DOCUMENTS INCORPORATED BY REFERENCE
None.
Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of shareholders of Priority Technology Holdings, Inc., scheduled to be held on May 22, 2024, will be incorporated by reference in Part III of this Form 10-K. Priority Technology Holdings, Inc. intends to file such proxy statement with the Securities and Exchange Commission no later than 120 days after its fiscal year ended December 31, 2023. M I ACQUISITIONS, INC.
Table of Contents
Cautionary Note Regarding Forward-looking Statements
Some of the statements made in this Annual Report on Form 10-K for the Year Ended December 31, 2017FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K containsconstitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. The statements contained in this report that are not purely historical are forward-looking statements. Ourfederal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management’smanagement's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward-looking statements. Furthermore, statements regarding our initial business combination, including the anticipated initial enterprise value and post-closing equity value of the combined company, the benefits of the proposed initial business combination, integration plans, expected synergies and revenue opportunities, anticipated future financial and operating performance and results, including estimates for growth, the expected management and governance of the combined company, and the expected timing of the transactions contemplated by the Purchase Agreement, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would”
"anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" 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 contained in this reportAnnual Report on Form 10-K include, but are not limited to, statements about: •negative economic and political conditions that adversely affect the general economy, consumer confidence and consumer and commercial spending habits, which may, include, for example,among other things, negatively impact our business, financial condition and results of operations;
•competition in the payment processing industry;
•the use of distribution partners;
•any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses or otherwise;
•any breakdowns in our processing systems;
•government regulation, including regulation of consumer information;
•the use of third-party vendors;
•any changes in card association and debit network fees or products;
•any failure to comply with the rules established by payment networks or standards established by third-party processors;
•any proposed acquisitions or dispositions or any risks associated with completed acquisitions or dispositions; and
•other risks and uncertainties set forth in the "Item 1A - Risk Factors" section of this Annual Report on Form 10-K. We caution you that the foregoing list may not contain all of the forward-looking statements
about our: | ● | ability to complete our initial business combination; |
| ● | success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination; |
| ● | officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination, as a result of which they would then receive expense reimbursements; |
| ● | potential ability to obtain additional financing to complete our initial business combination; |
| ● | pool of prospective target businesses; |
| ● | the ability of our officers and directors to generate a number of potential investment opportunities; |
| ● | potential change in control if we acquire one or more target businesses for stock; |
| ● | the potential liquidity and trading of our securities; |
| ● | the lack of a market for our securities; |
| ● | use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or |
| ● | financial performance following our initial public offering. |
made in this Annual Report on Form 10-K.
The forward-looking statements contained in this reportAnnual Report on Form 10-K are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assuranceYou should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you 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, including the risk factors set forth in the "Item 1A - Risk Factors" section of this Annual Report on Form 10-K, that may cause our 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, (i) risks related to the expected timing and likelihood of completion of the pending initial business combination, including the risk that the transaction may not close due to one or more closing conditions to the transaction not being satisfied or waived, such as regulatory approvals not being obtained, on a timely basis or otherwise, or that a governmental entity prohibited, delayed or refused to grant approval for the consummation of the transaction or required certain conditions, limitations or restrictions in connection with such approvals, or that the required approval of the Purchase Agreement by the stockholders of Priority was not obtained; (ii) risks related to the ability of the Company and Priority to successfully integrate the businesses; (iii) the occurrence of any event, change or other circumstances that could give rise to the termination of the Purchase Agreement (including circumstances requiring a party to pay the other party a termination fee pursuant to the Purchase Agreement); (iv) the risk that there may be a material adverse change with respect to the financial position, performance, operations or prospects of Priority or the Company; (v) risks related to disruption of management time from ongoing business operations due to the proposed initial business combination; (vi) the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the Company’s Common Stock; (vii) the risk that the proposed initial business combination and its announcement could have an adverse effect on the ability of Priority and the Company to retain customers and retain and hire key personnel and maintain relationships with their suppliers and customers and on their operating results and businesses generally; (viii) risks related to successfully integrating the businesses of the Priority and the Company, which may result in the combined company not operating as effectively and efficiently as expected; (ix) the risk that the combined company may be unable to achieve cost-cutting synergies or it may take longer than expected to achieve those synergies; and (x) risks associated with the financing of the proposed transaction. 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. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
You should read this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Forward-looking statements speak only as of the date they were made. 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 and/or if and when management knows or has a reasonable basislaws.
Terms Used in this Annual Report on
which to conclude that previously disclosed projections are no longer reasonably attainable.part I
Introduction
M I Acquisitions, Inc. is a blank check company formed underAs used in this Annual Report on Form 10-K, unless the laws of the State of Delaware on April 23, 2015. We were formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, with one or more target businesses. Our efforts to identify a prospective target business are not be limited to any particular industry or geographic region, although we initially focused our search on target businesses operating in the technology, media and telecommunications industries.
On September 19, 2016, we consummated our initial public offering (“IPO”) of 5,000,000 units. Each Unit consists of one share of common stock (“Common Stock”), and one warrant (“Public Warrant”) to purchase one share of Common Stock at an exercise price of $11.50 per share. The Units were sold at an offering price of $10.00 per Unit, generating gross proceeds of $50,000,000. The Company granted the underwriters a 45-day option to purchase up to 750,000 additional Units to cover over-allotments, if any.
On September 19, 2016, simultaneously with the consummation of the IPO, we consummated the private placement (“Private Placement”) of 402,500 units (the “Private Units”) at a price of $10.00 per Private Unit, generating total proceeds of $4,025,000. The Private Units are identicalcontext otherwise requires, references to the Units sold in the initial public offering except that the warrants underlying the Private Units (i) will be exercisable on a cashless basis at the holder’s optionterms "Company," "Priority," "we," "us" and (ii) will not be redeemable by the Company, in either case as long as they are held by the initial purchasers or any of their permitted transferees. The holders of Private Units agreed to certain restrictions on the Private Units, as described in the initial public offering registration statement. Additionally, the holders agreed not to transfer, assign or sell any of the Private Units or underlying securities (except in limited circumstances) until the completion of the Company’s initial business combination. The holders were granted certain demand and piggyback registration rights in connection with the Private Units. The Private Units were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transactions did not involve a public offering.
The underwriters exercised the over-allotment option in part and, on October 14, 2016, the underwriters purchased 310,109 over-allotment option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $3,101,090. On October 14, 2016, simultaneously with the sale of the over-allotment Units, we consummated the private sale of an additional 18,607 Private Units to one of the initial stockholders, generating gross proceeds of $186,070.
A total of $54,694,127 of the net proceeds from the sale of Units in the initial public offering (including the over-allotment option Units) and the private placements on September 19, 2016 and October 14, 2016, were placed in a trust account established for the benefit of the Company’s public stockholders and maintained at J.P. Morgan Chase Bank maintained by American Stock Transfer & Trust Company, acting as trustee. None of the funds held in trust will be released from the trust account, other than interest income to pay any tax obligations, until the earlier of (i) the consummation of the Company’s initial business combination and (ii) the Company’s failure to consummate a business combination within 18 months (or 21 months, if extended) from the date of the Offering. On November 14, 2016, the common stock and warrants underlying the Units sold in our initial public offering began to trade separately on a voluntary basis.
Since our initial public offering, our sole business activity has been identifying and evaluating suitable acquisition transaction candidates.
Recent Developments
On February 26, 2018, we entered into a Contribution Agreement dated February 26, 2018 with Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC (collectively, the “Interest Holders”) to acquire all of the outstanding equity interests of Priority Holdings, LLC (“Priority”), a leading provider of B2C and B2B payment processing solutions. On March 26, 2018, we entered into an Amended and Restated Contribution Agreement with the Interest Holders (as amended and restated, the “Purchase Agreement”).
Upon the closing of the transactions contemplated in the Purchase Agreement, M I will acquire (the “Acquisition”) 100% of the issued and outstanding equity securities of Priority, as well as assume certain of Priority’s debt, in exchange for a number of shares of our common stock equal to Priority’s equity value (which the Purchase Agreement defines as of the signing date as $947,835,000 enterprise value of Priority less the net debt of Priority at closing, subject to certain adjustments as described below) divided by $10.30. If Priority acquires any businesses prior to the closing of the Acquisition that increase Priority’s Adjusted EBITDA in aggregate by more than $9 million, Priority’s enterprise value will increase by multiplying the incremental increase in Adjusted EBITDA of such acquisition by 12.5, provided that estimated synergies related to any such acquisitions included in the Adjusted EBITDA calculation of Priority shall be capped at 20% of the Adjusted EBITDA of the applicable acquisition with respect to the 12-month period immediately preceding the consummation of such acquisition. In connection with the Acquisition, we will change our name"our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries.
Commonly Used or Defined Terms
| | | | | | | | |
| Term | | Definition |
| 2018 Plan | | Priority Technology Holdings, Inc. 2018 Equity Incentive Plan |
| 2021 Stock Purchase Plan | | Priority Technology Holdings, Inc. 2021 Employee Stock Purchase Plan |
| ACH | | Automated clearing house |
| AML | | Anti-money laundering |
| AOCI | | Accumulated other comprehensive income |
| AP | | Accounts payable |
| API | | Application program interface |
| APIC | | Additional paid-in capital |
| ASC | | Accounting Standards Codification |
| ASU | | Accounting Standards Update |
| ATI | | Adjusted taxable income |
| B2B | | Business-to-business |
| B2C | | Business-to-consumer |
| BaaS | | Banking as a service |
| BSA | | Bank Secrecy Act of 1970, as amended by the USA Patriot Act of 2001 |
| CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
| CCPA | | California Consumer Protection Act |
| CEO | | The Company's Chairman and Chief Executive Officer |
| CFPB | | U.S. Consumer Financial Protection Bureau |
| Common Stock | | The Company's Common Stock, par value $.001 per share |
| Company | | Priority Technology Holdings, Inc., a Delaware corporation, and its direct and indirect subsidiaries |
| Credit Agreement | | Credit and Guaranty Agreement dated April 27, 2021, by and among the Loan Parties (as defined therein) and Truist Bank |
| CRM | | Customer relationship management |
| Delayed Draw Term Loan | | Delayed draw term loan facility under the credit agreement |
| Dodd-Frank Act | | Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 |
| EBITDA | | Earnings before interest, taxes, depreciation, and amortization |
| Electronic Payments | | Payments with credit, debit and prepaid cards |
| EPS | | Earnings (loss) per share |
| ESPP | | Employee stock purchase plan |
| Exchange Act | | Securities Exchange Act of 1934 |
| FASB | | Financial Accounting Standards Board |
| FBO | | For the benefit of |
| FCRA | | Fair Credit Reporting Act |
| Federal Reserve Board | | Governors of the Federal Reserve System |
| FDIC | | Federal Deposit Insurance Corporation |
| FFIEC | | Federal Financial Institutions Examination Council |
| FI | | Financial institution |
| FIFO | | First in, first out |
| | | | | | | | |
| FinCEN | | Financial Crimes Enforcement Network |
| Finxera | | Finxera Holdings, Inc. |
| FSOC | | Financial Stability Oversight Council |
| GAAP | | United States Generally Accepted Accounting Principles |
| Initial Term Loan | | A senior secured first lien term loan facility in an aggregate principal amount of $300,000,000 |
| IRA | | Inflation Reduction Act |
| ISO | | Independent sales organization |
| ISV | | Independent software vendors |
| IT | | Information technology |
| LIBOR | | London Interbank Offered Rate |
| LIFO | | Last in, first out |
| LLC | | Limited Liability Company |
| Nasdaq | | National Association of Securities Dealers Automated Quotations |
| NCI | | Non-controlling interests |
| OFAC | | Office of Foreign Assets Control |
| Passport | | Priority Passport |
| PHOT | | Priority Hospitality Technology, LLC a Delaware limited liability company |
| PIK | | Payment-in-kind |
| POS | | Point-of-sale |
| PRET | | Priority Real Estate Technology, LLC, a Delaware limited liability company |
| PRTH | | The Company's Nasdaq Capital Market trading symbol |
| Redeemable NCI's | | Redeemable non-controlling preferred equity interests |
| ROU Asset | | Right of use asset |
| RSU | | Restricted stock units |
| SaaS | | Software as a Service |
| SAR | | Stock appreciation rights |
| SEC | | United States Securities and Exchange Commission |
| SMB | | Small and medium-sized businesses |
| SMS | | Short message service |
| SOFR | | Secured Overnight Financing Rate |
| Tax Act | | The Housing Assistance Tax Act of 2008 |
| TCPA | | Federal Telephone Consumer Protection Act of 1991 |
| Term Facility | | $620.0 million senior secured term loan facility issued under the Credit Agreement (including $320 million delayed draw facility). |
| Total Net Leverage Ratio | | The ratio of consolidated total debt to the Consolidated Adjusted EBITDA (as defined in the Credit Agreement). |
| Truist | | Truist Bank |
| TSP | | Technology service provider |
| U.S. | | United States of America |
| VARs | | Value-added resellers |
PART I.
Item 1. Business
Overview of the Company
Priority is a solutions provider in Payments and BaaS industry, operating at scale with 860,000 active customers across its SMB, B2B and Enterprise customers channels. Priority processes $120 billion in annual transaction volume and provides administration for $900 million in deposits. Priority’s purpose-built technology enables clients to collect, store, lend and send money while providing AP payment applications and Passport financial tools that best optimize their cash flow and maximize working capital bolstered by our industry leading personalized support.
Priority was established in 2005 and has grown from a founder-financed technology startup to become the 5th largest non-bank merchant acquirer in the U.S. by volume, according to the Nilson Report issued in March 2023. Since inception, we have built a native technology platform that provides all forms of payments (card acquiring and issuing, ACH, check and wire) and embedded finance services that serve customers of any size. Priority maintains a global business platform with 983 employees operating from its headquarters in Alpharetta, GA and regional offices in other locations, including New York, NY; Hicksville, NY; Chattanooga, TN; Raleigh, NC; Dallas, TX; San Francisco, CA; and Chandigarh, India.
Priority delivers value to its partners by leveraging its payments and embedded finance technology to deliver solutions that power modern commerce for SMBs and enterprise software and business partners. We handle the complexities of payments and embedded finance to free our partners to focus on their core business objectives. Priority's solutions are offered via API or proprietary applications with nationwide money transmission licenses, providing end-to-end operational support including automated risk management and underwriting, full compliance and industry leading customer service.
Our growth has been underpinned by three key strengths: 1) market leading proprietary product platforms in SMB, B2B and Enterprise Payments verticals; 2) focused distribution engines dedicated to helping our partners monetize their merchant payment networks; and 3) a cost-efficient, agile payment and business processing infrastructure, purpose-built to support our partners in operating in these distinct market verticals.
Priority's solutions are delivered via internally developed payment applications and services to customers in the following business segments:
•SMB Acquiring Solutions: Provides full-service acquiring and payment-enabled solutions for B2C transactions, leveraging Priority's proprietary software platform, distributed through ISO, direct sales and vertically focused ISV channels.
•B2B Payables:Provides market-leading AP automation solutions to corporations, software partners and industry leading FIs (including Citibank and Mastercard).
• Enterprise Payments and BaaS: Provides embedded finance and BaaS solutions to customers to modernize legacy platforms and accelerate software partners' strategies to monetize payments.
The MX product suite provides technology-enabled payment acceptance and business management capabilities to merchants, enterprises and our distribution partners. The MX product suite includes MX Connect and MX Merchant products, which together provide resellers and merchant clients a flexible and customizable set of business applications that help better manage critical business work functions and revenue performance using core payment processing as our leverage point. MX Connect provides our SMB payments reselling partners with automated tools that support low friction merchant on-boarding, underwriting and risk management, client service, and commission processing through a single mobile-enabled, web-based interface. The result is a smooth merchant activation onto our flagship consumer payments offering, MX Merchant, which provides core processing and business solutions to SMB clients. In addition to payment processing, the MX Merchant product suite encompasses a variety of proprietary and third-party product applications that merchants can adopt such as MX Insights, MX Storefront, MX Retail, MX Invoice, MX B2B and ACH.com, among others. This comprehensive suite of solutions enables merchants to 1) identify key consumer trends in their businesses; 2) quickly implement e-commerce or retail POS solutions; and 3) handle ACH payments. By empowering resellers to adopt a consultative selling approach and embedding our technology into the critical day-to-day workflows and operations of both merchants and resellers, we believe that we have established and maintained "sticky" relationships. We believe that our strong retention, coupled with consistent merchant onboarding, have resulted in strong processing volume and revenue growth.
In addition to our SMB offering, we have diversified our source of revenues through our growing presence in the B2B market. We provide automated AP offerings to our enterprise clients and financial institutions through our CPX platform. Our CPX platform offers clients a seamless bridge for buyer-to-supplier (payor-to-provider) payments by integrating directly to a buyer's payment instruction file and parsing it for payment to suppliers via virtual card, purchase card, ACH +, dynamic discounting or check. Successful implementation of our AP automation solutions provides: 1) suppliers with the benefits of cash acceleration; 2) buyers with valuable rebate/discount revenue: and 3) the Company with stable sources of payment processing and other revenue. Additionally, we provide a suite of integrated AP automation solutions businesses to FIs and card networks such as Citibank, Mastercard and Visa, among others. Alongside CPX as part of the AP suite, Priority acquired the assets of Plastiq Inc. through its subsidiary Plastiq, Powered by Priority, LLC, a leading B2B payments company, in the third fiscal quarter of 2023, and has helped tens of thousands of businesses improve cash flow with instant access to working capital, while automating and enabling control over all aspects of accounts payable and receivable. The flagship product, Plastiq Pay, pioneered a way for businesses to pay suppliers by credit card regardless of acceptance as an alternative to expensive, scarce bank loan options. Plastiq Accept offers an alternative to expensive merchant services, enabling businesses to accept credit cards with no merchant
fees and get paid across any cashcustomer touch point, including a website, invoice, checkout process, and in person via QR code. The Plastiq Connect API suite enables platforms, marketplaces, and ERPs, to expand B2B payment options for payables and receivables in their native customer experience while outsourcing payment execution, risk, and compliance.
Our Enterprise Payments segment provides embedded finance and BaaS solutions to customers that Priority spendsmodernize legacy platforms and accelerate modern software partners looking to acquire any technology assets, upmonetize payment components. We provide solutions for ISVs, third-party integrators, and merchants that allow for the leveraging of our core payments engine, our automated payables platform or our account ledgering capabilities all via API resources.
We generate revenue primarily from payment processing transactions, and to
$5,000,000,a lesser extent, from monthly subscription services and other solutions provided to
purchase securitiescustomers and interest income from the
Founders pursuant to the Promote Agreement described below or to extend the time we have to complete a business combination, such amounts will be included in the calculation of net debt as cash and cash equivalents(which would reduce the amount of net debt, effectively increasing the assumed enterprise value of Priority and increasing the number of shares that would be issued to the Interest Holders).An additional 9.8 million shares may be issued as earn out consideration to the Interest Holders and members of management or other service providerspermissible investments of the post-Acquisition company—4.9 million shares fordeposits we hold. Payment processing fees are generated from the first earn outongoing sales of our merchants and 4.9 million shares for the second earn out. are governed by multi-year merchant contracts. As a result, payment processing fees are highly recurring in nature.
For the first earn out, Adjusted EBITDA must be no less than $82.5year ended December 31, 2023, we generated revenue of $755.6 million, net loss attributable to common stockholders of $49.1 million and operating income of $81.5 million, compared to revenue of $663.6 million, net loss attributable to common stockholders of $39.0 million and operating income of $56.2 million for the year endingended December 31, 20182022.
Industry Overview
The payment processing industry provides merchants with credit, debit, gift, loyalty card and other payment processing services, along with related value-added solutions and information services. The industry continues to grow, driven by wider merchant acceptance, increased use of Electronic Payments, advances in payment technology and the stock price mustdisruption in banking by fintech providers. The proliferation of bankcards and the use of other payment technologies has made the acceptance of Electronic Payments through multiple channels a virtual necessity for many businesses to remain competitive. The increased use and acceptance of bankcards and the availability of more sophisticated products and services has resulted in a highly competitive, specialized industry.
Services to the SMB merchant market have tradedbeen historically characterized by basic payment processing without ready access to more sophisticated technology, value-added solutions, or customer service that are typically offered to large merchants. To keep up with the changing demands of how consumers wish to pay for goods and services, we believe SMB merchants and enterprise customers increasingly recognize the need for value-added services wrapped around omni-channel payment solutions that are tailored to their specific business needs.
Key Industry Trends
The following are key trends we believe are impacting the merchant acquiring/payment processing industry:
•Trend Toward Electronic Transactions – We believe the continued shift from cash/paper payments toward electronic/card payments will drive growth for merchant acquirers and processors as volume continues to grow correspondingly. We believe this migration and overall market growth will continue to provide tailwinds to the Electronic Payments industry.
•Convergence of Payments and Embedded Finance Solutions – As consumer behavior shifted during the COVID-19 pandemic, the scale of disruption grew dramatically and we believe the speed of change will continue to rise. The appetite of both merchants and consumers for new alternatives to traditional payment options remains top of mind and big tech companies, fintechs, challenger banks and other non-bank entrants are driving market disruption by offering customers better user experiences at lower prices. The continued displacement of cash and checks over the next several years, helped along by customers' adoption of digital shopping and fueled by their desire to avoid contact with physical infrastructure and objects, continues to create even more opportunities for disruption in excesspayments.
•Mobile Payments – Historically, e-commerce was conducted on a computer via a web browser; however, as mobile technologies continue to proliferate, consumers are making more purchases through mobile browsers and native mobile applications. We believe this shift represents a significant opportunity given the high growth rates of $12.00mobile
payments volume, higher fees for card-not-present and cross-border processing and potential for the in-app economy to stimulate and/or alter consumer spending behavior.
B2B payments is the largest payment market in the U.S. by volume and presents a significant opportunity for payment providers to capitalize on the conversion of check and paper-based payments to Electronic Payments, including card-based acceptance. As businesses have increasingly looked to improve efficiency and reduce costs, the electronification of B2B payments has gained momentum.
Competitive Strengths
We possess certain attributes that we believe differentiate us as a leading provider of merchant acquiring, commercial payment and embedded finance solutions in the U.S. Our key competitive strengths include:
•Diverse Reseller Community – We maintain strong reseller relationships with approximately 1,200 partners, including ISOs, FIs, ISVs, VARs and other referral partners. MX Connect enables resellers to efficiently market merchant acquiring solutions to a broad base of merchants through a one-to-many distribution model. We believe that our ability to service our reseller partners through a comprehensive offering provides a competitive advantage that has allowed the Company to build a large, diverse merchant base characterized by high retention. The strengths of our technology offering are manifested in the fact that we maintain ownership of merchant contracts, with most reseller contracts including strong non-solicit and portability restrictions.
•Comprehensive Suite of Payment Solutions – We offer a comprehensive and differentiated suite of traditional and emerging payment products and services that enables SMBs to address their payment needs through one provider. Our purpose-built proprietary technology provides technology-enabled payment acceptance and business management solutions to merchants, enterprises and ISVs. We provide a payment processing platform that allows merchants to accept Electronic Payments (e.g., credit cards, debit cards, and ACH) at the POS, online, and via mobile payment technologies. We deliver innovative business management products and add-on features that meet the needs of SMBs across different vertical markets. Additionally, with our embedded finance offerings and money transmissions licenses in 46 U.S. states, the District of Columbia and two U.S. territories, we are uniquely positioned to collect, store, lend and send money on behalf of our customers. As a result, we believe we are well-positioned to capitalize on the trend towards integrated payments solutions, new technology adoption and value-add service utilization that is underway in the SMB market. We believe our solutions facilitate a superior merchant experience that results in increased customer lifetime value.
•Highly Scalable Business Model with Operating Leverage – As a result of thoughtful investments in our technology, we have developed robust and differentiated infrastructure that has enabled us to scale in a cost-efficient manner. Our operating efficiency supports a low capital expenditure environment to develop product enhancements that drive organic growth across our SMB, B2B and Enterprise payment ecosystems, as well as attract both reselling partners and enterprise clients looking for best-in-class solutions. By creating a cost-efficient environment that facilitates the combination of ongoing product innovation to drive organic growth and stable cash flow to fund acquisitions, we anticipate ongoing economies of scale and increased margins over time.
•Experienced Management Team Led by Industry Veterans – Our executive management team has a record of execution in the merchant acquiring and technology-enabled payments industry. Our team has continued to develop and enhance our proprietary and innovative technology platforms that differentiate us in the payments industry. We invest to attract and retain executive leadership that align with the opportunities in the market and our strategic focus.
Growth Strategies
We intend to continue to execute a multi-pronged growth strategy, with diverse organic initiatives supplemented by acquisitions. Growth strategies include:
Organic Growth in our Reseller Network and Merchant Base
We expect to grow through our existing reseller network and merchant base by capitalizing on the organic growth of existing merchant volume and reseller merchant portfolios. By providing resellers with agile tools to manage their sales businesses and grow their merchant portfolio, we have established a solid base from which to generate new merchant adoption and retain existing merchants. By engaging in a consultative partnership approach, we maintain strong relationships with our reseller partners and continue to exhibit strong merchant adoption and volume growth trends. Through our resellers, we provide merchants with full-service acquiring solutions, as well as value-added services and tools to streamline their business processes and enable them to focus on driving same store sales growth.
Deploy our Embedded Finance Solution to Enterprise Customers
Our Enterprise Payments segment, and its flagship product Passport enables software partners and business platform customers to embed our payments and treasury solutions into their core operating and business systems that deliver a fully automated and digital experience to collect, store, lend and send money for their customers.Through Passport, Priority delivers a fully embedded finance solution to customers that manages the inflows and outflows, and reconciliation, of all forms of payments (ACH, wire, check, credit and debit) for any 20 trading daysnumber of clients from a single account.The platform today manages over 700,000 active accounts and, through its money transmission licenses in 46 U.S. states, the District of Columbia and two U.S. territories, handles over $795 million in deposits across a growing number of banking partners. This segment is quickly growing as marketplaces, gig economy platforms, software partners, and legacy business platforms are incorporating features of payment processing and embedded finance services into their customer experience and enhance their offering.
Expand our Network of Distribution Partners
We have established and maintained a strong position within any consecutive 30-day trading period at any timethe reseller community with approximately 1,200 partners. We intend to continue to expand our distribution network to reach new partners, particularly with ISVs and VARs to expand technology and integrated partnerships. We believe that our technology offering enables us to attract and retain high-quality resellers focused on or before December 31, 2019. Forgrowth.
Deploy Industry Specific Payment Technology
We intend to continue to enhance and deploy our technology-enabled payment solutions and our capabilities to collect, store and send money into industry-specific verticals. We continue to identify and evaluate new, attractive industries where we can deliver differentiated technology-enabled payment solutions that meet merchants' industry-specific needs.
Expand Electronic Payments Share of B2B Transactions with CPX and Plastiq
We have a growing presence in the second earn out, Adjusted EBITDA must be no lesscommercial payments market where we provide curated managed services and AP automation solutions to businesses, FIs and card networks such as Citibank, Mastercard and Visa. The commercial payments market is the largest and one of the fastest growing payments markets in the U.S. by volume. We are well positioned to capitalize on the shift from check to Electronic Payments, which currently lags the consumer payments market, by eliminating the friction between buyers and suppliers through our industry leading offerings of CPX and Plastiq. We believe this will drive strong growth and profitability.
Accretive Acquisitions
With a consistent, long-term goal of maximizing stockholder value, we intend to selectively pursue strategic and tactical acquisitions that meet our established criteria. We actively seek potential acquisition candidates that exhibit certain attractive attributes including predictable and recurring revenue, a scalable operating model, low capital intensity, complementary
technology offerings and a strong cultural fit. Our operating infrastructure is purpose-built to rapidly and seamlessly consolidate complementary businesses into our ecosystem all while optimizing revenue and cost synergies.
Sales and Distribution
We reach our SMB segment through three primary sales channels: 1) ISOs (Retail and Wholesale) and Agents; 2) FIs; and 3) ISVs and VARs. Our cloud-based solution, MX Connect, allows our partners and resellers to engage merchants for processing services and a host of value-added features designed to enhance their customer relationships. Our merchants utilize our cloud-based MX Merchant product suite to manage their businesses and process transactions. This separate solution increases our ability to retain the merchant if the ISO were to leave the Company.
Our B2B segment obtains its partner clients through: 1) direct sales initiatives; 2) ISVs and business partnerships; 3) the card networks (Mastercard and Visa); 4) large U.S. banking institutions and 5) other card issuer referral partners. We support a direct vendor sales model that provides turn-key merchant development, product sales and supplier enablement programs. By establishing a seamless bridge for buyer-to-supplier (payor-to-provider) payments that is integrated directly to a buyer's payment instruction file to facilitate payments to vendors via all payment types (virtual card, purchase card, ACH +, dynamic discounting), we have established ourselves as a top solutions provider in commercial payments. Our Plastiq offerings consist of all payment types including wires and checks to the vendors of our customers.
Our Enterprise segment goes to market through integrations with software partners and business platform customers by enabling them to embed our payments and treasury solutions into their core operating and business systems.Passport's offering provides those partners with a fully automated, scalable and integrated financial tool to collect, store, lend and send money for their customers.
Our market strategy has resulted in a merchant base that we believe is diversified across both industries and geographies resulting in, what we believe, is more stable average profitability per merchant. Only one reseller relationship contributes more than $91.5 million10% of total bankcard processing volume, and such relationship represents approximately 14% of our total bankcard processing volume for the fiscal year ending December 31, 20192023.
Security, Disaster Recovery and Back-up Systems
As a result of routine business operations, we store information relating to our merchants and their transactions. Because this information is considered sensitive in nature, we maintain a high level of security to protect it. Our computational systems are continually updated and audited to the latest security standards as defined by 1) payment card industry and data security standards; and 2) the Payment Card Industry Security Standards Council. As such, we have a dedicated team responsible for responding to security incidents. This team develops, maintains, tests and verifies our incident response plan. The primary function of this team is to react and respond to intrusions, denial of service, data leakage, malware, vandalism and other events that could potentially jeopardize data availability, integrity and confidentiality. In addition to handling security incidents, the incident response team continually educates themselves and us on information security matters.
High-availability and disaster recovery are provided through a combination of redundant hardware and software running at two geographically distinct data centers. Each data center deployment is an exact mirror of the other and each can handle all technical, payment and business operations for all product lines independently. If one data center becomes impaired, the traffic is automatically redirected to the other. Business continuity planning drills are run each quarter to test fail-over and recovery as well as staff operations and readiness.
Third-party Processors and Sponsor Banks
We partner with various vendors in the payments value chain, most notably processors and sponsor banks which sit between us (the merchant acquirer) and the stock pricecard networks, to assist us in providing payment processing services to merchant clients. Processing is a scale-driven business in which many acquirers outsource the processing function to a small number of large processors. In these partnerships, we serve as a merchant acquirer and enter into processing agreements with payment processors, such as Fiserv or Global Payments, to assist us in providing front-end and back-end transaction processing services
for our merchants. These third parties are compensated for their services. These processors in turn have agreements with card networks such as Visa and Mastercard, through which the transaction information is routed in exchange for network fees.
To provide processing services, merchant acquirers like Priority must be registered with the card networks (e.g., Visa and Mastercard). To register with a card network in the U.S., acquirers must maintain relationships with banks willing to sponsor the merchant acquirer's adherence to the rules and standards of the card networks, or a sponsor bank. We maintain sponsor bank relationships with Wells Fargo, Synovus Bank, Pueblo Bank and Axiom Bank. We maintain a card issuing relationship with Sutton Bank. For ACH payments, the Company's ACH network (ACH.com) is sponsored by South State Bank. Sponsor bank relationships enable us to route transactions under the sponsor bank's control and identification number (referred to as a BIN for Visa and ICA for Mastercard) across the card networks (or ACH network) to authorize and clear transactions.
Risk Management
Our thoughtful merchant and reseller underwriting policies combined with our forward-looking transaction monitoring capabilities have tradedenabled us to maintain low credit loss performance. Our risk management strategies are informed by a team with experience managing merchant acquiring risk operations that are augmented by our rules-based modern systems designed to manage risk at the transaction level.
Initial Underwriting – Central to our risk management process are our front-line underwriting policies that vet all resellers and merchants prior to their contractual arrangements with us. Our automated risk systems access: 1) guarantor information; 2) corporate ownership details; 3) anti-money laundering information; and, 4) OFAC and FinCEN information from a variety of integrated databases. The collected information is delivered to a team of underwriters who conduct necessary industry checks, financial performance analysis or owner background checks, as applicable and consistent with our policies. Based upon these results, the underwriting department rejects or approves the merchant or reseller and sets appropriate merchant and reseller reserve requirements which are held by our bank sponsors on our behalf. Resellers may be subject to quarterly and/or annual assessments for financial strength in compliance with our policies and adjustments to reserve levels. The results of our initial merchant underwriting process inform the transaction-level risk limits for volume, average ticket, transaction types and authorization codes that are captured by our CYRIS risk module - a proprietary risk system that monitors and reports transaction risk activity to our risk team. This transaction-level risk module, housed within MX Connect, forms the foundational risk management framework that enables the Company to optimize transaction activity and processing scale while preserving a modest aggregate risk profile that has resulted in historically low losses.
Real-Time Risk Monitoring – Merchant transactions are monitored on a transactional basis to proactively enforce risk controls. Our risk systems provide automated evaluation of merchant transaction activity against initial underwriting settings. Transactions that are outside underwriting parameters are queued for further investigation. Also, resellers whose merchant portfolio represents a concentration of investigated merchants are evaluated for risk action (i.e., increased reserves or contract termination).
Risk Audit – Transactions flagged by our risk monitoring systems or that demonstrate suspicious activity traits that have been flagged for review can result in funds being held in addition to other risk mitigation actions. The risk mitigation actions can include: 1) non-authorization of the transaction; 2) debit of reserves; or 3) termination of the processing agreement. Merchants are periodically reviewed to assess any risk adjustments based upon their overall financial health and compliance with network standards. Merchant transaction activity is investigated for instances of business activity changes or credit impairment (and improvement).
Loss Mitigation – In instances where transactions and/or individual merchants are flagged for fraud, or in instances where the transaction activity is resulting in excessive charge-backs, several loss mitigation actions may be taken. These include: 1) charge-back dispute resolution; 2) merchant and reseller funds (reserves or processed batches) withheld; 3) inclusion on Network Match List to notify the industry of a "bad actor"; and/or 4) legal action.
Investments - We use our primary portfolio to provide for the investment of excess funds at acceptable risk levels. Our portfolio consists primarily of money market accounts at FDIC insured institutions. Concentration in any one particular financial institution could create operational disruption or put customer funds in excess of $14.00FDIC insured limits at risk.
Acquisitions of a Business
On May 23, 2023, Plastiq, Powered by Priority, LLC, a subsidiary of PRTH, entered into an equity and asset purchase agreement with Plastiq, Inc., to acquire substantially all of the assets of Plastiq Inc., including the equity interest in Plastiq Canada, Inc ("Plastiq"). Plastiq is a buyer funded B2B payments platform offering bill pay and instant access to working capital to its customers and will complement the Company's existing supplier-funded B2B payments business. On May 24, 2023, Plastiq Inc. filed voluntary petitions for any 20 trading days within any consecutive 30-day trading periodrelief under Chapter 11 of Title 11 of the United States Code in the U.S. Bankruptcy Court for the District of Delaware.
The purchase was completed on July 31, 2023, for a total purchase consideration of approximately $37.0 million. The total purchase consideration included $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in the acquiring entity. The cash consideration for the purchase was funded by borrowings from the Company's revolving credit facility.
Competition
The U.S. acquiring industry is highly competitive, with several large processors accounting for the majority of processing volume. When excluding banks, we ranked 5th among U.S. non-bank merchant acquirers, according to the March 2023 Nilson Report.
The concentration at any time between January 1, 2019 and December 31, 2020. In the eventtop of the industry is partly a result of consolidation. We believe that consolidation has also resulted in many large processors maintaining multiple, inflexible legacy IT systems that are not well-equipped to adjust to changing market requirements. We believe that the first earn out targetslarge merchant acquirers whose innovation has been hindered by these redundant legacy systems risk losing market share to acquirers with more agile and dynamic IT systems.
Pricing has historically been the key factor influencing the selection of a merchant acquirer. Providers with more advanced tech-enabled services (primarily online and integrated offerings), have an advantage over providers who are not met,operating legacy technology and offering undifferentiated services that have come under pricing pressure from higher levels of competition. High quality customer service further differentiates providers as this helps to reduce attrition. Other competitive factors that set acquirers apart include: 1) price; 2) breadth of product offerings; 3) partnerships with FIs; 4) servicing capability; 5) data security; and 6) functionality. Leading acquirers are expected to continue to add additional services to expand cross-selling opportunities, primarily in omni-channel payment solutions, POS software, payments security, customer loyalty and other payments-related offerings.
The largest opportunity for acquirers to expand is within the entire 9.8 million shares may be issued ifSMB merchant market. As small businesses increasingly demand integrated solutions tailored to specific business functions or industries, merchant processors are adopting payment-enabled software offerings that combine embedded finance products with core business operating software. By subsisting within SMB's critical business software, processors are able to improve economic results through better merchant retention and higher processing margins. Through our MX Merchant platform, we are well-positioned to capitalize on the second earn out targetstrend towards integrated solutions, new technology adoption and value added-service utilization in the SMB market.
Providing BaaS products is highly competitive. We face competition from other BaaS providers and banks directly. We differentiate ourselves to merchants and enterprise customers through our ability to innovate and develop new products and services that offer new payment experiences for customers on our platform. Our agility, risk management and suite of products within a single platform differentiates us from competitors.
Government Regulation and Payment Network Rules
We operate in an increasingly complex legal and regulatory environment. We are
met.Concurrently withsubject to a variety of federal, state and local laws and regulations and the Purchase Agreement, our founding stockholders (the “Founders”)rules and Priority entered into a purchase agreement (the “Promote Agreement”) pursuant to which Priority agreed to purchase 421,107standards of the units issuedpayment networks that are utilized to provide our electronic payment services, as more fully described below.
Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act resulted in significant structural and other changes to the
Founders inregulation of the financial services industry. The Dodd-Frank Act directed the Federal Reserve Board to regulate the debit interchange transaction fees that a
private placement immediately prior to M I’s initial public offering, and 453,210 shares of common stock of M I issuedcard issuer or payment card network receives or charges for an electronic debit transaction. Pursuant to the
Founders for an aggregate purchase price of approximately $2.1 million. In addition, pursuantso-called "Durbin Amendment" to the
Promote Agreement,Dodd-Frank Act, these fees must be "reasonable and proportional" to the
Founders will forfeit 174,863 founder’s sharescost incurred by the card issuer in authorizing, clearing and settling the transaction. Pursuant to regulations promulgated by the Federal Reserve Board, debit interchange rates for card issuers with assets of $10.0 billion or more are capped at
the closing$0.21 per transaction and an ad valorem component of five basis points to reflect a portion of the
Acquisition, which shares may be reissued to the Founders if oneissuer's fraud losses plus, for qualifying issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. The cap on interchange fees has not had a material direct effect on our results of
the earn outs described above is achieved.operations.
In addition, the FoundersDodd-Frank Act limits the ability of payment card networks to impose certain restrictions because it allows merchants to: 1) set minimum dollar amounts (not to exceed $10.00) for the acceptance of a credit card (and allows federal governmental entities and Thomas C. Priore,institutions of higher education to set maximum amounts for the Executive Chairmanacceptance of Priority (“TCP”), enteredcredit cards); and 2) provide discounts or incentives to encourage consumers to pay with cash, checks, debit cards or credit cards.
The rules also contain prohibitions on network exclusivity and merchant routing restrictions. These rules require a card issuer to: 1) enable at least two unaffiliated networks on each debit card; 2) prohibit card networks from entering into exclusivity arrangements; and 3) restrict the ability of issuers or networks to mandate transaction routing requirements. The prohibition on network exclusivity has not significantly affected our ability to pass on network fees and other costs to our customers, nor do we expect it to in the future.
The Dodd-Frank Act created the CFPB, which has assumed responsibility for enforcing federal consumer protection laws, and the FSOC, which was established to, among other things, identify risks to the stability of the U.S. financial system. The FSOC has the authority to require supervision and regulation of nonbank financial companies that the FSOC determines pose a letter agreement (the “Letter Agreement”) pursuantsystemic risk to which the Founders granted TCP (i)U.S. financial system. Accordingly, we may be subject to additional systemic risk-related oversight.
Payment Network Rules and Standards
As a merchant acquirer, we are subject to the rightrules of Visa, Mastercard, American Express, Discover and other payment networks. In order to purchase the Founders’ remaining sharesprovide services, several of our common stock atsubsidiaries are either registered as service providers for member institutions with Mastercard, Visa and other networks or are direct members of Mastercard, Visa and other networks. Accordingly, we are subject to card association and network rules that could subject us to a variety of fines or penalties that may be levied by the prevailing market pricecard networks for certain acts or omissions.
Banking Laws and Regulations
The FFIEC is an interagency body comprised of federal bank and credit union regulators such as the Federal Reserve Board, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency and the CFPB. The FFIEC examines large data processors to identify and mitigate risks associated with systemically significant service providers, including specifically the risks they may pose to the banking industry.
