covered by this policy.

 

Under the policy, the Company will collect information that the Company deems reasonably necessary from each director, executive officer and, to the extent feasible, significant stockholder, to enable the Company to identify any existing or potential related-person transactions and to effectuate the terms of the policy. In addition, under the Code of Conduct, employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest.

 

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The policy will require that, in determining whether to approve, ratify or reject a related person transaction, our nominating and corporate governance committee, or other independent body of our Board, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, the Company’s best interests and those of our stockholders, as our nominating and corporate governance committee, or other independent body of our Board, determines in the good faith exercise of its discretion.

 

Our nominating and corporate governance committee has determined that certain transactions will not require the approval of the nominating and corporate governance committee, including certain employment arrangements of officers, director compensation, transactions with another company at which a related party’s only relationship is as a director, non-executive employee or beneficial owner of less than 10% of that company’s outstanding capital stock, transactions where a related party’s interest arises solely from the ownership of our Common Stock and all holders of our Common Stock received the same benefit on a pro rata basis and transactions available to all employees generally.

 

EXECUTIVE COMPENSATION

 

The following sets forth information about the compensation paid to or accrued by our principal executive officer and our two other most highly compensated persons serving as executive officers as of the periods indicated for services rendered for such periods. These executives are referred to as our “named executive officers.”

 

Summary Compensation Table

 

Name and Principal Position  Year  Salary
($)(1)
   RSUs
($)
   Stock
Options
($)(2)
   Bonus
($)
   All Other
Compensation
($)(3)
   Total
($)
 
Luvleen Sidhu  2020  $275,000   $100,300   $0   $0   $8,100   $383,400 
Chief Executive Officer  2019  $275,000   $0   $622,756   $0   $8,019   $905,775 
   2018  $250,000   $62,517   $0   $0   $7,500   $320,017 
Robert Savino(5)  2020  $250,000   $0   $0   $120,000   $7,319   $377,319 
Chief Product and  2019  $250,000   $0   $311,378   $100,000   $7,173   $668,551 
Technology Officer  2018  $250,000   $0   $0   $100,000   $6,715   $356,715 
Andrew Crawford  2020  $279,292   $0   $0   $0   $8,100   $287,392 
Chief Commercial Officer  2019  $279,292   $0   $0   $0   $8,100   $287,392 
   2018  $272,480   $54,501   $0   $0   $7,993   $334,974 

 

 
(1)BankMobile paid all amounts for fiscal year 2020.
(2)All stock options relating to Customers Bancorp stock were granted by Customers Bancorp on April 3, 2019 at a grant price of $18.62. Ms. Luvleen Sidhu was awarded 100,000 options. Mr. Savino received 50,000 options. The options were granted pursuant to a 5 year waterfall vesting schedule. Customers Bancorp accelerated vesting at the close of the Business Combination.
(3)All other compensation reflects 401(K) match.
(5)Robert Savino’s employment ended on January 13, 2021.

 

Employment Agreements

 

We currently have employment agreements in place with Ms. Luvleen Sidhu, our Chief Executive Officer, Andrew Crawford, our Chief Commercial Officer, Robert Diegel, our Chief Operating Officer, and Warren Taylor, our Chief Customer Officer.

 

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Ms. Luvleen Sidhu’s employment agreement has a term of two years and provides for immediate vesting of any equity incentive interests if terminated without cause or terminated for good reason. Ms. Luvleen Sidhu’s employment agreement automatically renews thereafter for successive two year periods unless either the Company or the employee give written notice to the other at least sixty (60) days prior to the end of the applicable term.

 

Messrs. Crawford, Diegel and Taylor’s employment agreements have a term of one year and provide for accelerated vesting of any equity incentive interests if terminated without cause or terminated for good reason. The employment agreements automatically renew thereafter for successive one-year periods unless either the Company or the employee give written notice to the other at least sixty (60) days prior to the end of the applicable term.

 

Ms. Luvleen Sidhu is entitled to receive an annual base salary of at least $275,000 pursuant to her employment agreement and incentive compensation in an amount, in such form, and at such time as approved by our Board. Such incentive compensation may take the form of cash payments (“Cash Bonus”), transfers of stock, stock appreciation awards, restricted stock units or stock options. Ms. Luvleen Sidhu is entitled to receive severance compensation in the event of a termination of her employment by the Company without “Cause” or by the executive for “Good Reason” in an amount equal to the sum of her then current base salary plus the average of the annual performance bonus (consisting of both cash and other incentive compensation, but excluding the Company match of any deferred compensation) provided to her with respect to the three (3) fiscal years of the Company immediately preceding the fiscal year of termination, for the greater of two (2) years or the period of time remaining in the applicable term, paid in equal installments on the normal pay dates following Ms. Luvleen Sidhu’s separation from service with the Company, subject to execution of a release of claims. Ms. Luvleen Sidhu is also eligible for employee benefits and shall be entitled to a fraction of any Cash Bonus for the fiscal year of the Company within which Ms. Luvleen Sidhu’s termination of employment occurs which, based upon the criteria established for such Cash Bonus, would have been payable to her had she remained employed through the date of payment.

 

Messrs. Crawford, Diegel and Taylor are entitled to receive an annual base salary of at least $279,292, $250,000 and $250,000, respectively, pursuant to their respective employment agreement and incentive compensation in an amount, in such form, and at such time as approved by our Board. Each of these executives are entitled to receive severance compensation in the event of a termination of his employment by the Company without “Cause” or by the executive for “Good Reason” in an amount equal to the sum of their then current base salary plus the average of the annual performance bonus (consisting of both cash and other incentive compensation, but excluding the Company match of any deferred compensation) provided to them with respect to the three (3) fiscal years of the Company immediately preceding the fiscal year of termination, for the greater of one (1) year or the period of time remaining in the applicable term, paid in equal installments on the normal pay dates following their separation from service with the Company, subject to execution of a release of claims. Messrs. Crawford, Diegel and Taylor are also eligible for employee benefits and shall be entitled to a fraction of any Cash Bonus for the fiscal year of the Company within which their termination of employment occurs which, based upon the criteria established for such Cash Bonus, would have been payable to them had they remained employed through the date of payment.