We are considered by the FFIEC to be a TSP based on the services we provide to FIs. As a TSP, we are subject to audits by an interagency group consisting of the Federal Reserve System, the FDIC, and the Office of the Comptroller of the Currency.
Through our subsidiary, Finxera, Inc., we also hold money transmission licenses in 46 U.S. states, the District of Columbia and two U.S. territories. Accordingly, we are subject to the applicable laws and regulations and are subject to examinations by state banking regulators.
Privacy and Information Security Laws
We provide services that may be subject to various state, federal and foreign privacy laws and regulations. These laws and regulations include: 1) the federal Gramm-Leach-Bliley Act of 1999, which applies to a broad range of FIs and to companies
that provide services to FIs in the U.S.; 2) certain health care technology laws, including HIPAA and the Health Information Technology for Economic and Clinical Act; and 3) the CCPA, which establishes a new privacy framework for covered businesses by: i) creating an expanded definition of personal information; ii) establishing new data privacy rights for consumers in the State of California; iii) imposing special rules on the collection of consumer data from minors; and iv) creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. We are also subject to a variety of foreign data protection and privacy laws, including, without limitation, Directive 95/46/EC, as implemented in each member state of the European Union and its successor, the General Data Protection Regulation. Among other things, these foreign and domestic laws, and their implementing regulations, in certain cases: 1) restrict the collection, processing, storage, use and disclosure of personal information; 2) require notice to individuals of privacy practices, and provide individuals with certain rights to prevent use; and 3) disclosure of protected information. These laws also impose requirements for safeguarding and removal or elimination of personal information.
AML and Counter-terrorism Regulation
The U.S. federal anti-money laundering laws and regulations, including the BSA, and the BSA implementing regulations administered by FinCEN, a bureau of the U.S. Department of the Treasury, require, among other things, each financial institution to: 1) develop and implement a risk-based anti-money laundering program; 2) file reports on large currency transactions; 3) file suspicious activity reports if the financial institution believes a customer may be violating U.S. laws and regulations; and 4) maintain transaction records. Given that a number of our clients are FIs that are directly subject to U.S. federal anti-money laundering laws and regulations, we have developed an anti-money laundering compliance program to best assist our clients in meeting such legal and regulatory requirements.
We are subject to certain conditions includingeconomic and trade sanctions programs that are administered by OFAC of the U.S. Department of Treasury, which place prohibitions and restrictions on all U.S. citizens and entities with respect to transactions by U.S. persons with specified countries and individuals and entities identified on OFAC's Specially Designated Nationals list (for example, individuals and companies owned or controlled by, or acting for or on behalf of, countries subject to certain economic and trade sanctions, as well as terrorists, terrorist organizations and narcotics traffickers identified by OFAC under programs that are not country specific). Similar anti-money laundering, counter-terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified on lists maintained by organizations similar to OFAC in several other countries and which may impose specific data retention obligations or prohibitions on intermediaries in the payment process. We have developed and continue to enhance compliance programs and policies to monitor and address such legal and regulatory requirements and developments. We continue to enhance such programs and policies to ensure that our customers do not engage in prohibited transactions with designated countries, individuals or entities.
Telephone Consumer Protection Actand Telemarketing Sales Rule
We are subject to the Federal TCPA and various state laws to the extent we place telephone calls and SMS messages to clients and consumers. The TCPA regulates certain telephone calls and SMS messages placed using automatic telephone dialing systems or artificial or prerecorded voices and can alter the way we do business. Additionally, as a floorprovider of $10.30 per sharededicated accounts in the debt resolution industry, we are also subject to certain requirements of the Telemarketing Sales Rule which requires independence of account administrators and (ii)certain prohibitions against advance payment of fees.
Escheat Laws
We are subject to U.S. federal and state unclaimed or abandoned property laws that require us to transfer to certain government authorities the unclaimed property of other that we hold when that property has been unclaimed for a rightcertain period of first refusal ontime. Moreover, we are subject to audit by state and foreign regulatory authorities with regard to our escheatment practices.
Other Regulation
The Tax Act of 2008 requires certain merchant acquiring entities and third-party settlement organizations to provide information returns for each calendar year with respect to payments made in settlement of electronic payment transactions and
third-party payment network transactions occurring in that calendar year. Reportable transactions are also subject to backup withholding requirements.
The foregoing is not an exhaustive list of the
shares.A more detailed description the Purchase Agreementlaws, rules and regulations which we are subject to and the related transactionsregulatory framework governing our business is changing continuously.
Intellectual Property
We have developed a payments platform that includes many instances of proprietary software, code sets, workflows and algorithms. It is our practice to enter confidentiality, non-disclosure and invention assignment agreements with our employees and contractors, and to enter into confidentiality and non-disclosure agreements with other third parties to limit access to, and disclosure and use of, our confidential information and proprietary technology. In addition to these contractual measures, we also rely on a combination of trademarks, copyrights, registered domain names, and patent rights to help protect the Priority brand and our other intellectual property.
Human Capital Management
As of December 31, 2023, we employed 983 employees, of which 974 were employed full-time. We have employees residing throughout the U.S., Canada and India. None of our employees are represented by a labor union or covered by a collective bargaining agreement.
Growth and Development
Our strategy to develop and retain the best talent includes an emphasis on employee training and development. We promote our core values of ownership, innovation, camaraderie, service, authenticity and trust as an organization and offer awards to colleagues who exemplify these qualities. We require a mandatory online training curriculum for our employees that includes annual anti-harassment and anti-discrimination training.
Inclusion and Diversity
Our inclusion and diversity program focuses on our employees, workplace and community. We believe that our business is strengthened by a diverse workforce that reflects the communities in which we operate. We believe all of our employees should be treated with respect and equality, regardless of gender, ethnicity, sexual orientation, gender identity, religious beliefs or other characteristics. Inclusion and diversity remain a common thread in all of our human resource practices so that we can attract, develop and retain the best talent for our workforce.
Availability of Filings
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge on our internet website at www.prioritycommerce.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to the SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that website is www.sec.gov. The contents of our websites are not intended to be found in our Currentincorporated by reference into this Annual Report on Form 8-K dated February 26, 2018,10-K or in any other report or document we file with the SEC, and more information about Priority canany references to our websites are intended to be foundinactive textual references only.
Item 1A. Risk Factors
An investment in our
CurrentCommon Stock and our financial results are subject to a number of risks. You should carefully consider the risks described below and all other information contained in this Annual Report on Form
8-K dated February 27, 2018.On March 13, 2018, the Company issued promissory notes in the aggregate principal amount of$132,753 to its sponsors (M SPAC LLC, M SPAC Holdings I, LLC and M SPAC Holdings II, LLC). The $132,753 received by the Company upon issuance of the notes was deposited into the Company’s trust account for the benefit of its public stockholders in order to extend theperiod of time the Company has to complete a business combination for an additional one month, from March 19, 2018 to April 19, 2018. The notes do not bear interest and are payable five business days after the date the Company completes a business combination.
A more detailed description of the promissory notes10-K and the related transactions candocuments incorporated by reference. Our business, prospects, financial condition or operating results could be found in our Current Report on Form 8-K dated March 14, 2018.
Competitive strengths
We believe our specific competitive strengths to be the following:
Status as a public company
We believe our structure will make us an attractive business combination partner to target businesses. As an existing public company, we offer a target business an alternative to the traditional initial public offering through a merger or other business combination. In this situation, the ownersharmed by any of the target business would exchange their shares of stock in the target business for shares of our stock or for a combination of shares of our stock and cash, allowing us to tailor the consideration to the specific needs of the sellers. We believe target businesses might find this method a more certain and cost-effective method to becoming a public company than the typical initial public offering. In a typical initial public offering, there are additional expenses incurred in marketing, roadshow and public reporting efforts that will likely not be present to the same extent in connection with a business combination with us. Furthermore, once the business combination is consummated, the target business will have effectively become public, whereas an initial public offering is always subject to the underwriters’ ability to complete the offering,these risks, as well as general market conditionsother risks not currently known to us or that we currently consider immaterial. Additional risks and uncertainties, including those generally affecting the industry in which we operate and risks that management currently deems immaterial, may arise or become material in the future and affect our business.
Risk Factors Related to Our Business
Unauthorized access to our systems or unauthorized disclosure of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise, could preventexpose us to liability, protracted and costly litigation and damage our reputation.
Our services include the offering from occurring. Once public,processing, transmission and storing of sensitive business and personal information about our merchants, merchants' customers, vendors, partners and other third parties. This information may include credit and debit card numbers, bank account numbers, personal identification numbers, names and addresses or other sensitive business information. This information may also be stored by third parties to whom we believeoutsource certain functions or other agents ("associated third parties"). We may have responsibility to the card networks, FIs, and in some instances, our merchants, and/or ISOs, for our failure or the failure of our associated third parties to protect this information.
Information security risks for us and our competitors have substantially increased in recent years in part due to the proliferation of new technologies and the increased sophistication, resources and activities of hackers, terrorists, activists, organized crime, and other external parties, including hostile nation-state actors. The techniques used to obtain unauthorized access, disable or degrade service, sabotage systems or utilize payment systems in an effort to perpetrate financial fraud change frequently and are often difficult to detect and all of which we are vulnerable to. We have been the target
business would then have greaterof brute force attempts to obtain unauthorized access to
capitalour systems. Threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Computer viruses can be distributed and
an additional meansspread rapidly over the internet and could infiltrate our systems or those of
providing management incentives consistent with stockholders’ interests than it would have as a privately-held company. It can offer further benefits by augmenting a company’s profile among potential new customers and vendors and aid in attracting talented employees.While we believe that our status as a public company will makeassociated third parties. Additionally, denial of service or other attacks could be launched against us an attractive business partner, some potential target businesses may view the inherent limitations in our status as a blank check company, such as our lack of an operating history and our requirements to seek stockholder approval of any proposed initial business combination and provide holders of public shares the opportunity to convert their shares into cash from the trust account, as a deterrent and may prefer to effect a business combination with a more established entity or with a private company.
Transaction flexibility
We offer a target businessfor a variety of optionspurposes, including interfering with our services or to create a diversion for other malicious activities. Our defensive measures may not prevent down-time, unauthorized access or use of sensitive data. While we maintain insurance coverage that will cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. Furthermore, we do not control the actions of our third-party partners and customers in their systems. These third parties may experience security breaches and any future problems experienced by these third parties, including those resulting from cyber attacks or other breakdowns or disruptions in services, could adversely affect our ability to conduct our business or expose us to liability. Further, our agreements with our bank sponsors and our third-party payment processors (as well as providingpayment network requirements) require us to take certain protective measures to ensure the ownersconfidentiality of merchant and consumer data. Any such actions, attacks or failure to adequately comply with these protective measures could hurt our reputation, force us to incur significant expenses in remediating the resulting impacts, expose us to uninsured liability, result in the loss of our bank sponsors or our ability to participate in the payment networks, or subject us to fees, penalties, sanctions, litigation or termination of our bank sponsor agreements or our third-party payment processor agreements.
As a
target business with sharesresult of information security risks, we must continuously develop and enhance our controls, processes and practices designed to protect our computer systems, software, data and networks from attack, damage or unauthorized access. This continuous development and enhancement will require us to expend additional resources, including to investigate and remediate significant information security vulnerabilities detected. Despite our investments in
a public company and a public means to sell such shares, providing cash for stock, and providing capital for the potential growth and expansion of its operations or strengthening its balance sheet by reducing its debt ratio. Becausesecurity measures, we are
ableunable to
consummate our initial business combination using our cash, debt or equity securities, or a combination of the foregoing, we have the flexibility to use the most efficient combinationassure that
will allow us to tailor the consideration to be paid to the target business to fit its needs and desires. However, since we have no specific business combination under consideration, we have not taken any
steps to secure third party financing and it may not be available to us.Competitive Weaknesses
We believe our competitive weaknesses to be the following:
Limited Financial Resources
Our financial reservessecurity measures will be relatively limited when contrasted with those of venture capital firms, leveraged buyout firms and operating businesses competing for acquisitions. In addition, our financial resources could be reduced because of our obligation to convert shares held by our public stockholders as well as any tender offer we conduct.
Lack of experience with blank check companies
Our management team is not experienced in pursuing business combinations on behalf of blank check companies. Other blank check companies may be sponsored and managed by individuals with prior experience in completing business combinations between blank check companies and target businesses. Our managements’ lack of experience may not be viewed favorably by target businesses.
Limited technical and human resources
As a blank check company, we have limited technical and human resources. Many venture capital funds, leveraged buyout firms and operating businesses possess greater technical and human resources than we do and thus we may be at a disadvantage when competing with them for target businesses.
Delay associated with stockholder approval or tender offer
We may be required to seek stockholder approval of our initial business combination. If we are not required to obtain stockholder approval of an initial business combination, we will allow our stockholders to sell their shares to us pursuant to a tender offer. Both seeking stockholder approval and conducting a tender offer will delay the consummation of our initial business combination. Other companies competing with us for acquisition opportunities may not be subject to similar requirement,system or human error.
Our systems or our third-party providers' systems may fail, which could interrupt our service, cause us to lose business, increase our costs and expose us to liability.
We depend on the efficient and uninterrupted operation of our computer systems, software, data centers and telecommunications networks, as well as the systems and services of third parties. A system outage or data loss could have a
material adverse effect on our business, financial condition, results of operations and cash flows. Not only could we suffer damage to our reputation in the event of a system outage or data loss, but we may also be ableliable to satisfythird parties. Many of our contractual agreements with FIs and certain other customers require the payment of penalties if we do not meet certain operating standards. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss or telecommunications failure.
The payment processing industry is highly competitive and such requirements more quickly thancompetition is likely to increase, which may adversely influence the prices we can. Ascan charge to merchants for our services and the compensation we must pay to our distribution partners, and as a result, we may be at a disadvantageour profit margins.
The payment processing industry is highly competitive. We primarily compete in
competingthe SMB merchant industry. We compete with FIs and their affiliates, independent payment processing companies and ISOs. We also compete with many of these same entities for
these opportunities.Effecting an Acquisition Transaction
General
Weproduction through distribution partners. Many of our distribution partners are not presently engaged in, andexclusive to us but also have relationships with our competitors, such that we have to continually expend resources to maintain those relationships. Our growth will not engage in, any substantive commercial business until we close a business combination. We intend to utilize cash derived from the proceeds of the IPO and the private placement of private units, our capital stock, debt or a combination of these in effecting our initial business combination. Although substantially all of the net proceeds of the IPO and the private placement of private units are intended to be applied generally toward effecting a business combination, the proceeds are not otherwise being designated for any more specific purposes. Accordingly, investors in the IPO were investing without first having an opportunity to evaluate the specific merits or risks of any one or more business combinations.
Selection of a Target Business and Structuring of Our Initial Business Combination
Subject to our management team’s fiduciary duties and the limitation that one or more target businesses have an aggregate fair market value of at least 80% of the value of the trust account (excluding any deferred underwriter’s fees and taxes payabledepend on the income earned on the trust account) at the timecontinued growth of the execution of a definitive agreement for our initial business combination, as described below in more detail, our management will have virtually unrestricted flexibility in identifyingElectronic Payments, particularly Electronic Payments to SMB merchants, and selecting a prospective target business. Additionally, there is no limitation on our ability to raise funds privatelyincrease our market share through successful competitive efforts to gain new merchants and distribution partners.
Additionally, many FIs and their subsidiaries or
through loans in connection with our initial business combination. We have not established any specific attributes or criteria (financial or otherwise) for prospective target businesses.Accordingly, there is no basis for investors to evaluate the possible merits or risks of the target businesswell-established payment-enabled technology providers with which we compete, have substantially greater capital, technological, management and marketing resources than we have. These factors may ultimately completeallow our competitors to offer better pricing terms to merchants and more attractive compensation to distribution partners, which could result in a loss of our potential or current merchants and distribution partners. Our current and future competitors may also develop or offer services that have price or other advantages over the services we provide.
We also face new, well capitalized, competition from emerging technology and non-traditional payment processing companies as well as traditional companies offering alternative Electronic Payments services and payment-enabled software solutions. If these new entrants gain a greater share of total Electronic Payments transactions, they could impact our ability to retain and grow our relationships with merchants and distribution partners. Acquirers may be susceptible to the adoption by the broader merchant community of payment-enabled software versus terminal based payments.
Increased merchant, referral partner or ISO attrition could cause our financial results to decline.
We experience attrition in merchant credit and debit card processing volume resulting from several factors, including business combination. To the extentclosures, transfers of merchant accounts to our competitors, unsuccessful contract renewal negotiations and account closures that we effect our initial business combination withinitiate for various reasons such as heightened credit risks or contract breaches by merchants. Our referral partners are a financially unstable companysignificant source of new business. If a referral partner or an entity in its early stageISO switches to another processor, terminates our services, internalizes payment processing that we perform, merges with or is acquired by one of developmentour competitors, or growth, including entities without established records of salesshuts down or earnings,becomes insolvent, we may be affectedno longer receive new merchant referrals from such referral partner, and we risk losing existing merchants that were originally enrolled by numerous risks inherentthe referral partner or ISO. We cannot predict the level of attrition in the future and it could increase. Higher than expected attrition could negatively affect our results, which could have a material adverse effect on our business, financial condition, results of operations and operationscash flows.
Changes in card association and debit network fees or products could increase costs or otherwise limit our operations.
From time to time, card associations and debit networks increase the organization and/or processing fees (known as interchange fees) that they charge. It is possible that competitive pressures will result in us absorbing a portion of financially unstablesuch increases in the future, which would increase our operating costs, reduce our profit margin, and early stageadversely affect our business, operating results, and financial condition. In addition, the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital for other purposes.
Changes in payment network rules or potential emerging growth companies. Althoughstandards could adversely affect our management will endeavor to evaluate the risks inherent in a particular target business, we may not properly ascertain or assess all significant risk factors. In evaluating a prospective target business, our management may consider a variety of factors, including one or more of the following:• financial condition and results of operation;
• growth potential;
• brand recognitionoperations.
Payment network rules are established and
potential;• return on equitychanged from time to time by each payment network as they may determine in their sole discretion and with or invested capital;
• market capitalizationwithout advance notice to their participants. The timelines imposed by the payment networks or enterprise value;
sponsor banks for expected compliance with new rules have historically been, and
skillmay continue to be, highly compressed, requiring us to quickly implement changes to our systems which increases the risk of
management and availabilitynon-compliance with new standards or the reduction of
additional personnel;• capital requirements;
• competitive position;
• barrierscertain types of merchant activity. In addition, the payment networks could make changes to entry;
• stage of developmentinterchange or other elements of the products, processes or services;
• existing distribution and potential for expansion;
• degree of current or potential market acceptancepricing structure of the products, processes or services;
• proprietary aspectsmerchant acquiring industry that would have a negative impact on our results of operations.
To remain competitive and to continue to increase our revenues and earnings, we must continually update our products and services, a process which could result in increased costs and the extentloss of intellectual propertyrevenues, earnings, merchants and distribution partners if the new products and services do not perform as intended or other protection for products or formulas;• impact of regulation on the business;
• regulatory environment of the industry;
• costs associated with effecting the business combination;
• industry leadership, sustainability of market share and attractiveness of market industries in which a target business participates; and
• macro competitive dynamicsare not accepted in the industry within which the company competes.
These criteria are not intended to be exhaustive. Our management may not consider any of the above criteria in evaluating a prospective target business. marketplace.
The
retention of our officers and directors following the completion of any business combination will not be a material consideration in our evaluation of a prospective target business.Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective. In evaluating a prospective target business, we will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which is made available to us. This due diligence review will be conducted either by our management or by unaffiliated third parties we may engage, although we have no current intention to engage any such third parties.
The time and costs required to select and evaluate a target business and to structure and complete our initial business combination remain to be determined. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital available to otherwise complete a business combination.
Fair Market Value of Target Business
Pursuant to Nasdaq listing rules, our initial business combination must occur with one or more target businesses having an aggregate fair market value equal to at least 80% of the value of the funds in the trust account (excluding any deferred underwriter’s fees and taxes payable on the income earned on the trust account), which we refer to as the 80% test, at the time of the execution of a definitive agreement for our initial business combination, although we may structure a business combination with one or more target businesses whose fair market value significantly exceeds 80% of the trust account balance. If we are no longer listed on Nasdaq, we will not be required to satisfy the 80% test.
We currently anticipate structuring a business combination to acquire 100% of the equity interests or assets of the target business or businesses. We may, however, structure a business combination where we merge directly with the target business or where we acquire less than 100% of such interests or assets of the target business in order to meet certain objectives of the target management team or stockholders or for other reasons, but we will only complete such business combination if the post-transaction company owns 50% or more of the outstanding voting securities of the target or otherwise owns a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act. Even if the post-transaction company owns 50% or more of the voting securities of the target, our stockholders prior to the business combination may collectively own a minority interest in the post-transaction company, depending on valuations ascribed to the target and us in the business combination transaction. For example, we could pursue a transaction in which we issue a substantial number of new shares in exchange for all of the outstanding capital stock of a target. In this case, we would acquire a 100% controlling interest in the target. However, as a result of the issuance of a substantial number of new shares, our stockholders immediately prior to our initial business combination could own less than a majority of our outstanding shares subsequent to our initial business combination. If less than 100% of the equity interests or assets of a target business or businesses are owned or acquired by the post-transaction company, the portion of such business or businesses that is owned or acquired is what will be valued for purposes of the 80% test. In order to consummate such an acquisition, we may issue a significant amount of our debt or equity securities to the sellers of such businesses and/or seek to raise additional funds through a private offering of debt or equity securities. Since we have no specific business combination under consideration, we have not entered into any such fund-raising arrangement and have no current intention of doing so. The fair market value of the target will be determined by our board of directors based upon one or more standards generally accepted by the financial community (such as actual and potential sales, earnings, cash flow and/or book value). If our board is not able to independently determine that the target business has a sufficient fair market value, we will obtain an opinion from an unaffiliated, independent investment banking firm, or another independent entity that commonly renders valuation opinions on the type of target business we are seeking to acquire, with respect to the satisfaction of such criteria. We will not be required to obtain an opinion from an independent investment banking firm, or another independent entity that commonly renders valuation opinions on the type of target business we are seeking to acquire, as to the fair market value if our board of directors independently determines that the target business complies with the 80% threshold. However, if we seek to consummate an initial business combination with an entity that is affiliated with any of our officers, directors or insiders and are therefore required to obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view, we may ask that banking firm to opine on whether the target business met the 80% fair market value test. Nevertheless, we are not required to do so and could determine not to do so without consent of our stockholders.
Lack of Business Diversification
We expect to complete only a single business combination, although this process may entail simultaneous business combinations with several operating businesses. Therefore, at least initially, the prospects for our success may be entirely dependent upon the future performance of a single business operation. Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is probable that we will not have the resources to diversify our operations or benefit from the possible spreading of risks or offsetting of losses. By consummating our initial business combination with only a single entity, our lack of diversification may:
• subject us to negative economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the particularElectronic Payments industry in which we may operate subsequentcompete is subject to our initial business combination,rapid technological changes and
• result in our dependency upon the performance of a single operating business or the development or market acceptance of a single or limited number of products, processes or services.
If we determine to simultaneously consummate our initial business combination with several businesses is characterized by new technology, product and such businesses are owned by different sellers, we will need for each of such sellers to agree that our purchase of its business is contingent on the simultaneous closings of the other combinations, which may make it more difficult for us, and delay our ability, to complete the business combination. With a business combination with several businesses, we could also face additional risks, including additional burdens and costs with respect to possible multiple negotiations and due diligence investigationsservice introductions, evolving industry standards, changing merchant needs and the additional risks associated with the subsequent assimilationentrance of the operations and services or products of the target companies in a single operating business.
Limited Ability to Evaluate the Target Business’ Management Team
Our assessment of the target business’ management team may not prove to be correct. In addition, the future management team may not have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of our officers and directors, if any, in the target business following our initial business combination remains to be determined. While it is possible that some of our key personnel will remain associated in senior management or advisory positions with us following our initial business combination, it is unlikely that they will devote their full-time efforts to our affairs subsequent to our initial business combination. Moreover, they would only be able to remain with the company after the consummation of our initial business combination if theynon-traditional competitors. We are able to negotiate employment or consulting agreements in connection with the business combination. Such negotiations would take place simultaneously with the negotiation of the business combination and could provide for them to receive compensation in the form of cash payments and/or our securities for services they would render to the company after the consummation of the business combination. While the personal and financial interests of our key personnel may influence their motivation in identifying and selecting a target business, their ability to remain with the company after the consummation of our initial business combination will not be the determining factor in our decision as to whether or not we will proceed with any potential business combination. Additionally, our officers and directors may not have significant experience or knowledge relating to the operations of the particular target business.
Following our initial business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We may not have the ability to recruit additional managers, or that any such additional managers we do recruit will have the requisite skills, knowledge or experience necessary to enhance the incumbent management.
Stockholder Approval of Business Combination
In connection with any proposed business combination, we will either (1) seek stockholder approval of our initial business combination at a meeting called for such purpose at which public stockholders (but not our insiders, officers or directors) may seek to convert their shares of common stock, regardless of whether they vote for or against the proposed business combination, into a portion of the aggregate amount then on deposit in the trust account, or (2) provide our stockholders with the opportunity to sell their shares to us by means of a tender offer (and therefore avoid the need for a stockholder vote) for an amount equal to their pro rata share of the aggregate amount then on deposit in the trust account, in each case subject to the limitations described herein. If we determine to engage in a tender offer, such tender offer will be structured so that each stockholder may tender all of his, her or its shares rather than some pro rata portion of his, her or its shares. The decision as to whether we will seek stockholder approval of a proposed business combination or whether we will allow stockholders to sell their shares to us in a tender offer will be made by us, solely in our discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require us to seek stockholder approval. We anticipaterisk that our business combination could be completed by way of a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar transaction. Stockholder approval will not be required under Delaware law if the business combination is structured as an acquisition of assets of the target company, a share exchange with target company stockholders or a purchase of stock of the target company; however, Nasdaq rules would require us to obtain stockholder approval if we seek to issue shares representing 20% or more of our outstanding shares as consideration in a business combination. A merger of our company into a target company would require stockholder approval under Delaware law. A merger of a target company into our company would not require stockholder approval unless the merger results in a change to our certificate of incorporation, or if the shares issued in connection with the merger exceed 20% of our outstanding shares prior to the merger. A merger of a target company with a subsidiary of our company would not require stockholder approval unless the merger results in a change in our certificate of incorporation; however, Nasdaq rules would require us to obtain stockholder approval of such a transaction if we week to issue shares representing 20% or more of our outstanding shares as consideration.
If a stockholder vote is not requiredexisting products and we do not decide to hold a stockholder vote for business or other legal reasons, we will provide our stockholders with an opportunity to tender their shares to us pursuant to a tender offer pursuant to Rule 13e-4services become obsolete, and Regulation 14E of the Exchange Act, which regulate issuer tender offers, and we will file tender offer documents with the SEC which will contain substantially the same financial and other information about the initial business combination as is required under the SEC’s proxy rules.
In the event we allow stockholders to tender their shares pursuant to the tender offer rules, our tender offer will remain open for at least 20 business days, in accordance with Rule 14e-1(a) under the Exchange Act, and we will not be permitted to complete our initial business combination until the expiration of the tender offer period. In addition, the tender offer will be conditioned on public stockholders not tendering more than a specified number of public shares, which number will be based on the requirement that we may not purchase public shares in an amount that would cause our net tangible assets to be less than $5,000,001 (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our initial business combination. If public stockholders tender more shares than we have offered to purchase, we will withdraw the tender offer and not complete the initial business combination.
If, however, stockholder approval of the transaction is required by law or Nasdaq requirements, or we decide to obtain stockholder approval for business or other legal reasons, we will:
• permit stockholders to convert their shares in conjunction with a proxy solicitation pursuant to Regulation 14A of the Exchange Act, which regulates the solicitation of proxies, and not pursuant to the tender offer rules, and
• file proxy materials with the SEC.
In the event that we seek stockholder approval of our initial business combination, we will distribute proxy materials and, in connection therewith, provide stockholders with the conversion rights described above upon completion of the initial business combination.
We will consummate our initial business combination only if public stockholders do not exercise conversion rights in an amount that would cause our net tangible assets to be less than $5,000,001 and a majority of the outstanding shares of common stock voted are voted in favor of the business combination. As a result, if stockholders owning approximately 88.6%or more of the shares of common stock sold in the IPO exercise conversion rights, the business combination will not be consummated. However, the actual percentages will only be able to be determined once a target business is located and we can assess all of the assets and liabilities of the combined company (which would include the fee payable to the underwriters in an amount of $1,062,022, any out-of-pocket expenses incurred by our insiders, officers, directors or their affiliates in connection with certain activities on our behalf, such as identifying and investigating possible business targets and business combinations that have not been repaid at that time, as well as any other liabilities of ours and the liabilities of the target business) upon consummation of the proposed business combination, subject to the requirement that we must have at least $5,000,001 of net tangible assets upon closing of such business combination. As a result, the actual percentages of shares that can be converted may be significantly lower than our estimates. We chose our net tangible asset threshold of $5,000,001 to ensure that we would avoid being subject to Rule 419 promulgated under the Securities Act. However, if we seek to consummate an initial business combination with a target business that imposes any type of working capital closing condition or requires us to have a minimum amount of funds available from the trust account upon consummation of such initial business combination, our net tangible asset threshold may limit our ability to consummate such initial business combination (as we may be required to have a lesser number of shares converted) and may force us to seek third party financing which may not be available on terms acceptable to us or at all. Alternatively, we may not be able to consummate a business combination unless the number of shares of common stock seeking conversion rights is significantly less than the 88.6% indicated above. As a result, we may not be able to consummate such initial business combination and we may not be able to locate another suitable target within the applicable time period, if at all. Public stockholders may therefore have to wait 18 months from the closing of the IPO (or up to 21 months from the closing of the IPO if we extend the period of time to consummate a business combination, as described in more detail below) in order to be able to receive a portion of the trust account.
Our insiders, officers and directors have agreed (1) to vote any shares of common stock owned by them in favor of any proposed business combination, (2) not to convert any shares of common stock into the right to receive cash from the trust account in connection with a stockholder vote to approve a proposed initial business combination or a vote to amend the provisions of our certificate of incorporation relating to stockholders’ rights or pre-business combination activity and (3) not sell any shares of common stock in any tender in connection with a proposed initial business combination.
Depending on how a business combination was structured, any stockholder approval requirement could be satisfied by obtaining the approval of either (i) a majority of the shares of our common stock that were voted at the meeting (assuming a quorum was present at the meeting), or (ii) a majority of the outstanding shares of our common stock. Because our insiders, officers and directors will collectively beneficially own approximately 24.8% of our issued and outstanding shares of common stock (assuming they do not purchase any units in the IPO upon consummation of the IPO and the sale of the private units, a minimum of approximately 10,626, or 0.2% (if the approval requirement was a majority of shares voted and the minimum number of shares required for a quorum attended the meeting), and a maximum of approximately 1,780,739, or 25.0% (assuming that a majority of the outstanding shares was required to approve the initial business combination), of the outstanding shares of our common stock not owned by our insiders, officers or directors would need to be voted in favor a business combination in order for it to be approved.
None of our insiders or their affiliates has indicated any intention to purchase units or shares of common stock from persons in the open market or in private transactions. However, if we seek stockholder approval of a business combination and if we hold a meeting to approve a proposed business combination and a significant number of stockholders vote, or indicate an intention to vote, against such proposed business combination, we or our insiders or their affiliates could make such purchases in the open market or in private transactions in order to influence the vote. However, they have no current commitments, plans or intentions to engage in such transactions and have not formulated any terms or conditions for any such transactions. No funds from the trust account can be released from the trust account prior to the consummation of a business combination to make such purchases (although such purchases could be made using funds available to us after the closing of a business combination). We do not currently anticipate that such purchases, if any, would constitute a tender offer subject to the tender offer rules under the Exchange Act or a going-private transaction subject to the going-private rules under the Exchange Act; however, if the purchasers determine at the time of any such purchases that the purchases are subject to such rules, the purchasers will comply with such rules. Notwithstanding the foregoing, we or our insiders or their affiliates will not make purchases of shares of common stock if the purchases would violate Sections 9(a)(2) or 10(b) of the Exchange Act or Regulation M, which are rules that prohibit manipulation of a company’s stock, and we and they will comply with Rule 10b-18 under the Exchange Act in connection with any open-market purchases. If purchases cannot be made without violating applicable law, no such purchases will be made. The purpose of such purchases would be to (i) vote such shares in favor of the business combination and thereby increase the likelihood of obtaining stockholder approval of the business combination or (ii) to satisfy a closing condition in an agreement with a target that requires us to have a minimum net worth or a certain amount of cash at the closing of our business combination, where it appears that such requirement would otherwise not be met. This may result in the completion of our business combination that may not otherwise have been possible. In addition, if such purchases are made, the public “float” of our common stock may be reduced and the number of beneficial holders of our securities may be reduced, which may make it difficult to maintain or obtain the quotation, listing or trading of our securities on a national securities exchange. Our insiders anticipate that they may identify the stockholders with whom our insiders or their affiliates may pursue privately negotiated purchases by either the stockholders contacting us directly or by our receipt of redemption requests submitted by stockholders following our mailing of proxy materials in connection with our initial business combination. To the extent that our insiders or their affiliates enter into a private purchase, they would identify and contact only potential selling stockholders who have expressed their election to redeem their shares for a pro rata share of the trust account or vote against the business combination.
Ability to Extend Time to Complete Business Combination
We have extended the time to complete an initial business combination to April 19, 2018 by depositing $132,753 into our trust account. If we anticipate that we may not be able to consummate our initial business combination by April 19, 2018 (as seems likely), we may extend the period of time to consummate a business combination up to two additional times, each by an additional one month (for a total of up to 21 months to complete a business combination). Pursuant to the terms of our amended and restated articles of incorporation and the trust agreement to be entered into between us and American Stock Transfer & Trust Company, LLC on the date of the IPO, in order to extend the time available for us to consummate our initial business combination, our insiders or their affiliates or designees, upon five days advance notice prior to the applicable deadline, must deposit into the trust account $132,753 ($0.025 per unit in either case), up to an aggregate of $398,258, or $0.075 per unit (if our life is extended three times), on or prior to the date of the applicable deadline, for each one month extension (we have already deposited $132,753 for the first extension). The insiders received for the first deposit and they or their designees will receive for any subsequent deposits a non-interest bearing, unsecured promissory note equal to the amount of any such deposit that will not be repaid in the event that we are unable to close a business combination unless there are funds available outside the trust accountdevelop new products and services in response to do so. In the event that we receive notice from our insiders five days prior to the applicable deadline of their intent to effect an extension, we intend to issue a press release announcing such intention at least three days prior to the applicable deadline. In addition, we intend to issue a press release the day after the applicable deadline announcing whether or not the funds had been timely deposited.industry demands. Our insiders and their affiliates or designees are not obligated to fund the trust account to extend the time for us to complete our initial business combination. To the extent that some, but not all, of our insiders, decide to extend the period of time to consummate our initial business combinations, such insiders (or their affiliates or designees) may deposit the entire $398,258. We currently anticipate to complete our proposed business combination with Priorityfuture success will depend in June 2018.
Conversion Rights
At any meeting called to approve an initial business combination, any public stockholder, whether voting for or against such proposed business combination, will be entitled to demand that his or her shares of common stock be converted for a full pro rata portion of the amount then in the trust account (initially $10.30 per share), plus any pro rata interest earned on the funds held in the trust account and not previously released to us or necessary to pay our tax obligations. Alternatively, we may provide our public stockholders with the opportunity to sell their shares of our common stock to us through a tender offer (and thereby avoid the need for a stockholder vote) for an amount equal to their pro rata share of the aggregate amount then on deposit in the trust account less any outstanding tax liabilities owed.
Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or hers, or any other person with whom he or she is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking conversion rights with respect to 20% or more of the shares of common stock sold in the IPO. Such a public stockholder would still be entitled to vote against a proposed business combination with respect to all shares of common stock owned by him or her, or his or her affiliates. We believe this restriction will prevent stockholders from accumulating large blocks of shares before the vote held to approve a proposed business combination and attempt to use the conversion right as a means to force us or our management to purchase their shares at a significant premium to the then current market price. By not allowing a stockholder to convert more than 20% of the shares of common stock sold in the IPO, we believe we have limited the ability of a small group of stockholders to unreasonably attempt to block a transaction which is favored by our other public stockholders.
None of our insiders, officers or directors will have the right to receive cash from the trust account in connection with a stockholder vote to approve a proposed initial business combination or a vote to amend the provisions of our certificate of incorporation relating to stockholders’ rights or pre-business combination activity with respect to any shares of common stock owned by them, directly or indirectly, whether acquired prior to the IPO or purchased by them in the IPO or in the aftermarket.
We may also require public stockholders who wish to convert, whether they are a record holder or hold their shares in “street name,” to either tender their certificates to our transfer agent at any time through the vote on the business combination or to deliver their shares to the transfer agent electronically using Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at the holder’s option. The proxy solicitation materials that we will furnish to stockholders in connection with the vote for any proposed business combination will indicate whether we are requiring stockholders to satisfy such delivery requirements. Accordingly, a stockholder would have from the time the stockholder received our proxy statement through the vote on the business combination to deliver his or her shares if he or she wishes to seek to exercise his or her conversion rights. Under Delaware law and our bylaws, we are required to provide at least 10 days advance notice of any stockholder meeting, which would be the minimum amount of time a public stockholder would have to determine whether to exercise conversion rights.
There is a nominal cost associated with the above-referenced delivery process and the act of certificating the shares or delivering them through the DWAC System. The transfer agent will typically charge the tendering broker $45.00 and it would be up to the broker whether or not to pass this cost on to the holder. However, this fee would be incurred regardless of whether or not we require holders to deliver their shares prior to the vote on the business combination in order to exercise conversion rights. This is because a holder would need to deliver shares to exercise conversion rights regardless of the timing of when such delivery must be effectuated. However, in the event we require stockholders to deliver their shares prior to the vote on the proposed business combination and the proposed business combination is not consummated, this may result in an increased cost to stockholders.
The foregoing is different from the procedures used by many blank check companies. Traditionally, in order to perfect conversion rights in connection with a blank check company’s business combination, the company would distribute proxy materials for the stockholders’ vote on an initial business combination, and a holder could simply vote against a proposed business combination and check a box on the proxy card indicating such holder was seeking to exercise his or her conversion rights. After the business combination was approved, the company would contact such stockholder to arrange for him or her to deliver his or her certificate to verify ownership. As a result, the stockholder then had an “option window” after the consummation of the business combination during which he or she could monitor the price of the company’s stock in the market. If the price rose above the conversion price, he or she could sell his or her shares in the open market before actually delivering his or her shares to the company for cancellation. As a result, the conversion rights, to which stockholders were aware they needed to commit before the stockholder meeting, would become a “continuing” right surviving past the consummation of the business combination until the holder delivered its certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a holder’s election to convert his or her shares is irrevocable once the business combination is approved.
Any request to convert such shares once made, may be withdrawn at any time up to the vote on the proposed business combination. Furthermore, if a holder of a public share delivered his or her certificate in connection with an election of their conversion and subsequently decides prior to the vote on the proposed business combination not to elect to exercise such rights, he or she may simply request that the transfer agent return the certificate (physically or electronically).
If the initial business combination is not approved or completed for any reason, then our public stockholders who elected to exercise their conversion rights would not be entitled to convert their shares for the applicable pro rata share of the trust account. In such case, we will promptly return any shares delivered by public holders.
Liquidation if No Business Combination
If we do not complete a business combination by April 19, 2018, we will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem 100% of the outstanding public shares and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject (in the case of (ii) and (iii) above) to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.
We have extended the time to complete an initial business combination to April 19, 2018 by depositing $132,753 into our trust account. However, if we anticipate that we may not be able to consummate our initial business combination by April 19, 2018 (as seems likely), we may extend the period of time to consummate a business combination up to two additional times, each by an additional one month (for a total of up to 21 months to complete a business combination). Pursuant to the terms of our amended and restated articles of incorporation and the trust agreement to be entered into between us and American Stock Transfer & Trust Company, LLC on the date of the IPO, in order to extend the time available for us to consummate our initial business combination, our insiders or their affiliates or designees, upon five days advance notice prior to the applicable deadline, must deposit into the trust account $132,753 ($0.025 per unit in either case), up to an aggregate of $398,258, or $0.075 per unit (if our life is extended three times), on or prior to the date of the applicable deadline, for each one month extension (we have already deposited $132,753 for the first extension). The insiders received for the first deposit and and they or their designees will receive for any subsequent deposits a non-interest bearing, unsecured promissory note equal to the amount of any such deposit that will not be repaid in the event that we are unable to close a business combination unless there are funds available outside the trust account to do so. In the event that we receive notice from our insiders five days prior to the applicable deadline of their intent to effect an extension, we intend to issue a press release announcing such intention at least three days prior to the applicable deadline. In addition, we intend to issue a press release the day after the applicable deadline announcing whether or not the funds had been timely deposited. Our insiders and their affiliates or designees are not obligated to fund the trust account to extend the time for us to complete our initial business combination. To the extent that some, but not all, of our insiders, decide to extend the period of time to consummate our initial business combinations, such insiders (or their affiliates or designees) may deposit the entire $398,258. We currently anticipate having to extend the time needed to complete our proposed business combination with Priority.
Upon liquidation, the warrants will expire and holders of warrants will receive nothing upon a liquidation with respect to such warrants, and the warrants will be worthless.
Under the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. The pro rata portion of our trust account distributed to our public stockholders upon the redemption of 100% of our outstanding public shares in the event we do not complete our initial business combination within the required time period may be considered a liquidation distribution under Delaware law. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any redemptions are made to stockholders, any liability of stockholders with respect to a redemption is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
Furthermore, if the pro rata portion of our trust account distributed to our public stockholders upon the redemption of 100% of our public shares in the event we do not complete our initial business combination within the required time period is not considered a liquidation distribution under Delaware law and such redemption distribution is deemed to be unlawful, then pursuant to Section 174 of the Delaware General Corporation Law, the statute of limitations for claims of creditors could then be six years after the unlawful redemption distribution, instead of three years, as in the case of a liquidation distribution. It is our intention to redeem our public shares as soon as reasonably possible following the 18th or 21st month from the closing of the IPO and, therefore, we do not intend to comply with the above procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date.
Because we will not be complying with Section 280 of the Delaware General Corporation Law, Section 281(b) of the Delaware General Corporation Law requires us to adopt a plan, based on facts known to us at such time that will provide for our payment of all existing and pending claims or claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to seeking to complete an initial business combination, the only likely claims to arise would be from our vendors (such as lawyers, investment bankers, etc.) or prospective target businesses.
We will seek to have all third parties (including any vendors or other entities we engage after the IPO) and any prospective target businesses enter into valid and enforceable agreements with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account.
As a result, the claims that could be made against us will be limited, thereby lessening the likelihood that any claim would result in any liability extending to the trust. We therefore believe that any necessary provision for creditors will be reduced and should not have a significant impactpart on our ability to distributedevelop or adapt to technological changes and the fundsevolving needs of our resellers, merchants and the industry at large. In addition, new products and offerings may not perform as intended or generate the business or revenue growth expected. Defects in our software and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential distribution partners and merchants, harm to our reputation, fines imposed by card networks, or exposure to liability claims. Any delay in the trust accountdelivery of new products or services or the failure to differentiate our products and services could render them less desirable, or possibly even obsolete, to our public stockholders. Nevertheless, theremerchants. Additionally, the market for alternative payment processing products and services is no guarantee that vendors, service providersevolving, and prospective target businesses will execute such agreements. In the event that a potential contracted party was to refuse to execute such a waiver, we will execute an agreement with that entity only if our management first determines that we would be unable to obtain, on a reasonable basis, substantially similar services or opportunities from another entity willing to execute such a waiver. Examples of instances where we may engagedevelop too rapidly or not rapidly enough for us to recover the costs we have incurred in developing new products and services.
Acquisitions create certain risks and may adversely affect our business, financial condition, or results of operations.
We have actively acquired businesses and expect to continue to make acquisitions of businesses and assets in the future. The acquisition and integration of businesses and assets involve a
third party that refusednumber of risks. These risks include valuation (negotiating a fair price for the business and assets), integration (managing the process of integrating the acquired business' people, products, technology, and other assets to
execute a waiver would berealize the
engagement of a third party consultant who cannot sign such an agreementprojected value and synergies), regulatory (obtaining any applicable regulatory or other government approvals), and due
to regulatory restrictions, such as our auditors who are unable to sign due to independence requirements, or whose particular expertise or skills are believed by management to be superior to those of other consultants that would agree to execute a waiver or a situation in which management does not believe it would be able to find a provider of required services willing to provide the waiver. There is also no guarantee that, even if they execute such agreements with us, they will not seek recourse against the trust account. Our insiders have agreed that they will be jointly and severally liable to us if anddiligence (identifying risks to the
extent any claims by a vendor for services rendered or products sold to us, or a prospective target business with which we have discussed entering into a transaction agreement, reduce the amount of funds in the trust account to below $10.30 per public share, except as to any claims by a third party who executed a valid and enforceable agreement with us waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account and except as to any claims under our indemnityprospects of the
underwriters of the IPO against certainbusiness, including undisclosed or unknown liabilities
including liabilities under the Securities Act. Our board of directors has evaluated our insiders’ financial net worth and believes theyor restrictions). There can be no assurances that we will be able to
satisfy any indemnification obligations that may arise. However, our insiders may not be ablecomplete suitable acquisitions for a variety of reasons, including the identification of and competition for acquisition targets, the need for regulatory approvals, the inability of the parties to
satisfy their indemnification obligations, as we have not required our insiders to retain any assets to provide for their indemnification obligations, nor have we taken any further steps to ensure that they will be able to satisfy any indemnification obligations that arise. Moreover, our insiders will not be liable to our public stockholders and instead will only have liability to us. As a result, if we liquidate, the per-share distribution from the trust account could be less than approximately $10.30 due to claims or potential claims of creditors. We will distribute to all of our public stockholders, in proportion to their respective equity interests, an aggregate sum equalagree to the
amount then held instructure or purchase price of the
trust account, inclusivetransaction and our inability to finance the transaction on commercially acceptable terms. In addition, any potential acquisition can subject us to a variety of
any interest not previously released to us, (subject to our obligations under Delaware law to provide for claims of creditors as described below).other risks:
•If we are unable to consummate an initialsuccessfully integrate the benefits plans, duties and responsibilities and other factors of interest to management of employees of the acquired business, combinationwe could lose employees to our competitors in the region, which could significantly affect our ability to operate the business and are forced to redeem 100%complete the integration;
•If the integration process causes any delays with the delivery of our outstanding public sharesservices, or the quality of those services, we could lose customers to our competitors;
• Any acquisition may otherwise cause disruption to the acquired company's business and operations and relationships with financial institution sponsors, customers, merchants, employees and other partners;
•Any acquisition and the related integration could divert the attention of our management from other strategic matters including possible acquisitions and alliances and planning for new product development or expansion into new markets for payments technology and software solutions; and
•The costs related to the integration of an acquired company's business and operations into ours may be greater than anticipated.
We are subject to economic and political risk, the business cycles of our merchants and distribution partners and the overall level of consumer and commercial spending, which could negatively impact our business, financial condition and results of operations.
The Electronic Payments industry depends heavily on the overall level of consumer, commercial and government spending. We are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income and changes in consumer purchasing habits. A sustained deterioration in general economic conditions or increases in interest rates could adversely affect our financial performance by reducing the number or aggregate dollar volume of transactions made using Electronic Payments. If our merchants make fewer sales of their products and services using Electronic Payments, or consumers spend less money through Electronic Payments, we will have fewer transactions to process at lower dollar amounts, resulting in lower revenue. In addition, a portionweakening in the economy could force merchants to close at higher than historical rates, resulting in exposure to potential losses and a decline in the number of transactions that we process. We also have material fixed and semi-fixed costs, including rent, debt service, contractual minimums and salaries, which could limit our ability to quickly adjust costs and respond to changes in our business and the economy.
Global economic, political and market conditions affecting the U.S. markets may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.
Worldwide financial market conditions, as well as various social and political tensions in the U.S. and around the world, may contribute to increased market volatility, may have long-term effects and may cause economic uncertainties or deterioration in the U.S. In addition, the fiscal and monetary policies of foreign nations, such as Russia and China, may have a severe impact on U.S. financial markets. We are monitoring the conflicts between Russia and Ukraine and Israel and Hamas.While we do not expect that such conflicts will themselves be material to our business, geopolitical instability and adversity arising from such conflict (including additional conflicts that could arise from such conflicts), the imposition of sanctions, taxes and/or tariffs against one of the funds heldcountries or their response to such sanctions (including retaliatory acts, such as cyber attacks and sanctions against other countries) could adversely affect the global economy or specific international, regional and domestic markets, which could have a material adverse effect on our business, results of operations or financial condition.
Any new legislation that may be adopted in the trust account, we anticipate notifyingU.S. could significantly affect the trusteeregulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the trustFederal Reserve Board and the FSOC. The U.S. may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the U.S. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the U.S. Such actions could have a significant adverse effect on our business, financial condition and results of operations, particularly in view of the regulatory oversight we presently face. We cannot predict the effects of these or similar events in the future on the U.S. economy in general, or specifically on our business model or growth strategy, which typically involves the use of debt financing. To the extent a downturn in the U.S. economy impacts our merchant accounts, regulatory changes increase the burden we face in operating our business, or disruptions in the credit markets prevent us from using debt to finance future acquisitions, our financial condition and results of operations may be materially and adversely impacted.
We rely on FIs and other service and technology providers. If they fail or discontinue providing their services or technology generally or to us specifically, our ability to provide services to merchants may be interrupted, and, as a result, our business, financial condition and results of operations could be adversely impacted.
We rely on various FIs to provide clearing services in connection with our settlement activities. If such FIs should stop providing clearing services, we must find other FIs to provide those services. Additionally, we rely on FIs to facilitate our B2B and money transmission services offerings. If we are unable to find a replacement financial institution, we may no longer be able to provide these services to certain customers, which could negatively affect our revenues, earnings and cash flows.
We also rely on third parties to provide or supplement bankcard processing services and for infrastructure hosting services. We also rely on third parties for specific software and hardware used in providing our products and services. The termination by our service or technology providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with our merchants and, if we cannot find alternate providers quickly, may cause those merchants to terminate their relationship with us.
We also rely in part on third parties for the development and access to new technologies, or updates to existing products and services for which third parties provide ongoing support, which increases the cost associated with new and existing product and service offerings. Failure by these third-party providers to devote an appropriate level of attention to our products and services could result in delays in introducing new products or services, or delays in resolving any issues with existing products or services for which third-party providers provide ongoing support.
Fraud by merchants or others could cause us to incur losses.
We have potential liability for fraudulent electronic payment transactions or credits initiated by merchants or others. Examples of merchant fraud include when a merchant or other party knowingly uses a stolen or counterfeit credit or debit card, card number, or other credentials to record a false sales or credit transaction, processes an invalid card, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. Failure to effectively manage risk and prevent fraud could increase in the future. Increases in chargebacks or other liabilities could have a material adverse effect on our financial condition, results of operations and cash flows.
We incur liability when our merchants refuse or cannot reimburse us for chargebacks resolved in favor of their customers.
We have potential liability for chargebacks associated with the transactions we process. If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is "charged back" to the merchant's bank and credited or otherwise refunded to the cardholder. The risk of chargebacks is typically greater with those merchants that promise future delivery of goods and services rather than delivering goods or rendering services at the time of payment. If we or our bank sponsors are unable to collect the chargeback from the merchant's account or reserve account (if applicable), or if the merchant refuses or is financially unable (due to begin liquidatingbankruptcy or other reasons) to reimburse the merchant's bank for the chargeback, we may bear the loss for the amount of the refund paid to the cardholder. Any increase in chargebacks not paid by our merchants could increase our costs and decrease our revenues. We have policies to manage merchant-related credit risk and often mitigate such assets promptly afterrisk by requiring collateral and monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such date and anticipate it will take noobligations by one or more than 10 business days to effectuate the redemption of our public shares. Our insidersmerchants could have waived their rightsa material adverse effect on our business.
If we fail to participate in any redemptioncomply with the applicable requirements of the card networks, they could seek to fine us, suspend us or terminate our registrations for membership. If we incur fines or penalties for which our merchants or ISOs are responsible that we cannot collect, we may have to bear the cost of such fines or penalties.
We are subject to card association and network rules that could subject us to a variety of fines or penalties that may be levied by the card networks for certain acts or omissions. The rules of the card networks are set by the card networks themselves and may be influenced by card issuers, some of which are our competitors with respect to
processing services. Many banks directly or indirectly sell processing services to merchants in direct competition with us. These banks could attempt, by virtue of their
insider shares. We will payinfluence on the
costsnetworks, to alter the networks' rules or policies to the detriment of
non-members, including us. The termination of our registrations or our membership status as a service provider or merchant processor, or any
subsequent liquidation from our remaining assets outsidechanges in a card association or other network rules or standards, including interpretation and implementation of the
trust account.rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to our customers, could have a material adverse effect on our business, financial condition, results of operations and cash flows. If
such funds are insufficient, our insiders have agreeda merchant or an ISO fails to
paycomply with the
funds necessary to complete such liquidation (currently anticipated to be no more than approximately $15,000) and have agreed not to seek repayment of such expenses. Each holder of public shares will receive a full pro rata portionapplicable requirements of the
amount then incard associations and networks, we or the
trust account, plus any pro rata interest earned on the funds held in the trust account and not previously released to usmerchant or
necessary to pay our tax obligations. The proceeds deposited in the trust account could, however, become subject to claims of our creditors that are in preference to the claims of public stockholders.Our public stockholders shall be entitled to receive funds from the trust account only in the event of our failure to complete our initial business combination in the required time period or if the stockholders seek to have us convert their respective shares of common stock upon a business combination which is actually completed by us. In no other circumstances shall a stockholder have any right or interest of any kind to or in the trust account.
If we are forced to file a bankruptcy case or an involuntary bankruptcy case is filed against us which is not dismissed, the proceeds held in the trust accountISO could be subject to applicable bankruptcy law, anda variety of fines or penalties that may be includedlevied by the card associations or networks. If we cannot collect or pursue collection of such amounts from the applicable merchant or ISO, we may have to bear the cost of such fines or penalties, resulting in our bankruptcy estate and subject to the claims of third parties with priority over the claimslower earnings for us. The termination of our stockholders. To the extentregistration, or any bankruptcy claims deplete the trust account, the per share redemption or conversion amount received by public stockholders may be less than $10.30.
If, after we distribute the proceedschanges in the trust accountVisa or Mastercard rules that would impair our registration, could require us to stop providing Visa and Mastercard payment processing services, which would make it impossible for us to conduct our public stockholders,business on its current scale.
The loss of, for example, key personnel or of our ability to attract, recruit, retain and develop qualified employees could adversely affect our business, financial condition and results of operations.
Our success depends upon the continued services of our senior management and other key personnel who have substantial experience in the Electronic Payments industry and the markets in which we
file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received byoffer our
stockholders.services. In addition, our
boardsuccess depends in large part upon the reputation within the industry of
directors may be viewed as having breached its fiduciary duty to our
creditors and/or having actedsenior managers who have developed relationships with our distribution partners, payment networks and other payment processing and service providers. Further, in
bad faith, thereby exposing itself andorder for us to
claims of punitive damages, by paying public stockholders fromcontinue to successfully compete and grow, we must attract, recruit, develop and retain personnel who will provide us with expertise across the
trust account prior to addressing the claims of creditors. Claims may be brought against us for these reasons.
Certificate of Incorporation
Our certificate of incorporation contains certain requirements and restrictions relating to the IPO that will apply to us until the consummationentire spectrum of our initial business combination. If we hold a stockholder vote to amend any provisionsintellectual capital needs. Our success is also dependent on the skill and experience of our certificate of incorporation relating to stockholder’s rights or pre-business combination activity (including the substance or timing withinsales force, which we must continuously work to maintain. While we have many key personnel who have substantial experience with our operations, we must also develop our personnel to complete a business combination), we will provide our public stockholders withsuccession plans capable of maintaining the opportunity to redeem their shares of common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account and not previously released to us to pay our tax obligations, divided by the number of then outstanding public shares, in connection with any such vote. Our insiders have agreed to waive any conversion rights with respect to any insider shares, private shares and any public shares they may hold in connection with any vote to amend our certificate of incorporation. Specifically, our certificate of incorporation provides, among other things, that:
• prior to the consummationcontinuity of our initial business combination, we shall either (1) seek stockholder approval of our initial business combination at a meeting calledoperations. The market for such purpose at which public stockholders may seek to convert their shares of common stock, regardless of whether they vote for or against the proposed business combination, into a portion of the aggregate amount then on deposit in the trust account less any outstanding tax obligations owed, or (2)provide our stockholders with the opportunity to sell their shares to us by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount equal to their pro rata share of the aggregate amount then on deposit in the trust account less any outstanding tax obligations owed, in each case subject to the limitations described herein;
• we will consummate our initial business combination only if public stockholders do not exercise conversion rights in an amount that would cause our net tangible assets to be less than $5,000,001qualified personnel is competitive, and a majority of the outstanding shares of common stock voted are voted in favor of the business combination;
• if our initial business combination is not consummated within 18 (or 21) months of the closing of the IPO, then our existence will terminate and we will distribute all amounts in the trust account to all of our public holders of shares of common stock;
• upon the consummation of the IPO, $51,500,000, or $59,225,000 if the over-allotment option is exercised in full, shall be placed into the trust account;
• we may not consummate any other business combination, merger, capital stock exchange, asset acquisition, stock purchase, reorganizationsucceed in recruiting additional personnel or similar transaction priormay fail to our initial business combination; and
• prior to our initial business combination, weeffectively replace current personnel who depart with qualified or effective successors.
We may
not issue additional shares of capital stock that would entitlebe responsible for the
holders thereof to (i) receive funds from the trust account or (ii) vote on any initial business combination.Potential Revisions to Agreements with Insiders
Eachactions of our insiders has entered into letter agreements with us pursuantvendors in some circumstances.
We use third parties to
which each of them has agreed to do certain things relatingprovide services to us
including IT related services and
our activities prior tosales related functions. Should a
business combination. We could seek to amend these letter agreements without the approvalcybersecurity related event or other act of
stockholders, although we have no intention to do so. In particular:• Restrictions relating to liquidating the trust account if we failed to consummate a business combination in the time-frames specified above could be amended, but only if we allowed all stockholders to redeem their shares in connection with such amendment;
• Restrictions relating to our insiders being required to vote in favor of a business combination or against any amendments to our organizational documents could be amended to allow our insiders to vote on a transaction as they wished;
• The requirement of members of the management team to remain our officer or director until the closing of a business combination could be amended to allow persons to resign from their positions with us if, for example, the current management team was having difficulty locating a target business and another management team had a potential target business;
• The restrictions on transfer of our securities could be amended to allow transfer to third parties who were not members of our original management team;
• The obligation of our management team to not propose amendments to our organizational documents could be amended to allow them to propose such changes to our stockholders;
• The obligation of insiders to not receive any compensation in connection with a business combination could be modified in order to allow them to receive such compensation;
• The requirement to obtain a valuation for any target business affiliated with our insiders, in the event it was too expensive to do so.
Except as specified above, stockholders would not be required to be given the opportunity to redeem their shares in connection with such changes. Such changes could result in:
• Our having an extended period of time to consummate a business combination (although with less in trust as a certain number of our stockholders would certainly redeem their shares in connection with any such extension);
• Our insiders being able to vote against a business combination or in favor of changes to our organizational documents;
• Our operations being controlled by a new management team that our stockholders did not elect to invest with;
• Our insiders receiving compensation in connection with a business combination; and
• Our insiders closing a transaction with one of their affiliates without receiving an independent valuation of such business.
We will not agree to any such changes unless we believed that such changes were in the best interests of our stockholders (for example, if we believed such a modification were necessary to complete a business combination). Each of our officers and directors have fiduciary obligations to us requiring that they act in our best interests and the best interests of our stockholders.
Competition
In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors. While we believe there may be numerous potential target businesses that we could complete a business combination with utilizing the net proceeds of the IPO, our ability to compete in completing a business combination with certain sizable target businesses may be limited by our available financial resources.
The following also may not be viewed favorably by certain target businesses:
• our obligation to seek stockholder approval of our initial business combination or engage in a tender offer may delay the completion of a transaction;
• our obligation to convert shares of common stock held by our public stockholders may reduce the resources available to us for our initial business combination;
• our outstanding warrants and unit purchase options, and the potential future dilution they represent;
• our obligation to pay the deferred underwriting commission to the underwriters upon consummation of our initial business combination;
• our obligation to either repay working capital loans that may be made to us by our insiders, officers, directors or their affiliates;
• our obligation to register the resale of the insider shares, as well as the private units (and underlying securities) and any shares issued to our insiders, officers, directors or their affiliates upon conversion of working capital loans; and
• the impact on the target business’ assetsnegligence occur as a result of unknown liabilities under the securities laws or otherwise depending on developments involving us prior to the consummation of a business combination.
Any of these factors may place us at a competitive disadvantage in successfully negotiating our initial business combination. Our management believes, however, that our status as a public entity and potential access to the United States public equity markets may give us a competitive advantage over privately-held entities having a similar business objective as ours in connection with an initial business combination with a target business with significant growth potential on favorable terms.
If we succeed in effecting our initial business combination, there will be, in all likelihood, intense competition from competitors of the target business. Subsequent to our initial business combination,third-party service provider, we may not have the resources or ability to compete effectively.
Facilities
We currently maintain our principal executive offices at 40 Wall Street, 58th Floor, New York, NY 10005. The costbe liable for this space is included in the $10,000 per-month fee payable to Magna Management LLC, a company controlled by our insiders, for office space, utilitiesthose actions.
Legal, Regulatory Compliance and secretarial services. Our agreement with Magna Management LLC provides that commencing on the date that our securities were first listed on the Nasdaq Capital Market and until we consummate a business combination, such office space, as well as utilities and secretarial services, will be made available to us as may be required from time to time. We believe that the fee charged by Magna Management LLC is at least as favorable as weTax Risks
Legal proceedings could have obtained from an unaffiliated person. We consider our current office space, combined with the other office space otherwise available to our executive officers, adequate for our current operations.Employees
We have two executive officers. These individuals are not obligated to devote any specific number of hours to our matters and intend to devote only as much time as they deem necessary to our affairs. The amount of time they will devote in any time period will vary based on whether a target business has been selected for the business combination and the stage of the business combination process the company is in. Accordingly, once a suitable target business to consummate our initial business combination with has been located, management will spend more time investigating such target business and negotiating and processing the business combination (and consequently spend more time on our affairs) than had been spent prior to locating a suitable target business. We presently expect our executive officers to devote an average of approximately 10 hours per week to our business. We do not intend to have any full-time employees prior to the consummation of our initial business combination.
As a smaller reporting company, we are not required to make disclosures under this Item.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
We do not own any real estate or other physical properties materially important to our operations. Our principal executive offices are located at40 Wall Street, 58th Floor, New York, NY 10005.The cost for this space is included in the $10,000 per-month fee payable to Magna Management LLC, a company controlled by our insiders, for office space, utilities and secretarial services. We consider our current office space adequate for our current operations.
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently a party to any material litigation or other legal proceedings brought against us. We are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
In the ordinary course of business, we may become involved in various litigation matters, including but not limited to commercial disputes and employee claims, and from time to time may be involved in governmental or regulatory investigations or similar matters arising out of our current or future business. Any claims asserted against us, regardless of merit or eventual outcome, could harm our reputation and have an adverse impact on our relationship with our merchants, distribution partners and other third parties and could lead to additional related claims. Certain claims may seek injunctive relief, which could disrupt the ordinary conduct of our business and operations or increase our cost of doing business. Our units beganinsurance or indemnities may not cover all claims that may be asserted against us, and any claims asserted against it, regardless of merit or eventual outcome, may harm our reputation and cause us to expend resources in our defense. Furthermore, there is no guarantee that we will be successful in defending ourselves in future litigation. Should the ultimate judgments or settlements in any pending litigation or future litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition and results of operations.
We are subject to extensive government regulation, and any new laws and regulations, industry standards or revisions made to existing laws, regulations or industry standards affecting the Electronic Payments industry may have an unfavorable impact on our business, financial condition and results of operations.
Our business is affected by laws and regulations and examinations that affect us and our industries. Regulation and proposed regulation of the payments industry has increased significantly in recent years.Failure to comply with regulations or guidelines may result in the suspension or revocation of a license or registration, the limitation, suspension or termination of service, including money transmission services, and the imposition of civil and criminal penalties, including fines, or may cause customers or potential customers to be reluctant to do business with us, any of which could have an adverse effect on our financial condition.
Interchange fees are subject to intense legal, regulatory and legislative scrutiny. In particular, the Dodd-Frank Act limits the amount of debit card fees charged by certain issuers, allowing merchants to set minimum dollar amounts for the acceptance of credit cards and allowing merchants to offer discounts or other incentives for different payment methods. These types of restrictions could negatively affect the number of debit transactions, which would adversely affect our business.The Dodd-Frank Act also created the CFPB, which has assumed responsibility for enforcing federal consumer protection laws, and the FSOC, which has the authority to determine whether any non-bank financial company, which may include us within the definitional scope, should be supervised by the Federal Reserve because it is systemically important to the U.S. financial
system. Any such designation would result in increased regulatory burdens on our business, which increases our risk profile and may have an adverse impact on our business, financial condition and results of operations.
We and many of our merchants may be subject to Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices. That statement and other laws, rules and or regulations, including the Telemarketing Sales Act, may directly impact the activities of certain of our merchants and, in some cases, may subject us, as the merchant's electronic processor or provider of certain services, to investigations, fees, fines and disgorgement of funds if we were deemed to have improperly aided and abetted or otherwise provided the means and instrumentalities to facilitate the illegal or improper activities of the merchant through our services. Various federal and state regulatory enforcement agencies, including the Federal Trade Commission and state attorneys general, have authority to take action against non-banks that engage in unfair or deceptive practices or violate other laws, rules and regulations and to the extent we are processing payments or providing services for a merchant that may be in violation of laws, rules and regulations, we may be subject to enforcement actions and as a result may incur losses and liabilities that may impact our business.
Our business may also be subject to the FCRA, which regulates the use and reporting of consumer credit information and also imposes disclosure requirements on entities that take adverse action based on information obtained from credit reporting agencies. We could be liable if our practices under the FCRA are not in compliance with the FCRA or regulations under it.
Separately, the Housing Assistance Tax Act of 2008 included an amendment to the Internal Revenue Code that requires the filing of yearly information returns by payment processing entities and third-party settlement organizations with respect to payments made in settlement of electronic payment transactions and third-party payment network transactions occurring in that calendar year. Transactions that are reportable pursuant to these rules are subject to backup withholding requirements. We could be liable for penalties if our information returns do not comply with these regulations.
These and other laws and regulations, even if not directed at us, may require us to make significant efforts to change our products and services and may require that we incur additional compliance costs and change how we price our services to merchants. Implementing new compliance efforts may be difficult because of the complexity of new regulatory requirements and may cause us to devote significant resources to ensure compliance. Furthermore, regulatory actions may cause changes in business practices by us and other industry participants which could affect how we market, price and distribute our products and services, which could limit our ability to grow, reduce our revenues or increase our costs. In addition, even an inadvertent failure to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our business or our reputation.
We may not be able to successfully manage our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our proprietary technology. Third parties may challenge, circumvent, infringe or misappropriate our intellectual property, or such intellectual property may not be sufficient to permit us to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of service offerings or other competitive harm. Others, including our competitors, may independently develop similar technology, duplicate our services or design around our intellectual property and, in such cases, we could not assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information. We may have to litigate to enforce or determine the scope and enforceability of our intellectual property rights and know-how, which is expensive, could cause a diversion of resources and may not prove successful. Also, because of the rapid pace of technological change in our industry, aspects of our business and our services rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all. The loss of intellectual property protection or the inability to license or otherwise use third-party intellectual property could harm our business and ability to compete.
We may also be subject to costly litigation if our services and technology are alleged to infringe upon or otherwise violate a third party's proprietary rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products, services or technology. Any of these third parties could make a claim of infringement against us with respect to our products, services or technology. We may also be subject to claims by third parties for patent, copyright or trademark
infringement, breach of license or violation of other third-party intellectual property rights. Any claim from third parties may result in a limitation on our ability to use the intellectual property subject to these claims. Additionally, in recent years, individuals and groups have been purchasing intellectual property assets for the sole purpose of making claims of infringement or other violations and attempting to extract settlements from companies like ours. Even if we believe that intellectual property related claims are without merit, defending against such claims is time consuming and expensive and could result in the diversion of the time and attention of our management and employees. Claims of intellectual property infringement or violation also might require us to redesign affected products or services, enter into costly settlement or license agreements, pay costly damage awards or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our products or services. Even if we have an agreement for indemnification against such costs, the indemnifying party, if any in such circumstances, may be unable to uphold our contractual obligations. If we cannot or do not license the infringed technology on reasonable terms or substitute similar technology from another source, our revenue and earnings could be adversely impacted.
Changes in tax laws and regulations could adversely affect our results of operations and cash flows from operations.
Changes in tax laws in our significant tax jurisdictions could materially increase the amount of taxes we owe, thereby negatively impacting our results of operations as well as our cash flows from operations. For example, restrictions on the deductibility of interest expense in a U.S. jurisdiction without a corresponding reduction in statutory tax rates could negatively impact our effective tax rate, financial position, results of operations and cash flows in the period that such a change occurs and future periods.
Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
We operate in a rapidly changing industry. Accordingly, our risk management policies and procedures may not be fully effective to identify, monitor, manage and remediate our risks. Some of our risk evaluation methods depend upon information provided by others and public information regarding markets, merchants or other matters that are otherwise inaccessible by us. In some cases, that information may not be accurate, complete or up-to-date. Additionally, our risk detection system is subject to a high degree of "false positive" risks being detected, which makes it difficult for us to identify real risks in a timely manner. If our policies and procedures are not fully effective or we are not always successful in capturing all risks to which we are or may be exposed, we may suffer harm to our reputation or be subject to litigation or regulatory actions that materially increase our costs and subject us to reputational damage that could limit our ability to grow and cause us to lose existing merchant clients.
The financial services industry continues to be highly regulated and subject to new laws or regulations in many jurisdictions, including the U.S. states in which we operate, which could restrict the products and services we offer, impose additional compliance costs on us, render our current operations unprofitable or even prohibit our current or future operations.
We are required to comply with frequently changing federal, state, and local laws and regulations that regulate, among other things, the terms of the financial products and services we offer. New laws or regulations may require us to incur significant expenses to ensure compliance. Federal and state regulators of consumer financial products and services are also enforcing existing laws, regulations, and rules more aggressively, and enhancing their supervisory expectations regarding the management of legal and regulatory compliance risks. For example, State attorneys general have indicated that they will take a more active role in enforcing consumer protection laws, including through the establishment of state consumer protection agencies as well as the use of Dodd-Frank Act provisions that authorize state attorneys general to enforce certain provisions of federal consumer financial laws and obtain civil money penalties and other relief available to the CFPB.
The application of traditional federal and state consumer protection statutes and related regulations to innovative products offered by financial technology companies such as us is often uncertain, evolving and unsettled. To the extent that our products are deemed to be subject to any such laws, we could be subject to additional compliance obligations, including state licensing requirements, disclosure requirements and usury or fee limitations, among other things. Application of such requirements and restrictions to our products and services could require us to make significant changes to our business practices (which may increase our operating expenses and/or decrease revenue) and, in the event of retroactive application of such laws, subject us to litigation or enforcement actions that could result in the payment of damages, restitution, monetary penalties, injunctive
restrictions, or other sanctions, any of which could have a material adverse effect on our business, financial position, and results of operations.
Recently, federal bank regulators have increasingly focused on the risks related to bank and non-bank financial service company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. This focus is demonstrated by recent regulatory enforcement actions against banks that have allegedly not adequately addressed these concerns while growing their non-bank financial service offerings. Additionally, there are ongoing investigations by federal and state governmental entities concerning a prepaid debit card product program that was offered by the Company through an independent program manager. We could be subject to additional regulatory scrutiny with respect to that portion of our business that could have a material adverse effect on the business, financial condition, results of operations and growth prospects of the Company.
Further, we may not be able to respond quickly or effectively to regulatory, legislative, and other developments, and these changes may in turn impair our ability to offer our existing or planned features, products, and services and/or increase our cost of doing business. In addition, we expect to continue to launch new products and services in the coming years, which may subject us to additional legal and regulatory requirements under federal, state and local laws and regulations. To the extent the application of these laws or regulations to our new offerings is unclear or evolving, including changing interpretations and the implementation of new or varying regulatory requirements by federal or state governments and regulators, this may significantly affect or change our proposed business model, increase our operating expenses and hinder or delay our anticipated launch timelines for new products and services.
Disruptions or security failures in our information technology systems, including as a result of cybersecurity incidents, could create liability for us and/or limit our ability to effectively monitor, operate and control our operations and adversely affect our reputation, business, financial condition, results of operation and cash flows.
We may face risks related to cybersecurity, such as unauthorized access, cybersecurity attacks and other security incidents, which could adversely affect our business and operations. The Company relies upon operational and information systems, some of which are managed by third parties, to process, transmit and store electronic information and to manage or support a variety of our business processes, activities and products. Additionally, we collect and store sensitive data, including the personally identifiable information of our customers and employees, in data centers and on information systems (including systems that may be controlled or maintained by third parties). The Company’s business, and in particular, the debit card and cash management solutions business and global payments business, is dependent on its ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services provided to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth and geographical reach of the Company’s client base, developing and maintaining its operational and information systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts.
Although the Company continues to take protective measures to maintain the confidentiality, integrity and security of our operational and information systems and infrastructure, the techniques used in cyberattacks are becoming increasingly diverse and sophisticated. For example, the Company’s operational and information systems or infrastructure, or those of our third-party providers, may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, disruptions of service, computer viruses or other malicious code, cyberattacks and other incidents that could create a cybersecurity event, any of which could remain undetected for an extended period of time. Furthermore, the Company may not be able to ensure that all of its clients, suppliers, counterparties and other third parties have appropriate controls in place to protect themselves from cyberattacks or to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. Given the increasingly high volume of transactions, certain errors may be repeated or compounded before they can be discovered and rectified. In addition, the increasing reliance on information systems, and the occurrence and potential adverse impact of attacks on such systems, both generally and in the financial services industry, have encouraged increased government and regulatory scrutiny of the measures taken by companies to protect against cybersecurity threats and incidents. As these threats, incidents and government and regulatory oversight of associated risks continue to evolve, the Company may be required to expend additional resources to enhance or expand upon the security measures it currently maintains. Although the Company has developed, and continues to invest in, systems and processes that are designed to detect and prevent security breaches and cyberattacks, a breach of its
systems and global payments infrastructure or those of our non-bank financial service partners and processors could result in: losses to the Company and its customers; loss of business and/or customers; damage to its reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to its business; an inability to grow its online services or other businesses; additional regulatory scrutiny or penalties; and/or exposure to civil litigation and possible financial liability — any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. We have not encountered cybersecurity threats or incidents that have materially and adversely affected, or are reasonably likely to materially and adversely affect, the Company’s business, results of operations or financial condition; however, the impacts of such threats or incidents in the future may be material.
While the Company maintains cybersecurity insurance, the costs related to cybersecurity threats or disruptions may not be fully insured. For information on our cybersecurity risk management, strategy and governance, see Part I, Item 1C., Cybersecurity
Risk Related to Our Capital Structure
We face risks related to our substantial indebtedness.
We have a substantial amount of indebtedness and may incur other debt in the future. Our level of debt and the covenants to which we agreed could have negative consequences on us, including, among other things, (i) requiring us to dedicate a large portion of our cash flow from operations to servicing and repayment of the debt; (ii) limiting funds available for strategic initiatives and opportunities, working capital and other general corporate needs and (iii) limiting our ability to incur certain kinds or amounts of additional indebtedness, which could restrict our ability to react to changes in our business, our industry and economic conditions.
Substantially all of our indebtedness is variable rate debt, primarily based on SOFR, which replaced LIBOR effective June 30, 2023. As a result of this variable rate debt, an increase in interest rates generally, such as those we have recently experienced, would adversely affect our profitability. We may enter into pay-fixed interest rate swaps or other derivative transactions to limit our exposure to changes in floating interest rates. Such instruments may result in economic losses should interest rates decline to a point lower than our fixed rate commitments. We would be exposed to credit-related losses, which could impact the results of operations in the event of fluctuations in the fair value of the interest rate swaps due to a change in the credit worthiness or non-performance by the counterparties to the interest rate swaps.
The credit agreements governing our existing credit facilities and any other debt instruments we may issue in the future will contain restrictive covenants that may impair our ability to conduct business.
The credit agreements governing our existing credit facilities contain operating covenants and financial covenants that may limit management's discretion with respect to certain business matters. In addition, any debt instruments we may issue in the future will likely contain similar operating and financial covenants restricting our business. Among other things, these covenants will restrict our ability to:
•pay dividends, or redeem or purchase equity interests;
•incur additional debt;
•incur liens;
•change the nature of our business;
•engage in transactions with affiliates;
•sell or otherwise dispose of assets;
•make acquisitions or other investments; and
•merge or consolidate with other entities.
In addition, the credit agreement governing our revolving credit facility contains a total net leverage ratio financial covenant that is applicable when 35% or more of the revolving credit facility is drawn at quarter end. A breach of any of these covenants (or any other covenant in the documents governing our Credit and Guaranty Agreement) could result in a default or event of default under our Credit and Guaranty Agreement. If an event of default occurred, the applicable lenders or agents could elect to terminate borrowing commitments and declare all borrowings and loans outstanding thereunder, together with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In addition, or in the alternative, the applicable lenders or agents could exercise their rights under the security documents entered into in connection with our Credit and Guaranty Agreement. Any acceleration of amounts due under the Credit and Guaranty Agreement would likely have a material adverse effect on us.
Because we have no current plans to pay cash dividends on our Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your Common Stock for a price greater than that which you paid for it.
We intend to retain future earnings, if any, for future operations, expansion, and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. The declaration, amount, and payment of any future dividends on shares of Common Stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition, and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions, implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants of our existing and outstanding indebtedness and may be limited by covenants of any future indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our Common Stock unless you sell our Common Stock for a price greater than that which you paid for it.
Mr. Thomas Priore, our President, Chief Executive Officer and Chairman, controls the Company, and his interests may conflict with ours or yours in the future.
Thomas Priore and his affiliates have the ability to elect all of the members of our Board of Directors and thereby control our policies and operations, including the appointment of management, future issuances of our Common Stock or other securities, the payment of dividends, if any, on our Common Stock, the incurrence or modification of debt by us, amendments to our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, Thomas Priore may have an interest in pursuing acquisitions, divestitures, and other transactions that, in his judgment, could enhance his investment, even though such transactions might involve risks to you. For example, he could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. Additionally, in certain circumstances, acquisitions of debt at a discount by purchasers that are related to a debtor can give rise to cancellation of indebtedness income to such debtor for U.S. federal income tax purposes.
Our Amended and Restated Certificate of Incorporation provides that neither he nor any of his affiliates, or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. So long as Thomas Priore continues to own a significant amount of our combined voting power, even if such amount is less than 50%, he will continue to be able to strongly influence or effectively control our decisions. Furthermore, so long as Thomas Priore and his respective affiliates collectively own at least 50% of all outstanding shares of our Common Stock entitled to vote generally in the election of directors, they will be able to appoint individuals to our Board of Directors. In addition, given his level of control, Thomas Priore will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of the Company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of the Company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of Common Stock as part of a sale of the Company and ultimately might affect the market price of our Common Stock.
Item 1B. Unresolved Staff Comments
N/A
Item 1C. Cybersecurity
Risk management and strategy
We recognize the importance of maintaining the trust and confidence of the customers we serve, our business partners, employees and our stockholders and are committed to protecting the confidentiality, integrity and reliance of our business operations and systems. Effective data protection and cyber security practices, including responsible stewardship of our intellectual property and the secure processing, storage, maintenance and transmission of critical information by us and other third parties with whom we do business is vital to our operations. We have adopted policies and procedures with an intended design to identify, assess and manage risks associated with cybersecurity threats.
•We perform risk assessments periodically at both an enterprise level and system level in addition to assessments performed by third parties;
•Our information security team performs threat monitoring services;
•Our Internal Audit function performs annual reviews of selected systems and applications to test certain controls;
•Independent consultants and auditors evaluate selected systems and applications on an annual basis;
•We perform risk assessments of third-party vendors and perform ongoing risk-based monitoring of those third parties; and
•We maintain a business continuity plan for execution in the event of a cybersecurity incident.
We have not experienced any material cybersecurity incidents in the past calendar years and the expenses we have incurred from cybersecurity incidents during that time were immaterial. We have not identified risks from known cybersecurity threats that have materially affected us, including our operations, business strategy, results of operations or financial condition.
Governance
Our Board considers cybersecurity risk as part of its risk oversight function. The Board oversees the Company’s overall risk framework including management’s implementation of our cybersecurity risk management program.The Board receives reports from the Chief Risk Officer on a regular basis on cybersecurity and information technology risk management.
Our Company’s cybersecurity team, overseen by our Chief Information Security Officer (“CISO”) is responsible for assessing and managing our risks from cybersecurity threats, including defining our security policy and furnishing related information for Board reporting. The CISO approves all security policies and oversees the identification, assessment, and management of security risks.The CISO regularly reports to management’s SOX Committee which may elevate cybersecurity issues to the Board at any time.
Item 2. Properties
We operate from several offices throughout the U.S. and one office in India, all of which we lease.
Our key office locations include:
•corporate headquarters in Alpharetta, GA;
•administrative office in Hicksville, NY;
•administrative office in New York, NY;
•administrative office in Dallas, TX;
•administrative office in Houston, TX;
•administrative office in Chattanooga, TN;
•administrative office in San Francisco, CA;
•administrative office in Raleigh, NC; and
•administrative office in Chandigarh, India.