 

Equity Incentive Plan

 

We have also entered into our 2020 Equity Incentive Plan, which became effective upon the closing of the Business Combination. The 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 of which may be granted to employees, including officers, non-employee directors and consultants of us and its affiliates. Additionally, the 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. Initially, the aggregate number of shares of Common Stock that may be issued pursuant to stock awards under the Equity Incentive Plan after the Equity Incentive Plan becomes effective will not exceed 10% of the issued and outstanding shares of our common stock immediately after the closing of the Business Combination.

 

The maximum number of shares of Common Stock subject to awards granted under the Equity Incentive Plan or any other equity plan maintained by us during any single fiscal year to any non-employee director, taken together with any cash fees paid to the director during the year, will not exceed $300,000 in any calendar year.

 

The Equity Incentive Plan permits the grant of performance-based stock and cash awards. The Plan Administrator can structure such awards so that stock or cash will be issued or paid pursuant to such award only after the achievement of certain performance goals during a designated performance period.

 

Director Compensation

 

For fiscal year 2019, BankMobile did not provide director compensation to its directors. However, all of the directors are reimbursed for their reasonable out-of-pocket expenses related to their services as a member of the BankMobile board of directors. In connection with the Business Combination, we intend to approve and implement a non-employee director compensation policy.

 

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BUSINESS

 

Overview

 

Recognizing the product delivery flexibility demanded by the changing needs of the U.S. population in general and the millennial generation in particular, and the low cost of non-traditional distribution channels, Customers Bancorp launched the BankMobile business as a key strategic initiative in January 2015. Today, we offer 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 branchless, nationwide, digital distribution channels.

 

We were established as the technology arm of Customers Bank to facilitate deposits and banking services between a customer and an FDIC-insured partner bank. Today, we are one of the largest digital banking platforms in the country with over 2 million accounts serving middle income Americans, millennials and “digital natives” looking for a tech savvy banking experience. Our strategy is to generate sustainable revenue streams and “customers for life” through our technology platform and customer experience, which provide consumers with access to a full suite of banking products including checking, savings, personal loans, credit cards and student refinancing. We employ a customer centric approach with a focus on affordability, transparency and consumer friendly products. Our BaaS business model leverages well known partners’ existing students, customer and employee bases to achieve high volume, low cost customer acquisition relative to traditional banking models and provide deposit funding and loan sources to partner banks. Today we are employing this strategy in our Higher Education, White Label, and Workplace Banking businesses. Our digital banking platform includes modern cloud-based technology, proprietary onboarding screening, processing, and account servicing.

 

Company History

 

BankMobile Technologies, Inc. was incorporated in May 2016 as a wholly-owned subsidiary of Customers Bank (the “Bank”), a Pennsylvania-state chartered bank and wholly-owned subsidiary of Customers Bancorp, Inc. (NYSE: CUBI), a Pennsylvania corporation (“Customers Bancorp,” and together with the Bank, “Customers”). On September 30, 2017, a portion of the operations, assets, and liabilities related to the BankMobile business were contributed by the Bank to us. On January 4, 2021, we were acquired by Megalith Financial Corporation and changed our corporate name to BM Technologies, Inc. The Bank holds Company-serviced deposit accounts, deposit liabilities and related assets funded by the deposits held pursuant to applicable banking law, which requires that deposit accounts and liabilities are held by a chartered bank. We are not a bank, do not hold a bank charter, and do not have direct banking powers.

 

As part of its expansion of our business, in June 2016, Customers Bancorp completed the acquisition of Higher One, Inc.’s Refund Management Disbursements Services business (the “Disbursement business”). In connection with this transaction, Customers Bancorp acquired all of the assets of Higher One’s Disbursement business, including all property and equipment, all contractual relationships with education institutions, and all intellectual property and assumed normal business-related liabilities. In addition, Customers Bancorp hired approximately 225 Higher One team members, including team members who previously had managed the Disbursement business. Following the acquisition, as part of the integration of the then-existing BankMobile business and the business acquired from Higher One, Higher One’s OneDisburse product, which was sold to colleges and universities, was rebranded as BankMobile Disbursements, and the OneAccount consumer financial account was replaced with BankMobile Vibe. BankMobile substantially enhanced the features provided with the BankMobile Vibe product and significantly reduced its fees. Our management estimates that they saved students over $100 million in fees, when comparing to the average cost of a checking account as reported by the CFPB, in just the first two years after acquiring the business from Higher One in June 2016. In December 2017, we entered into an agreement to acquire the assets relating to the BlackboardPayTM financial aid credit balance disbursement solution from Blackboard Transact, Inc. for an aggregate purchase price of $1.5 million. BlackboardPay electronically delivered student financial aid to the campus ID credential or a stand-alone prepaid account.

 

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Today, our disbursement business serves as a market leader, with disbursements of over $10 billion annually, on approximately 725 college and university campuses across the United States, consisting of over 5 million signed student enrollments (“SSEs”), representing approximately one in three eligible SSEs throughout all of the higher education institutions in the United States based on the Department of Education’s IPEDS data. Since the acquisition of the Disbursement business from Higher One in June 2016, we have added approximately 960,000 SSEs representing approximately 25% growth to the SSE customer base. Our disbursement services provide not only revenue from fees charged to higher education institutions for those services, but also provide us with the opportunity to convert the students receiving disbursements into long-term customers of our partner bank, such that the partner bank becomes the “bank for life” for graduating and unenrolled students and services the financial needs of graduates throughout their lives, with our Company benefiting from the continued use of the BankMobile platform and through deposit servicing agreements with the partner bank.

 

The White Label business was commercially launched in April 2019 with T-Mobile through the launch of T-Mobile MONEY. On August 24, 2020, T-Mobile announced that all of the benefits of T-Mobile MONEY were being expanded to include the Sprint customer base that was acquired by T-Mobile.