We lease several small facilities for sales and operations. Our current facilities meet the needs of our employee base and can accommodate our currently contemplated growth.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings and claims, which arise in the ordinary course of business. In the opinion of the Company, based on consultations with inside and outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available and we determine that an unfavorable outcome is probable on a claim and that the amount of probable loss that we will incur on that claim is reasonably estimable, we will record an accrued expense for the claim in question. If and when we record such an accrual, it could be material and could adversely impact our results of operations, financial condition and cash flows.
The Company is involved in a case that was filed on October 11, 2023 and is currently pending in the United States District Court for the Northern District of California (the “Complaint”).The Complaint is a putative class action brought by Wyatt Miller d/b/a Hellam’s Tobacco and Wine Shop and Aguilar Auto Repair, LLC against The Credit Wholesale Company, Inc. (“Wholesale”), Priority Technology Holdings, Inc., Priority Payment Systems (“PPS”), LLC and Wells Fargo Bank, N.A. (“Wells Fargo”).The Complaint alleges that Wholesale is an agent of Priority, PPS and Wells Fargo and that it made non-consensual recordation of telephonic communications with California businesses in violation of California Invasion of Privacy Act (the “Act”).The Complaint seeks to certify a class of affected businesses and an award of $5,000 per violation of the Act. As of March 12, 2024, the outcome of this legal proceeding is not probable nor is there any reasonable estimate of loss.
Item 4. Mine Safety Disclosures
N/A
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On July 25, 2018, our Common Stock began trading on The Nasdaq Capital Market
or Nasdaq, under the symbol
“MACQU” on September 14, 2016. The common stock and warrants comprising the units began separate trading on Nasdaq on November 14, 2016 under the symbols “MACQ” and “MACQW”, respectively.The table below sets forth the high and low closing sale prices"PRTH". As of units, common stock and warrants reported by the Nasdaq for the period from September 14, 2016 (the date on which our units were first traded on the Nasdaq) through March 27, 2018.
| | | Common Stock | | | Warrants | | | Units | |
| Period Ended | | High | | | Low | | | High | | | Low | | | High | | | Low | |
| September 30, 2016 | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | $ | 10.08 | | | $ | 10.00 | |
| December 31, 2016 | | $ | 10.04 | | | $ | 9.80 | | | $ | 0.29 | | | $ | 0.17 | | | $ | 10.21 | | | $ | 9.97 | |
| March 31, 2017 | | $ | 10.25 | | | $ | 9.95 | | | $ | 0.4794 | | | $ | 0.20 | | | $ | 10.28 | | | $ | 10.18 | |
| June 30, 2017 | | $ | 10.2025 | | | $ | 10.01 | | | $ | 0.35 | | | $ | 0.30 | | | $ | 10.50 | | | $ | 10.22 | |
| September 30, 2017 | | $ | 10.20 | | | $ | 10.01 | | | $ | 0.35 | | | $ | 0.305 | | | $ | 10.49 | | | $ | 10.22 | |
| December 31, 2017 | | $ | 10.299 | | | $ | 10.1099 | | | $ | 0.4793 | | | $ | 0.335 | | | $ | 10.65 | | | $ | 10.4201 | |
| January 1, 2018 through March 27, 2018 | | $ | 10.50 | | | $ | 10.16 | | | $ | 0.9395 | | | $ | 0.35 | | | $ | 12.95 | | | $ | 10.61 | |
Holders7, 2024, we had 69 holders of Record
At March 27, 2018, there were 7,058,743 sharesrecord of our common stock issued and outstanding held by 4 shareholders of record. The number of record holders was determined from the records of our transfer agent andCommon Stock. This figure does not include beneficial ownersthe number of common stockpersons whose sharessecurities are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividends
nominee or "street" name accounts through brokers. We have never declared or paid, and do not paidanticipate declaring or paying in the foreseeable future, any cash dividends on our common stock to date and do not intend to pay cash dividends prior to the completion of an initial business combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of an initial business combination. The payment of any dividends subsequent to an initial business combination will be within the discretion of our board of directors at such time. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board of directors does not anticipate declaring any dividends in the foreseeable future. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future. Further, if we incur any indebtedness, our ability to declare dividends may be limited by restrictive covenants we may agree to in connection therewith.
Securities Authorized for Issuance Under Common Stock.
Equity Compensation
PlansNone.
Recent Sales of Unregistered Securities
None.
Plan Information | | | | | | | | | | | | | | | | | | | | |
| Period | | Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) | | Weighted-average exercise price of outstanding options, warrants and rights(2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) |
| Equity Compensation Plans approved by security holders | | 400,365 | | $ | 6.870 | | | 3,547,798 |
| Equity Compensation Plans not approved by security holders | | — | | $ | — | | | — | |
Use of Proceeds
On September 19, 2016, we consummated our IPO of 5,000,000 Units. Each Unit consists of one share of Common Stock,
(1)Represents stock options and one Public WarrantRSUs outstanding under the Company's 2018 Plan.
(2)The weighted-average exercise price set forth in this column is calculated for stock options outstanding and excludes outstanding RSU awards, since recipients are not required to purchase one share of Common Stock atpay an exercise price to receive the shares related to these awards.
Unregistered Sales of $11.50 per share. Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The
Units were sold at an offering price of $10.00 per Unit, generating gross proceeds of $50,000,000. We granted the underwriters a 45-day optionfollowing table presents information with respect to
purchase up to 750,000 additional Units to cover over-allotments, if any. Simultaneously with the consummation of the IPO, we consummated a private placement of 402,500 Private Units at a price of $10.00 per Private Unit, generating total proceeds of $4,025,000. The underwriters exercised the over-allotment option in part and, on October 14, 2016, the underwriters purchased 310,109 over-allotment option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $3,101,090. On October 14, 2016, simultaneously with the sale of the Over-Allotment Units, we consummated the private sale of an additional 18,607 Private Units to one of the initial stockholders, generating gross proceeds of $186,070. The remainder of the over-allotment option expired unexercised.The Private Units are identical to the units sold in the Offering except the warrants included in the Private Units will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be heldpurchases made by the initial purchasers or their permitted transferees. The holdersCompany of its Common Stock during the Private Units have agreed (A)three months ended December 31, 2023 (shares are in whole units):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 1-31, 2023 | | 38,817 | | $ | 4.35 | | | — | | 690,626 |
| November 1-30, 2023 | | 11,923 | | | $ | 3.53 | | | — | | 690,626 |
| December 1-31, 2023 | | 17,343 | | | $ | 3.56 | | | — | | 690,626 |
| Total | | 68,083 | | | | | — | | | |
(1)Includes shares withheld to vote their private shares and any public shares acquired by them in favor of any proposed business combination, (B) not to propose, or vote in favor of, an amendment to our certificate of incorporation that would affect the substance or timing of our obligation to redeem 100% of our public shares if we do not complete our initial business combination by March 13, 2018 (or June 13, 2018, as applicable), unless we provide our public stockholders with the opportunity to redeem their shares of common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account and not previously released to us to pay oursatisfy employees' tax withholding obligations divided by the number of then outstanding public shares, (C) not to convert any shares (including the private shares) into the right to receive cash from the trust account in connection with a stockholder vote to approve our proposed initial business combination (or sell anythe vesting of restricted stock awards. The number of shares they hold to us in a tender offer in connection with a proposed initial business combination) or a vote to amendwithheld was determined based on the provisionsfair market value on the vesting date.
Item 6. Reserved
Table of our certificate of incorporation relating to the substance or timing of our obligation to redeem 100% of our public shares if we do not complete our initial business combination by March 13, 2018 (or June 13, 2018, as applicable) and (D) that the private shares shall not be entitled to be redeemed for a pro rata portion of the funds held in the trust account if a business combination is not consummated. Additionally, our insiders (and/or their designees) have agreed not to transfer, assign or sell any of the private units or underlying securities (except to the same permitted transferees as the insider shares and provided the transferees agree to the same terms and restrictions as the permitted transferees of the insider shares must agree to, each as described above) until the completion of our initial business combination.Upon the closing of the above transactions, a total of $54,694,127 of the net proceeds from the IPO (including the partial exercise of the over-allotment option) and the Private Placement were in a trust account established for the benefit of the Company’s public shareholders. As of December 31, 2017, cash and cash equivalents held in trust totaled $55,081,899.
We paid a total of $1,593,033 in underwriting discounts and commissions and $1,687,451 for other costs and expenses related to our formation and the IPO.
For a description of the use of the proceeds generated in our initial public offering, see below Part II, Contents
Item
7 – Management’s7. Management's Discussion and Analysis of Financial Condition and Results of Operations
of this Form 10-K.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
| ITEM 6. | SELECTED FINANCIAL DATA |
As a smaller reporting company, we are not required to make disclosures under this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunctiontogether with theour audited financial statements and the related notes thereto containedincluded elsewhere in this report. Certain information containedAnnual Report on Form 10-K. This section of this Form 10-K generally discusses 2023 and 2022 items and year-over-year comparisons between 2023 and 2022. Discussions of 2021 items and year-over-year comparisons between 2022 and 2021 are not included in the discussionthis Form 10-K, and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Overview
We were formed on April 23, 2015 for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more target businesses. Our efforts to identify a prospective target business were not limited to any particular industry or geographic region, although we initially focused on target businesses operating in the technology, media and telecommunications industries. We intend to utilize cash derived from the proceeds of our public offering in effecting our initial business combination.
We presently have no revenue, have had losses since inception from incurring formation costs, general and administrative costs and costs in connection with our search for business combination candidates and have had no operations other than the active solicitation of a target business with which to complete a business combination. We have relied upon the sale of our securities and loans from our officers and directors to fund our operations.
On September 19, 2016, we consummated our IPO of 5,000,000 Units. Each Unit consists of one share of Common Stock and one Public Warrant to purchase one share of Common Stock at an exercise price of $11.50 per share. The Units were sold at an offering price of $10.00 per Unit, generating gross proceeds of $50,000,000. We granted the underwriters a 45-day option to purchase up to 750,000 additional Units to cover over-allotments, if any. Simultaneously with the consummation of the IPO, we consummated the Private Placement of 402,500 Private Units at a price of $10.00 per Private Unit, generating total proceeds of $4,025,000. The underwriters exercised the over-allotment option in part and, on October 14, 2016, the underwriters purchased 310,109 over-allotment option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $3,101,090. On October 14, 2016, simultaneously with the sale of the Over-Allotment Units, we consummated the private sale of an additional 18,607 Private Units to one of the initial stockholders, generating gross proceeds of $186,070. The remainder of the over-allotment option expired unexercised.
As of December 31, 2017, a total of $55,081,899 of the net proceeds from the Offering (including the partial exercise of the over-allotment option) and the Private Placement were in a trust account established for the benefit of the Company’s public shareholders.
Our management has broad discretion with respect to the specific application of the net proceeds of the initial public offering and the private placement, although substantially all of the net proceeds are intended to be applied generally towards consummating a business combination.
Recent Developments
On February 26, 2018, we entered into a Contribution Agreement (as amended and restated on March 26, 2018, the “Purchase Agreement”) with Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC to acquire all of the outstanding equity interests of Priority Holdings, LLC (“Priority”), a leading provider of B2C and B2B payment processing solutions.
A more detailed description the Purchase Agreement can be found in"Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 17 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Certain amounts in this section may not add mathematically due to rounding.
Results of Operations
This section includes certain components of our results of operations for the years ended December 31, 2023 (or "2023"), December 31, 2022 (or "2022"). We have derived this data, except key indicators including merchant bankcard processing dollar values and
more information about Priority can be foundtransaction volumes (SMB Payments), issuing dollar volume and transaction count (B2B Payments), and average billed clients and new enrollments (Enterprise Payments), from our audited Consolidated Financial Statements included elsewhere in
ourthis Annual Report on Form
8-K dated February 27, 2018.On March 13, 2018, the Company issued promissory notes in the aggregate principal amount of$132,753 to its sponsors (M SPAC LLC, M SPAC Holdings I, LLC and M SPAC Holdings II, LLC). The $132,753 received by the Company upon issuance of the notes was deposited into the Company’s trust account for the benefit of its public stockholders in order to extend theperiod of time the Company has to complete a business combination for an additional one month, from March 19, 2018 to April 19, 2018. The notes do not bear interest and are payable five business days after the date the Company completes a business combination.
10-K.
Revenue
A more detailed description of the promissory notes and the related transactions can be found in our Current Report on Form 8-K dated March 14, 2018.
Results of Operations
Our entire activity from inception up to September 19, 2016 was related to the Company’s formation, the IPO and general and administrative activities. Since the IPO, our activity has been limited to general and administrative activities and the evaluation of business combination candidates, and we will not be generating any operating revenues until the closing and completion of our initial business combination. We expect to generate small amounts of non-operating income in the form of interest income on cash and cash equivalents. Interest income is not expected to be significant in view of current low interest rates on risk-free investments (treasury securities). We expect to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the year ended December 31, 2017, we had a net loss2023, our consolidated revenue of $124,854. During$755.6 million increased by $92.0 million, or 13.9%, from $663.6 million for the year ended December 31, 2017, we incurred $831,721of general2022. This overall increase was driven by increases in merchant card fee rates and administrative expensesequipment revenue, offset by a decrease in certain fee-based revenue, a true up of an invoice from one of the partner banks for certain services provided in Q1 2022 and $120,000a decline in processed merchant bankcard dollar value due to diversification of administrative fees paidmerchant portfolio by one of the referral partners in our SMB Payments segment, an increase in new enrollments and higher interest income in our Enterprise Payments segment and an increase in revenue from the Plastiq business acquired during the year offset by a decrease in revenue in B2B Payments segment due to a related party. the wind down of certain managed services programs in Q4 2022.
Revenues by type for 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Revenue Type: | | | | | | | | | | | |
| Merchant card fees | $ | 595,205 | | $ | 553,037 | | | | $ | 42,168 | | | | |
| Money transmission services | 98,137 | | 71,536 | | | | 26,601 | | | | |
| Outsourced services and other services | 49,600 | | 29,627 | | | | 19,973 | | | | |
| Equipment | 12,670 | | 9,441 | | | | 3,229 | | | | |
| Total revenues | $ | 755,612 | | $ | 663,641 | | | | $ | 91,971 | | | | |
Merchant Card Fees
For the year ended December 31, 2017, these expenses2023, our merchant card fees revenue of $595.2 million increased by $42.2 million, or 7.6%, from $553.0 million for the year ended December 31, 2022. This increase was primarily driven by revenue from the Plastiq business that was acquired during the year and merchant card fee rate increases. These increases were partially offset by a decrease in certain fee-based revenue, a true up of an invoice from one of the partner banks for certain services provided in Q1 2022 and a decline in processed merchant bankcard dollar value due to the diversification of processor services by one of the referral partners.
Money Transmission Services
Money transmission services revenue of $98.1 million for the year ended December 31, 2023 increased by $26.6 million or 37.2%, from $71.5 million for the year ended December 31, 2022 and is primarily driven by an increase in customer enrollments.
Outsourced Services and Other Services
Outsourced services and other income totaling $826,867, whichservices revenue of $49.6 million for the year ended December 31, 2023 increased by $20.0 million, or 67.4%, from $29.6 million for the year ended December 31, 2022. This increase was comprised ofprimarily due to growth in interest income due to higher interest rates and deposit balances, and additional revenues generated by our Passport platform, offset by decreased managed services revenue due to wind down of $399,166certain programs in Q4 2022.
Equipment
Equipment revenue of $12.7 million for the year ended December 31, 2023, increased by $3.3 million, or 34.2%, from $9.4 million for the year ended December 31, 2022. The increase was primarily due to increased sales of point-of-sale equipment.
Operating Expenses
Operating expenses for 2023 and settlement income2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Operating expenses | | | | | | | | | | | |
| Cost of services (excludes depreciation and amortization) | $ | 480,307 | | $ | 436,753 | | | | $ | 43,554 | | | | |
| Salary and employee benefits | 79,974 | | 65,077 | | | | 14,897 | | | | |
| Depreciation and amortization | 68,395 | | 70,681 | | | | (2,286) | | | | |
| Selling, general and administrative | 45,412 | | 34,965 | | | | 10,447 | | | | |
| Total operating expenses | $ | 674,088 | | $ | 607,476 | | | | $ | 66,612 | | | | |
Costs of $427,701, which we receivedServices (excludes depreciation and amortization)
Costs of services (excludes depreciation and amortization) of $480.3 million for the year ended December 31, 2023 increased by $43.6 million, or 10.0%, from
an entity that decided that it no longer wished$436.8 million for the year ended December 31, 2022, primarily due to
engagethe corresponding increase in
a transaction with us. The settlement income received was approximately the amount of the expenses we incurred pursuing that transaction. revenues. For the year ended December 31, 2016, we had2023, costs of services (excluding depreciation and amortization) as a net losspercentage of $107,995. During the year ended December 31, 2016, we incurred $137,529 of general and administrative expenses and $35,667 of administrative fees paidtotal revenues decreased to a related party. These expenses63.6% as compared to 65.8% for the year ended December 31, 2016 were2022. This decrease was primarily due to the increase in interest and money transmission revenues which do not have significant cost of services.
Salary and employee benefits
Salary and employee benefits expense of $80.0 million for the year ended December 31, 2023 increased by $14.9 million, or 22.9%, from $65.1 million for the year ended December 31, 2022, primarily due to higher wages, an increase in stock-based compensation and increased headcount from acquisitions and to support overall growth of the Company. The Company's employee headcount increased to 983 in 2023 from 870 in 2022.
Depreciation and amortization expense
Depreciation and amortization expense of $68.4 million for the year ended December 31, 2023 decreased by $2.3 million, or 3.2%, from $70.7 million for the year ended December 31, 2022, primarily due to full amortization of certain intangible assets partially offset by $27,500the depreciation of new assets placed in service.
Selling, general and administrative
Selling, general and administrative expenses of $45.4 million for the extinguishmentyear ended December 31, 2023 increased by $10.4 million, or 29.9%, from $35.0 million for the year ended December 31, 2022, primarily due to certain nonrecurring expenses and other expenses to support overall growth of the Company. Nonrecurring expenses for the year primarily include PayRight restructuring costs of $3.5 million, expenses related to the acquisition of the Plastiq business of $1.7 million and certain legal and other costs of $3.0 million.
Other (Expenses) Income, net
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | | | |
| Other (expense) income | | | | | | | | | | | | | |
| Interest expense | $ | (76,108) | | $ | (53,554) | | | | $ | (22,554) | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other income, net | 1,736 | | 589 | | | | 1,147 | | | | | | |
| Total other expenses, net | $ | (74,372) | | $ | (52,965) | | | | $ | (21,407) | | | | | | |
Interest expense
Interest expense of $76.1 million for the year ended December 31, 2023 increased by $22.5 million, or 42.1%, from $53.6 million for the year ended December 31, 2022, due to increased interest rates and higher debt balances to fund the acquisition of Plastiq in the third fiscal quarter of 2023. Other income, net of $1.7 million for the year ended December 31, 2023 increased by $1.1 million, or 194.7%, from $0.6 million for the year ended December 31, 2022, due to increased interest income from the Company's operating accounts.
Income tax expense
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Income (loss) before income taxes | $ | 7,152 | | | $ | 3,200 | | | | | $ | 3,952 | | | | | |
| Income tax expense | $ | 8,463 | | | $ | 5,350 | | | | | $ | 3,113 | | | | | |
| Effective tax rate | 118.3 | % | | 167.2 | % | | | | | | | | |
The decrease in the effective tax rate from 2022 to 2023 is primarily due to a reduction in the amount of additional valuation allowance recorded against certain business interest carryover deferred tax assets.
Our consolidated effective income tax rates differ from the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the U.S. tax code. The consolidated effective income tax rate for 2023 may not be indicative of our effective tax rate for future periods.
On August 16, 2022, the U.S. government enacted the IRA into law. The IRA, among other provisions, implements a 15% corporate alternative minimum tax based on global adjusted financial statement income and a 1% excise tax on share repurchases, which took effect for tax years beginning after December 31, 2022. The IRA did not have a material effect on our reported results, cash flows, or financial position during 2023. If applicable in future periods, we expect to reflect the excise tax within equity as part of the repurchase price of Common Stock.
Earnings Attributable to Common Shareholders
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Net income (loss) | $ | (1,311) | | $ | (2,150) | | | | $ | 839 | | | | |
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | (47,744) | | (36,880) | | | | (10,864) | | | | |
| | | | | | | | | | | |
| Net loss attributable to common stockholders | $ | (49,055) | | $ | (39,030) | | | | $ | (10,025) | | | | |
Dividends and accretion attributable to redeemable senior preferred stockholders was $47.7 million for the year ended December 31, 2023, and was comprised of $18.0 million of accumulated dividends accrued as part of the carrying value of the redeemable senior preferred stock, $26.4 million of cash dividends, and $3.3 million related to accretion of discounts and issuance costs. The increase in dividends and accretion from 2022 to 2023 is due to an increase in the dividend rate for 2023 resulting from an increase in variable interest rates during the year and increase in carrying value of redeemable senior preferred stocks (as a result of accumulated accrued dividend).
Segment Results
SMB Payments
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Revenue | $ | 582,870 | | $ | 562,237 | | | | $ | 20,633 | | | | |
| Operating expenses | 536,388 | | 507,371 | | | | 29,017 | | | | |
| Operating income | $ | 46,482 | | $ | 54,866 | | | | $ | (8,384) | | | | |
| Operating margin | 8.0 | % | | 9.8 | % | | | | | | | | |
| Depreciation and amortization | $ | 41,036 | | $ | 43,925 | | | | $ | (2,889) | | | | |
| Key Indicators: | | | | | | | | | | | |
| Merchant bankcard processing dollar value | $ | 59,054,039 | | $ | 59,440,491 | | | | $ | (386,452) | | | | |
| Merchant bankcard transaction volume | 696,203 | | 636,576 | | | | 59,627 | | | | |
Revenue
Revenue from our SMB Payments segment was $582.9 million for the year ended December 31, 2023, compared to $562.2 million for the year ended December 31, 2022. The increase of $20.6 million, or 3.7%, was primarily driven by merchant card fee rate increases, equipment revenue, and accrual of certain incentives, offset by a decrease in certain fee-based revenue, a true up of an invoice from one of the partner banks for certain services provided in Q1 2022 and a decline in processed merchant bankcard volume due to the diversification of processor services by one of its referral partners. The Company's merchant card fee revenue from the SMB Payments segment ($563.9 million for 2023 and $549.6 million for 2022) as a percentage of merchant bankcard processing dollar value during 2023 increased to 0.95% from 0.92% during 2022. The increase was primarily driven by an increase in incentive revenue and changes in the merchant mix.
Operating Income
Operating income from our SMB Payments segment was $46.5 million for the year ended December 31, 2023, compared to $54.9 million for the year ended December 31, 2022. The decrease of $8.4 million, or 15.3%, is due to a higher mix of volume growth from larger reseller partners with higher commissions of $3.2 million and an increase in other operating expenses. Increase in other operating expenses include a $5.7 million increase in salary and employee benefits due to higher headcount and stock-based compensation and a $2.3 million increase in selling, general and administrative expenses driven by higher travel and other operating costs which was offset by a decrease of $2.8 million in depreciation and amortization for assets fully depreciated and amortized in the prior year.
Depreciation and Amortization
Depreciation and amortization expense of our SMB Payments segment was $41.0 million for the year ended December 31, 2023, compared to $43.9 million for the year ended December 31, 2022. The decrease of $2.9 million or 6.6% is due to full amortization of certain intangible assets.
B2B Payments
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Revenue | $ | 40,726 | | $ | 18,890 | | | | $ | 21,836 | | | | |
| Operating expenses | 43,261 | | 18,682 | | | | 24,579 | | | | |
| Operating (loss) income | $ | (2,535) | | $ | 208 | | | | $ | (2,743) | | | | |
| Operating margin | (6.2) | % | | 1.1 | % | | | | | | | | |
| Depreciation and amortization | $ | 2,221 | | $ | 744 | | | | $ | 1,477 | | | | |
| Key Indicators: | | | | | | | | | | | |
| B2B issuing dollar volume | $ | 851,948 | | $ | 814,964 | | | | $ | 36,984 | | | | |
| B2B issuing transaction count | 1,087 | | 933 | | | | 154 | | | | |
Revenue
Revenue from our B2B Payments segment was $40.7 million for the year ended December 31, 2023, compared to $18.9 million for the year ended December 31, 2022. The increase of $21.8 million, or 115.6%, was primarily driven by an increase of $27.4 million in the Plastiq business and an increase of $1.7 million in the CPX business due to increased volumes. This increase was offset by a decrease of $7.3 million driven by the Companywind down of certain customer programs in the managed services business during Q4 2022.
Operating Loss
Operating loss from our B2B Payments segment was $2.5 million for the year ended December 31, 2023, compared to operating income of $0.2 million for the year ended December 31, 2022. This is primarily due to certain provisions for doubtful accounts in the CPX business, transaction bonuses in the Plastiq business, and loss of operating income from the managed services business.
Depreciation and Amortization
Depreciation and amortization from our B2B Payments segment was $2.2 million for the year ended December 31, 2023, compared to $0.7 million depreciation and amortization expense for the year ended December 31, 2022. The increase in depreciation and amortization expense is primarily due to assets acquired from the acquisition of the Plastiq business in the 3rd quarter of 2023.
Enterprise Payments
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | 2023 vs 2022 | | |
| 2023 | | 2022 | | | | $ Change | | | | |
| Revenue | $ | 132,016 | | $ | 82,514 | | | | $ | 49,502 | | | | |
| Operating expenses | 58,052 | | 51,577 | | | | 6,475 | | | | |
| Operating income | $ | 73,964 | | $ | 30,937 | | | | $ | 43,027 | | | | |
| Operating margin | 56.0 | % | | 37.5 | % | | | | | | | | |
| Depreciation and amortization | $ | 23,753 | | $ | 24,892 | | | | $ | (1,139) | | | | |
| Key Indicators: | | | | | | | | | | | |
| Average billed clients | $ | 556,526 | | $ | 379,725 | | | | $ | 176,801 | | | | |
| Average monthly new enrollments | 51,059 | | 32,013 | | | | | 19,046 | | | | |
Revenue
Revenue from our Enterprise Payments segment was $132.0 million for the year ended December 31, 2023, compared to $82.5 million for the year ended December 31, 2022. The increase of $49.5 million, or 60.0%, was primarily driven by an increase in customer enrollments, additional revenues generated by our Passport BaaS platform, and growth in interest income due to higher deposit balances and higher returns on the amendmentpermissible investments related to our money transmission licenses.
Operating Income
Operating income from our Enterprise Payments segment was $74.0 million for the year ended December 31, 2023, compared to $30.9 million for the year ended December 31, 2022. The increase of a note payable$43.1 million, or 139.1%, was primarily driven by the increase in revenue.
Depreciation and $37,701Amortization
Depreciation and amortization expense from our Enterprise Payments segment was $23.8 million for the year ended December 31, 2023, compared to $24.9 million for the year ended December 31, 2022. The decrease of
interest income.$1.1 million, or 4.6%, was primarily driven by full amortization of certain intangible assets in the prior year offset by depreciation expense on assets placed in service during the year.
Liquidity and Capital Resources
Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, for technology solutions and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs, including for our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit agreement are sufficient to meet our working capital requirements for at least the next twelve months. This is based upon management's estimates and assumptions regarding effects of micro and macro factors impacting the economic environment in which the Company operates on our financial results. Actual future results could differ materially, as the magnitude, duration and effects of changes in economic, political and market conditions are difficult to predict, and ultimately could negatively impact our liquidity and capital resources. Our principal uses of cash are to fund business operations (including capital expenditures and strategic investments) and administrative costs, and to service our debt.
Our working capital, defined as current assets less current liabilities, was $29.2 million at December 31, 2023 and $22.5 million at December 31, 2022. As of December 31, 2017,2023, we had cash outsideand cash equivalents with a balance of $39.6 million compared to $18.5 million at December 31, 2022. These cash and cash equivalent balances do not include restricted cash of $11.9 million and $10.6 million at December 31, 2023 and December 31, 2022, respectively, which reflects cash accounts holding customer
settlement funds and cash reserves for potential losses. The current portion of long-term debt included in current liabilities was $6.7 million and $6.2 million at December 31, 2023 and 2022, respectively.
At December 31, 2023, we had availability of approximately $65.0 million under our trust accountrevolving credit arrangement.
The following tables and narrative reflect our changes in cash flows for the comparative annual periods.
| | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2023 | | 2022 | | |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 81,256 | | | $ | 70,518 | | | |
| Investing activities | (55,748) | | | (36,503) | | | |
| Financing activities | 210,105 | | | 8,502 | | | |
| Net increase in cash and restricted cash | $ | 235,613 | | | $ | 42,517 | | | |
Cash Provided by Operating Activities
Net cash provided by operating activities was $81.3 million and $70.5 million for the years ended December 31, 2023 and December 31, 2022, respectively. The $10.8 million, or 15.2% increase in 2023 was driven by changes in the operating assets and liabilities.
Cash Used in Investing Activities
Net cash used in investing activities was $55.7 million compared to cash used investing activities of
$172,196.Our liquidity needs have been satisfied$36.5 million for the years ended December 31, 2023 and 2022, respectively. Net cash used to date through receiptacquire businesses in 2023 was $28.2 million compared to net cash used of $25,000 from$5.0 million in 2022. Additions to property, equipment and software was $21.3 million for 2023 compared to $18.9 million in 2022 and acquisitions of intangible assets was $6.6 million compared to $8.0 million in 2022. Net payments received of $0.4 million on loans to ISOs for the saleyear ended December 31, 2023, compared to $4.7 million related to the funding of new loans to ISOs in 2022.
Cash Provided by Financing Activities
Net cash provided by financing activities was $210.1 million for the
insider shares, loans and advances from insiders and ayear ended December 31, 2023, compared to $8.5 million for the year ended December 31, 2022. The net cash provided by for 2023 included changes in the net obligations for funds held on the behalf of customers of $211.1 million, $49.8 million related
party and an unrelated party in an aggregate amount of $241,921 that were repaid at the closing of the IPO, and theto proceeds from the
IPO and Private Placement. In addition, we received $427,701 from a company with which we were negotiating a business combination after it decided that it no longer wished to engage in a transaction with us. The amount received was approximately the amountincrease of the
expenses we incurred in pursuing that transaction.We intendTerm Facility and $44.0 million related to use substantially alladditional borrowings under the revolving credit facility. This was offset by $56.5 million of cash used for the repayment of borrowings under the revolving credit facility, $6.3 million of cash used for the repayment of the net proceedsTerm Facility, $24.7 million of cash dividends paid to redeemable senior preferred stockholders, $1.3 million of cash used for shares withheld for taxes, $4.7 million of payments of contingent consideration for business combinations and $1.2 million for debt issuance and modification costs paid related to the modification of the IPO,Term Facility and the revolving credit facility. The net cash provided by financing activities for 2022 included borrowings from the revolving credit facility of $29.5 million and changes in the net obligations for funds held on the behalf of customers of $43.1 million. These cash inflows were offset by cash used for the repayment of debt of $38.2 million, cash used for the repurchase of Common Stock of $7.5 million, dividends paid to redeemable senior preferred stockholders of $11.5 million and $7.0 million of payments of contingent consideration for business combinations.
Long-Term Debt
For the year ended December 31, 2023, we had outstanding debt obligations, including the funds held incurrent portion and net of unamortized debt discount of $638.7 million, compared to $605.1 million for the trust account, in connection with our initial business combination and to pay our expenses relating thereto, including a deferred underwriting commission payable to Chardan Capital Markets, LLCyear ended December 31, 2022, resulting in an amountincrease of $33.6 million. The debt balance for the year ended December 31, 2023 consisted of funds outstanding under the term facility, offset by $15.7 million of unamortized debt discounts and issuance costs. There were no funds outstanding under the revolving credit facility as of December 31, 2023. Minimum amortization of the term facility are equal quarterly
installments in aggregate annual amounts equal to $1,062,022. To the extent that our capital stock is used in whole or in part as consideration to effect our initial business combination, the remaining proceeds held in the trust account as well as any other net proceeds not expended will be used as working capital to finance the operations1.0% of the target business. Such working capital funds could be usedoriginal principal, with the balance paid upon maturity. The term facility matures in a variety of ways including continuing or expandingApril 2027 and the target business’ operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders’ fees which we had incurred prior torevolving credit facility expires in April 2026.
On June 30, 2023, the
completion of our initial business combination if the funds available to us outsideCredit Agreement of the
trust account were insufficientCompany was amended to
cover such expenses.
We anticipate thatincorporate the approximately $170,000 outside of our trust account will be insufficient to allow us to operate until June 19, 2018, assuming that a business combination is not consummated during that time. Over this time period, we will be using these funds for identifying and evaluating prospective business combination candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to consummate our initial business combination with and structuring, negotiating and consummating the business combination.
following: $50,000 of expenses•Reference rate: The reference rate for the searchcalculation of interest on the Company’s term loan and revolving credit facility was amended from LIBOR to SOFR effective June 30, 2023. Per the amended terms, the outstanding borrowings under the Credit Agreement interest will accrue using the SOFR rate plus a term SOFR adjustment plus an applicable margin per year, subject to a SOFR floor of 1.00% per year. The applicable interest rate as of December 31, 2023, for target businessesthe revolving credit facility based on one-month SOFR was 10.20% and for the legal, accountingterm facility based on one-month SOFR was 11.21%.
•Increase in the revolving credit facility: The amendments also resulted in an increase in the Company’s revolving credit facility from $40.0 million to $65.0 million.
On October 2, 2023, the Company modified its existing Term Facility Credit agreement with Truist. The agreement increased the principal balance by $50.0 million and increased the quarterly principal amortization payment from $1.6 million to $1.7 million. There were no other third-party expenses attendantsignificant modifications to the due diligence investigations, structuringCredit Agreement.
The Credit Agreement contains representations and negotiatingwarranties, financial and collateral requirements, mandatory payment events, events of our initial business combination;
$15,000 of expenses for the due diligencedefault and investigation of a target business by our officers, directorsaffirmative and insiders;
$50,000 of expenses in legal and accounting fees relating to our SEC reporting obligations;
$50,000 for the payment of the administrative fee to Magna Management LLC (of $10,000 per month for up to 21 months), subject to deferral as described herein;
$5,000 for general working capitalnegative covenants, including without limitation, covenants that will be used for miscellaneous expenses, liquidation obligations and reserves, including director and officer liability insurance premiums.
If our estimates of the costs of undertaking due diligence and negotiating our initial business combination are less than the actual amount necessary to do so, or the amount of interest available to us from the trust account for the payment of tax obligations is less than we expect as a result of the current interest rate environment, we may have insufficient funds available to operate our business prior to our initial business combination. Moreover, we may need to obtain additional financing either to consummate our initial business combination or because we become obligated to convert a significant number of our public shares upon consummation of our initial business combination, in which case we may issue additional securities or incur debt in connection with such business combination. Subject to compliance with applicable securities laws, we would only consummate such financing simultaneously with the consummation of our initial business combination. Following our initial business combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
Going concern:
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates,restrict among other things, the realizationability to create liens, pay dividends or distribute assets from the loan parties to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates) and satisfactionto enter into certain leases.
If the aggregate principal amount of
liabilitiesoutstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the
normal courseCredit Agreement as the ratio of
business.consolidated total debt less unrestricted cash to consolidated adjusted EBITDA (as defined in the Credit Agreement). If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. As of December 31,
2017,2023, the Company
had $172,196was in
cash and cash equivalents held outside Trust Account, $399,166 in interest income available fromcompliance with the
Company's investmentscovenants in the
Trust Account to pay its tax obligations, and a working capital deficit of $206,276. Further, the Company has incurred and expects to continue to incur significant costs in pursuit of its financing and acquisition plans. The Company’s plans to raise capital or to consummate the initial Business Combination may not be successful. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.Based on the foregoing, the Company may have insufficient funds available to operate its business through the earlier of consummation of a Business Combination or June 19, 2018. Following the initial Business Combination, if cash on hand is insufficient, the Company may need to obtain additional financing in order to meet its obligations. The Company cannot be certain that additional funding will be available on acceptable terms, or at all.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Off-Balance Sheet Financing Arrangements
As of December 31, 2017, we did not have any off-balance sheet arrangements. We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial assets.
Contractual Obligations
At December 31, 2017, we did not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities other than a monthly fee of $10,000 for general and administrative services payable to Magna Management LLC, an affiliate of our insiders, which will be paid for up to 21 months starting on the closing date of the IPO and an outstanding Note issued to an unrelated third party.
Critical Accounting PoliciesEstimates
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP requires management to make estimates and assumptions about future events that affect the amounts reported amountsin the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective, and complex judgments.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities disclosureand are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of contingentdeferred tax assets and liabilities atis dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the dateweight of theavailable evidence, including expected future earnings.
We recognize an uncertain tax position in our financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of
benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.
Goodwill and expenses duringLong-lived Assets
We test goodwill for impairment for each of our reporting units on an annual basis on October 1 or when events occur, or circumstances indicate the
periods reported. Actual resultsfair value of a reporting unit may be below its carrying value. We perform the annual assessment using the qualitative method. Where deemed appropriate, we may perform a quantitative assessment that uses market data and discounted cash flow analysis, which involve estimates of future revenues and operating cash flows. Changes in these estimates and assumptions or a significant decrease in earnings could materially
differ from those estimates. We have identifiedaffect the
following as our critical accounting policies:Common stock subject to possible conversion:
We accountfair value of goodwill and could result in a goodwill impairment charge.
The annual impairment assessment for
our common stock subject to possible conversion in accordance with the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity”. Common stock subject to mandatory conversion are classified as a liability instrument and is measured at fair value. Conditionally convertible common stock (including common shares that feature conversion rights that are either within the control of the holder or subject to conversion upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain conversion rights that are considered by us to be outside of our control and subject to the occurrence of uncertain future events. Accordingly, the common stock subject to possible conversion is presented as temporary equity, outside of the stockholders’ equity section of the balance sheet.
Recent Accounting Pronouncements
Managementgoodwill does not believe that any recently issued, but not yet effective, accounting standardschange our requirements to assess goodwill on an interim date between scheduled annual testing dates if currently adopted would have a material effect ontriggering events are present.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate the
accompanying financial statements. | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company, we are not required to make disclosures under this Item.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements and the notes thereto begin on page F-1carrying value of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal year ended December 31, 2017, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were effective.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive, principal financial and principal accounting officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
| 1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| | |
| 2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
| | |
| 3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatementsasset may not be prevented or detected on a timely basisrecoverable. For long-lived assets, except goodwill, an impairment loss is indicated when the undiscounted future cash flows estimated to be generated by internal control over financial reporting. However, these inherent limitationsthe asset group are known featuresnot sufficient to recover the unamortized balance of the financial reporting process. Therefore, it is possible to design intoasset group.
We amortize the
process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal controlcost of our acquired intangible assets over
financial reporting fortheir estimated useful lives using either a straight-line or an accelerated method that most accurately reflects the
company.Our management’s assessmentestimated pattern in which the economic benefit of the effectivenessrespective asset is consumed.
Business Combinations
We allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. For acquisitions that include contingent consideration, we estimate the fair value of contingent consideration at the acquisition date. The estimated fair value of contingent consideration is updated in future periods based on information available at that time. Management uses all available information when estimating the fair values of the assets acquired, liabilities assumed and contingent consideration, and must apply judgement and make certain assumptions when making these estimates. The assumptions management uses when determining fair values include estimated future cash flows or income, market rate assumptions, actuarial assumptions and discount rate assumptions. We typically engage third-party valuation advisors to assist in estimating the fair values of acquired assets and assumed liabilities. Our estimates of fair value are based upon assumptions the Company believes to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized, and actual results could differ materially.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
Our debt facilities under our
internal control system asCredit Agreement bear interest at either a base rate or a SOFR rate plus an applicable margin per year, subject to a SOFR rate floor of 1.00% per year. As of December 31,
2017 was based2023, we had $654.4 million in outstanding borrowings under our Credit Agreement. Ignoring the 1.00% SOFR floor, a hypothetical 1.00% increase or decrease in the applicable SOFR rate on
the framework for effective internal control over financial reporting described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO. Based on this assessment, our
principal executive, principal financial and principal accounting officer has concluded that our internal control over financial reporting was effective as of December 31, 2017.This Form 10-K does not include an attestation report of internal controls from the company’s registered public accounting firm due to our status as an emerging growth companyoutstanding indebtedness under the JOBS Act.
Changes in Internal Control over Financial Reporting
There have been no changes inCredit Agreement would increase or decrease cash interest expense on our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
On March 26, 2018, we entered into an Amended and Restated Contribution Agreement with the Interest Holders (as amended and restated, the “Purchase Agreement”). The revisions:
| ● | changed Priority’s enterprise value to $947,835,000; |
| ● | amended the language relating to the inclusion of acquisitions between signing and closing in the definition of Priority’s enterprise value; and |
| ● | amended the definition of net assumed debt to include the cost of acquisition of technology assets, up to $5,000,000, the amount paid by Priority to purchase securities from the Founders pursuant to the Promote Agreement and any amounts paid by Priority to extend the time we have to complete a business combination in the calculation of net debt as cash and cash equivalents. |
part III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth information about our directors and executive officers as of March 27, 2018.
Name | | Age | | Position |
Joshua Sason | | 30 | | Chief Executive Officer and Director |
Marc Manuel | | 49 | | Chief Financial Officer and Director |
Russell Rieger | | 58 | | Vice President of Strategy |
Donald S. Ienner | | 65 | | Director |
David Schulhof | | 47 | | Director |
Samuel S. Holdsworth | | 65 | | Director |
Below is a summary of the business experience of each of our executive officers and directors
Joshua Sason has served as our Chief Executive Officer and a Director since our inception. Mr. Sason is the founder & Chief Executive Officer of Magna Management LLC, a global investment firm which invests across the worldwide public and private equity markets and the entertainment industry. In the eight years since launching the firm, Mr. Sason has grown Magna Management LLC into a leading investor in its market segment, investing over $300M into lower middle market credit and equity opportunities and positioning the firm's brand amongst the most creative and forward thinking in the investment management industry. Mr. Sason co-founded and has served as Chairman of the New York construction company Sason Builders, LLC since June 2014 and was the Founder and Chairman of the boutique talent acquisition company, Mainz, since November 2013 until it was acquired in late 2017. In addition, Mr. Sason has been the Chief Executive Officer of Magna Entertainment, LLC since 2013. Magna Entertainment has invested in and produced a number of feature films and documentaries, including the 2016 feature, “Bleed for This”.
Marc Manuel has served as our Chief Financial Officer and Director since July 12, 2016. Marc served as a Managing Director for Magna Management, LLC from 2012 through 2017. At Magna, Mr. Manuel had been responsible for helping to build out Magna’s Equities strategy, making portfolio investments as both a lead investor in syndicated transactions and as a sole investor. Prior to joining Magna, from September 2009 until July 2012, Mr. Manuel worked as an Investment Banker at Scarsdale Equities LLC. Prior to working at Scarsdale Equities LLC, Mr. Manuel owned his own business and consulted for a wide array of companies ranging from early stage startups to members of the Fortune 10. He holds a B.A. from George Washington University, Cum Laude, and an MBA from Fordham University.
Russell Riegerhas been our Vice President of Strategy since July 25, 2016. Mr. Rieger has been Vice President of Magna Entertainment, LLC since April 2014. From 1997 to 2002, he served as General Manager and Executive Vice President of Creative for Maverick Records (of which Madonna was one of the founders), building the label into a freestanding record company with over 100 employees and working with successful artists including the Prodigy, Alanis Morissette, Muse, and the Deftones, as well as was executive producing movie soundtracks, including The Matrix. In 2003 he became principal founder and partner at Pipeline LLC, an entertainment branding and marketing company based in Los Angeles where he worked until 2009. Mr. Rieger moved to NYC in 2010 and founded his own consulting firm, working with startup companies, private equity and hedge funds focusing on the entertainment and media industries, where he worked until April 2014. Prior to working at Maverick and Pipeline, Mr. Rieger was the General Manager of London Records, from 1992 to 1997, where he helped to launch the record label in the United States and worked with several gold and platinum artists such as Portishead, Salt n’ Pepa, Meat Puppets and Paul Weller. He began his career, in 1982 as a co-manager for Modern English and shortly after, co-founded a management company that represented the Replacements, the Del Fuegos and Cyndi Lauper among others. Mr. Rieger is a graduate of the State University of New York at Albany where he received a BA in both Political Science and Philosophy.
Donald S. Iennerhas been our director since February 1, 2016. Mr. Ienner has been the managing member of DSI-1008, LLC, a consulting firm for the music industry, since October 2011. From 2007 to October 2011, he served as a consultant to the music industry. From 1989 to 2006, he served in various capacities with Columbia Records/Sony Music, most recently as Chairman and CEO of Sony Music Label Group U.S. Mr. Ienner has worked in the music industry since 1969 and held various positions with Cam-USA, Millennium Records and Arista Records prior to joining Columbia Records/Sony Music in 1989. Mr. Ienner has previously been a nominating committee member for the Rock and Roll Hall of Fame, a board member of the Recording Industry Association of America, and a board member of Gibson Guitars.
David Schulhofhas been our director since December 16, 2015. Mr. Schulhof has served as the President of IM Global Music since December 2014. Previously, from March 2012 to November 2014, he was a Managing Director at G2 Investment Group, an offshoot of New York private equity firm Guggenheim Partners, focusing on the firm’s media investments. Prior to G2, he was Co-Founder and CEO of Evergreen Copyrights from January 2005 through December 2010, which pursued a global acquisition strategy. Schulhof and his partners built Evergreen into one of the leading independent music publishing companies worldwide and in 2010 sold Evergreen to KKR/BMG Rights Management. Before launching Evergreen, from 1997 to 2004, he was Vice President of Motion Picture Music at Miramax and Dimension films, overseeing music, music publishing, music supervision and soundtracks for the Studio. Prior to joining Miramax, he was a lawyer at the law offices of Pryor Cashman Sherman and Flynn, representing film, music and TV clients. He began his career at Interscope Records and graduated from the NYU School of Law and Georgetown University.
Samuel S. Holdsworthhas been our director since December 16, 2015. Mr. Holdsworth is a Managing Director of Sword, Rowe & Co., a firm providing investment and advisory services for media and entertainment businesses. Prior thereto, from January 2012 until December 2013, Mr. Holdsworth provided consulting services to financial and content related businesses. From January 2008 until January 2012 he was the Executive Chairman of Solvi Brands, LLC, an early stage consumables company. Mr. Holdsworth was a founding partner at JPMorgan Entertainment Partners, a private equity fund, from Jan. 1999 until June 2006. He was also Chairman and CEO of Ryko Corp., a diversified music company from early 2001 until it was sold to Warner Music Group in June 2006. From 1991 through 1999 he ran an investment banking practice doing M&A, turn-around and fundraising for businesses in the media, entertainment and lodging space. He began his entrepreneurial career in publishing, founding Musician Magazine in 1976 and selling it to Billboard Publications in 1981. He was previously a principal and president of BPI Communications Entertainment division, publisher of Billboard Magazine and managed the Hollywood Reporter, Adweek and other media business properties. He also founded and was Executive Producer of the Billboard Awards Show on the Fox Network from 1990 through 1997.
Except as described below and under “— Conflicts of Interest,” none of these individuals is currently a principal of or affiliated with a public company or blank check company that executed a business plan similar to our business plan.
Officer and Director Qualifications
Our officers and board of directors are composed of a diverse group of leaders. Most of the current officers or directors have senior leadership experience in the entertainment and media industry. In these positions, they have also gained experience in core management skills, such as strategic and financial planning, financial reporting, compliance, risk management, and leadership development. Most of our officers and directors also have experience serving on boards of directors and board committees of other companies, and have an understanding of corporate governance practices and trends, which provides an understanding of different business processes, challenges, and strategies. Further, our officers and directors also have other experience that makes them valuable, managing and investing assets or facilitating the consummation of business combinations.
We, along with our officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other experiences of our officers and board members described below, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals of consummating an acquisition transaction.
Joshua Sason
Mr. Sason is well-qualified to serve as Chief Executive Officer and a member of the Board due to his business leadership, operational experience, and experience in direct investments across the worldwide public and private equity markets and the entertainment industry. We believe Mr. Sason’s access to contacts and sources, ranging from private and public company contacts, private equity funds and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Sason’s investment experience in the entertainment industry and background in negotiating, structuring and consummating private equity transactions will further our purpose of consummating an acquisition transaction.
Marc Manuel
Mr. Manuel is well-qualified to serve as a member of the Board due to his investment experience, merger and acquisition experience and operational experience. We believe Mr. Manuel’s access to contacts and sources, ranging from private and public company contacts, private equity funds and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Manuel’s strategic consulting experience and background in negotiating, structuring and consummating private equity transactions will further our purpose of consummating an acquisition transaction.
Donald S. Ienner
Mr. Ienner is well-qualified to serve as a member of the Board due to his business leadership and experience in the music industry and public company experience. We believe Mr. Manuel’s access to contacts and sources in the music industry will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Ienner’s strategic consulting experience and background in the music industry will further our purpose of consummating an acquisition transaction.
David Schulhof
Mr. Schulhof is well-qualified to serve as a member of the Board due to his business leadership, operational experience, legal background and experience in mergers and acquisitions in the entertainment and media industry. We believe Mr. Schulhof’s access to contacts and sources, ranging from private and public company contacts, private equity funds and investment bankers in the entertainment and media industry will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Schulhof’s broad operational experience and background in negotiating, structuring and consummating mergers and acquisitions including the acquisition of Evergreenindebtedness by KKR/BMG Rights Management will further our purpose of consummating an acquisition transaction.
Samuel S. Holdsworth
Mr. Holdsworth is well-qualified to serve as a member of the Board due to his business leadership, operational experience, experience in investment and advisory services for media and entertainment businesses. We believe Mr. Holdsworth’s contacts and sources, ranging from private and public company contacts, private equity funds and investment bankers in the entertainment and media industry will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Holdsworth’s broad consulting experience and background in negotiating, structuring and consummating mergers and acquisitions will further our purpose of consummating an acquisition transaction.
Russell Rieger
Mr. Rieger is well-qualified to serve as an officer of the company due to his investment, operational, corporate strategy and consulting experience in the entertainment and media industries. We believe Mr. Rieger’s access to contacts and sources in the entertainment and media industries, ranging from private and public company contacts, private equity funds and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Rieger’s consulting experience and background in negotiating, structuring and consummating private equity transactions will further our purpose of consummating an acquisition transaction.
Board Committees
The Board has a standing audit and compensation committee. The independent directors oversee director nominations. Each audit committee and compensation committee has a charter, which was filed with the SEC as exhibits to the Registration Statement on Form S-1 on July 26, 2016.
Audit Committee
The Audit Committee, which is established in accordance with Section 3(a)(58)(A) of the Exchange Act, engages Company’s independent accountants, reviewing their independence and performance; reviews the Company’s accounting and financial reporting processes and the integrity of its financial statements; the audits of the Company’s financial statements and the appointment, compensation, qualifications, independence and performance of the Company’s independent auditors; the Company’s compliance with legal and regulatory requirements; and the performance of the Company’s internal audit function and internal control over financial reporting. The Audit Committee held two meetings during 2017.
The members of the Audit Committee are Samuel S. Holdsworth, Chair, David Schulhof and Donald S. Ienner. The Board has determined that Samuel S. Holdsworth is an audit committee financial expert, as defined in the Exchange Act.
Compensation Committee
The Compensation Committee reviews annually the Company’s corporate goals and objectives relevant to the officers’ compensation, evaluates the officers’ performance in light of such goals and objectives, determines and approves the officers’ compensation level based on this evaluation; makes recommendations to the Board regarding approval, disapproval, modification, or termination of existing or proposed employee benefit plans, makes recommendations to the Board with respect to non-CEO and non-CFO compensation and administers the Company’s incentive-compensation plans and equity-based plans. The Compensation Committee has the authority to delegate any of its responsibilities to subcommittees as it may deem appropriate in its sole discretion. The chief executive officer of the Company may not be present during voting or deliberations of the Compensation Committee with respect to his compensation. The Company’s executive officers do not play a role in suggesting their own salaries. Neither the Company nor the Compensation Committee has engaged any compensation consultant who has a role in determining or recommending the amount or form of executive or director compensation. The Compensation Committee held one meeting during 2017.
The members of the Compensation Committee are David Schulhof, Chair, Samuel S. Holdsworth and Donald S. Ienner.
Independent Directors Overseeing Director Nominations
The independent directors of the Company assist the Board in overseeing various Board composition, and to the extent they deem necessary, perform the following:
| ● | Make recommendations to the Board regarding the size and composition of the Board, establish procedures for the nomination process and screen and recommend candidates for election to the Board. |
| ● | Recommend for approval by the Board on an annual basis desired qualification and characteristics for Board membership and with corresponding attributes. |
| ● | Establish and administer a periodic assessment procedure relating to the performance of the Board as a whole and its individual members. |
The Board does not have a formal policy on Board candidate qualifications. The Board may consider those factors it deems appropriate in evaluating director nominees made either by the Board or shareholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board members, and specialized knowledge or experience. Depending upon the current needs of the Board, certain factors may be weighed more or less heavily. In considering candidates for the Board, the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met. “Diversity,” as such, is not a criterion that the Committee considers. The directors will consider candidates from any reasonable source, including current Board members, shareholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the recommendation.
Conflicts of Interest
Investors should be aware of the following potential conflicts of interest:
• None of our officers and directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating their time among various business activities.
• In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Our officers and directors may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
• Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company.
• Unless we consummate our initial business combination, our officers, directors and insiders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceed the amount of available proceeds not deposited in the trust account.
• The insider shares beneficially owned by our officers and directors will be released from escrow only if our initial business combination is successfully completed. Additionally, if we are unable to complete an initial business combination within the required time frame, our officers and directors will not be entitled to receive any amounts held in the trust account with respect to any of their insider shares or private units. Furthermore, our insiders (and/or their designees) have agreed that the private units will not be sold or transferred by them until after we have completed our initial business combination. For the foregoing reasons, our board may have a conflict of interest in determining whether a particular target business is an appropriate business with which to effect our initial business combination.
In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
• the corporation could financially undertake the opportunity;
• the opportunity is within the corporation’s line of business; and
• it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation.
Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. Furthermore, our certificate of incorporation provides that the doctrine of corporate opportunity will not apply with respect to any of our officers or directors in circumstances where the application of the doctrine would conflict with any fiduciary duties or contractual obligations they may have. In order to minimize potential conflicts of interest which may arise from multiple affiliations, our officers and directors (other than our independent directors) have agreed to present to us for our consideration, prior to presentation to any other person or entity, any suitable opportunity to acquire a target business, until the earlier of: (1) our consummation of an initial business combination and (2) 21 months from the date of the IPO. This agreement is, however, subject to any pre-existing fiduciary and contractual obligations such officer or director may from time to time have to another entity. Accordingly, if any of them becomes aware of a business combination opportunity which is suitable for an entity to which he or she has pre-existing fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such entity, and only present it to us if such entity rejects the opportunity.approximately $6.7 million per year. We do not believe, however, that the pre-existing fiduciary duties or contractual obligationscurrently hedge against interest rate risk.
Item 8. Financial Statements and directors will materially undermine our abilitySupplementary Data
Index to
complete our business combination because in most cases the affiliated companies are closely held entities controlled by the officer or director or the nature of the affiliated company’s business is such that it is unlikely that a conflict will arise.The following table summarizes the current pre-existing fiduciary or contractual obligations of our officers, directors and director nominees:
Consolidated Financial Statements | Name of Individual
| | Name of Affiliated
Company | | Entity’s Business |
| AffiliationPage |
Joshua Sason | | Magna Management LLC | | Investments | | Founder & Chief Executive Officer |
Joshua Sason | | Sason Builders | | Construction | | Chairman |
Joshua Sason | | Magna Entertainment, LLC | | Film production | | Chief Executive Officer |
Joshua Sason | | Bowmo Inc. | | Staffing | | Board Member |
Joshua Sason | | PledgeMusic | | Music | | Board Member |
Joshua Sason | | M SPAC LLC | | Investment Holding Company | | Managing Member |
Joshua Sason | | M SPAC Holdings I LLC | | Investment Holding Company | | Managing Member |
Joshua Sason | | M SPAC Holdings II LLC | | Investment Holding Company | | Managing Member |
Russell Rieger | | Magna Entertainment, LLC | | Film production | | Vice President |
Donald S. Ienner | | DSI-1008, LLC | | Consulting | | Managing Member |
David Schulhof | | IM Global Music | | Film distribution | | President |
Samuel S. Holdsworth | | Sword, Rowe & Co. | | Investment and advisory services | | Managing Director |
Our insiders, officers and directors, have agreed to vote any shares of common stock held by them in favor of our initial business combination. In addition, they have agreed to waive their respective rights to receive any amounts held in the trust account with respect to their insider shares and private shares if we are unable to complete our initial business combination within the required time frame. If they purchase shares of common stock in the IPO or in the open market, however, they would be entitled to receive their pro rata share of the amounts held in the trust account if we are unable to complete our initial business combination within the required time frame, but have agreed not to convert such shares in connection with the consummation of our initial business combination.
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions will require prior approval by our audit committee and a majority of our uninterested “independent” directors, or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our audit committee and a majority of our disinterested “independent” directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
To further minimize conflicts of interest, we have agreed not to consummate our initial business combination with an entity that is affiliated with any of our officers, directors or insiders, unless we have obtained (i) an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view and (ii) the approval of a majority of our disinterested and independent directors (if we have any at that time). Furthermore, in no event will our insiders or any of the members of our management team be paid any finder’s fee, consulting fee or other similar compensation prior to, or for any services they render in order to effectuate, the consummation of our initial business combination (regardless of the type of transaction that it is).
Code of Ethics
We adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws. The code of ethics codifies the business and ethical principles that govern all aspects of our business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were filed in a timely manner.
| ITEM 11. | EXECUTIVE COMPENSATION |
Employment Agreements
We have not entered into any employment agreements with our executive officers and have not made any agreements to provide benefits upon termination of employment.
Executive Officers and Director Compensation
No executive officer has received any cash compensation for services rendered to us. Commencing on September 13, 2016 through the completion of our initial business combination with a target business, we will pay to Magna Management LLC, a company owned by our insiders, a fee of $10,000 per month for providing us with office space and certain office and secretarial services. However, pursuant to the terms of such agreement, we may delay payment of such monthly fee upon a determination by our audit committee that we lack sufficient funds held outside the trust to pay actual or anticipated expenses in connection with our initial business combination. Any such unpaid amount will accrue without interest and be due and payable no later than the date of the consummation of our initial business combination. Other than the $10,000 per month administrative fee, no compensation or fees of any kind, including finder’s fees, consulting fees and other similar fees, will be paid to our insiders or any of the members of our management team, for services rendered prior to or in connection with the consummation of our initial business combination (regardless of the type of transaction that it is). However, such individuals will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses, performing business due diligence on suitable target businesses and business combinations as well as traveling to and from the offices, plants or similar locations of prospective target businesses to examine their operations. There is no limit on the amount of out-of-pocket expenses reimbursable by us; provided, however, that to the extent such expenses exceed the available proceeds not deposited in the trust account, such expenses would not be reimbursed by us unless we consummate an initial business combination.
After our initial business combination, members of our management team who remain with us may be paid consulting, management or other fees from the combined company with any and all amounts being fully disclosed to stockholders, to the extent then known, in the proxy solicitation materials furnished to our stockholders. It is unlikely the amount of such compensation will be known at the time of a stockholder meeting held to consider our initial business combination, as it will be up to the directors of the post-combination business to determine executive and director compensation. In this event, such compensation will be publicly disclosed at the time of its determination in a Current Report on Form 8-K, as required by the SEC.
We have not set aside any amount of assets for pension or retirement benefits.
Any compensation to be paid to our chief executive officer and other officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table sets forth as of March 27, 2018 the number of shares of our common stock beneficially owned by (i) each person who is known by us to be the beneficial owner of more than five percent of our common stock; (ii) each director; (iii) each of the named executive officers in the Summary Compensation Table; and (iv) all directors and executive officers as a group. As of March 27, 2018, we had 7,058,743 shares of common stock issued and outstanding.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. The following table does not include the placement warrants as these warrants are not exercisable within 60 days of March 27, 2018. All shares have identical voting rights.
| Name and Address of Beneficial Owner(1) | | Amount and
Nature of
Beneficial
Ownership of
Common
Stock(2) | | | Approximate
Percentage of
Outstanding
Shares of
Common Stock | |
| M SPAC LLC(3) | | | 1,139,609 | | | | 16.1 | % |
| M SPAC Holdings I LLC(3) | | | 249,148 | | | | 3.5 | % |
| M SPAC Holdings II LLC(3) | | | 359,878 | | | | 5.1 | % |
| Joshua Sason(4) | | | 1,748,634 | | | | 24.8 | % |
| Marc Manuel | | | 0 | | | | — | |
| Russell Rieger | | | 0 | | | | — | |
| Donald S. Ienner | | | 0 | | | | — | |
| David Schulhof | | | 0 | | | | — | |
| Samuel S. Holdsworth | | | 0 | | | | — | |
| All directors, director nominees and executive officers as a group (6 individuals) | | | 1,748,634 | | | | 24.8 | % |
* Less than 1%.
(1) Unless otherwise indicated, the business address of each of the individuals is c/o Magna Management LLC, 40 Wall Street, 58th Floor, New York, NY 10005.
(2) Does not include beneficial ownership of any shares of common stock underlying outstanding warrants as such shares are not issuable within 60 days of the date of this report.
(3) Joshua Sason is the sole managing member of M SPAC LLC, M SPAC Holdings I LLC and M SPAC Holdings II LLC and thus may be deemed to have voting and investment power with respect to the shares owned by such entities.
(4) Securities beneficially owned consist of securities owned by M SPAC LLC, M SPAC Holdings I LLC and M SPAC Holdings II LLC, of which the individual is a managing member.
All of the insider shares outstanding prior to the IPO were placed in escrow with American Stock Transfer & Trust Company, LLC, as escrow agent. Subject to certain limited exceptions, 50% of these shares will not be transferred, assigned, sold or released from escrow until the earlier of six months after the date of the consummation of our initial business combination and the date the closing price of our common stock equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after our initial business combination and the remaining 50% of the insider shares will not be transferred, assigned, sold or released from escrow until six months after the date of the consummation of our initial business combination or earlier in either case if, subsequent to our initial business combination, we complete a liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. We cancelled 109,973 shares of the insider shares which were released from escrow for cancellation on November 10, 2016.
During the escrow period, the holders of these shares will not be able to sell or transfer their securities except (1) transfers among the insiders, to our officers, directors, advisors and employees, (2) transfers to an insider’s affiliates or its members upon its liquidation, (3) transfers to relatives and trusts for estate planning purposes, (4) transfers by virtue of the laws of descent and distribution upon death, (5) transfers pursuant to a qualified domestic relations order, (6) private sales made at prices no greater than the price at which the securities were originally purchased or (7) transfers to us for cancellation in connection with the consummation of an initial business combination, in each case (except for clause 7) where the transferee agrees to the terms of the escrow agreement and forfeiture, as the case may be, as well as the other applicable restrictions and agreements of the holders of the insider shares. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate, there will be no liquidation distribution with respect to the insider shares.
In order to meet our working capital needs following the consummation of the IPO, our insiders, officers and directors may, but are not obligated to, loan us funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion. Each loan would be evidenced by a promissory note. The notes would either be paid upon consummation of our initial business combination, without interest, or, at the lender’s discretion, up to $200,000 of the notes may be converted upon consummation of our business combination into additional private units at a price of $10.00 per unit. Our stockholders have approved the issuance of the private units upon conversion of such notes, to the extent the holder wishes to so convert such notes at the time of the consummation of our initial business combination. If we do not complete a business combination, any outstanding loans from our insiders, officers and directors or their affiliates, will be repaid only from amounts remaining outside our trust account, if any. Concurrently with the Purchase Agreement, our founding stockholders (the “Founders”) and Priority entered into a purchase agreement (the “Promote Agreement”) pursuant to which Priority agreed to purchase 421,107 of the units issued to the Founders in a private placement immediately prior to M I’s initial public offering, and 453,210 shares of common stock of M I issued to the Founders for an aggregate purchase price of approximately $2.1 million. In addition, pursuant to the Promote Agreement, the Founders will forfeit 174,863 founder’s shares at the closing of the Acquisition, which shares may be reissued to the Founders if one of the earn outs described above is achieved.
In addition, the Founders and Thomas C. Priore, the Executive Chairman of Priority (“TCP”), entered into a letter agreement (the “Letter Agreement”) pursuant to which the Founders granted TCP (i) the right to purchase the Founders’ remaining shares of our common stock at the prevailing market price subject to certain conditions including a floor of $10.30 per share and (ii) a right of first refusal on the shares.
Our executive officers and directors are deemed to be our “promoters,” as that term is defined under the federal securities laws.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
In April 2015, we sold an aggregate of 1,437,500 shares of our common stock for $25,000, or approximately $.02 per share, to M SPAC LLC, which is controlled by Joshua Sason. On July 20, 2016, M SPAC LLC sold back 494,480 shares to us at a price equal to the amount paid for such shares. We subsequently sold an aggregate of 494,480 shares of our common stock for $8,600, or approximately $0.02 per share, to M SPAC Holdings I LLC and M SPAC Holdings II LLC, each of which is controlled by Joshua Sason.
The underwriters exercised a portion of their over-allotment option. Our insiders forfeited an aggregate of 109,973 insider shares in proportion to the portion of the over-allotment option that was not exercised. We recorded the forfeited shares as treasury stock and simultaneously retired the shares. Such forfeited shares were immediately cancelled which resulted in the retirement of the treasury shares and a corresponding charge to additional paid-in capital.
M SPAC LLC, M SPAC Holdings I LLC and M SPAC Holdings II LLC, entities controlled by Joshua Sason, our Chief Executive Officer, purchased, pursuant to written purchase agreements with us, 402,500 private units for a total purchase price of $4,025,000, from us. These purchases took place on a private placement basis simultaneously with the consummation of the IPO. Simultaneously with the purchase of units resulting from the exercise of the over-allotment option by the underwriter, M SPAC LLC, M SPAC Holdings I LLC and M SPAC Holdings II LLC also purchased from us at a price of $10.00 per unit 18,607 private units.
In order to meet our working capital needs following the consummation of the IPO, our insiders, officers and directors may, but are not obligated to, loan us funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion. Each loan would be evidenced by a promissory note. The notes would either be paid upon consummation of our initial business combination, without interest, or, at the lender’s discretion, up to $200,000 of the notes may be converted upon consummation of our business combination into additional private units at a price of $10.00 per unit. Our stockholders have approved the issuance of the private units upon conversion of such notes, to the extent the holder wishes to so convert such notes at the time of the consummation of our initial business combination. If we do not complete a business combination, any outstanding loans from our insiders, officers and directors or their affiliates, will be repaid only from amounts remaining outside our trust account, if any.
On March 13, 2018, the Company issued promissory notes in the aggregate principal amount of$132,753 to its sponsors (M SPAC LLC, M SPAC Holdings I, LLC and M SPAC Holdings II, LLC). The $132,753 received by the Company upon issuance of the notes was deposited into our trust account for the benefit of its public stockholders in order to extend theperiod of time we have to complete a business combination for an additional one month, from March 19, 2018 to April 19, 2018. The notes do not bear interest and are payable five business days after the date we complete a business combination.
A more detailed description of the promissory notes and the related transactions can be found in our Current Report on Form 8-K dated March 14, 2018.
The holders of our insider shares issued and outstanding on the date of the IPO, as well as the holders of the private units (and underlying securities) and any shares our insiders, officers, directors or their affiliates may be issued in payment of working capital loans made to us, will be entitled to registration rights pursuant to an agreement to be signed prior to or on the effective date of the IPO. The holders of a majority of these securities are entitled to make up to two demands that we register such securities. The holders of the majority of the insider shares can elect to exercise these registration rights at any time commencing three months prior to the date on which these shares of common stock are to be released from escrow. The holders of a majority of the private units or shares issued in payment of working capital loans made to us can elect to exercise these registration rights at any time after we consummate a business combination. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to our consummation of our initial business combination. We will bear the expenses incurred in connection with the filing of any such registration statements.
Magna Management LLC, a company owned by our insiders, has agreed that, commencing on the date of the IPO through the earlier of our consummation of our initial business combination or our liquidation, it will make available to us certain general and administrative services, including office space, utilities and administrative support, as we may require from time to time. We have agreed to pay Magna Management LLC $10,000 per month for these services. However, pursuant to the terms of such agreement, we may delay payment of such monthly fee upon a determination by our audit committee that we lack sufficient funds held outside the trust to pay actual or anticipated expenses in connection with our initial business combination. Any such unpaid amount will accrue without interest and be due and payable no later than the date of the consummation of our initial business combination. We believe that the fee charged by Magna Management LLC is at least as favorable as we could have obtained from an unaffiliated person.
Other than the fees described above, no compensation or fees of any kind, including finder’s fees, consulting fees or other similar compensation, will be paid to our insiders or any of the members of our management team, for services rendered to us prior to, or in connection with the consummation of our initial business combination (regardless of the type of transaction that it is). However, such individuals will receive reimbursement for any out-of-pocket expenses incurred by them in connection with activities on our behalf, such as identifying potential target businesses, performing business due diligence on suitable target businesses and business combinations as well as traveling to and from the offices, plants or similar locations of prospective target businesses to examine their operations. There is no limit on the amount of out-of-pocket expenses reimbursable by us; provided, however, that to the extent such expenses exceed the available proceeds not deposited in the trust account and the interest income earned on the amounts held in the trust account, such expenses would not be reimbursed by us unless we consummate an initial business combination.
After our initial business combination, members of our management team who remain with us may be paid consulting, board, management or other fees from the combined company with any and all amounts being fully disclosed to stockholders, to the extent then known, in the proxy solicitation materials furnished to our stockholders. It is unlikely the amount of such compensation will be known at the time of a stockholder meeting held to consider our initial business combination, as it will be up to the directors of the post-combination business to determine executive and director compensation. In this event, such compensation will be publicly disclosed at the time of its determination in a Current Report on Form 8-K, as required by the SEC.
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions will require prior approval by our audit committee and a majority of our uninterested independent directors, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our audit committee and a majority of our disinterested independent directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
Related Party Policy
Our Code of Ethics requires us to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except under guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $100,000 in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
We also require each of our directors and executive officers to annually complete a directors’ and officers’ questionnaire that elicits information about related party transactions.
These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
To further minimize conflicts of interest, we have agreed not to consummate our initial business combination with an entity that is affiliated with any of our insiders, officers or directors unless we have obtained an opinion from an independent investment banking firm and the approval of a majority of our disinterested and independent directors (if we have any at that time) that the business combination is fair to our unaffiliated stockholders from a financial point of view. Furthermore, in no event will our insiders, or any of the members of our management team be paid any finder’s fee, consulting fee or other similar compensation prior to, or for any services they render in order to effectuate, the consummation of our initial business combination (regardless of the type of transaction that it is).
Director Independence
Nasdaq listing standards require that within one year of the listing of our securities on the Nasdaq Capital Market we have at least three independent directors and that a majority of our board of directors be independent. For a description of the director independence, see above Part III, Item 10 - Directors, Executive Officers and Corporate Governance.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Principal Accounting Fees
The following chart sets forth public accounting fees in connection with services rendered byMarcum LLP for the years ended December 31, 2017 and 2016.
| Marcum LLP | | | | | | |
| | | 2017 | | | 2016 | |
| Audit Fees | | $ | 43,540 | | | | 60,000 | |
| Audit-Related Fees | | $ | - | | | | - | |
| Tax Fees | | $ | 2,288 | | | | 2,189 | |
| All Other Fees | | $ | 85,831 | | | | - | |
Audit fees were for professional services rendered by Marcum LLP for the audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Forms 10-Q, and services that are normally provided by Marcum LLP in connection with statutory and regulatory filings or engagements for that fiscal year, including in connection with our initial public offering. Tax fees consist of fees billed for professional services relating to tax compliance. All other fees consist of fees billed for all other services including permitted due diligence services related to a potential business combination.
Marcum LLP did not bill any other fees for services rendered to us during the fiscal years ended December 31, 2017 and 2016 for assurance and related services in connection with the audit or review of our financial statements.
Pre-Approval of Services
The audit committee is responsible for appointing, setting compensation and overseeing the work of the independent auditors. In recognition of this responsibility, the audit committee shall review and, in its sole discretion, pre-approve all audit and permitted non-audit services to be provided by the independent auditors as provided under the audit committee charter. All services subsequent to the formation of the audit committee in 2015 have been approved by the audit committee.
part IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following are filed with this report:
| (1) | The financial statements listed on the Financial Statements’ Table of Contents |
| (2) | Not applicable |
(b) Exhibits
The following exhibits are filed with this report. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington D.C. 20549. Copies of such materials can also be obtained from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.
Exhibit No. | | Description |
| | |
1.1 | | Underwriting Agreement, dated September 13, 2016, by and between the Registrant and Chardan Capital Markets, LLC (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
2.1* | | Amended and Restated Contribution Agreement dated March 26, 2018 by and among Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC |
| | |
3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
3.2 | | Bylaws (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.1 | | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.2 | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.3 | | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.4 | | Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1/A filed with the Securities & Exchange Commission on September 12, 2016) |
| | |
4.5 | | Warrant Agreement, dated September 13, 2016, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.1 | | Investment Management Trust Account Agreement, dated September 13, 2016, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.2 | | Registration Rights Agreement, dated September 13, 2016, by and among the Registrant and the initial stockholders (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
10.3 | | Stock Escrow Agreement dated September 13, 2016 among the Registrant, American Stock Transfer & Trust Company, LLC, and the initial stockholders (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.4 | | Form of Letter Agreement by and between the Registrant, the initial shareholders and the officers and directors of the Company (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on September 9, 2016) |
| | |
10.5 | | Administrative Services Agreement dated September 13, 2016 by and between the Registrant and Magna Management LLC (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.6 | | Purchase Agreement dated February 26, 2018(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 2, 2018) |
| | |
10.7 | | Letter Agreement dated February 26, 2018(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 2, 2018) |
| | |
10.8 | | Promissory Note issued to M SPAC LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
10.9 | | Promissory Note issued to M SPAC Holdings I LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
10.10 | | Promissory Note issued to M SPAC Holdings II LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
14 | | Form of Code of Ethics (incorporated by reference to Exhibit 14 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. |
| | |
32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.
|
| | |
101.INS | | XBRL Instance Document |
| |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | M I ACQUISITIONS, INC. |
| | |
Dated: March 27, 2018 | | By: | | /s/ Joshua Sason |
| | Name: | | Joshua Sason |
| | Title: | | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons in the capacities and on the dates indicated.
Signature | | Title | | Date |
| | | | |
/s/ Joshua Sason | | Chief Executive Officer and Director | | March 27, 2018 |
Joshua Sason | | (Principal Executive Officer) | | |
| | | | |
/s/ Marc Manuel | | Chief Financial Officer and Director | | March 27, 2018 |
Marc Manuel | | (Principal Accounting and Financial Officer) | | |
| | | | |
/s/ Russell Rieger | | Vice President of Strategy | | March 27, 2018 |
Russell Rieger | | | | |
| | | | |
/s/ Donald S. Ienner | | Director | | March 27, 2018 |
Donald S. Ienner | | | | |
| | | | |
/s/ David Schulhof | | Director | | March 27, 2018 |
David Schulhof | | | | |
| | | | |
/s/ Samuel S. Holdsworth | | Director | | March 27, 2018 |
Samuel S. Holdsworth | | | | |
EXHIBIT INDEX
Exhibit No. | | Description |
| | |
1.1 | | Underwriting Agreement, dated September 13, 2016, by and between the Registrant and Chardan Capital Markets, LLC (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
2.1* | | Amended and Restated Contribution Agreement dated March 26, 2018 by and among Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC |
| | |
3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
3.2 | | Bylaws (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.1 | | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.2 | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.3 | | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
4.4 | | Form of Unit Purchase Option between the Registrant and Chardan Capital Markets, LLC (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1/A filed with the Securities & Exchange Commission on September 12, 2016) |
| | |
4.5 | | Warrant Agreement, dated September 13, 2016, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.1 | | Investment Management Trust Account Agreement, dated September 13, 2016, by and between American Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
| | |
10.2 | | Registration Rights Agreement, dated September 13, 2016, by and among the Registrant and the initial stockholders (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on September 16, 2016) |
10.6 | | Purchase Agreement dated February 26, 2018(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 2, 2018) |
| | |
10.7 | | Letter Agreement dated February 26, 2018(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 2, 2018) |
| | |
10.8 | | Promissory Note issued to M SPAC LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
10.9 | | Promissory Note issued to M SPAC Holdings I LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
10.10 | | Promissory Note issued to M SPAC Holdings II LLC dated March 13, 2018. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities & Exchange Commission on March 14, 2018) |
| | |
14 | | Form of Code of Ethics (incorporated by reference to Exhibit 14 to the Registration Statement on Form S-1 filed with the Securities & Exchange Commission on July 26, 2016) |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. |
| | |
32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the U.S. Securities and Exchange Commission.
|
| | |
101.INS | | XBRL Instance Document |
| |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
M I ACQUISITIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the
ShareholdersStockholders and
the Board of Directors of
M I Acquisitions, Priority Technology Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of M I Acquisitions,Priority Technology Holdings, Inc. (the “Company”)Company) as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations stockholders’ equityand comprehensive loss, changes in stockholders' deficit and non-controlling interests and cash flows for each of the twothree years in the period ended December 31, 2017,2023, and the related notes (collectively(collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017,2023, in conformity with accounting principlesU.S. generally accepted in the United States of America.Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
accounting principles.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Marcumllp
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Accounting for Plastiq
| | | | | |
| Description of the Matter | As more fully described in Note 2 of the consolidated financial statements, the Company completed its acquisition of substantially all of the assets of Plastiq, including the equity interests in Plastiq Canada, Inc. The purchase was completed on July 31, 2023 for total consideration of $37.0 million including $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in Plastiq, Powered by Priority, LLC. The acquisition was accounted for as a business combination. The Company’s accounting for the acquisition included determining the fair value of contingent consideration payments in addition to intangible assets acquired of $30.5 million, which primarily included customer relationships, referral partner relationships, tradename, and developed technology. |
| Auditing the Company’s accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of the contingent consideration payments as well as the fair value of the acquired intangible assets. The significant estimation was primarily due to the sensitivity of the respective fair values to the future performance of the acquired business. The significant underlying assumptions used to estimate the fair value of contingent consideration payments and intangible assets, included revenue and operating margin growth rates and prospective free cash flow from the operations of the acquired business, weighted average cost of capital, and royalty rate assumptions, as applicable. These assumptions relate to the future performance of the acquired business are forward-looking and could be affected by future economic and market conditions. |
| | | | | |
| Description of the Matter | As more fully described in Note 2 of the consolidated financial statements, the Company completed its acquisition of Plastiq, Inc. during the year ended December 31, 2023 for total consideration of $37.0 million including $28.5 million in cash and the remaining consideration of $8.5 million was in the form of deferred or contingent consideration and certain equity interest in the acquiring entity. The acquisition was accounted for as a business combination. The Company’s accounting for the acquisition included determining the fair value of contingent consideration payments in addition to intangible assets acquired of $30 million, which primarily included customer relationships, referral partner relationships, tradename, and developed technology.
Auditing the Company’s accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of the contingent consideration payments as well as the fair value of the acquired intangible assets. The significant estimation was primarily due to the sensitivity of the respective fair values to the future performance of the acquired business. The significant underlying assumptions used to estimate the fair value of contingent consideration payments and intangible assets, included revenue and operating margin growth rates and prospective free cash flow from the operations of the acquired entity, weighted average cost of capital, and royalty rate assumptions, as applicable. These assumptions relate to the future performance of the acquired business are forward-looking and could be affected by future economic and market conditions.
|
| |
| | | | | |
| How We Addressed the Matter in Our Audit | To test the fair value of the contingent consideration payments and intangible assets identified, our audit procedures included, among others, evaluating the Company’s use of income approach and Monte Carlo simulation, as applicable, evaluating the significant assumptions, and evaluating the completeness and accuracy of underlying data supporting the significant assumptions. We involved our specialist to assist with our evaluation of the methodologies used by management’s expert and significant assumptions used in the valuation of the contingent consideration payments and intangible assets identified. For example, we compared the significant assumptions to current industry, market and economic trends, as well as historical results of the acquired businesses. We performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions. We also evaluated the appropriateness of the Company’s disclosures included in Note 2 in relation to the acquisition.
|
Accrued Residual Commissions and Residual Commission Expenses
| | | | | |
| Description of the Matter | Accrued residual commissions recorded by the Company and included on the Consolidated Balance Sheet were $33.0 million at December 31, 2023, and residual commission expenses included within costs of services on the Consolidated Statement of Operations were $415.1 million for the year ended December 31, 2023. As discussed in Note 1 of the consolidated financial statements, the Company accrues and pays commission expense for certain customer services and other services provided by its independent sales organizations (ISOs). Commissions are based on a percentage of the net revenues generated from the Company’s merchant customers, and these percentages vary based on the program type and transaction volume of each merchant. |
| Auditing residual commissions was complex due to the non-standard nature of the pricing terms within the ISO contracts, the volume of contracts, the volume of transactions processed each month, and the degree of auditor judgment needed to design the nature and extent of audit procedures to obtain sufficient audit evidence. |
| | | | | |
| How We Addressed the Matter in Our Audit | To test accrued residual commissions and residual commission expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data supporting the commission calculations and the accuracy of the calculations. We selected a sample of monthly ISO payments and, for each sample item, we compared the pricing terms included in the calculation to the respective ISO contract or other source documents, recalculated the related expense and accrual, and agreed the commission payment to evidence of cash disbursement. Additionally, for these monthly ISO payments, we selected a sample of merchant customers, obtained their monthly processing statements, which were generated by the Company’s third-party processors, and agreed the monthly payment volumes to the commission calculations. |
/s/
Marcum Ernst & Young LLP
We have served as the Company’s auditor since
2015.New York, NY
2020.