 

We recently launched our Workplace Banking business and have signed multiple clients, including BenefitHub, one of the largest HR benefits marketplaces, which provide access to over 6 million potential customers. In this business, we work through benefits brokers and benefit marketplaces to provide our digital banking platform to HR departments around the country as an additional benefit to employees.

 

On August 3, 2020, we announced a collaboration with Google to introduce digital bank accounts in the Higher Education vertical. It is anticipated that this product will replace the current BankMobile Vibe offering available to students. The digital checking account will be built on top of our existing banking infrastructure and the accounts will be FDIC-insured. Google will provide the front-end user experience, which will have some aspects that is believed to be unique to the higher education market from the standard Google Plex account.

 

On August 6, 2020, we and Megalith, a special purpose acquisition company, announced that we had entered into a definitive merger agreement. Upon the January 4, 2021 closing of the transaction, the combined company was renamed BM Technologies, Inc. and was listed on the NYSE American. All of our serviced deposits and loans remained at the Bank following the closing of the transaction.

 

Industry Overview

 

Banking is one of the largest and most complex industries in the global economy and is characterized by intense competition between incumbent financial institutions, as well as with new challenger banks and non-bank technology providers. With the proliferation of technologies like social media and digital commerce, the industry is engaging with consumers through new channels and methods. The digital transformation is enabling non-bank institutions to partner with technology providers to offer their consumers with an ever-expanding product suite covering traditional banking and lending solutions. Forward-thinking companies are capitalizing on the opportunity to expand solutions for their consumers by partnering with banking as solution providers.

 

Favorable Industry Trends

 

The following are important trends that we believe will impact our growth and market opportunity:

 

Shift in Consumer Preferences — Technological advancements have driven a change in consumer banking preferences. Consumers are seeking financial solutions that are more cost-effective and digitally enabled. According to the 2017 Accenture Consumer Retail Banking Survey Summary, one in two consumers switch their primary banks due to discounts and promotions on fees. In addition, according to the 2019 PWC Consumer Banking Survey, one in three consumers switch primary banks for a better interest rate on their deposits.

 

Consumers are Seeking an Affordable Banking Alternative — Consumers are not only seeking, but demanding alternatives to the existing banking landscape. Based on the Cornerstone Performance Report in 2017, Americans are paying $34 billion in overdraft fees a year while one in three Americans is living paycheck to paycheck. Our management believe consumers will continue to adopt digital banking solutions that offer a more cost-effective solution.

 

Consumers Comfort with Mobile Financial Management — Historically, most consumers’ banking activity has been conducted in person at brick and mortar financial institutions, however, as mobile technologies continue to advance, consumers are increasingly using mobile browsers and leveraging native mobile applications. According to the 2019 PWC Consumer Banking Survey, 63% of consumers are using mobile channel more frequently. Our management believes this shift will drive increased demand as a result of the increased convenience for consumers in completing financial transactions and will create long-term client relationships as consumers adopt our mobile banking applications, which we deliver on a white-label basis, customized to our clients’ particular needs.

 

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Shift in Consumer Behavior Related to COVID-19 — As a result of the COVID-19 pandemic, our management believes consumer preferences will change for the foreseeable future to prefer digital (e.g., mobile and web) customer experiences as opposed to going into brick and mortar locations for banking needs. We believe that COVID-19 will accelerate the shift towards digital providers, as consumers will be less interested in going into physical locations and handling physical money and more accepting of digital banking. While our year-over-year interchange and card revenue has declined in part due to COVID-19, we expect the accelerated shift to digital banking to outweigh and outlast any short term COVID-19 adverse effects on consumer behavior.

 

Expanding Financial Service Offerings — We believe that more companies will continue to adopt financial service offerings to deepen their relationship with their consumers and grow their revenue opportunity. Our management believes that we are well positioned to deliver banking as a service solutions to these companies.

 

Competitive Strengths

 

Market Leadership in Disbursements — Our Disbursement business serves as a market leader in higher education student disbursements, serving approximately 725 college and university campuses across the United States, consisting of over 5 million SSEs, representing approximately one in three eligible SSEs throughout all of the higher education schools in the United States. The platform currently supports disbursements through ACH, paper check and transfer into a BankMobile Vibe checking account, with an enhanced digital banking offering planned to launch in 2021 through the Google partnership.

 

High-Volume, Low-Cost Customer Acquisition Strategy — We believe that we acquire customers at significantly lower costs than others in the banking industry through our B2B2C distribution model. We drive customer acquisition and our marketing engine through a differentiated distribution model that leverages both captive distribution channels and our partners’ brand equity to establish trust and accelerate adoption by consumers. We have achieved net customer acquisition cost of less than $10 per customer, which we believe is very attractive compared to other digital banking platforms and traditional retail banks where the cost of acquiring customers is estimated to be between $350 and $1,500 per customer, according to ARK Investment Management LLC’s research.

 

Demonstrated Ability to Integrate Acquisitions — Since inception, we have completed two acquisitions. We have successfully integrated new employees, technology assets and certain contracts from those acquired entities. Our acquisitions of HigherOne’s disbursements business and Blackboard Transact Assets have allowed us to strategically enter new vertical markets and further penetrate existing ones.

 

Differentiated Banking-as-a-Service Platform — Our management team believes that our full BaaS offering is unique in the market. We provide an end-to-end offering that provides access to primary digital banking technology, full-service banking support, compliance, deposit operations, fraud management, customer care, access to partner banks and FDIC insurance. We also anticipate providing an attractive revenue share to our partners by partnering with Durbin Amendment-exempt banks. Our platform is customizable for our white label partners to provide unique customer-centric experiences that can differentiate their product offering and integrate with their existing customer experience.

 

Demonstrated Ability to Establish Relationships with Market Leaders — Leveraging strong industry relationships, a unique customer acquisition model and a proven platform, we have established sticky relationships with market leaders. In April 2019, we launched our first white label banking partnership with T-Mobile. The product enabled T-Mobile to offer its customers a digitally-enhanced bank account, while providing us and our partner banks with low-cost and high-volume customer acquisition opportunities through T-Mobile’s extensive retail customer base. Additionally, in August 2020, we entered into an agreement with Google to launch digital bank accounts for the higher-education market.

 

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Deep Understanding of the Banking Landscape — We believe that we are unique in the market given our deep FinTech and banking experience. We have been part of a bank since our inception and have banking DNA and deeply understand and respect the regulatory environment.

 

Experienced Management Team — Our management team is highly experienced, collectively having spent decades in the banking, student disbursements, or related fintech industries with the members of the executive management team averaging 24 years of relevant industry experience. The management team has developed a strong culture of innovation and the ability to execute.

 

Product and Service Offerings

 

We generate revenue from our digital banking platform and from disbursement services. The majority of our revenue is generated through customers’ usage of digital checking and savings accounts offered through the banking platform. The largest source of revenue from the digital checking and savings accounts is interchange income, which is paid by the merchant when an account holder uses their debit card. The second largest source of revenue is deposit servicing fees, which are fees paid to us by our partner bank to source and service deposits. The third, and smallest, source of revenue related to the digital checking and savings accounts are account fees that some users may pay to us. Additional sources of our revenue include subscription revenue paid by colleges and universities for disbursement services and subscription and maintenance fees paid by white label banking customers. Approximately 85% of our revenue in 2022 is expected to come from existing business relationships.

 

“Banking-as-a-Service” Platform Offerings

 

We connect banking customers to partner banks digitally through our white-label or co-branded apps, websites, and other channels. Customers have access to checking, savings, and lending products, with every feature required for customers to use the BankMobile checking account as their primary bank. We support VIP product pricing, instant virtual and physical debit cards, bill pay, mobile check deposit, money transfers, free access to 55,000 ATMs nationwide, cash deposits to 70,000 MasterCard repower locations, the ability to get paid up to two (2) days early with direct deposit, in-app direct deposit switching, and similar customer friendly technology enabled services.

 

We provide our partners with the technology to offer a full white-label primary digital banking experience to the end consumer with an omni channel approach (mobile, web, Alexa, etc.). This is delivered through our “Banking-as-a-Service” Platform, which is a modern, native cloud stack that enables our partners to create specialized banking experiences that are embedded in partner’s business and highly differentiated in the marketplace.

 

We also provide full-service banking support to our partners including deposit operations, compliance, debit card issuance, customer care, fraud management, core processing, ATM access, data analytics and reporting, and access to deposit and lending products from multiple bank partners. Our full-service delivery of digital technology, banking operations, and bank partnerships enables our partners to launch a full financial services marketplace tailored to their business strategy.

 

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Our digital banking product offering is described below:

 

“Primary-ready” branded digital bank — Support for multiple bank products, including checking and savings accounts, as a financial services marketplace via one cohesive user interface.  
     
Modern omni-channel mobile and web apps — Consistent digital experience across channels.  
   
Frictionless instant signup — Supports integration with partner’s existing sales channels while giving partner customers quick access to banking services.  
   
Path-to-primary prompts — Contextualized early-life experience that guides customers to switch banks across mobile, web, email, and push notifications.  
   
Customized partner rewards — creates differentiated offerings by supporting VIP pricing and aggregated rewards based on customer behavior across both partner and bank products.  
   
Instant Business-to-business-to-customer (B2B2C) disbursements — Supports instant deposit upon account opening to fulfill partner deposit use cases, such as a retail rebate.  
   
Money movement — Support for in-app direct deposit switching, cash load, mobile check deposit, transfers, bill-pay, person-to-person transfer, ATM’s, and virtual/physical debit cards using one simple “Add, Move, Spend” money user experience.  

 

 

Our “Banking-as-a-Service” technology solution is described below:

 

Digital Clients — Modern omni-channel mobile banking app and web technologies can be branded per partner.  
     
BaaS Customer HUB — Real-time aggregated platform enables cross-industry, customer-centric experiences such as VIP pricing, gamified offers, multi-product bundling, and contextual digital communications. Enables delivery of a financial services marketplace across multiple banking products from multiple core banking systems in one cohesive customer experience.  
   
Value-added Banking Services — Frictionless customer-oriented signup and risk-based money movement engine optimizes the digital sales funnel across multiple products, while enabling intelligent fraud mitigants that preserve the customer experience.  
   
Partner Integration Layer — Partner application programing interfaces (APIs) allow for deep and customized experiences, such as partner-embedded bank signup and instant monetary disbursements based on a partner offer.  
   
Cloud Native Technology — Enables innovative banking solutions with cost-efficient scale, high reliability, and reuse to multiple partners.  
   
Core Banking Systems — “Primary bank” features at the depth and breadth that bank customers expect.  

 

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Disbursement Business

 

Our Disbursement business assists higher education institutions in their distributions of funds to students. The disbursement business generates subscription revenue from colleges and universities for disbursement services and also generates customers on our digital banking platform who may choose to receive their disbursement in our product called BankMobile Vibe. When a student receives Federal student aid and/or loans, the higher education institution is responsible for handling the application of those funds (“disbursements”). The institutions first apply the disbursements to any allowable charges, such as tuition and related fees, along with room and board or on-campus housing or dining. The excess money becomes a payment to students and is referred to as a refund. Beyond Federal student aid and loans, additional disbursements facilitated by us may include private student loans, PLUS loans (loans in the names of a student’s parents), student payroll, refunds for dropped classes or overpayments, and federal stimulus payments such as the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. We work with institutions under contract to provide the administrative activities associated with disbursements and payment of refunds, while giving students the option of moving the refund balance to a new BankMobile Vibe account, to their existing bank account through an ACH transfer, or through a disbursed paper check (paper checks are currently offered as a disbursement option to fewer than a third of SSEs).