Atlanta, Georgia
March
27, 2018
Priority Technology Holdings, Inc.
Consolidated Balance Sheets
| | | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | |
| Assets | | | | | | | | |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 172,196 | | | $ | 362,535 | |
| Prepaid expenses and other current assets | | | 9,936 | | | | 56,241 | |
| Total current assets | | | 182,132 | | | | 418,776 | |
| | | | | | | | | |
| Cash and cash equivalents held in trust | | | 55,081,899 | | | | 54,731,828 | |
| Total Assets | | $ | 55,264,031 | | | $ | 55,150,604 | |
| | | | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | | | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 349,292 | | | $ | 111,011 | |
| Offering costs payable | | | 11,616 | | | | 11,616 | |
| Note payable | | | 27,500 | | | | 27,500 | |
| Total Current Liabilities | | | 388,408 | | | | 150,127 | |
| | | | | | | | | |
| Deferred underwriting fee payable | | | 1,062,022 | | | | 1,062,022 | |
| | | | | | | | | |
| Total Liabilities | | | 1,450,430 | | | | 1,212,149 | |
| | | | | | | | | |
| Commitments | | | | | | | | |
| | | | | | | | | |
| Common stock subject to possible conversion (4,705,821 and 4,748,033 shares at conversion value as of December 31, 2017 and 2016, respectively) | | | 48,813,595 | | | | 48,938,449 | |
| | | | | | | | | |
| Stockholders' Equity: | | | | | | | | |
| Preferred stock, $0.001 par value; 1,000,000 authorized none issued and outstanding | | | - | | | | - | |
| Common stock, $0.001 par value; 30,000,000 shares authorized; 2,352,922 and 2,310,710 shares issued and outstanding (excluding 4,705,821 and 4,748,033 shares subject to possible conversion) at December 31, 2017 and 2016, respectively | | | 2,353 | | | | 2,311 | |
| Additional paid in capital | | | 5,240,728 | | | | 5,115,916 | |
| Accumulated deficit | | | (243,075 | ) | | | (118,221 | ) |
| Total Stockholders' Equity | | | 5,000,006 | | | | 5,000,006 | |
| | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 55,264,031 | | | $ | 55,150,604 | |
The accompanying notes are an integral part
(in thousands, except share data)
| | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 39,604 | | | $ | 18,454 | | | |
| Restricted cash | 11,923 | | | 10,582 | | | |
| Accounts receivable, net of allowances of $5,289 and $1,143, respectively | 58,551 | | | 78,113 | | | |
| Prepaid expenses and other current assets | 13,273 | | | 11,832 | | | |
| Current portion of notes receivable, net of allowances of $0 and $0, respectively | 1,468 | | | 1,471 | | | |
| Settlement assets and customer/subscriber account balances | 756,475 | | | 532,018 | | | |
| Total current assets | 881,294 | | | 652,470 | | | |
| Notes receivable, less current portion | 3,728 | | | 3,191 | | | |
| Property, equipment and software, net | 44,680 | | | 34,687 | | | |
| Goodwill | 376,103 | | | 369,337 | | | |
| Intangible assets, net | 273,350 | | | 288,794 | | | |
| Deferred income taxes, net | 22,533 | | | 16,447 | | | |
| Other noncurrent assets | 13,649 | | | 8,437 | | | |
| Total assets | $ | 1,615,337 | | | $ | 1,373,363 | | | |
| Liabilities, Redeemable Senior Preferred Stock and Stockholders' Deficit | | | | | |
| Current liabilities: | | | | | |
| Accounts payable and accrued expenses | $ | 52,643 | | | $ | 51,864 | | | |
| Accrued residual commissions | 33,025 | | | 35,979 | | | |
| Customer deposits and advance payments | 3,934 | | | 2,618 | | | |
| Current portion of long-term debt | 6,712 | | | 6,200 | | | |
| Settlement and customer/subscriber account obligations | 755,754 | | | 533,340 | | | |
| Total current liabilities | 852,068 | | | 630,001 | | | |
| Long-term debt, net of current portion, discounts and debt issuance costs | 631,965 | | | 598,926 | | | |
| Other noncurrent liabilities | 18,763 | | | 11,643 | | | |
| | | | | |
| Total liabilities | 1,502,796 | | | 1,240,570 | | | |
Commitments and contingencies (Note 16) | | | | | |
| Redeemable senior preferred stock, net of discounts and issuance costs: | | | | | |
| Redeemable senior preferred stock, $0.001 par value per share; 250,000 shares authorized; 225,000 issued and outstanding at December 31, 2023 and December 31, 2022 | 258,605 | | | 235,579 | | | |
| Stockholders' deficit: | | | | | |
| Preferred stock, $0.001 par value per share; 100,000,000 shares authorized; none issued or outstanding at December 31, 2023 and December 31, 2022 | — | | | — | | | |
| Common Stock, $0.001 par value per share; 1,000,000,000 shares authorized; 79,589,055 and 78,385,685 shares issued at December 31, 2023 and December 31, 2022, respectively; and 76,956,889 and 76,044,629 shares outstanding at December 31, 2023 and December 31, 2022, respectively. | 77 | | | 76 | | | |
| Treasury stock at cost, 2,632,166 and 2,341,056 shares at December 31, 2023 and December 31, 2022, respectively | (12,815) | | | (11,559) | | | |
| Additional paid-in capital | — | | | 9,650 | | | |
| Accumulated other comprehensive income | (29) | | | — | | | |
| Accumulated deficit | (134,951) | | | (102,208) | | | |
| Total stockholders' deficit attributable to stockholders of PRTH | (147,718) | | | (104,041) | | | |
| Non-controlling interests in consolidated subsidiaries | 1,654 | | | 1,255 | | | |
| Total stockholders' deficit | (146,064) | | | (102,786) | | | |
| Total liabilities, redeemable senior preferred stock and stockholders' deficit | $ | 1,615,337 | | | $ | 1,373,363 | | | |
Priority Technology Holdings, Inc.
M I Acquisitions, Inc.
Consolidated Statements of Operations
| | | For the Year | | | For the Year | |
| | | Ended | | | Ended | |
| | | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | |
| EXPENSES | | | | | | | | |
| Administration fee - related party | | $ | 120,000 | | | $ | 35,667 | |
| Operating costs | | | 831,721 | | | | 137,529 | |
| | | | | | | | | |
| TOTAL EXPENSES | | | 951,721 | | | | 173,196 | |
| | | | | | | | | |
| OTHER INCOME | | | | | | | | |
| Interest income | | | 399,166 | | | | 37,701 | |
| Settlement income | | | 427,701 | | | | - | |
| Extinguishment of debt | | | - | | | | 27,500 | |
| TOTAL OTHER INCOME | | | 826,867 | | | | 65,201 | |
| | | | | | | | | |
| Net loss | | $ | (124,854 | ) | | $ | (107,995 | ) |
| | | | | | | | | |
| Net loss per share of common stock - basic and diluted | | $ | (0.19 | ) | | $ | (0.06 | ) |
| | | | | | | | | |
| Weighted average shares of common stock outstanding - basic and diluted | | | 2,330,884 | | | | 1,664,794 | |
The accompanying notes are an integral part and Comprehensive Loss
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | | | | | | |
| 2023 | | 2022 | | 2021 | | | | | | | | | |
| Revenues | $ | 755,612 | | $ | 663,641 | | | $ | 514,901 | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | |
| Costs of services (excludes depreciation and amortization) | 480,307 | | 436,753 | | | 359,885 | | | | | | | | | | |
| Salary and employee benefits | 79,974 | | 65,077 | | | 43,818 | | | | | | | | | | |
| Depreciation and amortization | 68,395 | | 70,681 | | | 49,697 | | | | | | | | | | |
| Selling, general and administrative | 45,412 | | 34,965 | | | 28,408 | | | | | | | | | | |
| Total operating expenses | 674,088 | | 607,476 | | 481,808 | | | | | | | | | |
| Operating income | 81,524 | | 56,165 | | | 33,093 | | | | | | | | | | |
| Other (expense) income | | | | | | | | | | | | | | |
| Interest expense | (76,108) | | (53,554) | | | (36,485) | | | | | | | | | | |
| Debt extinguishment and modification costs | — | | — | | | (8,322) | | | | | | | | | | |
| Gain on sale of business and investment | — | | — | | | 7,643 | | | | | | | | | | |
| Other income, net | 1,736 | | 589 | | | 202 | | | | | | | | | | |
| Total other (expense) income, net | (74,372) | | (52,965) | | | (36,962) | | | | | | | | | | |
| Income (loss) before income taxes | 7,152 | | 3,200 | | | (3,869) | | | | | | | | | | |
| Income tax expense (benefit) | 8,463 | | 5,350 | | | (5,258) | | | | | | | | | | |
| Net (loss) income | (1,311) | | (2,150) | | | 1,389 | | | | | | | | | | |
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | (47,744) | | | (36,880) | | | (18,009) | | | | | | | | | | |
| Less: NCI preferred unit redemptions, net of deferred tax benefit | — | | | — | | | (8,021) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net loss attributable to common stockholders | (49,055) | | | (39,030) | | | (24,641) | | | | | | | | | | |
| Other comprehensive loss | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | (29) | | | — | | | — | | | | | | | | | | |
| Comprehensive loss | $ | (49,084) | | | $ | (39,030) | | | $ | (24,641) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Loss per common share: | | | | | | | | | | | | | | |
| Basic | $ | (0.63) | | $ | (0.50) | | | $ | (0.34) | | | | | | | | | | |
| Diluted | $ | (0.63) | | $ | (0.50) | | | $ | (0.34) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | |
| Basic | 78,333 | | 78,233 | | | 71,902 | | | | | | | | | | |
| Diluted | 78,333 | | 78,233 | | | 71,902 | | | | | | | | | | |
Priority Technology Holdings, Inc.
M I Acquisitions, Inc.
Statement
Consolidated Statements of Changes in
Stockholders’ EquityFor the Years Ended December 31, 2017Stockholders' Deficit and 2016
| | | Common Stock | | | Additional Paid-In | | | Accumulated | | | Stockholders' | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | |
| Balance, December 31, 2015 | | | 1,437,500 | | | $ | 1,438 | | | $ | 23,562 | | | $ | (10,226 | ) | | $ | 14,774 | |
| | | | | | | | | | | | | | | | | | | | | |
| Sale of 5,000,000 units | | | 5,000,000 | | | | 5,000 | | | | 49,995,000 | | | | - | | | | 50,000,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Underwriters discount and offering expenses | | | - | | | | - | | | | (3,280,484 | ) | | | - | | | | (3,280,484 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Sale of 421,107 private units | | | 421,107 | | | | 421 | | | | 4,210,649 | | | | - | | | | 4,211,070 | |
| | | | | | | | | | | | | | | | | | | | | |
| Exercise of underwriters' overallotment | | | 310,109 | | | | 310 | | | | 3,100,780 | | | | - | | | | 3,101,090 | |
| | | | | | | | | | | | | | | | | | | | | |
| Forfeiture and cancellation of 109,973 Founders' shares | | | (109,973 | ) | | | (110 | ) | | | 110 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Decrease in common stock subject to possible conversion | | | (4,748,033 | ) | | | (4,748 | ) | | | (48,933,701 | ) | | | - | | | | (48,938,449 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (107,995 | ) | | | (107,995 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | | | 2,310,710 | | | | 2,311 | | | | 5,115,916 | | | | (118,221 | ) | | | 5,000,006 | |
| | | | | | | | | | | | | | | | | | | | | |
| Decrease in common stock subject to possible conversion | | | 42,212 | | | | 42 | | | | 124,812 | | | | - | | | | 124,854 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (124,854 | ) | | | (124,854 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2017 | | | 2,352,922 | | | $ | 2,353 | | | $ | 5,240,728 | | | $ | (243,075 | ) | | $ | 5,000,006 | |
The accompanying notes are an integral partNon-Controlling Interests
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Treasury
Stock | APIC | AOCI | Accumulated
Deficit | Deficit Attributable to Stockholders | NCIs | Total |
| Shares | $ | Shares | $ |
| January 1, 2021 | 67,391 | | $ | 68 | | 451 | | $ | (2,388) | | $ | 5,769 | | $ | — | | $ | (102,013) | | $ | (98,564) | | $ | — | | $ | (98,564) | |
| Equity-classified stock-based compensation | — | | — | | — | | — | | 2,888 | | — | | — | | 2,888 | | — | | 2,888 | |
| Vesting of stock-based compensation | 465 | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Liability-classified stock-based compensation converted to equity-classified | — | | — | | — | | — | | 313 | | — | | — | | 313 | | — | | 313 | |
| Issuance of Common Stock | 7,551 | | 7 | | — | | — | | 34,381 | | — | | — | | 34,388 | | — | | 34,388 | |
| Exercise of stock options | 174 | | — | | — | | — | | 1,195 | | — | | — | | 1,195 | | — | | 1,195 | |
| Fair value of NCI preferred units redemption, net of deferred tax benefit | — | | — | | — | | — | | (8,021) | | — | | — | | (8,021) | | — | | (8,021) | |
| Fair value of common shares issued for NCI redemption | 1,428 | | 2 | | — | | — | | 9,962 | | — | | — | | 9,964 | | — | | 9,964 | |
| Share repurchases and shares withheld of taxes | (269) | | — | | 269 | | (1,703) | | — | | — | | — | | (1,703) | | — | | (1,703) | |
| Warrants issued | — | | — | | — | | — | | 11,357 | | — | | — | | 11,357 | | — | | 11,357 | |
| Dividends on redeemable senior preferred stock | — | | — | | — | | — | | (16,164) | | — | | — | | (16,164) | | — | | (16,164) | |
| Accretion of unamortized issuance costs for redeemable senior preferred stock | — | | — | | — | | — | | (1,845) | | — | | — | | (1,845) | | — | | (1,845) | |
| Change in estimate of tax basis differences | — | | — | | — | | — | | — | | — | | 566 | | 566 | | — | | 566 | |
| Net income | — | | — | | — | | — | | — | | — | | 1,389 | | 1,389 | | — | | 1,389 | |
| December 31, 2021 | 76,740 | | $ | 77 | | 720 | | $ | (4,091) | | $ | 39,835 | | $ | — | | $ | (100,058) | | $ | (64,237) | | $ | — | | $ | (64,237) | |
| Equity-classified stock-based compensation | — | | — | | — | | — | | 6,695 | | — | | — | | 6,695 | | — | | 6,695 | |
| Vesting of stock-based compensation | 925 | | 1 | | — | | — | | — | | — | | — | | 1 | | — | | 1 | |
| Issuance of profit interests in wholly-owned subsidiaries | — | | — | | — | | — | | — | | — | | — | | — | | 1,255 | | 1,255 | |
| | | | | | | | | | |
| Share repurchases | (1,621) | | (2) | | 1,621 | | (7,468) | | — | | — | | — | | (7,470) | | — | | (7,470) | |
| Dividends on redeemable senior preferred stock | — | | — | | — | | — | | (33,594) | | — | | — | | (33,594) | | — | | (33,594) | |
| Accretion of unamortized issuance costs for redeemable senior preferred stock | — | | — | | — | | — | | (3,286) | | — | | — | | (3,286) | | — | | (3,286) | |
| Net loss | — | | — | | — | | — | | — | | — | | (2,150) | | (2,150) | | — | | (2,150) | |
| | | | | | | | | | |
Priority Technology Holdings, Inc.
Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interests
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Treasury
Stock | APIC | AOCI | Accumulated
Deficit | Deficit Attributable to Stockholders | NCIs | Total |
| Shares | $ | Shares | $ |
| December 31, 2022 | 76,044 | | $ | 76 | | 2,341 | | $ | (11,559) | | $ | 9,650 | | $ | — | | $ | (102,208) | | $ | (104,041) | | $ | 1,255 | | $ | (102,786) | |
| Equity-classified stock-based compensation | — | | — | | — | | — | | 6,480 | | — | | — | | 6,480 | | — | | 6,480 | |
| ESPP compensation and vesting of stock-based compensation | 1,204 | | 1 | | — | | — | | 182 | | — | | — | | 183 | | — | | 183 | |
| Shares withheld for taxes | (291) | | — | | 291 | | (1,256) | | — | | — | | — | | (1,256) | | — | | (1,256) | |
| Dividends on redeemable senior preferred stock | — | | — | | — | | — | | (44,404) | | — | | — | | (44,404) | | — | | (44,404) | |
| Accretion of redeemable senior preferred stock | — | | — | | — | | — | | (3,340) | | — | | — | | (3,340) | | — | | (3,340) | |
| Adjustments to NCI | — | | — | | — | | — | | — | | — | | — | | — | | (403) | | (403) | |
| Issuance of profit interests/common equity in subsidiaries | — | | — | | — | | — | | — | | — | | — | | — | | 802 | | 802 | |
| Foreign currency translation adjustment | — | | — | | — | | — | | — | | (29) | | — | | (29) | | — | | (29) | |
| Reclassification of negative additional paid-in capital | — | | — | | — | | — | | 31,432 | | — | | (31,432) | | — | | — | | — | |
| Net loss | — | | — | | — | | — | | — | | — | | (1,311) | | (1,311) | | — | | (1,311) | |
| December 31, 2023 | 76,957 | | $ | 77 | | 2,632 | | $ | (12,815) | | $ | — | | $ | (29) | | $ | (134,951) | | $ | (147,718) | | $ | 1,654 | | $ | (146,064) | |
Priority Technology Holdings, Inc.
Consolidated Statements of Cash Flows
| | | For the Year | | | For the Year | |
| | | Ended | | | Ended | |
| | | December 31, 2017 | | | December 31, 2016 | |
| | | | | | | |
| Cash Flows From Operating Activities: | | | | | | | | |
| Net loss | | $ | (124,854 | ) | | $ | (107,995 | ) |
| Gain on extinguishment of debt | | | - | | | | (27,500 | ) |
| Interest earned on cash and securities held in Trust Account | | | (399,166 | ) | | | (37,701 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Formation and organization costs paid by related parties | | | - | | | | 2,537 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Prepaid expenses | | | 46,305 | | | | (56,241 | ) |
| Accounts payable and accrued expenses | | | 238,281 | | | | 111,011 | |
| Accrued offering costs payable | | | - | | | | (34,383 | ) |
| Net Cash Used In Operating Activities | | | (239,434 | ) | | | (150,272 | ) |
| | | | | | | | | |
| Cash Flows From Investing Activities: | | | | | | | | |
| Cash deposited into Trust Account | | | (22,607 | ) | | | (54,694,127 | ) |
| Interest released from Trust Account | | | 71,702 | | | | | |
| Net Cash Provided By (Used In) Investing Activities | | | 49,095 | | | | (54,694,127 | ) |
| | | | | | | | | |
| Cash Flows From Financing Activities: | | | | | | | | |
| Proceeds from public offering, net of offering costs | | | - | | | | 51,202,624 | |
| Proceeds from insider units | | | - | | | | 4,211,070 | |
| Payments of related party notes | | | - | | | | (131,720 | ) |
| Proceeds from related party advances | | | - | | | | 55,201 | |
| Payments of related party advances | | | - | | | | (55,201 | ) |
| Payments of offering costs | | | - | | | | (80,040 | ) |
| Net Cash Provided By Financing Activities | | | - | | | | 55,201,934 | |
| | | | | | | | | |
| Net change in cash and cash equivalents | | | (190,339 | ) | | | 357,535 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 362,535 | | | | 5,000 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 172,196 | | | $ | 362,535 | |
| | | | | | | | | |
| Supplemental disclosure of non-cash financing activities: | | | | | | | | |
| Payment of deferred offering costs by issuance of notes and related party notes | | $ | - | | | $ | 15,000 | |
| Reclassification of deferred offering costs to equity | | $ | - | | | $ | 258,997 | |
| Accrual of offering costs | | $ | - | | | $ | 45,999 | |
| Change in common stock subject to possible conversion | | $ | 124,854 | | | $ | 48,938,449 | |
| Deferred Underwriting commission | | $ | - | | | $ | 1,062,022 | |
(in thousands)
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| 2023 | | 2022 | | 2021 | | |
| Cash flows from operating activities: | | | | | | | |
| Net (loss) income | $ | (1,311) | | | $ | (2,150) | | | $ | 1,389 | | | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | |
| Gain and transaction costs recognized on sale of business and investment | — | | | — | | | (7,643) | | | |
| Depreciation and amortization of assets | 68,395 | | | 70,681 | | | 49,697 | | | |
| Stock-based, ESPP and incentive units compensation | 6,769 | | | 6,228 | | | 3,213 | | | |
| Amortization of debt issuance costs and discounts | 3,849 | | | 3,521 | | | 2,305 | | | |
| Write-off of deferred loan costs and discount | — | | | — | | | 2,580 | | | |
| Deferred income tax | (6,086) | | | (8,183) | | | (2,559) | | | |
| Change in contingent consideration | (1,639) | | | 2,059 | | | — | | | |
| PIK interest (paid) | — | | | — | | | (23,715) | | | |
| | | | | | | |
| Other non-cash items, net | (3,924) | | | 74 | | | 462 | | | |
| Change in operating assets and liabilities: | | | | | | | |
| Accounts receivable | 24,471 | | | (19,580) | | | (16,694) | | | |
| Prepaid expenses and other current assets | (936) | | | (160) | | | (1,597) | | | |
| Income taxes (receivable) payable | (273) | | | 6,260 | | | (5,107) | | | |
| Notes receivable | (912) | | | 377 | | | 333 | | | |
| Accounts payable and other accrued liabilities | (3,218) | | | 19,794 | | | 7,018 | | | |
| Customer deposits and advance payments | 1,102 | | | (2,403) | | | 2,138 | | | |
| Other assets and liabilities, net | (5,031) | | | (6,000) | | | (2,443) | | | |
| Net cash provided by operating activities | 81,256 | | | 70,518 | | | 9,377 | | | |
| Cash flows from investing activities: | | | | | | | |
| Acquisition of business, net of cash acquired | (28,222) | | | (4,976) | | | (407,129) | | | |
| Proceeds from sale of business and investment | — | | | — | | | 15,278 | | | |
| Additions to property, equipment and software | (21,256) | | | (18,882) | | | (9,719) | | | |
| Notes receivable, net | 376 | | | (4,662) | | | — | | | |
| Acquisitions of assets and other investing activities | (6,646) | | | (7,983) | | | (49,463) | | | |
| | | | | | | |
| Net cash used in investing activities | (55,748) | | | (36,503) | | | (451,033) | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of long-term debt, net of issue discount | 49,750 | | | — | | | 607,318 | | | |
| Debt issuance and modification costs paid | (1,220) | | | — | | | (9,073) | | | |
| Repayments of long-term debt | (6,328) | | | (6,200) | | | (361,425) | | | |
| Borrowings under revolving credit facility | 44,000 | | | 29,500 | | | 30,000 | | | |
| Repayments of borrowings under revolving credit facility | (56,500) | | | (32,000) | | | (15,000) | | | |
| Proceeds from the issuance of redeemable senior preferred stock, net of discount | — | | | — | | | 219,062 | | | |
| Redeemable senior preferred stock issuance fees and costs | — | | | — | | | (8,098) | | | |
| | | | | | | |
| Repurchases of Common Stock and shares withheld for taxes | (1,256) | | | (7,468) | | | (1,703) | | | |
| Dividends paid to redeemable senior preferred stockholders | (24,718) | | | (11,459) | | | (7,460) | | | |
| Profit distributions to redeemable NCIs of subsidiaries | — | | | — | | | (815) | | | |
| Proceeds from exercise of stock options | — | | | — | | | 1,196 | | | |
| Settlement and customer/subscriber accounts obligations, net | 211,077 | | | 43,143 | | | 417,627 | | | |
| Payment of contingent consideration related to business combination | (4,700) | | | (7,014) | | | — | | | |
| | | | | | | |
Priority Technology Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| 2023 | | 2022 | | 2021 | | |
| Net cash provided by financing activities | 210,105 | | | 8,502 | | | 871,629 | | | |
| Net change in cash and cash equivalents and restricted cash: | | | | | | | |
| Net increase in cash and cash equivalents, and restricted cash | 235,613 | | | 42,517 | | | 429,973 | | | |
| Cash and cash equivalents and restricted cash at beginning of period | 560,610 | | | 518,093 | | | 88,120 | | | |
| Cash and cash equivalents and restricted cash at end of period | $ | 796,223 | | | $ | 560,610 | | | $ | 518,093 | | | |
| | | | | | | |
| Reconciliation of cash and cash equivalents, and restricted cash: | | | | | | | |
| Cash and cash equivalents | $ | 39,604 | | | $ | 18,454 | | | $ | 20,300 | | | |
| Restricted cash | 11,923 | | | 10,582 | | | 28,859 | | | |
Cash and cash equivalents included in settlement assets and customer/subscriber account balances (see Note 4) | 744,696 | | | 531,574 | | | 468,934 | | | |
| Total cash and cash equivalents, and restricted cash | $ | 796,223 | | | $ | 560,610 | | | $ | 518,093 | | | |
| | | | | | | |
| Supplemental cash flow information: | | | | | | | |
| Cash paid for interest | $ | 75,859 | | | $ | 46,907 | | | $ | 26,056 | | | |
| Cash paid for income taxes, net of refunds | $ | 12,917 | | | $ | 6,744 | | | $ | 2,212 | | | |
| Non-cash investing and financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cash portion of dividend payable and ticking fee for redeemable senior preferred stock(1) | $ | (7,027) | | | $ | (5,341) | | | $ | — | | | |
| Contingent consideration accrual | $ | 5,951 | | | $ | 6,079 | | | $ | 3,000 | | | |
| Adjustment to value of profit interest unit | $ | (404) | | | $ | — | | | $ | — | | | |
| Issuance of NCI | $ | 184 | | | $ | 1,255 | | | $ | — | | | |
| Measurement period adjustment to purchase price | $ | 111 | | | $ | — | | | $ | — | | | |
| Notes receivable from sellers used as partial consideration for acquisitions | $ | — | | | $ | — | | | $ | 3,499 | | | |
| Forfeiture of liability-classified award | $ | — | | | $ | 325 | | | $ | — | | | |
| Change in ESPP liability | $ | — | | | $ | 143 | | | $ | — | | | |
| Non-cash additions to other noncurrent assets for right-of-use operating leases | $ | 1,520 | | | $ | 1,722 | | | $ | 234 | | | |
(1)The dividend payable for year ended December 31, 2023, was paid on January 2, 2024. The dividend payable for year ended December 31, 2022, was paid on January 2, 2023.
Priority Technology Holdings, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies
The Business
Headquartered in Alpharetta, GA, the Company began operations in 2005 with a mission to build a merchant-inspired payments platform that would advance the goals of its customers and partners. Our approach leverages a single platform to collect, store, lend and send money that operates at scale. Our technology supports high-value payments products complemented by our personalized support. We are a leading provider to businesses, enterprises and distribution partners such as retail ISOs, FIs, wholesale ISOs and ISVs.
The Company operates from a purpose-built business platform that includes tailored customer service offerings and bespoke technology development, allowing the Company to provide end-to-end solutions for payment and payment-adjacent needs.
The Company provides:
•SMB payments processing solutions for B2C transactions through ISOs, FIs, ISVs and other referral partners. Our proprietary MX platform for B2C payments provides merchants a fully customizable suite of business management solutions. We enable customers to accept card, electronic and digital-based payments at the point of sale by providing a suite of services.
•B2B payments solutions such as automated vendor payments and professionally curated managed services to industry leading FIs and networks. Our proprietary B2B CPX platform was developed to be a best-in-class solution for buyer/supplier payment enablement. Our Plastiq payables management software helps businesses improve cash flow with instant access to working capital, while automating and enabling control over all aspects of accounts receivable and payable.
•Enterprise payments solutions for ISVs and other third parties that allow them to leverage the Company's core payments engine via robust API resources and high-utility embeddable code and consulting and development solutions focused on the increasing demand for integrated payments solutions for transitioning to the digital economy. Our BaaS features transaction monitoring, draft authorization audits, fee collection practice monitoring, and other services.
The Company provides its services through three reportable segments: 1) SMB Payments; 2) B2B Payments; and 3) Enterprise Payments. For additional information about our reportable segments, see Note 18. Segment Information. To provide many of its services, the Company enters into agreements with payment processors which in turn, have agreements with multiple card associations. These card associations comprise an alliance aligned with insured FIs ("member banks") that work in conjunction with various local, state, territory and federal government agencies to make the rules and guidelines regarding the use and acceptance of credit and the card associations. The Company has multiple sponsorship bank agreements and is itself a registered ISO with Visa. The Company is also a registered member service provider with Mastercard. The Company's sponsorship agreements allow the capture and processing of electronic data in a format to allow such data to flow through networks for clearing and fund settlement of merchant transactions. The Company also offers money transmission services in 46 U.S. states, the District of Columbia and two U.S. territories.
Basis of Presentation and Consolidation
The accompanying
notes are an integral part of these financial statements.
M I Acquisitions, Inc.
Notes toConsolidated Financial Statements
Note 1 — Organization, Plan include the accounts of Business Operations and Going Concern Consideration
M I Acquisitions, Inc. (the “Company”) was incorporated in Delaware on April 23, 2015 as a blank check company whose objective is to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities (a “Business Combination”). The Company’s efforts to identify a prospective target business will not be limited to any particular industry or geographic region, although the Company intendsand its majority-owned subsidiaries. The Company generally utilizes the equity method of accounting when it has an ownership interest of between 20% and 50% in an entity, provided the Company is able to focus its search on target businesses operatingexercise significant influence over the investee's operations. All material intercompany balances and transactions have been eliminated in consolidation.
NCI represents the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100% of the interests. Changes in the
technology, media and telecommunications industries.At December 31, 2017,Company's ownership interest while the Company had not yet commencedretains its controlling
interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any operations.gain or loss recognized in earnings. For 2023, there was no income or loss attributable to NCI in accordance with the applicable operating agreements.
The results for the year ended December 31,
2017,2023, include the
Company’s activity has been limited to the evaluation of business combination candidates, and the Company will not be generating any operating revenues until the closing and completion of an initial business combination.The registration statement for the Company’s initial public offering was declared effective on September 13, 2016. The Company consummated a public offering of 5,000,000 units (“Units”) on September 19, 2016 (the “Offering”), generating gross proceeds of $50,000,000 and net proceeds of $47,981,581 after deducting $2,018,419 of transaction costs. In addition, the Company generated gross proceeds of $4,025,000 from the private placement of 402,500 units (the “Private Placement”) to certain initial stockholders (“Initial Stockholders”)post-acquisition results of the Company. Plastiq business which was acquired through Chapter 11 bankruptcy process on July 31, 2023.
Use of Estimates
The
Units sold pursuant to the Offering and the Private Placement were sold at an offering pricepreparation of
$10.00 per Unit. The Company also incurred additional issuance costs totaling $1,169,032, of which the deferred underwriting fee of $1,062,022 was unpaid as of December 31, 2017.The underwriters exercised the over-allotment option in part and, on October 14, 2016, the underwriters purchased 310,109 Over-allotment Option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $3,101,090 and net proceeds of $3,008,057 after deducting $93,033 of transaction costs. On October 14, 2016, simultaneously with the sale of the over-allotment Units, the Company consummated the private sale of an additional 18,607 private Units to one of the initial stockholders, generating gross proceeds of $186,070.
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Offering and Private Placement, although substantially all of the net proceeds are intended to be generally applied toward consummating a Business Combination. The Company’s Units, common stock and warrants are listed on the Nasdaq Capital Market (“NASDAQ”). Pursuant to the NASDAQ listing rules, the Company’s initial Business Combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of the balance in the trust account at the time of the execution of a definitive agreement for such Business Combination, although this may entail simultaneous acquisitions of several target businesses. There is no assurance that the Company will be able to effect a Business Combination successfully.
Following the closing of the Offering and the Private Placement (including the partial exercise of the over-allotment option) an amount of $54,694,127 (or $10.30 per share sold to the public in the Offering included in the Units (“Public Shares”)) from the sale of the Units and Private Units is being held in a trust account (“Trust Account”) at J.P. Morgan Chase Bank maintained by American Stock Transfer & Trust Company, acting as trustee, and may be invested in money market funds meeting the applicable conditions of Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended, and that invest solely in U.S. treasuries or United States bonds, treasuries or notes having a maturity of 180 days or less. The funds in the Trust Account may not be released until the earlier of (i) the consummation of the Company’s initial Business Combination and (ii) the Company’s failure to consummate a Business Combination within the prescribed time. The remaining net proceeds (not held in the Trust Account) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. However, the interest earned on the Trust Account balance may be released to the Company to pay the Company’s tax obligations. Placing funds in the Trust Account may not protect those funds from third party claims against the Company. Although the Company will seek to have all vendors, service providers, prospective target businesses or other entities it engages, execute agreements with the Company waiving any claim of any kind in or to any monies held in the Trust Account, there is no guarantee that such persons will execute such agreements. The Company’s insiders will agree to be liable under certain circumstances to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or vendors or other entities that are owed money by the Company for service rendered, contracted for or products sold to the Company. However, they may not be able to satisfy those obligations should they arise. With these exceptions, expenses incurred by the Company may be paid prior to a Business Combination only from the net proceeds of the Proposed Public Offering not held in the Trust Account; provided, however, that in order to meet its working capital needs following the consummation of the Proposed Public Offering, the Company’s Initial Stockholders, officers and directors or their affiliates may, but are not obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion. Each loan would be evidenced by a promissory note. The notes would either be paid upon consummation of the Company’s initial Business Combination, without interest, or, at the lender’s discretion, up to $200,000 of the notes may be converted upon consummation of the Company’s Business Combination into additional Private Units at a price of $10.00 per Unit. If the Company does not complete a Business Combination, the loans would not be repaid.
The Company will either seek stockholder approval of any Business Combination at a meeting called for such purpose at which stockholders may seek to convert their shares into their pro rata share of the aggregate amount then on deposit in the Trust Account, less any tax obligations then due but not yet paid, or provide stockholders with the opportunity to sell their shares to the Company by means of a tender offer for an amount equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, less any tax obligations then due but not yet paid. The Company will proceed with a Business Combination only if it will have net tangible assets of at least $5,000,001 upon consummation of the Business Combination and, solely if stockholder approval is sought, a majority of the outstanding common shares of the Company voted are voted in favor of the Business Combination. Notwithstanding the foregoing, a public stockholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking conversion rights with respect to 20% or more of the common shares sold in the Offering. Accordingly, all shares purchased by a holder in excess of 20% of the shares sold in the Offering will not be converted to cash.
In connection with any stockholder vote required to approve any Business Combination, the Initial Stockholders agreed (i) to vote any of their respective shares, including the common shares sold to the Initial Stockholders in connection with the organization of the Company (the “Initial Shares”), common shares included in the Private Units sold in the Private Placement, and any common shares which were initially issued in connection with the Offering, whether acquired in or after the effective date of the Offering, in favor of the initial Business Combination and (ii) not to convert such respective shares into a pro rata portion of the Trust Account or seek to sell their shares in connection with any tender offer the Company engages in.
Pursuant to the Company’s amended and restated Certificate of Incorporation if the Company is unable to complete its initial Business Combination by April 19, 2018, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem 100% of the outstanding public shares and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining holders of common stock and the Company’s board of directors, dissolve and liquidate.
We have extended the time to complete an initial business combination to April 19, 2018 by depositing $132,753 into our trust account. However, if we anticipate that we may not be able to consummate our initial business combination by April 19, 2018 (as seems likely), we may extend the period of time to consummate a business combination up to two additional times, each by an additional one month (for a total of up to 21 months to complete a business combination). Pursuant to the terms of our amended and restated articles of incorporation and the trust agreement to be entered into between us and American Stock Transfer & Trust Company, LLC on the date of the IPO, in order to extend the time available for us to consummate our initial business combination, our insiders or their affiliates or designees, upon five days advance notice prior to the applicable deadline, must deposit into the trust account $132,753 ($0.025 per unit in either case), up to an aggregate of $398,258, or $0.075 per unit (if our life is extended three times), on or prior to the date of the applicable deadline, for each one month extension (we have already deposited $132,753 for the first extension). The insiders received for the first deposit and and they or their designees will receive for any subsequent deposits a non-interest bearing, unsecured promissory note equal to the amount of any such deposit that will not be repaid in the event that we are unable to close a business combination unless there are funds available outside the trust account to do so. . In the event that the Company receives notice from its insiders five days prior to the applicable deadline of their intent to effect an extension, the Company intends to issue a press release announcing such intention at least three days prior to the applicable deadline. In addition, the Company intends to issue a press release the day after the applicable deadline announcing whether or not the funds had been timely deposited. The Company’s insiders and their affiliates or designees are not obligated to fund the trust account to extend the time for the Company to complete its initial Business Combination. To the extent that some, but not all, of the Company’s insiders, decide to extend the period of time to consummate the initial Business Combination, such insiders (or their affiliates or designees) may deposit the entire $398,259. If the Company is unable to consummate an initial Business Combination and is forced to redeem 100% of the outstanding public shares for a pro rata portion of the funds held in the Trust Account, each holder will receive a pro rata portion of the amount then in the Trust Account less tax obligations. Holders of warrants will receive no proceeds in connection with the liquidation. The Initial Stockholders and the holders of Private Units will not participate in any redemption distribution with respect to their initial shares and Private Units, including the common stock included in the Private Units.
To the extent the Company is unable to consummate a business combination, the Company will pay the costs of liquidation from the remaining assets outside of the trust account. If such funds are insufficient, the insiders have agreed to pay the funds necessary to complete such liquidation (currently anticipated to be no more than $15,000) and have agreed not to seek repayment of such expenses.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2017, the Company had $172,196 in cash and cash equivalents held outside Trust Account, $399,166 in interest income available from the Company’s investments in the Trust Account to pay its tax obligations, and a working capital deficit of $206,276. Further, the Company has incurred and expects to continue to incur significant costs in pursuit of its financing and acquisition plans. The Company’s plans to raise capital or to consummate the initial Business Combination may not be successful. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Based on the foregoing, the Company may have insufficient funds available to operate its business through the earlier of consummation of a Business Combination or June 19, 2018 (if an extension is completed). Following the initial Business Combination, if cash on hand is insufficient, the Company may need to obtain additional financing in order to meet its obligations. The Company cannot be certain that additional funding will be available on acceptable terms, or at all.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 2 — Significant Accounting Policies
Basis of presentation
The accompanying financial statements are presentedConsolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Emerging Growth Company
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) 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. The Company has 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, the Company, 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 the Company’s financial statement with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
Marketable securities held in Trust Account
The amounts held in the Trust Account represent substantially all of the proceeds of the Initial Public Offering and are classified as restricted assets since such amounts can only be used by the Company in connection with the consummation of a Business Combination. Except with respect to interest earned on the funds held in the Trust Account that may be released to pay income or other tax obligations, the proceeds will not be released from the Trust Account until the earlier of the completion of a Business Combination or the redemption of 100% of the outstanding public shares if we have not completed a Business Combination in the required time period. As of December 31, 2017, marketable securities held in the Trust Account consisted of $55,081,899 in United States Treasury Bills with an original maturity of six months or less. During the year ended December 31, 2017, the Company withdrew interest income totaling $71,702 to be utilized for payment of tax obligations. Of this amount, $22,607 was returned to the Company for overpayment of its tax obligations and deposited into the Trust Account.
Fair value of financial instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet, primarily due to their short-term nature.
Use of Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements.Consolidated Financial Statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.
Concentration
Significant Accounting Policies
Revenue Recognition
The Company applies the five-step model to assess its contracts with customers. At contract inception, the Company assesses the services and goods promised in its contracts with customers and identifies the performance obligation for each promise to transfer a distinct good or service to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring a service or good to the customer in an amount to which the Company expects to be entitled (i.e., transaction price) allocated to the distinct services or goods. The Company has elected the permitted practical expedient that allows it to use the portfolio approach for many of
credit riskFinancial instrumentsits contracts since this approach's impact on the financial statements, when applied to a group of contracts (or performance obligations) with similar characteristics, is not materially different from the impact of applying the revenue standard on an individual contract basis. Under the portfolio practical expedient, collectability is still assessed at the individual contract level when determining if a contract exists. The Company has elected to exclude any contracts with an original duration of one year or less and any variable consideration that potentially subjectmeets specified criteria from its disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance.
In delivering payment services to the customer, the Company may also provide a limited license agreement to the customer for the use of one or more of the Company's proprietary cloud-based software applications. The Company grants a right to use its software applications only when the customer has contracted with the Company to concentrationreceive related payment services. When combined with the underlying payment services, the license and the payment services provided to the customer are a single stand-ready obligation and the Company's performance obligation is defined by each time increment, rather than by the underlying activities, (quantity and timing of which is not determinable),satisfied over time based on days elapsed.