 

The Disbursement business handled over $10 billion of payments in 2019 related from higher education institutions that were ultimately transmitted to students. The Disbursement business’ services simplify or eliminate many of the complexities higher education institutions and students face with regard to timing, compliance with regulations, staffing needs, technology demands, audit/record keeping and general customer care, quality assurance and education features associated with tuition, expense reimbursements and personal financial education. Clients are provided access to our proprietary technologies, reporting features, infrastructure and service teams to appropriately and seamlessly handle the disbursements of financial aid and comply with Department of Education laws.

 

We provide options for the institutions and students as to how refunds are transmitted, including depositing into a new or existing BankMobile Vibe account, to another bank through an ACH transfer, or through a disbursed paper check. In 2019, the BankMobile Vibe account product averaged approximately $500 million in balances for the year and had approximately $2.4 billion in spend volume related to approximately 1 million active bank accounts. The BankMobile Vibe account is a deposit account insured by our FDIC insured partner bank, and provides a MasterCard® Debit card, and other digital banking services and features such as money management tools. BankMobile Vibe is cost competitive and tailored to the campus communities that we serve, providing students with convenient and faster access to disbursement funds. 30% to 35% of our active student accounts have a deposit or spend in 5 out of the last 6 months. Approximately 10% of our active student accounts deposit $300 or more each month into their account, and historically, active student customer retention has been close to 70%.

 

Strategy

 

Our BaaS business model leverages partners’ existing customer bases to achieve high volume, low cost customer acquisition in our Higher Education Disbursements, White Label, and Workplace Banking businesses, and provide deposit funding to partner banks. We are targeting to add one new large partner per year and are currently in multiple RFP processes. In all businesses, we strive to acquire, engage, and retain customers at a lower cost than traditional banks. We do this by working with partners, including colleges and universities, white label partners, and large employers and benefits brokers. These three businesses are described below.

 

Student Banking

 

Through the Higher Education Disbursement business, we partner with higher education institutions to provide disbursement and other services to their students. These disbursement services provide us with a low cost, high volume customer acquisition opportunity for the digital banking product, as the disbursement and refund process allows us to offer students the option of having their refund deposited into a new or existing BankMobile Vibe account. This opens opportunities for us to create “customers for life,” as the student customers graduate or leave school and continue to use our products and services. In addition, as new students enter higher education institutions each year, we have new opportunities each year to acquire additional customers for our bank partners.

 

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Access to these potential student customers is significantly driven by our relationships with higher education institutions’ IT departments. While our disbursement business serves as a market leader in disbursements on approximately 725 college and university campuses across the United States, an important element of our strategy is to increase the number of higher education institution clients. As part of that strategy, our sales team intends to leverage the Disbursement business’ deep experience in providing the higher education industry with cost-saving disbursement services, with particular focus on higher education institutions that are relying either on inefficient in-house disbursement solutions or service-light software solutions.

 

The BankMobile Vibe product gives students quick access to their financial aid refunds along with a secure, low-cost, high-value digital banking experience, access to 55,000 free ATMs, and several additional features designed to make it a compelling option for students. Besides being the fastest way for students to get access to their initial deposit, BankMobile Vibe provides account holders with exclusive offers through partnerships with Bartleby, Udemy, and Billshark. Additionally, we believe that we have a one-of-a-kind rewards program that was launched four years ago and recognizes students for good financial behavior and academic achievements. Students earn “stamps” for maintaining a positive balance, setting up balance alerts, allocating a budget and self-reporting their GPA. Each stamp earns an entry into the Student Success Sweepstakes, which awards $10,000 four times a year towards student loan pay-downs.

 

White Label Banking

 

A key element of our strategy is the development of additional relationships with white label partners. By providing “Banking-as-a-Service,” we are able to connect non-bank businesses with partner banks to provide them with the technology and banking infrastructure to allow their customers to access banking services, including free checking, and other financial services products they may not have access to otherwise, as well as rewards and incentives the businesses may want to provide to better attract, engage and retain their customers. The white label strategy allows us to leverage many of the assets and expertise developed through providing services through the Disbursement business to higher education institutions, and our management believes that this provides the ability to launch a full-featured digital banking platform at a fraction of the cost of a start up with the flexibility to specialize valuable differentiators per market beyond what a large incumbent bank could support. The white label strategy also allows us to leverage clients’ existing direct-to-consumer relationships and continue to provide additional low-cost and high-volume customer acquisition opportunities.

 

In February 2017, we entered into our first white label banking partnership with T-Mobile. The product was commercially launched in April of 2019, enabling T-Mobile to offer its customers a digitally-enhanced bank account, while providing us with low-cost and high-volume customer acquisition opportunities through T-Mobile’s extensive retail customer base. The T-Mobile MONEY account currently offers no account fees, and 4% interest on balances up to $3,000 for qualifying T-Mobile customers among other compelling features.

 

Currently, T-Mobile is our only material white label partner. We have a strong pipeline of other white label partners with an addressable market of over 100 million potential end customers, not including T-Mobile Money customers. The criteria for a white label partner are having strong brand equity, access to millions of customers and a “natural checkout moment” where it makes sense to interject the bank account to improve the customer experience.

 

Workplace Banking

 

Similar to white label banking and student banking, in the workplace banking business, we reach end consumers by working with key partners to leverage their existing employee base. In workplace banking, we work with benefits brokers who target Fortune-1000 companies, and also benefit marketplaces, to offer a digital banking platform and financial wellness educational materials to employees, as part of an employer’s broader benefits package. Most recently, we have signed an agreement with “Benefithub,” one of the largest HR benefit marketplaces, which is anticipated to provide access to at least six million employees.

 

Customers

 

Higher Education Institutions

 

The Disbursement business serves as a market leader in disbursements, providing disbursement and payments services to approximately 725 college and university campuses across the United States. The Disbursement business’ products and services address the unique and specific financial transactional, reporting and customer service needs of these higher education institution clients. The services provided by the Disbursement business to these clients include business-to-business features that support those specific institutions. These institutional relationships are essential to the generation of individual customers.

 

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Additional details on the Disbursement business customer base:

 

Approximately 87% schools are public colleges and universities.

 

Nearly half of the campuses served are 2-year schools.

 

We believe that the risk of any significant customer losses due to institutions closing is very low as only 1% of campuses served appear on the U.S. Department of Education’s Heightened Cash Monitoring list.

 

Retail Customers

 

Our individual customers currently come primarily through the higher education and white label channels; our workplace banking channel was only recently launched. As our white label and workplace banking businesses further develop, it is expected that additional individual customers will be originated through various white label businesses and relationships with Fortune-1000 employers nationwide. Students and former students typically become customers of ours through the financial aid disbursement process. Students that choose to maintain a BankMobile Vibe bank account have the protection of an FDIC insured deposit account provided by our banking partners and have access to a MasterCard® Debit card and other digital banking services.

 

Approximately 56% of our student account holders are 20-29 years old.

 

Approximately 66% of our student account holders are female.

 

Approximately 24% of our student account holders are employed full time, 36% are employed part-time, and 39% are not employed.

 

Growth Drivers:

 

We intend to drive future growth in the following ways:

 

Further Expand within Higher Education

 

We expect growth in the Higher Education vertical to be driven by two factors: increased adoption rates; and growth in the SSE base. Card revenue and deposit servicing fees from the higher education vertical are the largest sources of revenue today for us and we expect to be able to expand our revenue in this segment by increasing the adoption rate of BankMobile Vibe accounts. The primary driver in initial sign-ups for BankMobile Vibe accounts is the selection by a student to receive a refund payment through a BankMobile Vibe account as opposed to receiving a check or having an ACH payment sent to a different bank. We believe that as a result of the announced collaboration with Google and additional future partnerships, we will be able to increase the percentage of students that choose to receive their disbursement in a BankMobile Vibe account. Additionally, we also expect to continue to expand our penetration of the market for higher education disbursement services as we expand to serve additional college and university campuses.

 

Further Expand within White Label and Workplace Banking Verticals

 

We also expect to grow meaningfully by expanding within our existing white label and workplace banking partners and by signing up additional white label and workplace banking partners. The revenue from both of these verticals represents a small portion of our revenue today and a very large potential market. Additionally, on August 24, 2020 T-Mobile announced that they were expanding the benefits of T-Mobile MONEY to the newly acquired Sprint customer base, which further increases the size of our potential addressable market. We also expect to be able to add additional large white label partners. We have seen significant interest from large companies to offer financial services to its existing loyal customer bases and we believe that our BaaS offering is positioned well to serve this market. We are targeting to add one new large partner per year and are currently in multiple RFP processes.

 

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Expand with Existing Retail Customers

 

As we generates a substantial number of new customers on an annual basis at a low customers acquisition cost of less than $10 per customer, our management believes that there are significant opportunities to expand our business with those customers beyond primarily checking and savings accounts. Additionally, our management believes that in the future we will be able to generate revenue by extending credit to our customers. We currently have relationships and products built to offer credit cards and loans to our customer base, however this business today is negligible as there is a misalignment in our customer base and the credit criteria for our current partner bank. As a commercial bank, Customers Bank will only extend credit to prime customers. We believe that in the future we will be able to establish partnerships with companies that specialize in extending credit to sub-prime customers, which will allow us to offer credit to a much larger portion of our existing customer base.

 

Our customer acquisition costs are determined by aggregating the total cost of our sales and marketing departments, which drive new account acquisition, as well as any bounty costs paid to our white label partner to obtain gross costs, which is then reduced by the subscription fees paid to us by colleges and universities, to calculate total customer acquisition costs. This cost is then divided by the number of new active accounts in the period to get a cost per account.

 

Strategic Acquisitions

 

We have successfully acquired and integrated two acquisitions. Our acquisitions have contributed meaningfully to our growth, product offerings and industry expertise. We plan to continue to evaluate opportunistic acquisitions that would allow us to either expand our product offerings to existing customers or allow us to enter into new verticals.

 

Sales and Marketing

 

Our sales and marketing efforts separately target our key markets, which include higher education institutions and their students, corporate white label partners, workplace lenders and direct to consumer opportunities.

 

Higher Education Institutions

 

Our dedicated and experienced sales team actively markets our products and services to higher education institutions in the United States. This team identifies potential new clients through a variety of channels, including industry publications, higher education regional and national tradeshows, partnerships with referral sources, existing client showcase events and through word-of-mouth referrals. The sales process typically includes an extended solicitation period, which can be lengthy, and that usually includes phone conversations, in-person presentations and formal proposals to various levels of administrators. Historically, the primary points of contact at these potential clients have been an institution’s chief financial officer, chief business officer, controller, and bursar.

 

An important part of our sales effort is educating potential clients about the benefits of our products and services for both the higher education institution and its students. Our management team believes that institutions are attracted to the idea of partnering with us to provide their payment functions because of the resulting operating efficiencies, compliance monitoring, outsourcing of student service phone calls, and the potential benefits to students, such as receiving financial aid disbursements more quickly and conveniently.

 

Students

 

Once we enter into a contract with a higher education institution, we begin focusing marketing efforts on the institution’s students. Our consumer-marketing department conducts student-directed marketing efforts with a primary goal of increasing awareness and usage of our services, including both disbursements choices and selection of the BankMobile Vibe account.

 

We work closely with our higher education institutional clients to communicate the benefits of our products and services through school-branded communications and literature in an effort to make students aware of the BankMobile Vibe benefits before they make a refund selection.

 

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Corporate White Label Partners

 

We have a direct sales approach for white label opportunities and identify targets through a variety of channels. We target opportunities where we believe we can leverage our deep BaaS experience to successfully support white label companies. Our target market is broad and includes large retail and subscription-based companies with a significant customer base, large member organizations (such as labor unions), financial technology, retail, government, and payroll services.