In order to provide our payment services, we obtain authorization for the transaction and request funds settlement from the card issuing financial institution through the payment network. When third parties are involved in the transfer of services or goods to the customer, the Company considers the nature of each specific promised service or good and applies judgment to determine whether the Company controls the service or good before it is transferred to the customer or whether the Company is acting as an agent of the third party. To determine whether the Company controls the service or good, it assesses indicators including: 1) which party is primarily responsible for fulfillment; 2) which party has discretion in determining pricing for the service or good; and 3) other considerations deemed to be applicable to the specific situation. Based on our assessment of these indicators, we have concluded that the promise to our customers to provide payment services is distinct from the services provided by the card issuing FIs and payment networks in connection with payment transactions. We do not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card issuing FIs and payment networks before those services are transferred to our customer, and on that basis, we do not control those services prior to being transferred to our customer. As a result, we present our revenues net of the interchange fees retained by the card issuing FIs and the fees charged by the payment networks.
SMB Payments– The Company's SMB Payments segment enables the Company's customers to accept card, electronic and digital-based payments at the point of sale by providing a suite of services including authorization, settlement and funding, customer support and help-desk functions, chargeback resolution, payment security, consolidated billing and statements, and
online reporting. Additionally, the Company enables customers to accept card, electronic and digital-based payments at the point of sale by providing a suite of services. The Company also earns revenue and commissions from resale of electronic POS equipment and certain subscription coupons.
Typically, revenues generated from these transactions are based on a variable percentage of the dollar amount of each transaction, and in some instances, additional fees (e.g., statement fees, annual fees and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services) are charged for each transaction. The Company's sponsoring banks collect the gross merchant discount from the card holder's issuing bank, pay the interchange fees and assessments to the payment networks and credit riskcard associations, retain their fees, and pay to the Company the net amount which represents the Company's revenue.
B2B Payments– The Company's B2B Payments segment enables the Company's customers to automate their accounts payable and other commercial payments functions with the Company's payment services that utilize physical and virtual payment cards as well as ACH transactions. The Company also provides cost-plus-fee turn-key business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of Electronic Payments. Revenues are generally earned on a per-transaction basis and are recognized by the Company net of certain third-party costs for interchange fees, assessments to the payment networks, credit card associations fees, sponsor bank fees and rebates to customers.
The Company's payables management software helps businesses improve cash flow with instant access to working capital, while automating and enabling control over all aspects of accounts receivable and payable. For these transactions, the Company acts as a merchant of record, therefore, considered as the principal and accordingly presents its revenue on a gross basis. The Company also offers volume rebates as an incentive to increase business and customer engagement. These rebates are presented as net of revenue. Transaction processing costs, including interchange fees, are presented as costs of revenue.
Enterprise Payments– The Company's Enterprise Payments segment uses payment-adjacent technologies to facilitate the acceptance of Electronic Payments from customers.
Revenue from the Enterprise Payments segment consists of the following:
•Enrollment fees: The revenue associated with enrollment fees is recognized upon the receipt of a fully executed enrollment application, completion of the customer account setup, data verification and the constructive receipt of the applicable non-refundable fee.
•Subscription fees: The Company recognizes monthly subscription fees as recurring maintenance fees each month during the term of the client's enrollment. Revenue from transaction-based fees is recognized upon constructive receipt of transaction fees for payments to creditors issued via ACH payments, paper checks or wire transfers. These fees are transferred to the Company from the customer account balances, which may be maintained by the Company in money transmission license trust accounts or by partner banks.
•Interest revenue: Interest revenue is derived from certain customer balances maintained in interest bearing accounts with select partner banks.
•CRM and consulting fees: CRM license fees are recognized on a monthly basis and consulting fees are recognized when services are performed.
A substantial portion of this segment's revenues are earned as an agent of a third party, and therefore this earned revenue is reported as a net amount within revenue.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. However, as allowed by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original
duration of one year or less and any variable consideration that meets specified criteria. As described above, the Company's most significant performance obligations consist of cash accountsvariable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion. Therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
Cost of Services
Costs of merchant card fees primarily consist of residual payments to agents and ISOs and other third-party costs directly attributable to payment processing. The residual payments represent commissions paid to agents and ISOs based upon a percentage of the net revenues generated from merchant transactions. Costs of outsourced services and other revenue consist of salaries directly related to outsourced services revenue, the cost of equipment (point of sale terminals) sold, and third-party fees and commissions related to the Company's ACH processing activities.
Contracts with Customers and Contract Costs
The Company accrues and pays commission expense based on variable merchant payment volumes and for certain customer service and other services provided by its ISOs. Since commission expenses are accrued and paid to ISOs on a monthly basis after the merchant enters into a new or renewed contract, these are not deemed to be a cost to acquire a new contract but they are reported within costs of services on our Consolidated Statements of Operations and Comprehensive Loss. The ISO is typically an independent contractor or agent of the Company.
The Company may occasionally elect to buy out all or a portion of an ISO's rights to receive future commission payments related to certain merchants. Amounts paid to the ISO for these residual buyouts are capitalized and amortized over the useful life on a straight-line basis under the accounting guidance for intangible assets and included in intangible assets, net on our Consolidated Balance Sheets.
The Company pays bonuses to certain ISOs for meeting established performance criteria which results in a continued benefit to the Company for future periods. The incremental costs are incurred to secure a future stream of revenue and are recorded as contract acquisitions costs and are amortized over the estimated time on which benefit is expected to be received.
A contract with a customer creates a legal right and obligation. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company's right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues recognized in excess of the amount billed to the customer is recognized as a contract asset. Contract liabilities represent consideration received from customers in excess of revenues recognized. Material contract assets and liabilities are presented net at the individual contract level in the Consolidated Balance Sheets and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
Contract Acquisition Costs
The Company pays certain bonuses to it's ISOs for boarding incremental merchants which the Company expects to obtain benefit from in future periods. These bonuses are recorded as contract acquisition costs and are amortized over five years. Net contract acquisition costs were $6.6 million and $2.1 million at December 31, 2023 and 2022, respectively. Amortization expense for contract acquisition costs for the years ended December 31, 2023 and 2022 was $1.0 million and $0.2 million, respectively. Amortization expense for the year ended December 31, 2021, was immaterial.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents includes highly liquid instruments with an original maturity of three months or less, and cash owned by the Company that is held in financial institutioninstitutions. Restricted cash is held by the Company in financial institutions for the purpose of in-process customer settlements or reserves held per contact terms.
Accounts Receivable, net
Accounts receivable is stated net of allowance for current period credit losses for any uncollectible amounts and are amounts primarily due from the Company's sponsor banks for revenues earned, net of related interchange and processing fees, and do not bear interest. Other types of accounts receivable are from agents, merchants and other customers. Amounts due from sponsor banks are typically paid within 30 days following the end of each month.
Inventory
Inventory consists primarily of POS terminals and certain subscription coupons which is carried at timesthe lower of cost or net realizable value. Cost is equal to the purchase price and other expenses incurred with acquiring the inventory and is substantially valued using the weighted average cost method. The carrying amount is reduced when items are determined to be obsolete/expired.
Notes Receivable
Notes receivable are primarily comprised of notes receivable from ISOs under the terms of the agreements the Company preserves the right to hold back residual payments due to the ISOs and to apply such residuals against future payments due to the Company. Notes receivable are recorded at the unpaid principal balance. Interest on notes receivable is recognized on a monthly basis and is included in interest income. See Note 5. Notes Receivable. Allowance for Expected Losses
The Company utilizes a combination of aging and loss-rate methodologies to develop an estimate of current expected credit losses based on the nature and risks associated with the underlying asset pool. A broad range of factors are considered during the estimation of the allowance including historical losses, adjustments for current conditions and future trends. The Company may exceedalso utilize a mix of qualitative and quantitative risk factors within its estimation. The allowance for expected loss from accounts receivable was $5.3 million and $1.1 million at December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, there was no allowance for expected loss on notes receivable. SeeNote 5. Notes Receivable. As of December 31, 2023 and 2022, the Federal depository insurance coverageallowance for expected losses on settlement assets was $6.6 million and $5.0 million, respectively. See Note 4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations. A reconciliation of $250,000. the beginning and ending amount of allowance for expected losses is as follows for the year ended December 31, 2023: | | | | | | | | | | | | | |
| (in thousands) | Trade Receivables | | | | Settlement assets |
| Balance at January 1, 2023 | $ | (1,143) | | | | | $ | (4,976) | |
| Charge-offs (recoveries), net | 130 | | | | | 3,407 | |
Provision(1) | (4,276) | | | | | (4,989) | |
| Balance at December 31, 2023 | $ | (5,289) | | | | | $ | (6,558) | |
(1)Provision for trade receivables includes restructuring related costs of $3.5 million
The Company has elected not experiencedto measure expected losses for accrued interest on notes receivable but instead recognize losses for accrued interest within the period losses are incurred.
Customer Deposits and Advance Payments
The Company may receive cash payments from certain customers and vendors that require future performance obligations by the Company. Amounts associated with obligations expected to be satisfied within one year are reported in customer deposits and advance payments on the Company's Consolidated Balance Sheets and amounts associated with obligations expected to be satisfied after one year are reported as a component of other noncurrent liabilities on the Company's Consolidated Balance Sheets. These payments are subsequently recognized in the Company's Consolidated Statements of Operations and Comprehensive Loss when the Company satisfies the performance obligations required to retain and earn these deposits and advance payments.
A vendor may make an upfront payment to the Company to offset costs that the Company incurs to integrate the vendor into the Company's operations. These upfront payments are deferred by the Company and are subsequently amortized against expense in its Consolidated Statements of Operations and Comprehensive Loss as the related costs are incurred by the Company in accordance with the agreement with the vendor.
Property and Equipment
Property and equipment are stated at cost, except for property and equipment acquired in a business combination, which is recorded at fair value at the time of the transaction. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance which do not extend the useful life of the respective assets are charged to expense as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. At the time of retirements, sales or other dispositions of property and equipment, the original cost and related accumulated depreciation are removed from the respective accounts and management believesthe gains or losses are presented as a component of income or loss from operations.
| | | | | |
| Property, equipment and software | Estimated Useful Life |
| Furniture and fixtures | 5 - 10 years |
| Equipment | 3 - 8 years |
| Computer software | 2 - 5 years |
| Leasehold improvements | 3 - 10 years |
Costs Incurred to Develop Software for Internal Use
Costs incurred to develop or obtain internal-use software and implementation costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The Company uses an agile development methodology in which feature-by-feature updates are made to its software. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized using the straight-line method over the estimated useful life of the software, which generally range from two to five years. Maintenance costs including those in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case such costs are capitalized and amortized using the straight-line method over the estimated useful life of the software.
Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product. For the year ended December 31, 2023, there was accelerated depreciation for internal-use software of $0.3 million from certain restructuring costs. There were no impairment charges associated with internal-use software for the years ended December 31, 2022 and 2021.
For the years ended December 31, 2023, 2022 and 2021, the Company capitalized software development costs of $21.3 million, $16.8 million and $7.8 million, respectively. As of December 31, 2023 and 2022, capitalized software development costs, net of accumulated amortization, totaled $40.6 million and $28.1 million, respectively, and are included in property, equipment and software, net on the Consolidated Balance Sheets.
Amortization expense for capitalized software development costs for the years ended December 31, 2023, 2022 and 2021 was $9.4 million, $6.9 million and $5.9 million, respectively, and are included in depreciation and amortization on the Consolidated Statements of Operations and Comprehensive Loss.
Other Intangible Assets
Other intangible assets are initially recorded at cost or fair value when acquired in connection with a business combination. The carrying value of an intangible asset acquired in an asset acquisition may subsequently be increased for contingent consideration when due to the seller and such amounts can be estimated. The portion of any unpaid purchase price that is contingent on future activities is not initially recorded by the Company on the date of acquisition. Rather, the Company recognizes contingent consideration when it becomes probable and estimable. All of the Company's intangible assets, except goodwill and money transmission licenses, have finite lives and are subject to amortization. Intangible assets consist of acquired merchant portfolios, customer relationships, ISO and referral partner relationships, residual buyouts, trade names, technology, non-compete agreements and money transmission licenses.
| | | | | | | | |
| Intangible Asset | Nature | Estimated Useful Life |
| ISO and Referral Partner Relationships | Acquired relationships with ISOs and referral partners | 11 – 25 years |
| Residual Buyouts | Surrender of rights to receive commissions by ISOs | 3 – 9 years |
| Customer Relationships | Acquired customer relationships | 2 – 10 years |
| Merchant Portfolios | Acquired rights to a portfolio of merchants | 5 – 10 years |
| Technology | Acquired proprietary software and website domains | 6 – 10 years |
| Trade Names and Non-compete Agreements | Acquired trade names and non-compete agreements | 3 – 10 years |
| Money Transmission Licenses | Acquired licenses to collect, store, lend and send money in 46 U.S. states, the District of Columbia and two U.S. territories. | indefinite |
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. For long-lived assets, except goodwill, an impairment loss is indicated when the undiscounted future cash flows estimated to be generated by the asset group are not sufficient to recover the carrying value of the asset group. If indicated, the loss is measured as the excess of carrying value over the asset groups' fair value, as determined based on discounted future cash flows. The Company concluded there were no indications of impairment for the years ended December 31, 2023, 2022 and 2021. See Note 7. Goodwill and Other Intangible Assets. Goodwill
The Company tests goodwill for impairment on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. The test for goodwill impairment may be a qualitative or a quantitative analysis depending on the facts and circumstances associated with the reporting unit. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value. See Note 7. Goodwill and Other Intangible Assets for further information. Leases
The Company evaluates lease and service arrangements at lease inception to determine if the arrangement is a lease or contains a lease. Lease arrangements are evaluated at their commencement date to determine classification as operating or finance. Operating leases are reported as part of other noncurrent assets, accounts payable and accrued expenses and other noncurrent liabilities on the Company's Consolidated Balance Sheets. Finance leases, if applicable, are reported as part of property, equipment and software, net, and debt on the Company's Consolidated Balance Sheets. Leases with a term of twelve months or less are generally not included on the Company's Balance Sheets. The Company does not separate lease and non-lease components. Certain estimates and assumptions are made when determining the value of ROU Assets and the related liabilities, including when establishing the lease term and discount rates and variable lease payments (e.g., rent escalations tied to changes in the Producer Price Index). The lease term for all of the Company's leases includes the non-cancelable period of the lease adjusted for any renewal or termination options the Company is reasonably certain to exercise. The lease payment stream includes any rent escalation that is required under certain lease agreements. The Company's leases generally do not exposedprovide an
implicit rate of interest, nor is it readily determinable by the Company, and as such the Company uses its incremental borrowing rate in determining the discounted value of the lease payments. Lease expense and depreciation expense, if applicable, are recognized on a straight-line basis over the term of the lease.
Settlement Assets and Customer/Subscriber Account Balances and Related Obligations
Debt Issuance and Modification Costs
Eligible debt issuance costs associated with the Company's credit facilities are deferred and amortized to significant risksinterest expense over the term of the related debt using the effective interest method. Debt issuance costs associated with Company's term debt are presented on such accounts. Net Income (Loss) Per Common Share
the Company's Consolidated Balance Sheets as a direct reduction in the carrying value of the associated debt liability. Debt modification costs represent amounts paid to third parties to modify existing debt agreements when those amounts are not eligible for capitalization. See
Note 10. Debt Obligations for amounts paid for the year ended December 31, 2023, which were not eligible for capitalization. Restructuring Costs
The Company's Management approved a plan to restructure the business of its wholly owned subsidiary, PayRight. PayRight's business activity included advancing funds to customers, which did not generate the desired financial results due to changes in the economic environment, particularly the cost of capital. The restructuring plan includes termination of the advancing business effective June 30, 2024. The Company compliesincluded costs related to this restructuring within selling, general and administrative operating expenses and depreciation and amortization within its Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2023. The costs include allowance for certain advances whose recoverability was impacted by the restructuring of $3.5 million and $0.3 million for accelerated depreciation and amortization of assets of the restructured business.
Acquisitions
Business Combinations and Asset Acquisitions
The Company uses the acquisition method of accounting for business combinations which requires assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon the valuation of the acquired business and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
The Company accounts for a transaction as an asset acquisition when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, or otherwise does not meet the definition of a business. Asset acquisition-related costs are capitalized as part of the asset or assets acquired.
Contingent Consideration
Contingent consideration related to the Company's business combinations are estimated based on the present value of a weighted payout probability at the measurement date using a Monte Carlo simulation model. This valuation falls within Level 3 on the fair value hierarchy. The current portion of contingent consideration is included in accounts payable and accrued expenses on the Company's Consolidated Balance Sheets and the noncurrent portion of contingent consideration is included in other noncurrent liabilities on the Company's Consolidated Balance Sheets.
For asset acquisitions that do not meet the definition of a business, the portion of the unpaid purchase price that is contingent on future activities is not recorded by the Company on the date of acquisition, but when it becomes probable and can be estimated.
Non-controlling Interests
Occasionally, the Company issues common equity and non-voting incentive units within its subsidiaries. The Company is the majority owner of these subsidiaries and, therefore, the common equity and incentive units are deemed to be NCI. NCI is valued based on the events and methodologies including the acquisition-date fair value or the option pricing method. SeeNote 2. Acquisitions for further information related to the fair value of the common equity issued during 2023. To estimate the initial fair value of the incentive units, the Company utilizes future cash flow scenarios with focus on those cash flow scenarios which could result in future distributions to the NCIs. In subsequent periods, income or loss will be attributed to an NCI based on the hypothetical liquidation at book value method utilizing the terms of the operating agreement between the Company and the NCI.
As the majority owner, the Company has call rights on the incentive units issued to the NCIs. These call rights can only be executed under certain circumstances and execution is always optional at the Company's discretion. The call rights do not meet the definition of a free-standing financial instrument or derivative; thus no separate accounting is required for these call rights.
Accrued Residual Commissions
Accrued residual commissions consist of amounts due to ISOs and disclosure requirementsindependent sales agents based on a percentage of the net revenues generated from the Company's merchant customers referred by the respective ISO and independent sales agent. Percentages vary based on the program type and transaction volume of each merchant. Residual commission expenses were $415.1 million, $396.2 million and $330.2 million, respectively, for the years ended December 31, 2023, 2022 and 2021, and are included in costs of services in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
ISO Deposit and Loss Reserve
ISOs may partner with the Company in an exclusive partner program in which ISOs are given negotiated pricing in exchange for bearing the risk of loss. Through the arrangement, the Company accepts deposits on behalf of the ISO and a reserve account is established by the Company. All amounts maintained by the Company are included in the accompanying Consolidated Balance Sheets as other liabilities, which are directly offset by restricted cash accounts owned by the Company of $6.4 million and $5.1 million as of December 31, 2023 and 2022, respectively.
Stock-based Compensation
The Company recognizes the cost resulting from all stock-based payment transactions in the financial statements at grant date fair value. Stock-based compensation expense is recognized over the requisite service period and is reflected in salary and employee benefits expense on the Company's Consolidated Statements of Operations and Comprehensive Loss. Awards generally vest over three or four years and may not vest evenly over the vesting period. The effects of forfeitures are recognized as they occur. All shares issued from option exercises or vesting of RSU awards are original issuance shares and any shares withheld for taxes are repurchased by the Company.
The Company measures a liability award under a stock-based compensation payment arrangement based on the award's fair value remeasured at each reporting date until the date of settlement. Compensation cost for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value of the instrument for each reporting period.
Stock Options
Under the Company's 2018 Plan, the Company determines the fair value of stock options using the Black-Scholes option pricing model, which requires the use of the following subjective assumptions:
Expected volatility– Measure of the amount by which a stock price has fluctuated or is expected to fluctuate. In 2018, when the Company's outstanding stock options were granted, there was a relatively short amount of time that the Company's Common Stock (Nasdaq: PRTH) were traded on a public market, the Company utilized volatility data for the Common Stock of a peer group of comparable public companies. An increase in the expected volatility would increase the fair value of the stock option and related compensation expense.
Risk-free interest rate– U.S. Treasury rate for a stripped-principal treasury note as of the grant date having a term equal to the expected term of the stock option. An increase in the risk-free interest rate will increase the fair value of the stock option and related compensation expense.
Expected term– Period of time over which the stock options granted are expected to remain outstanding. In 2018, when the Company's outstanding stock options were granted, the Company lacked sufficient exercise information for its stock option plan since it was a newly public company. Accordingly, the Company used a method permitted by the SEC whereby the expected term was estimated to be the mid-point between the vesting dates and the expiration dates of the stock option grants. An increase in the expected term will increase the fair value of the stock option and the related compensation expense.
Dividend yield– The Company uses an amount of zero as the Company has paid no cash or stock dividends and does not anticipate doing so in the foreseeable future. An increase in the dividend yield will decrease the fair value of the stock option and the related compensation expenses.
If a participant terminates employment with the Company, vested options may be exercised for a short period of time while unvested options are forfeited. However, in any event, a stock option will expire ten years from the date of the grant.
Time-based restricted stock awards
The fair value of time-based restricted stock awards is determined based on the quoted closing price of the Company's Common Stock on the business day prior to the grant date and is recognized as compensation expense over the vesting term of the awards.
Performance-based restricted stock awards
The Company accounts for its performance-based restricted stock awards based on the quoted closing price of the Company's Common Stock on the business day prior to the grant date, adjusted for any market-based vesting criteria, and records stock-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved. The performance goals may be work-related goals for the individual recipient and/or based on certain corporate performance goals. The Company reassesses the probability of vesting at each reporting period and prospectively adjusts stock-based compensation expense based on its probability assessment. Additionally, if performance goals are set or reset on an annual basis, compensation cost is recognized in any reporting period only for performance-based restricted stock awards in which the performance goals have been established and communicated to the award recipient.
Non-voting Incentive Units
The Company issued non-voting incentive units to certain employees and partners in six subsidiaries. These non-voting incentive units were determined to be equity and are accounted for under ASC Topic 260, “718 Stock Compensation. The non-voting incentive units are either fully vested when granted, or vest according to the service period and/or performance measure noted in the grant agreement. As the non-voting incentive units are vested, they are recognized as NCI to the Company, who is the majority owner of the subsidiaries.
Employee Stock Purchase Program
The 2021 Employee Stock Purchase plan authorizes the issuance of shares of the Company’s Common Stock pursuant to purchase rights granted to employees. The fair value of purchase rights issued under the Employee Stock purchase Plan is estimated using the Black-Scholes option pricing model. The model requires management to make a number of assumptions, including the fair value of the Company’s Common Stock, expected volatility, expected term, risk-free interest rate, and
expected dividends. The Company records the resulting compensation expense in the Consolidated Statements of Operations and Comprehensive Loss over each three-month offering period. See Note 14. Stock-based Compensation. Repurchased Stock
Pursuant to the provisions of ASC 505-30, Treasury Stock, the Company has elected to apply the cost method when accounting for treasury stock resulting from the repurchase of its Common Stock. Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account, treasury stock. The equity accounts that were originally credited for the original share issuance, Common Stock and additional paid-in capital, remain intact. SeeNote 13. Stockholders' Deficit. If the treasury shares are ever reissued in the future, proceeds in excess of repurchased cost will be credited to additional paid-in capital. Any deficiency will be charged to retained earnings (accumulated deficit), unless additional paid-in capital from previous treasury stock transactions exists, in which case the deficiency will be charged to that account, with any excess charged to retained earnings (accumulated deficit). If treasury stock is reissued in the future, a cost flow assumption (e.g., FIFO, LIFO or specific identification) will be adopted to compute excesses and deficiencies upon subsequent share reissuance.
Earnings Per(Loss) per Share.” Net income (loss) per common share
Basic EPS is computed by dividing net income (loss) applicableavailable to common stockholdersCommon Stockholders by the weighted averageweighted-average number of common shares of Common Stock outstanding during the period, plus,excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the extent dilutive, the incremental number of shares of common stock to settle warrants, as calculated using the treasury stock method. An aggregate of 4,707,821 and 4,748,033 shares of common stock subject to possible redemption at December 31, 2017 and 2016, respectively, have been excluded from the calculation of basic loss per ordinary share since such shares,potential dilution, if redeemed, only participate in their pro rata share of the trust earnings. At December 31, 2017 and 2016, the Company did not have any, dilutivethat could occur if securities andor other contracts that could, potentially, beto issue Common Stock were exercised or converted into common stock and then share inCommon Stock, using the earningsmore dilutive of the Company under the treasury stocktwo-class method or if-converted method. AsDiluted EPS excludes potential shares of Common Stock if their effect is anti-dilutive. If there is a result, diluted loss per common share is the same as basic loss per common share for the period.
Reconciliation of net loss per common share
The Company’s net loss is adjusted for the portion of income that is attributable to common stock subject to redemption, as these shares only participate in the income of the Trust Account and not the losses of the Company. Accordingly,any period, basic and diluted loss per common share is calculated as follows:
| | | Year Ended
December 31, | | | Year Ended
December 31, | |
| | | 2017 | | | 2016 | |
| Net loss | | $ | (124,854 | ) | | $ | (107,995 | ) |
| Less: Income attributable to common shares subject to redemption | | | (309,425 | ) | | | 38,533 | |
| Adjusted net loss | | $ | (434,279 | ) | | $ | (69,462 | ) |
| | | | | | | | | |
| Weighted average shares outstanding, basic and diluted | | | 2,330,884 | | | | 1,664,794 | |
| | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (0.19 | ) | | $ | (0.04 | ) |
Common stock subject to possible conversion
The Company accounts for its common stock subject to possible conversionEPS are computed in accordance with the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity”same manner.
See Note 13. Stockholders' Deficit. Common stock subject to mandatory conversion is classified as a liability instrument and is measured at fair value. Conditionally convertible common stock (including common shares that feature conversion rights that are either within the control of the holder or subject to conversion upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s common stock features certain conversion rights that are considered by the Company to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, the common stock subject to possible conversion is presented as temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet.
The Company accounts for income taxes under ASC 740 “Income Taxes”. ASC 740 requires the recognition ofasset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings.
The Financial Accounting Standards Board, or FASB, Staff has provided additional guidance to address the accounting for boththe effects of the provisions related to the taxation of Global Intangible Low-Tax Income noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse in future years or to include the tax expense in the year it is incurred. The Company has made a policy election to recognize such taxes as current period expenses when incurred.
The Company recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. The Company recognized interest and penalties associated with uncertain tax positions as a component of income tax expense. See Note 12. Income Taxes. Fair Value Measurements
The Company measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-level fair
value hierarchy to prioritize the inputs used to measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 – Unobservable inputs that are not corroborated by market data.
The fair values of the Company's merchant portfolios, assets and liabilities acquired in mergers and business combinations, and contingent consideration are primarily based on Level 3 inputs and are generally estimated based upon valuation techniques that include discounted cash flow analysis based on cash flow projections or Monte Carlo simulations and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analysis or Monte Carlo simulation is corroborated by a market-based approach that utilizes comparable company public trading values and, where available, values observed in public market transactions.
The carrying values of accounts and notes receivable, accounts payable and accrued expenses, long-term debt, restricted cash and cash and cash equivalents, including settlement assets and the associated deposit liabilities, approximate their fair values due to either the short-term nature of such instruments or the fact that the interest rate of the debt is based upon current market rates. See Note 17. Fair Value. Foreign Currency
The Company's reporting currency is the U.S. dollar. The functional currency of the Indian subsidiary of the Company is Indian Rupee (i.e. local currency of Republic of India). The functional currency of the Canadian subsidiary of the Company is the Canadian Dollar. Accordingly, assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current exchange rate on the last day of the reporting period. Revenues and expenses are translated using the average exchange rate in effect during the reporting period. Translation adjustments are reported as a component of accumulated other comprehensive income (loss).
Concentration of Risk
A substantial portion of the Company's revenues and receivables are attributable to merchants. For the years ended December 31, 2023, 2022 and 2021, no individual merchant customer accounted for 10% or more of the Company's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other reseller partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. For the years ended December 31, 2023, 2022 and 2021, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's SMB Payments reportable segment that represented approximately 15%, 21% and 22%, respectively, of the Company's consolidated revenues.
A majority of the Company's cash and restricted cash (including subscriber account balances) is held in certain FIs, substantially all of which is in excess of FDIC limits. On at least an annual basis, the Company reviews qualitative and quantitative factors including earnings (with emphasis on return on equity and net interest margin), capitalization (with emphasis on Tier 1 and Capital ratios), asset quality (emphasis on Net charge-offs ratios), and liquidity, evaluating the performance of these FIs with their peers. The Company may shift funds as a response to risks noted and to optimize returns and costs. The Company does not believe it is exposed to any significant credit risk from these transactions.
Recently Adopted Accounting Standards
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new guidance changes how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaces the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The Company adopted ASU 2016-13 effective January 1, 2023 using the modified-retrospective approach. The implementation of ASU 2016-13 did not have a material impact on the Company's Audited Consolidated Financial Statements. Additionally, the Company modified its accounting policy to conform with the requirements of the adoption of this standard.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates, such as the SOFR. An entity that makes this election would not have to remeasure the contract at the modification date or reassess a previous accounting determination. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope ASU 2021-01, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The Company adopted the optional expedients of Topic 848 on June 30, 2023 upon the amendments of its Credit Agreement (see Note 10. Debt Obligations) and the Certificate of Designation (see Note 11. Redeemable Senior Preferred Stock and Warrants), which transitioned the Company's reference rates from LIBOR to SOFR. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements. Recently Issued Accounting Standards Pending Adoption
Segment Reporting ASU 2023-07
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires incremental reportable segment disclosures, primarily about significant segment expenses. The amendments also require entities with a single reportable segment to provide all disclosures required by these amendments, and all existing segment disclosures. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024. The Company will adopt this guidance for the year ended December 31, 2024. This guidance is expected to only impact the disclosures with no impact on the results of operations, financial position or cash flows.
Income Taxes ASU 2023-09
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, to enhance the transparency and decision usefulness of income tax disclosures. The guidance includes improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating when it will adopt this guidance and the potential effects this guidance will have on its disclosures.
2. Acquisitions
Plastiq Acquisition
On May 23, 2023,Plastiq, Powered by Priority, LLC (the "Acquiring Entity"), a subsidiary of PRTH, entered into a stalking horse equity and asset purchase agreement with Plastiq, Inc. and certain of its affiliates ("Plastiq") to acquire substantially all of the assets of Plastiq, including the equity interest in Plastiq Canada, Inc. Plastiq is a buyer funded B2B payments platform offering bill pay and instant access to working capital to its customers and will complement the Company's existing supplier-funded B2B Payments business. On May 24, 2023, Plastiq filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware.
The purchase was completed on July 31, 2023 for a total purchase consideration of approximately $37.0 million. The total purchase consideration included $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in the Acquiring Entity. The cash consideration for the purchase was funded by borrowings from the Company's revolving credit facility.
The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the acquired assets and assumed liabilities were recognized at their fair values as of July 31, 2023 , with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill. The fair values of the acquired assets and assumed liabilities as of July 31, 2023 were estimated by management using the discounted cash flow method and other factors specific to certain assets and liabilities. The preliminary purchase price allocation is set forth in the table below and expected to be finalized as soon as practicable but no later than one year from the closing date.
| | | | | |
| (in thousands) | |
| Consideration: | |
| Cash | $ | 28,500 | |
Contingent consideration payments (1) | 8,419 | |
| Common equity of the Acquiring Entity | 330 | |
Less: cash and restricted cash acquired(3) | (278) | |
| Total purchase consideration, net of cash and restricted cash acquired | $ | 36,971 | |
| |
| Recognized amounts of assets acquired and liabilities assumed: | |
Accounts receivable(3) | $ | 831 | |
Prepaid expenses(3) | 469 | |
| Settlement assets | 8,277 | |
| Equipment, net | 47 | |
Goodwill(3) | 7,252 | |
Intangible assets(2) | 30,460 | |
Accounts payable and accrued expenses(3) | (1,872) | |
| Customer deposits | (214) | |
| Settlement obligations | (8,279) | |
| Total purchase consideration | $ | 36,971 | |
(1)The fair value of the contingent consideration payments issued was determined utilizing a Monte Carlo simulation. The contingent consideration payments were calculated based on the path for the simulated metrics and the contractual terms of the contingent consideration payments and were discounted to present value at a rate reflecting the risk associated with the payoffs. The fair value was estimated to be the average present value of the contingent consideration payments over all iterations of the simulation.
(2)The intangible assets acquired consist of $13.0 million for customer relationships, $7.0 million for referral partner relationships, $6.5 million for technology and $3.9 million for trade name.
(3)During the fourth quarter 2023, the Company recorded measurement period adjustments due to additional information received related to cash acquired, accounts receivable, prepaid expenses, goodwill and accounts payable. This
measurement period adjustment resulted in decreases in cash and restricted cash acquired of $40.0 thousand, and accounts receivable of $50.0 thousand offset by increases in prepaid expenses of $46.0 thousand, and goodwill of $0.3 million, and accounts payable of $0.2 million.
The contingent consideration will not exceed the contractual undiscounted future value of $23.1 million and will be remeasured quarterly based on actual operating results. As of December 31, 2023, total consideration was $9.7 million, $2.2 million included in accounts payable and accrued expenses and $7.5 million included in noncurrent liabilities on the Consolidated Balance Sheets. Total interest accreted for the year was $1.3 million. The Company will make quarterly payments equal to 75% of the cash available for the contingent consideration as required by the contract. The payment made for the year ended December 31, 2023, was immaterial.
This business is reported within the Company's B2B Payments reportable segment. The Company's Consolidated Financial Statements for year ended December 31, 2023 include the operating results of Plastiq from August 1, 2023 through December 31, 2023 as noted in the table below:
| | | | | |
| Year Ended December 31, 2023 |
| (in thousands) | |
| Revenues | $ | 27,436 | |
Operating loss(1) | $ | (1,997) | |
| |
| |
(1)Excluding acquisition related costs of $1.3 million
The bankruptcy of Plastiq, Inc. before acquisition by the Company resulted in significant changes to the cost structure of the acquired business. As a result, pre-acquisition financial information is not relevant and therefore impractical to include.
For the twelve months ended December 31, 2023, the Company incurred $1.7 million in acquisition related costs, which primarily consisted of consulting, legal and accounting and valuation expenses. These expenses were recorded in selling, general and administrative expenses in the Company's Consolidated Statements of Operations and Comprehensive Loss. Based on the purchase consideration and pre-acquisition operating results, this business combination did not meet the materiality requirements for pro forma disclosures.
Acquisitions occurring in prior years
Ovvi Acquisition
On November 18, 2022, the Company completed its acquisition of certain assets and assumption of a certain liability of Ovvi, LLC, under an asset purchase agreement through its wholly-owned subsidiary, Priority Ovvi, LLC ("Ovvi"). The acquisition was accounted for as a business combination using the acquisition method of accounting. Prior to this acquisition, the business operated as a SaaS proprietary platform for the restaurant, hospitality and retail industries by providing complete all-in-one point of sale software and hardware systems, comprehensive ancillary services including fraud detection and mitigation, and processing services for various types of cards including credit cards, debit cards, private label cards and prepaid cards. This business is reported within the Company's SMB Payments reportable segment. Transaction costs were not material and were expensed. The non-voting incentive shares issued to the seller will be evaluated at each reporting period to determine whether or not profit or loss should be allocated based on the subsidiary's operating agreement. The preliminary purchase price allocation is set forth in the table below and is expected to be finalized as soon as practicable, but no later than one year from the acquisition date.
| | | | | |
| (in thousands) | |
| Consideration: | |
Cash(1) | $ | 5,026 | |
| |
Fair value of class B shares issued in Ovvi (NCI)(3) | 5,026 | |
Total enterprise value of business acquired(3) | 659 | |
| $ | 5,685 | |
| Recognized amounts of assets acquired and liabilities assumed: | |
Accounts receivable(4) | $ | 43 | |
Inventory(4) | 98 | |
| Property, equipment and software, net | 20 | |
Goodwill(3)(4) | 3,504 | |
Intangible assets(2) | 2,021 | |
| Other non-current asset | 152 | |
| Other non-current liability | (153) | |
Total enterprise value of business acquired(3) | $ | 5,685 | |
| |
(1)Includes $50.0 thousand withheld for inventory acquired which was subsequently released in March 2023.
(2)The intangible assets consist of $1.3 million for technology, $0.4 million for customer relationships and $0.3 million for trade names.
(3)During the first quarter of 2023, the Company recorded measurement period adjustments due to additional information received related to the valuation of the Class B shares. This measurement period adjustment resulted in a decrease of $0.6 million in goodwill and NCI.
(4)During the third quarter of 2023, the Company recorded measurement period adjustments due to additional information received related to accounts receivable and inventory. This measurement period adjustment resulted in a decrease of $0.1 million in accounts receivable and inventory, offset by an increase in goodwill of $0.1 million.
Finxera Acquisition
On September 17, 2021, the Company completed its acquisition of 100% of the equity interests of Finxera. Finxera is a provider of deposit account management and licensed money transmission services in the U.S. The acquisition allows the Company to offer clients turn-key merchant services, payment facilitation, card issuing, automated payables, virtual banking, e-wallet tools, risk management, underwriting and compliance on a single platform.
The transaction was funded with the Company's cash on hand, proceeds from the issuance of the redeemable senior preferred stock and debt, and the issuance of common equity shares to the sellers.
The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the assets acquired and liabilities assumed were recognized at their fair values as of the September 17, 2021, with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill. The fair values of the assets acquired and liabilities assumed as of the September 17, 2021 were estimated by management based on the valuation of the Finxera business using the discounted cash flow method and other factors specific to certain assets and liabilities. The final purchase price allocation is set forth in the table below:
| | | | | |
| (in thousands) | |
| Consideration: | |
| Cash | $ | 379,220 | |
Equity instruments(1) | 34,388 | |
| Less: cash and restricted cash acquired | (6,598) | |
| Total purchase consideration, net of cash and restricted cash acquired | $ | 407,010 | |
| |
| Recognized amounts of assets acquired and liabilities assumed: | |
| Accounts receivable | $ | 385 | |
| Prepaid expenses and other current assets | 5,297 | |
| Current portion of notes receivable | 784 | |
| Settlement assets and customer/subscriber account balances | 498,811 | |
| Property, equipment and software, net | 712 | |
| Goodwill | 244,712 | |
Intangible assets, net(2) | 211,400 | |
| Other noncurrent assets | 955 | |
| Accounts payable and accrued expenses | (7,837) | |
| Settlement and customer/subscriber account obligations | (498,811) | |
| Deferred income taxes, net | (44,018) | |
| Other noncurrent liabilities | (5,380) | |
| Total purchase consideration | $ | 407,010 | |
(1)The fair value of the 7,551,354 shares of PRTH Common Stock that were issued was determined based on their market price at the time of closing adjusted for an appropriate liquidity discount due to trading restrictions under Securities Rule 144.
(2)The intangible assets acquired consist of $154.9 million for referral partner relationships, $34.3 million for technology, $20.1 million for customer relationships and $2.1 million for money transmission licenses.
Goodwill of $244.7 million arising from the acquisition primarily consists of the expected synergies and other benefits from combining operations. Goodwill attributable to the acquisition of $8.7 million was deductible for income tax purposes. The goodwill was allocated 100% to the Company's Enterprise Payments reportable segment.
Wholesale Payments, Inc.
On April 28, 2021, a subsidiary of the Company completed its acquisition of certain residual portfolio rights for a purchase price of $42.4 million and $24.8 million of post-closing payments and earn-out payments based on meeting certain attrition thresholds over a three-year period from the date of acquisition. The transaction did not meet the definition of a business, therefore it was accounted for as an asset acquisition under which the cost of the acquisition was allocated to the acquired assets based on relative fair values. As an asset acquisition, additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset. The seller's note payable to the Company of $3.0 million and an advance of $2.0 million outstanding at the time of the purchase were netted against the initial purchase price, resulting in cash of $41.2 million being paid by the Company to the seller, which was funded from cash proceeds from the issuance of the redeemable senior preferred stock and cash on hand.
C&H Financial Services, Inc.
On June 25, 2021, a subsidiary of the Company acquired certain assets and assumed certain related liabilities under an asset purchase agreement. The acquisition was accounted for as a business combination using the acquisition method of accounting. Prior to this acquisition, the business was an ISO partner of the Company where it developed expertise in software-integrated payment services, as well as marketing programs for specific verticals such as automotive and youth sports. This business is reported within the Company's SMB Payments reportable segment. The initial purchase price for the net assets was $35.0 million in cash and a total purchase price of not more than $60.0 million including post-closing payments and earn-out payments based on certain gross profit and revenue achievements over a three-year period from the date of acquisition. The
acquisition date fair value of the contingent consideration was $4.7 million, which increased the total purchase price to $39.7 million. The seller's note payable to the Company of $0.5 million at the time of purchase was netted against the initial purchase price, resulting in cash of $34.5 million being paid by the Company to the seller, which was funded from a $30.0 million draw down from a revolving credit facility and $4.5 million cash on hand. Transaction costs were not material and were expensed. The purchase price allocation is set forth in the table below.
| | | | | |
| (in thousands) | |
| Accounts receivable | $ | 214 | |
| Prepaid expenses and other current assets | 209 | |
| Property, equipment and software, net and other current assets | 287 | |
| Goodwill | 13,804 | |
Intangible assets, net(1) | 25,400 | |
| Other noncurrent liabilities | (214) | |
| Total purchase price | $ | 39,700 | |
(1)The intangible assets acquired consist of $20.2 million for merchant portfolio intangible assets with a ten-year useful life and $5.2 million for ISO partner relationships with a twelve-year useful life.