 

An important part of our sales effort is educating potential white label partners about the benefits of our products and services and how a digital banking offering can benefit their customers and build brand loyalty. We are in various stages of discussions with multiple companies and have found that these companies are attracted to the idea of partnering with us to provide financial accounts and products as well as payment functions because of the resulting operating efficiencies, brand enhancements, customer retention value, and revenue opportunities that our services provide.

 

Workplace Banking Partners

 

We have a direct sales approach for workplace banking opportunities, with a dedicated sales effort targeting nationwide benefits brokers. Those brokers have the nationwide connections with Fortune-1000 companies to sell our products and services in the United States. Financial education and benefits are important to employers today, and with our digital banking platform, employers are able to offer attractive, low cost financial products to their employees along with financial education, and we are able to access their large employee bases.

 

Customer and Client Service

 

We are dedicated to addressing the needs of both our higher education institutional clients and student customers. We believe that our multi-pronged approach to providing cost-effective customer service helps support client and customer satisfaction.

 

Higher Education Institutions

 

We believe that our sales and marketing efforts are enhanced by providing reliable after-sale service. We provide higher education institutional clients with a variety of service touch points, such as a dedicated relationship manager, administrative support and by hosting conferences. Our dedicated relationship managers are responsible for ensuring strong relationships are maintained with each institutional client and for assisting, supporting and providing updates on the quality and use of our services. Our administrative support is designed to address a range of client issues from client-specific technical questions to client service matters that require management’s attention. During our conferences, clients can meet in person with our management and staff to learn about new features and products, updates to current offerings and build long lasting personal relationships.

 

Customer Care for Students

 

We offer phone channels seven (7) days a week and web-based self-service tools for all students, available 24/7. Regardless of refund preference, students have the ability to make or update a refund preference selection, manage notifications, reset their password and update their profile information. Questions can be easily answered through our FAQ database, co-branded student website or 24/7 automated voice response system. In addition, if a student would like to speak with a live agent they can call a toll-free customer service number specifically for college students. We never charge a fee for speaking with a Customer Service Agent. Customer Service is available 8:00 am to 11:00 pm eastern standard time, Monday through Friday, with limited Saturday and Sunday hours as well.

 

We offer customer service in English and Spanish. In addition, the Automated Services Line (commonly referred to as an “IVR”) is supported in both English and Spanish and provides all students access to a variety of features and functions 24/7/365 via a toll-free phone call. We also support both relay calls and TTY through toll-free customer service.

 

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Key Relationships with Third Parties

 

We maintain relationships with a number of third parties that provide key services to us. Partnering with these third-party providers allows us to streamline operations and infrastructure and provide a high level of specialized services. Our primary third-party provider relationships are described below.

 

Customers Bank

 

Customers Bank is our current bank partner. The Bank holds the FDIC insured deposits that we source and service. The Bank is also the issuing bank on our debit cards, and the Bank pays us a deposit servicing fee for the deposits generated and passes through interchange income earned from debit transactions.

 

FIS Global

 

FIS provides back-end account and transaction data processing for BankMobile Vibe accounts and BankMobile Vibe cards and T-Mobile MONEY accounts, including core processing, ACH processing, issuance authorization and settlement, ATM driving and related services. FIS receives a monthly fee for services it provides and for related software licenses.

 

MasterCard International Incorporated

 

MasterCard provides the payment network for MasterCard debit cards issued by Customers Bank to our customers. We arrange for the marketing of both embossed and unadorned MasterCard debit cards. We receive various incentives, both directly from MasterCard and FIS (via the NYCE network), for achieving growth targets in the issuance and promotion of accounts.

 

Ubiquity Global Services

 

Ubiquity provides English and Spanish customer care and IVR services to us, including inbound and outbound customer care services. Ubiquity Global Services operates via several off-shore Ubiquity managed customer service centers located in the Philippines and El Salvador. Ubiquity receives a monthly fee for the services it provides.

 

Competition

 

Consumer Banking Competition

 

Competition for us exists both at the digital banking product level, which is the product used by consumers, and in the disbursement business and Banking -as-a-Service businesses, which are the channels that we use to acquire digital banking customers.

 

Our competitive positioning versus both traditional banking channels and other digital banking platform (which often refer to themselves as ‘Challenger Banks’ or ‘Neobanks’) relies on our belief that a B2B2C model not only is more effective in deflecting the cost of acquisition, but also that it can be more successful in getting consumers to open, fund and use their accounts. We do this by working with brands that have large addressable markets and that consumer’s trust with whom they have recurring transactions. Due to our low cost of acquisition and blended offers with partner ecosystems, our consumer products can be competitively priced compared to both physical and digital-only consumer banks, and can provide an offer or reward that may be unique in the industry. Our baseline digital banking experience and related financial products are maintained above or on-par with other consumer banks, which enables us to retain customers at a rate above or on-par with the industry

 

Customers acquired through our Disbursements products and services have access to traditional bank branches that may have a physical presence near the university and college campuses it serves, large national banks, as well as smaller regional or local banks, digital banks, other student and disbursement businesses, and local and national loan providers. Our BaaS and Workplace Banking products also compete with traditional bank deposit products, branch delivery channels, and digital banks.

 

There are many Digital Banking Platform competitors that also offer competitive digital checking and savings accounts including Chime, Varo, MoneyLion, N26, and many others. Many of the Digital Banking Platform competitors are backed by large Venture Capital funds and have raised substantial amounts of funding to date.

 

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Student Refund Disbursements — B2B Competition

 

Our Disbursements products and services compete against all forms of payment, including paper-based transactions (principally checks), electronic transactions such as wire transfers and Automated Clearing House (“ACH”) payments and other electronic forms of payment, including card-based payment systems and banks providing student disbursement services. Many competitors, including Blackboard, TouchNet Information Systems, Inc., Heartland Payment Systems and Nelnet, Inc., provide payment software, products and services that compete with those we offer. Several banks, notably PNC and Bank of America, also provide disbursement services. In addition, the Disbursement business also competes with in-house providers of disbursement services.

 

Banking-as-a-Service — B2B Competition

 

Our BaaS business competes with financial solutions delivered in-house by potential partners, with banks that only white-label their charter, with technology firms that may only have a portion of a full financial services solution, by emerging BaaS providers that may be more comprehensive in nature, and by large retail banks that may entertain partner co-brand models. Competitors include Green Dot, BBVA, Wells Fargo, and others. Our main differentiation with all these potential competitors is the ability to provide a proven and comprehensive suite of digital-first financial services, by delivering all the services required for a partner to enter the financial services space, and by highly tailoring the consumer experience, product pricing, and rewards as a differentiating offering inside a partner’s ecosystem.

 

Intellectual Property

 

The protection of intellectual property, including trademarks (and particularly those relating to the names associated with our product and service offerings, including “BankMobile,” “BankMobile Vibe” and “BankMobile Disbursements”), patents, copyrights, and domain names is critical to our success. We protect our intellectual property rights by relying on federal, state and common law rights, and also on confidentiality procedures and contractual restrictions to establish and protect our proprietary rights in our products and service offerings. In addition, we have obtained and are in the process of applying for patents and copyrights to protect key elements of our products and delivery methods and believe this intellectual property will allow us to continue to differentiate our business from potential competitors. Effective protection of intellectual property rights is expensive, can frequently result in disputes that may require litigation to resolve, and may not be successful.

 

Seasonality

 

Deposits related to our products fluctuate throughout the year due primarily to the relationship between the deposits level and the typical cycles of student enrollment in higher education institutions. Deposit balances typically experience seasonal lows in June and July when student enrollment is lower and experience seasonal highs in September and January when student enrollment is high and individual account balances are generally at their peak.

 

Employees

 

As of September 30, 2020, we had approximately 310 employees. All of our employees are located in the United States. None of these employees are represented by any collective bargaining unit or is a party to a collective bargaining agreement.

 

Properties

 

At September 30, 2020, we leased two facility locations; Customers Bank is listed on the lease as lessee on one of the locations with efforts to assign to us underway; BankMobile Technologies, Inc. is listed as lessee on the other location. Additionally, we have several employees that currently sit in Customers Bank locations. The table below summarizes these business locations by county and state:

 

County  State  Leased 
Delaware(1)  PA   1 
New Haven(2)  CT   1 
Total facilities      2 

 

 
(1)Includes a 7,326 square foot facility space utilized by our business personnel with a lease expiring in 2022. BankMobile Technologies, Inc. is the lessee on this lease.
(2)Includes a 23,000 square foot facility space utilized by BankMobile Disbursement and Operations personnel with a lease expiring June 2022. Customers Bank is the lessee on this lease, efforts to assign to us is underway.

 

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Regulation

 

We are not subject to direct banking regulation, except as a service provider to our partner banks. We are also subject to the regulations of the Department of Education, due to our student Disbursements business, and are periodically examined by them.

 

Our contracts with most of our higher education institutional clients requires us to comply with numerous laws and regulations, including, where applicable, regulations promulgated by the Department of Education (“ED”) regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV; FERPA; 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 GLBA. Other products and services offered by us may also be subject to other federal and state laws and regulations.

 

United States Department of Education

 

Because we provide services to some higher education institutions that involve handling federal student financial aid funds, we are considered a “third-party servicer” under Title IV of the Higher Education Act of 1965 and the related regulations (“Title IV”), which govern the administration of federal student financial aid programs. Those regulations require a third-party servicer annually to submit a compliance audit conducted by outside independent auditors that cover the servicer’s Title IV activities. Each year we are required to submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the ED, which includes a report by an independent audit firm. This yearly compliance audit submission to ED provides comfort to our higher education institution clients that we are in compliance with the applicable third-party servicer regulations. We will also provide this compliance audit report to clients upon request to help them fulfill their compliance audit obligations as Title IV participating institutions.

 

Under ED’s regulations, a third-party servicer that contracts with a Title IV institution acts in the nature of a fiduciary in the administration of Title IV programs. Among other requirements, the regulations provide that a third-party servicer is jointly and severally liable with its client institution for any liability to ED arising out of the servicer’s violation of Title IV or its implementing regulations. ED is also empowered to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil penalties on the violating servicer. We may enter into “Tier 1” arrangements with educational institutions, which are subject to more stringent regulations than certain other (“Tier 2” or “non-covered”) arrangements.

 

Additionally, on behalf of our higher education institution clients, we are required to comply with ED’s cash management regulations regarding payment of financial aid credit balances to students and providing bank accounts to students that may be used for receiving such payments. Violations of Title IV or its implementing regulations could subject us to sanctions. There is limited enforcement and interpretive history of Title IV regulations.

 

Banking Regulators

 

We are not subject to direct banking regulation, except as a service provider to our partner banks.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth information regarding the beneficial ownership of shares of our common stock by:

 

  each person known by us to be the beneficial owner of more than 5% of any class of our common stock;

 

  all executive officers and directors of the Company.

 

Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days.

 

In the table below, percentage ownership is based on 12,200,302 shares of Class A common stock outstanding as of February 10, 2021. The table below does not include the Class A Common Stock underlying the Placement Warrants held or to be held by the Company’s officers or Sponsor because these securities are not exercisable within sixty (60) days. This table also assumes that there are no issuances of equity securities under the 2020 Equity Incentive Plan.

 

Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. Unless otherwise noted, the business address of each of the following entities or individuals is 201 King of Prussia Road, Suite 350, Wayne, PA 19087.

 

Name and Address of Beneficial Owner (1)  Number of
Shares
Beneficially
Owned
   % of Class 
Directors and Named Executive Officers        
Luvleen Sidhu(1)   809,248    6.64%
Pankaj Dinodia   0    * 
Mike Gill   0    * 
Aaron Hodari(2)   0    * 
Brent Hurley   10,322    * 
A.J. Dunklau   2,064    * 
Marcy Schwab   0    * 
Robert Ramsey(3)   57,805    * 
Robert Diegel(4)   97,612    * 
All executive officers and directors as a group (9 individuals)   977,051    8.01%