3. Revenues
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Revenue Type: | | | | | |
| Merchant card fees | $ | 595,205 | | | $ | 553,037 | | | $ | 468,764 | |
| Money transmission services | 98,137 | | | 71,536 | | | 19,415 | |
| Outsourced services and other services | 49,600 | | | 29,627 | | | 21,033 | |
| Equipment | 12,670 | | | 9,441 | | | 5,689 | |
Total revenues(1)(2) | $ | 755,612 | | | $ | 663,641 | | | $ | 514,901 | |
(1)Includes contracts with an original duration of one year or less and variable consideration under a stand-ready series of distinct days of service. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
(2)Approximately $33.4 million, $7.5 million and $0.7 million, of interest income for the years ended December 31, 2023, 2022 and 2021, respectively, is included in outsourced services and other services revenue in the table above.
The following table presents a disaggregation of our consolidated revenues by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 563,878 | | | $ | — | | | $ | 6,322 | | | $ | 12,670 | | | $ | 582,870 | |
| B2B | 31,114 | | | — | | | 9,612 | | | — | | | 40,726 | |
| Enterprise | 213 | | | 98,137 | | | 33,666 | | | — | | | 132,016 | |
| Total revenues | $ | 595,205 | | | $ | 98,137 | | | $ | 49,600 | | | $ | 12,670 | | | $ | 755,612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 549,646 | | | $ | — | | | $ | 3,150 | | | $ | 9,441 | | | $ | 562,237 | |
| B2B | 3,391 | | | — | | | 15,499 | | | — | | | 18,890 | |
| Enterprise | — | | | 71,536 | | | 10,978 | | | — | | | 82,514 | |
| Total revenues | $ | 553,037 | | | $ | 71,536 | | | $ | 29,627 | | | $ | 9,441 | | | $ | 663,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 466,819 | | | $ | — | | | $ | 3,122 | | | $ | 5,689 | | | $ | 475,630 | |
| B2B | 1,945 | | | — | | | 15,193 | | | — | | | 17,138 | |
| Enterprise | — | | | 19,415 | | | 2,718 | | | — | | | 22,133 | |
| Total revenues | $ | 468,764 | | | $ | 19,415 | | | $ | 21,033 | | | $ | 5,689 | | | $ | 514,901 | |
Deferred revenues were not material for the years ended December 31, 2023, 2022 and 2021.
Contract Assets and Contract Liabilities
Material contract assets and liabilities are presented net at the individual contract level in the Consolidated Balance Sheets and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
Contract liabilities were $0.6 million, $0.2 million and $1.3 million as of December 31, 2023, 2022, and 2021, respectively. Substantially all of these balances are recognized as revenue within 12 months.
Net contract assets were not material for any period presented.
Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were $0.5 million for the year ended December 31, 2023. For the years ended December 31, 2022 or 2021, the impairment losses on receivables or contract assets arising from the Company's contracts with customers were not material.
4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations
SMB Payments Segment
In the Company's SMB Payments reportable segment, funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. The standards of the card networks require possession of funds during the settlement process by a member bank which controls the clearing transactions. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company. Therefore, neither is recognized in the Company's Consolidated Balance Sheets. Member banks held merchant funds of $98.0 million and $110.3 million at December 31, 2023 and 2022, respectively.
Exception items include items such as customer chargeback amounts received from merchants and other losses. Under agreements between the Company and its merchant customers, the merchants assume liability for such chargebacks and losses. If the Company is ultimately unable to collect amounts from the merchants for any charges or losses due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for these charges. In order to mitigate the risk of such liability, the Company may: 1) require certain merchants to establish and maintain reserves designed to protect the Company from such charges or losses under its risk-based underwriting policy; and 2) engage with certain ISOs in partner programs in which the ISOs assume liability for these charges or losses. A merchant reserve account is funded by the merchant and held by the member bank during the term of the merchant agreement. Unused merchant reserves are returned to the merchant after termination of the merchant agreement or in certain instances upon a reassessment of risks during the term of the merchant agreement.
Exception items that become the liability of the Company are recorded as merchant losses, a component of costs of services in the Consolidated Statements of Operations and Comprehensive Loss. Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets and customer/subscriber account balances in the Company's Consolidated Balance Sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover. Expenses for merchant losses for the years ended December 31, 2023, 2022 and 2021 were $6.2 million, $4.4 million and $2.8 million, respectively.
B2B Payments Segment
In the Company's B2B Payments segment, the Company earns revenues from certain of its services by processing transactions for FIs and other business customers. Customers transfer funds to the Company, which are held in either Company-owned bank accounts controlled by the Company or bank-owned FBO accounts controlled by the banks, until such time as the transactions are settled with the customer payees. Amounts due to customer payees that are held by the Company in Company-owned bank accounts are included in restricted cash. Amounts due to customer payees that are held in bank-owned FBO accounts are not assets of the Company. As such, the associated obligations related to these funds are not liabilities of the Company; therefore, neither is recognized in the Company's Consolidated Balance Sheets. Bank-owned FBO accounts held funds of $69.0 million and $52.9 million at December 31, 2023 and 2022, respectively. Company-owned bank accounts held $1.2 million and $4.1 million at December 31, 2023 and 2022, respectively, which are included in restricted cash and settlement obligations in the Company's Consolidated Balance Sheets.
For the Plastiq business, the Company accepts card payments from its customers and processes disbursements to their vendors. The time lag between authorization and settlement of card transactions creates certain receivables (from card networks) and payables (to the vendors of customers). These receivables and payables arise from the settlement activities that the Company performs on the behalf of its customers and therefore, are presented as Settlement assets and related obligations.
Enterprise Payments Segment
In the Company's Enterprise Payments segment, revenue is derived primarily from enrollment fees, monthly subscription fees, transaction-based fees and money transmission services fees. As part of its licensed money transmission services, the Company accepts deposits from customers and subscribers which are held in bank accounts maintained by the Company on behalf of customers and subscribers. After accepting deposits, the Company is allowed to invest available balances in these accounts in
certain permitted investments, and the return on such investments contributes to the Company's net cash inflows. These balances are payable on demand. As such, the Company recorded these balances and related obligations as current assets and current liabilities. The nature of these balances is cash and cash equivalents but they are not available for day-to-day operations of the Company. Therefore, the Company has classified these balances as settlement assets and customer/subscriber account balances and the related obligations as settlement and customer/subscriber account obligations in the Company's Consolidated Balance Sheets.
In certain states, the Company accepts deposits under agency arrangement with member banks wherein accepted deposits remain under the control of the member banks. Therefore, the Company does not record assets for the deposits accepted and liabilities for the associated obligation. Agency owned accounts held $19.6 million and $6.1 million and at December 31, 2023 and 2022, respectively.
The Company's consolidated settlement assets and customer/subscriber account balances and settlement and customer/subscriber account obligations were as follows:
| | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 |
Settlement Assets, net of estimated losses(1): | | | |
| Card settlements due from merchants | $ | 2,705 | | | $ | 444 | |
| Card settlements due from networks | 8,185 | | | — | |
| Customer/Subscriber Account Balances: | | | |
| Cash and cash equivalents | 745,585 | | | 531,574 | |
| | | |
| Total settlement assets and customer/subscriber account balances | $ | 756,475 | | | $ | 532,018 | |
| | | |
| Settlement and Customer/Subscriber Account Obligations: | | | |
| Customer account obligations | $ | 710,775 | | | $ | 516,086 | |
| Subscriber account obligations | 33,921 | | | 15,488 | |
| Total customer/subscriber account obligations | 744,696 | | | 531,574 | |
Due to customer payees(2) | 11,058 | | | 1,766 | |
| Total settlement and customer/subscriber account obligations | $ | 755,754 | | | $ | 533,340 | |
(1)Allowance for estimated losses was $6.6 million and $5.0 million as of December 31, 2023 and 2022, respectively
(2)Card settlements due from networks includes $8.2 million as of December 31, 2023 of related assets and remainder are included in restricted cash on our Consolidated Balance Sheets. There were no card settlements due from networks in 2022.
5. Notes Receivable
The Company has notes receivable of $5.2 million and $4.7 million as of December 31, 2023 and 2022, respectively, which are reported as current portion of notes receivable and notes receivable less current portion on the Company's Consolidated Balance Sheets. The notes bear a weighted-average interest rate of 18.6% and 15.4% as of December 31, 2023 and 2022, respectively. The notes receivable are comprised of notes receivable from ISOs, and under the terms of the agreements the Company preserves the right to hold back residual payments due to the ISOs and to apply such residuals against future payments due to the Company.
As of December 31, 2023, the principal payments for the Company's notes receivables are due as follows:
| | | | | |
| (in thousands) | |
| Year Ending December 31, | |
| 2024 | $ | 1,468 | |
| 2025 | 1,365 | |
| 2026 | 909 | |
| 2027 | 1,031 | |
| 2028 | 423 | |
| Thereafter | — | |
| Total | $ | 5,196 | |
As of December 31, 2023 and 2022, the Company had no allowance for doubtful notes receivable.
6. Property, Equipment and Software
A summary of property, equipment and software, net was as follows:
| | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 | | | | |
| Computer software | $ | 78,492 | | | $ | 64,197 | | | | | |
| Equipment | 10,377 | | | 13,302 | | | | | |
| Leasehold improvements | 1,535 | | | 6,990 | | | | | |
| Furniture and fixtures | 1,442 | | | 2,909 | | | | | |
| Property, equipment and software | 91,846 | | | 87,398 | | | | | |
| Less: Accumulated depreciation | (56,442) | | | (58,409) | | | | | |
| Capital work in-progress | 9,276 | | | 5,698 | | | | | |
| Property, equipment and software, net | $ | 44,680 | | | $ | 34,687 | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Depreciation expense | $ | 11,494 | | | $ | 9,511 | | | $ | 8,460 | |
Computer software consists of purchased software, internally developed back office systems including those used to assist in the reporting of merchant processing transactions and other related information.
Fully depreciated assets are retained in property, equipment and software, net, until removed from service. During the year ended December 31, 2023, certain fully depreciated assets were removed from service.
7. Goodwill and Other Intangible Assets
Goodwill
The Company records goodwill upon acquisition of a business when the purchase price is greater than the fair value assigned to the underlying separately identifiable tangible and intangible assets acquired and the liabilities assumed. The Company's goodwill relates to the following reporting units:
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 | | |
| SMB Payments | $ | 124,139 | | | $ | 124,625 | | | |
| Enterprise Payments | 244,712 | | | 244,712 | | | |
| Plastiq (B2B Payments) | 7,252 | | | — | | | |
| Total | $ | 376,103 | | | $ | 369,337 | | | |
The following table summarizes the changes in the carrying value of goodwill:
| | | | | |
| (in thousands) | Amount |
| Balance at January 1, 2022 | 365,740 | |
| Final purchase price adjustment for Finxera | (392) | |
| Ovvi acquisition | 3,989 | |
| Balance at December 31, 2022 | 369,337 | |
| Purchase price adjustment for Ovvi | (486) | |
| Plastiq acquisition and purchase price adjustments | 7,252 | |
| Balance at December 31, 2023 | $ | 376,103 | |
For business combinations consummated during the year ended December 31, 2023, goodwill was fully deductible for income tax purposes.
The Company performed its most recent annual goodwill impairment analysis as of October 1, 2023, as noted below:
•For the purpose of the goodwill impairment analysis, the Company determined the reporting units were Enterprise Payments, SMB Payments, and Plastiq, a component of the B2B Payments operating segment, as allowed by ASC 350.
•The Company's SMB Payments operating segment experienced a decrease in bankcard volume and revenue during 2023 due to the diversification of an ISV. Additionally, this operating segment also experienced compressed margins due to expenses associated with costs of sales increasing at a larger rate than revenue. Considering the most recent fair value valuation was performed in 2019, the Company elected the option to unconditionally bypass the qualitative impairment analysis and proceed with performing the quantitative analysis for the SMB Payments reporting unit as allowed by ASC 350. For the purpose of the quantitative analysis, the guideline public company method and the discounted cash flow method (equally weighted) were determined to be the appropriate methodology. The impairment analysis concluded the fair value of the reporting unit was greater than its carrying amount and therefore, no impairment was recognized.
•The Company's Enterprise Payments operating segment had an increase in volumes, revenue and margins for 2023. The remaining goodwill related to the acquisition of Plastiq (seeNote 2. Acquisitions). Given the performance of the Enterprise Payments operating segment and the relatively short time passed since the Plastiq acquisition, the Company elected to perform the qualitative impairment analysis for these reporting units. Under the qualitative impairment analysis, the Company identified drivers which may affect the reporting units' fair value, determined which events and circumstances impacted those drivers and concluded it was not more likely than not that the fair value of the reporting units was less than the carrying amount.
There were no impairment losses for the years ended December 31, 2023, 2022 or 2021.
As of December 31, 2023, the Company is not aware of any triggering events that have occurred since October 1, 2023.
Other Intangible Assets
At December 31, 2023 and 2022, other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | December 31, 2023 | | Weighted-average
Useful Life |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
| Other intangible assets: | | | | | | | |
| ISO and referral partner relationships | $ | 182,339 | | | $ | (36,506) | | | $ | 145,833 | | | 14.7 |
| Residual buyouts | 135,164 | | | (92,699) | | | 42,465 | | | 6.3 |
| Customer relationships | 109,017 | | | (92,781) | | | 16,236 | | | 8.4 |
| Merchant portfolios | 83,350 | | | (56,139) | | | 27,211 | | | 6.5 |
| Technology | 57,639 | | | (22,712) | | | 34,927 | | | 9.0 |
| Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 0.0 |
| Trade names | 7,104 | | | (2,526) | | | 4,578 | | | 11.7 |
Money transmission licenses(1) | 2,100 | | | — | | | 2,100 | | | |
| Total gross carrying value | $ | 580,103 | | | $ | (306,753) | | | $ | 273,350 | | | 9.7 |
(1)These assets have an indefinite useful life.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | December 31, 2022 | | Weighted-average
Useful Life |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
| Other intangible assets: | | | | | | | |
| ISO relationships | $ | 175,300 | | | $ | (24,021) | | | $ | 151,279 | | | 14.8 |
| Residual buyouts | 132,325 | | | (76,316) | | | 56,009 | | | 6.6 |
| Customer relationships | 96,000 | | | (83,298) | | | 12,702 | | | 8.2 |
| Merchant portfolios | 76,423 | | | (43,170) | | | 33,253 | | | 6.7 |
| Technology | 50,963 | | | (18,566) | | | 32,397 | | | 8.4 |
| Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 0.0 |
| Trade names | 3,183 | | | (2,129) | | | 1,054 | | | 11.6 |
Money transmission licenses(1) | 2,100 | | | — | | | 2,100 | | | |
| Total gross carrying value | $ | 539,684 | | | $ | (250,890) | | | $ | 288,794 | | | 9.7 |
(1)These assets have an indefinite useful life.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2023 | | 2022 | | 2021 |
| Amortization expense | $ | 56,901 | | | $ | 61,170 | | | $ | 41,237 | |
The estimated amortization expense of intangible assets as of December 31, 2023, for the next five years and thereafter is:
| | | | | | | | |
| (in thousands) | | Estimated Amortization Expense |
| Year Ending December 31, | |
| 2024 | | $ | 40,559 | |
| 2025 | | 34,480 | |
| 2026 | | 33,691 | |
| 2027 | | 31,427 | |
| 2028 | | 23,426 | |
| Thereafter | | 107,667 | |
Total(1) | | $ | 271,250 | |
(1)Total will not agree to the intangible asset net book value due to intangible assets with indefinite useful life.
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives and other relevant events or circumstances.
The Company tests intangible assets for impairment when events occur or circumstances indicate that the fair value of an intangible asset or group of intangible assets may be impaired.
The Company also considered the market conditions and other factors and concluded that there were no additional impairment indicators present at December 31, 2023.
8. Leases
The Company's leases consist primarily of real estate leases for office space, which are classified as operating leases. Lease expense for the Company's operating leases is recognized on a straight-line basis over the term of the lease. The Company did not have any finance leases at December 31, 2023 and 2022.
The ROU Assets and lease liabilities consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | | Financial Statement Classification | | December 31, 2023 | | December 31, 2022 |
| Operating Lease ROU Assets: | | | | | | |
| Operating lease ROU Assets | | Other noncurrent assets | | $ | 5,427 | | | $ | 4,593 | |
| Operating Lease Obligations: | | | | | | |
| Operating lease obligations - current | | Accounts payable and accrued expenses | | $ | 1,582 | | | $ | 1,336 | |
| Operating lease obligations - noncurrent | | Other noncurrent liabilities | | 4,592 | | | 4,110 | |
| Total operating lease obligations | | | | $ | 6,174 | | | $ | 5,446 | |
| | | | | | |
| Weighted-average remaining lease term in years | | | | 3.8 | | 4.4 |
| Weighted-average discount rate | | | | 5.9 | % | | 6.9 | % |
The Components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | Financial Statement Classification | | 2023 | | 2022 | | 2021 |
Operating lease expense (1) | | Selling, general and administrative | | $ | 1,760 | | | $ | 1,984 | | | $ | 1,841 | |
(1)Excludes short-term lease expense and sublease income, which was immaterial for the years ended December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | Financial Statement Classification | | 2023 | | 2022 | | 2021 |
| Operating cash flows from operating leases | | Operating activities | | $ | 1,862 | | | $ | 2,131 | | | $ | 1,803 | |
Lease Commitments
Future minimum lease payments for the Company's real estate operating leases at December 31, 2023 were as follows:
| | | | | | | | |
| (in thousands) | | |
| Year Ending December 31, | | Amount Due |
| 2024 | | $ | 1,873 | |
| 2025 | | 1,731 | |
| 2026 | | 1,701 | |
| 2027 | | 1,254 | |
| 2028 | | 265 | |
| Thereafter | | 65 | |
| Total future minimum lease payments | | 6,889 | |
| Amount representing interest | | (715) | |
| Total future minimum lease payments, net of interest | | $ | 6,174 | |
9. Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses consisted of the following:
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 | | |
| Accrued expenses | $ | 12,621 | | | $ | 17,742 | | | |
| Accrued card network fees | 14,320 | | | 14,243 | | | |
| Accrued compensation | 8,748 | | | 7,287 | | | |
| Contingent consideration, current portion | 5,951 | | | 6,079 | | | |
| Accounts payable | 11,003 | | | 6,513 | | | |
| Total accounts payable and accrued expenses | $ | 52,643 | | | $ | 51,864 | | | |
10. Debt Obligations
Outstanding debt obligations consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 |
| Credit Agreement: | | | |
| Term facility - matures April 27, 2027, interest rate of 11.21% and 9.82% at December 31, 2023 and 2022, respectively | $ | 654,373 | | | $ | 610,700 | |
| Revolving credit facility - $65.0 million ($40.0 million for 2022) line, matures April 27, 2026, interest rate of 10.20% and 8.82% at December 31, 2023 and 2022, respectively | — | | | 12,500 | |
| | | |
| | | |
| | | |
| | | |
| Total debt obligations | 654,373 | | | 623,200 | |
| Less: current portion of long-term debt | (6,712) | | | (6,200) | |
| Less: unamortized debt discounts and deferred financing costs | (15,696) | | | (18,074) | |
| Long-term debt, net | $ | 631,965 | | | $ | 598,926 | |
Contractual Maturities
Based on terms and conditions existing at December 31, 2023, future minimum principal payments for long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Revolving Credit Facility | | |
| December 31, | | Term Facility | | | Total Principal Due |
| 2024 | | $ | 6,712 | | | $ | — | | | $ | 6,712 | |
| 2025 | | 6,712 | | | — | | | 6,712 | |
| 2026 | | 6,712 | | | — | | | 6,712 | |
| 2027 | | 634,237 | | | — | | | 634,237 | |
| | | | | | |
| | | | | | |
| Total | | $ | 654,373 | | | $ | — | | | $ | 654,373 | |
Additionally, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as defined in the Credit Agreement.
Credit Agreement
On April 27, 2021, the Company entered into a Credit Agreement with Truist which provides for: 1) a $300.0 million Initial Term Loan; 2) a $290.0 million Delayed Draw Term Loan (together, the "Term Facility"); and 3) a $40.0 million senior secured revolving credit facility. The First Amendment to the Credit Agreement on May 20, 2021, clarified and provided further detail on the Credit Agreement's terms. The Second Amendment to the Credit Agreement on September 17, 2021, increased the amount of the Delayed Draw Term Loan facility by $30.0 million to $320.0 million. The additional Delayed Draw Term Loan is part of the same class of term loans made pursuant to the original commitments under the Credit Agreement.
Third Amendment to the April 2021 Credit Agreement
On June 30, 2023, the Credit Agreement of the Company was amended to incorporate the following:
•Reference rate: The reference rate for the calculation of interest on the Company’s term loan and revolving credit facility was amended from LIBOR to SOFR effective June 30, 2023. Per the amended terms, the outstanding borrowings under the Credit Agreement interest will accrue using the SOFR rate plus a term SOFR adjustment plus an applicable margin per year, subject to a SOFR floor of 1.00% per year. The applicable interest rate as of December 31, 2023, for the revolving credit facility based on one-month SOFR was 10.20% and for the term facility based on one-month SOFR was 11.21%.
•Increase in the revolving credit facility: The amendments also resulted in an increase in the Company’s revolving credit facility from $40.0 million to $65.0 million.
Fourth Amendment to the April 2021 Credit Agreement
On October 2, 2023, the Company modified its existing Term Facility Credit agreement with Truist. The agreement increased the principal balance by $50.0 million and increased the quarterly principal amortization payment from $1.6 million to $1.7 million. There were no other significant modifications to the Credit Agreement.
Outstanding borrowings under the Credit Agreement accrue interest using either a base rate or a SOFR rate plus an applicable margin per year, subject to a SOFR rate floor of 1.00% per year. Accrued interest is payable on each interest payment date (as defined in the Credit Agreement). The revolving credit facility incurs an unused commitment fee on any undrawn amount in an amount equal to 0.50% per year of the unused portion. The future applicable interest rate margins may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for SOFR and the rate used for base-rate borrowings.
Prepayments of outstanding principal may be made in permitted increments subject to a 1.00% penalty for certain prepayments made in connection with repricing transactions.
Proceeds from the Initial Term Loan were used to partially fund the refinancing of the Company's existing credit facilities as of April 27, 2021. Proceeds from the Delayed Draw Term Loan were used to fund the Company's acquisition of Finxera. Proceeds from the Fourth Amendment were used to repay the balance of the revolving credit facility (used to acquire Plastiq business) and added additional cash for general corporate purposes.
Interest Expense and Amortization of Deferred Loan Costs and Discounts
Deferred financing costs and debt discounts are amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense. Unamortized deferred financing costs and debt discount are included in long-term debt on the Company's Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| (in thousands) | | 2023 | | 2022 | 2021 |
Interest expense(1) | | $ | 76,108 | | | $ | 53,554 | | $ | 36,485 | |
| | | | | |
| | | | | |
(1)Included in this amount is $1.7 million and $0.9 million of interest expense related to the accretion of contingent considerations from acquisitions for December 31, 2023 and 2022.
Interest expense included amortization of deferred financing costs and debt discounts of $3.8 million, $3.5 million and $4.0 million for the years ended December 31, 2023, 2022 and 2021, respectively.
As a result of the Third Amendment in June 2023, the Company incurred $0.8 million of deferred loan costs. The Fourth Amendment in October 2023 was issued at a discount of $0.3 million. These costs, along with other capitalized modification costs of $0.4 million, will be amortized over the remaining period of the existing Term Loan as a reduction of the carrying amount of the debt obligation. Debt issuance costs of $0.1 million for the Fourth Amendment were expensed as incurred.
Debt Covenants
The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the loan parties to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates) and to enter into certain leases. The outstanding amount of any loans and any other amounts owed under the Credit Agreement may, after the occurrence of an event of default, at the option of Truist on behalf of
lenders representing a majority of the commitments, be declared immediately due and payable. Events of default include the failure of the Company to make principal, premium or interest payment when due, or the failure by the Company to perform or comply with any term or covenant in the Credit Agreement, after any applicable cure period.
If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving credit facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. As of December 31, 2023, the Company was in compliance with the covenants in the Credit Agreement.
11. Redeemable Senior Preferred Stock and Warrants
On April 27, 2021, the Company entered into an agreement pursuant to which it issued 150,000 shares of redeemable senior preferred stock, par value $0.001 per share, and a detachable warrant to purchase 1,803,841 shares of the Company's Common Stock, for gross proceeds of $150.0 million, less a $5.0 million discount and $5.5 million of issuance costs.
The agreement also provided the Company the option to issue an additional 50,000 shares of redeemable senior preferred stock upon the closing of the Finxera acquisition for $50.0 million, less a $0.6 million discount and within 18 months after the issuance of those additional shares, subject to the satisfaction of certain customary closing conditions. The Company was also provided with the option to issue an additional delayed 50,000 shares at a purchase price of $50.0 million, less a $0.6 million discount, subject to the satisfaction of certain customary closing conditions.
Of the total net proceeds of $139.5 million, $131.4 million was allocated to the redeemable senior preferred stock, $11.4 million was allocated to additional paid-in capital for the warrants and $3.3 million was allocated to noncurrent assets for the committed financing put right.
On September 17, 2021, the Company issued an additional 75,000 shares of redeemable senior preferred stock for $75.0 million, less a $0.9 million discount, $0.7 million of ticking fees and $1.9 million of issuance costs. Upon issuance of these additional shares, the $3.3 million that was previously allocated to noncurrent assets for the committed financing put right was reclassified to the redeemable senior preferred stock.
The redeemable senior preferred stock ranks senior to the Company's Common Stock, equal with any other class of the Company's stock designated as being ranked on a parity basis with the redeemable senior preferred stock and junior to any other class of the Company's stock, including preferred stock, that is designated as being ranked senior to the redeemable senior preferred stock, with respect to the payment and distribution of dividends, the purchase or redemption of the Company's stock and the liquidation, winding up of and distribution of assets of the Company.
The redeemable senior preferred stock does not meet the definition of a liability pursuant to ASC 480, Distinguishing Liabilities from Equity, as it is redeemable upon the occurrence of events that are not solely within the Company's control. Therefore, the Company classified the redeemable senior preferred stock as temporary equity and is accreting the carrying amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method.
The following table provides the redemption value of the redeemable senior preferred stock for the periods presented:
| | | | | | | | | | | |
| (in thousands) | December 31, 2023 | | December 31, 2022 |
| Redeemable senior preferred stock | $ | 225,000 | | | $ | 225,000 | |
| Accumulated unpaid dividend | 43,498 | | | 25,498 | |
| Dividend payable | 7,027 | | | 5,341 | |
| Redemption value | 275,525 | | | 255,839 | |
| Less: unamortized discounts and issuance costs | (16,920) | | | (20,260) | |
| Redeemable senior preferred stock, net of discounts and issuance costs | $ | 258,605 | | | $ | 235,579 | |
The following table provides a reconciliation of the beginning and ending carrying amounts of the redeemable senior preferred stock for the periods presented:
| | | | | | | | | | | |
| (in thousands) | Shares | | Amount |
| | | |
| | | |
| | | |
| | | |
| January 1, 2022 | 225 | | | $ | 210,158 | |
| | | |
| Unpaid dividend on redeemable senior preferred stock | — | | | 16,794 | |
| Accretion of discounts and issuance cost | — | | | 3,286 | |
| Cash portion of dividend and ticking fee outstanding at the end of the year | — | | | 5,341 | |
| December 31, 2022 | 225 | | | $ | 235,579 | |
| | | |
| Unpaid dividend on redeemable senior preferred stock | — | | | 18,000 | |
| Accretion of discounts and issuance cost | — | | | 3,340 | |
| Cash portion of dividend outstanding at December 31, 2023 | — | | | 7,027 | |
| Payment of cash portion of dividend and ticking fee outstanding at December 31, 2022 | — | | | (5,341) | |
| December 31, 2023 | 225 | | | $ | 258,605 | |
On June 30, 2023, the Company amended the Certificate of Designation of its redeemable senior preferred stock to transition the reference rate used for the calculation of dividends from LIBOR to SOFR. Under the Amended Certificate of Designation, the dividend rate (capped at 22.50%) will be equal to the three-month term SOFR (minimum of 1.00%), plus the three-month term SOFR spread adjustment of 0.26% plus the applicable margin of 12.00%. All other terms in the agreement were unchanged. For the three months ended December 31, 2023, SOFR is the reference rate for calculation of the dividend. The dividend rate is subject to future increases if the Company doesn't comply with the minimum cash payment requirements outlined in the agreement, which includes required payments of dividends, required payments related to redemption or required prepayments. The dividend rate may also increase if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors or if an event of default as outlined in the agreement occurs. The dividend rate as of December 31, 2023, and 2022 was 17.7% and 15.7% respectively.
The following table provides a summary of the dividends for the period presented:
| | | | | | | | | | | |
| (in thousands) | Year Ended December 31, 2023 | | Year Ended
December 31, 2022 |
Dividends paid in cash(1) | $ | 26,404 | | | $ | 16,800 | |
| Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock | 18,000 | | | 16,794 | |
| Dividends declared | $ | 44,404 | | | $ | 33,594 | |
(1)Included in this amount is $7.0 million and $5.3 million of dividends outstanding as of December 31, 2023 and 2022 respectively.
The following table presents cumulative dividends in arrears in aggregate and per-share:
| | | | | | | | | | | |
| (in thousands, except per share amounts) | Year Ended December 31, 2023 | | Year Ended
December 31, 2022 |
| Cumulative preferred dividends in arrears | $ | 43,498 | | | $ | 25,497 | |
| Redeemable senior preferred stock, outstanding | 225 | | | 225 | |
| Cumulative preferred dividends in arrears, per share | $ | 193.3 | | | $ | 113.3 | |
The redeemable senior preferred shares have no stated maturity and will remain outstanding indefinitely until redeemed or otherwise repurchased by the Company. Outstanding shares of redeemable senior preferred stock can be redeemed at the option of the Company for cash in whole or in part at the following redemption price:
| | | | | |
| Redemption Date | Redemption Price |
| Prior to April 27, 2023 | 100% of liquidation preference (i.e., $1,000 per share) plus any accrued and unpaid dividends and the make-whole amount (i.e., present value of additional 2% of the liquidation preference plus any accrued and unpaid dividends thereon through the redemption date plus 102% of the amount of dividends that will accrue from the redemption date through April 27, 2023) |
| April 27, 2023 - April 26, 2024 | 102% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date |
| April 27, 2024 and thereafter | 100% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date |
Upon the occurrence of a change in control or a liquidation event, the Company will redeem all of the outstanding redeemable senior preferred shares for cash at the applicable redemption price described above.
The holders of the redeemable senior preferred stock may request the Company to pursue a sale transaction for the purpose of redeeming the redeemable senior preferred stock from and after the earliest of: 1) October 27, 2028; 2) 30 days after the redeemable senior preferred stockholders provide written notice to the Company of a failure by the Company to take steps within its control to prevent the Company's Common Stock from no longer being listed; and 3) the date that is 90 days following the Company's failure to consummate a mandatory redemption of the redeemable senior preferred stock upon the occurrence of a change in control or liquidation event.
The Company used the proceeds from the April 2021 sale of the redeemable senior preferred stock to partially fund the refinancing to partially fund the Wholesale Payments, Inc. and C&H Financial Services, Inc. acquisitions in the second quarter of 2021 (see Note 2. Acquisitions) and to pay certain fees and expenses relating to the Refinancing and the offering of the redeemable senior preferred stock and warrants. The Company used the proceeds from the September 2021 sale of additional shares of redeemable senior preferred stock to fund the Finxera acquisition (see Note 2. Acquisitions). Warrants
On April 27, 2021 the Company issued warrants to purchase up to 1,803,841 shares of the Company's Common Stock, par value $0.001 per share, at an exercise price of $0.001. The exercise price and the number of shares issuable upon exercise of the warrants are subject to certain adjustments from time to time on the terms outlined in the warrants. These warrants were exercisable upon issuance. In connection with the issuance of the warrants, the Company entered into an agreement pursuant to which it agreed to provide certain registration rights with respect to the common shares issuable upon exercise of the warrants. Under this agreement the holders of the related shares of Common Stock were granted piggyback rights to be included in certain underwritten offerings of Common Stock and the right to demand a shelf registration of the shares of Common Stock issued upon exercise of the warrants. As of December 31, 2023, none of the warrants have been exercised. The warrants are considered to be equity contracts indexed in the Company's own shares and therefore were recorded at their inception date relative fair value and are included in additional paid-in capital on the Company's Consolidated Balance Sheet.
12. Income Taxes
Components of consolidated income tax (benefit) expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | For the Years Ended December 31, | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 | | | | | | | | | | | |
| U.S. current income tax expense (benefit) | | | | | | | | | | | | | | | | |
| Federal | $ | 10,624 | | | $ | 10,411 | | | $ | (2,321) | | | | | | | | | | | | |
| State and local | 3,187 | | | 2,546 | | | (379) | | | | | | | | | | | | |
| Foreign | 738 | | | 349 | | | 1 | | | | | | | | | | | | |
| Total current income tax expense (benefit) | $ | 14,549 | | | $ | 13,306 | | | $ | (2,699) | | | | | | | | | | | | |
| U.S. deferred income tax expense (benefit) | | | | | | | | | | | | | | | | |
| Federal | $ | (5,149) | | | $ | (5,001) | | | $ | (1,343) | | | | | | | | | | | | |
| State and local | (712) | | | (2,970) | | | (1,213) | | | | | | | | | | | | |
| Foreign | (225) | | | 15 | | | (3) | | | | | | | | | | | | |
| Total deferred income tax (benefit) expense | $ | (6,086) | | | $ | (7,956) | | | $ | (2,559) | | | | | | | | | | | | |
| Total income tax expense (benefit) | $ | 8,463 | | | $ | 5,350 | | | $ | (5,258) | | | | | | | | | | | | |
The Company's consolidated effective income tax rate was 118.3% for the year ended December 31, 2023, compared to a consolidated effective income tax rate of 167.2% for the year ended December 31, 2022. For the year ended December 31, 2021, the Company's consolidated effective income tax benefit rate was 135.9%. The effective rate for 2023 differed from the statutory rate of 21% primarily due to: 1) an increase in the valuation allowance against certain business interest carryover deferred tax assets. The effective rate for December 31, 2022 differed from the statutory federal rate of 21% primarily due to: 1) an increase in the valuation allowance against certain business interest carryover deferred tax assets; 2) non-deductible transaction costs incurred in the acquisition of Finxera; 3) the finalization of prior estimates on the sale of the assets of PRET's real estate services business impacting amounts attributable to noncontrolling partners; and 4) an increase in the tax basis of certain intangible assets resulting from a change in a subsidiary's entity status. The effective rate for December 31, 2021, differed from the statutory federal rate of 21% primarily due to earnings attributable to noncontrolling interests and valuation allowance changes against certain business interest carryover deferred tax assets.
The following table provides a reconciliation of the consolidated income tax (benefit) expense at the statutory U.S. federal tax rate to actual consolidated income tax (benefit) expense:
| | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | For the Years Ended December 31, | | | | |
| 2023 | | 2022 | | 2021 | | | | |
| U.S. federal statutory expense (benefit) | $ | 1,502 | | | $ | 672 | | | $ | (813) | | | | | |
| Non-controlling interests | — | | | — | | | (3,024) | | | | | |
| State and local income taxes, net | 1,588 | | | 421 | | | (372) | | | | | |
| Foreign rate differential | 114 | | | 142 | | | — | | | | | |
| Excess tax benefits pursuant to ASU 2016-09 | 235 | | | 4 | | | (339) | | | | | |
| Valuation allowance changes | 3,958 | | | 4,957 | | | 1,120 | | | | | |
| Nondeductible items | 768 | | | 576 | | | 703 | | | | | |
| Transaction Costs | — | | | — | | | 2,338 | | | | | |
| Intangible assets | — | | | (1,226) | | | (4,110) | | | | | |
| Tax credits | — | | | (100) | | | (223) | | | | | |
| Other, net | 298 | | | (96) | | | (538) | | | | | |
| Income tax expense (benefit) | $ | 8,463 | | | $ | 5,350 | | | $ | (5,258) | | | | | |
Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement and tax basiscarrying amount of the Company's assets and liabilities, tax credits and for the expected futuretheir respective tax benefit to be derived from taxbases, and loss and tax credit carry forwards. The significant components of consolidated deferred income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | |
| (in thousands) | 2023 | | 2022 | | | | | | |
| Deferred Tax Assets: | | | | | | | | | |
| Accruals and reserves | $ | 1,392 | | | $ | 1,510 | | | | | | | |
| Investments in partnership | 689 | | | — | | | | | | | |
| Intangible assets | 25,682 | | | 15,600 | | | | | | | |
| Net operating loss carryforwards | 934 | | | 749 | | | | | | | |
| Interest limitation carryforwards | 18,917 | | | 15,142 | | | | | | | |
| Other | 3,982 | | | 4,107 | | | | | | | |
| Gross deferred tax assets | 51,596 | | | 37,108 | | | | | | | |
| Valuation allowance | (19,421) | | | (15,462) | | | | | | | |
| Total deferred tax assets | 32,175 | | | 21,646 | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | | |
| Prepaid assets | (1,124) | | | (1,101) | | | | | | | |
| Investments in partnership | — | | | (41) | | | | | | | |
| Property and equipment | (8,518) | | | (4,057) | | | | | | | |
| Total deferred tax liabilities | (9,642) | | | (5,199) | | | | | | | |
| Net deferred tax assets | $ | 22,533 | | | $ | 16,447 | | | | | | | |
In accordance with the provisions of ASC 740, additionally requiresIncome Taxes, the Company provides a valuation allowance to be establishedagainst deferred tax assets when it is more likely than not that some portion or all or a portion of the deferred tax assets will not be realized.ASC 740 also clarifies The assessment considers all available positive and negative evidence and is measured quarterly. As of December 31, 2023 and 2022, the accounting for uncertainty inCompany had a consolidated valuation allowance of approximately $19.4 million and $15.5 million, respectively, against certain deferred income taxestax assets related to business interest deduction carryovers and business combination costs that the Company believes are not more likely than not to be realized.
The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date. The Company refers to the difference between the tax benefit recognized in an enterprise’sits financial statements and prescribes a recognition thresholdthe tax benefit claimed in the income tax return as an "unrecognized tax benefit." A reconciliation of the beginning and measurement processending amount of unrecognized tax benefits is as follows:
| | | | | |
| (in thousands) | |
| Balance as of January 1, 2023 | $ | 302 | |
| Additions based on tax positions related to the current year | — | |
| Additions based on positions of prior years | — | |
| Reductions for tax positions of prior years | — | |
| Reductions related to lapse of the applicable statutes of limitations | (148) | |
| Settlements | — | |
| Balance as of December 31, 2023 | $ | 154 | |
As of December 31, 2023 and 2022, the balance of unrecognized tax benefits that, if recognized, affect our effective tax rate was $0.0 million and $0.1 million, respectively. The Company continually evaluates the uncertain tax benefit associated with its uncertain tax positions. It is reasonably possible that the liability for financial statement recognition and measurementuncertain tax benefits could decrease during the next 12 months by up to $0.1 million due to the expiration of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. statutes of limitations.
The Company is
requiredsubject to
fileU.S. federal income tax
returns in the United States (federal) and
in various state and local jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. Since the Company was incorporated on April 23, 2015, the evaluation was performed for the 2015, 2016 and 2017 tax year. The Company believes that its income tax
positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in
a material change to its financial position.The Company’s policymultiple state jurisdictions. Tax periods for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the period from January 1, 2017 through December 31, 2017. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
On December 22, 2017,2020 and all years thereafter remain open to examination by the Tax Cutsfederal and Jobs Act (“Tax Act”) was signed into law. Under ASC 740, the enactment of the Tax Act also requires companies, to recognize the effects of changes instate taxing jurisdictions and tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company's gross deferred tax assets will be revalued from 35% to 21% with a corresponding offset to the valuation allowance. The Company will continue to analyze the Tax Act to assess the full effects on its financial results, including disclosures,periods for our fiscal year ending December 31, 2018.
Related Parties
The Company follows subtopic ASC 850-102019 and all years thereafter remain open for the identification of related parties and disclosure of related party transactions.
Pursuantcertain state taxing jurisdictions to Section 850-10-20, the related parties include: (a.) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b.) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company may deal if one party controls or can significantly influenceis subject.
At December 31, 2023 and December 31, 2022, the management or operating policiesCompany had state NOL carryforwards of approximately $17.9 million and $13.4 million, respectively, with expirations dates ranging from 2023 to 2043.
The Company has historically been impacted by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of ATI, as defined. In March 2020, the CARES Act was enacted, which among other provisions, provides for the increase of the
other163(j) ATI limitation from 30% to
an extent that one50% for tax years 2019 and 2020. As of
the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Settlement Income
During the year ended December 31, 2017,2023, the Company received $427,701 from an entity with which the Company was negotiating a business combination pursuant to a Letterhad interest deduction limitation carryforwards of Intent originally executed$78.1 million.
13. Stockholders' Deficit
Except as otherwise required by law or as otherwise provided in
February 2017. During quarter ended June 30, 2017, the Letterany certificate of
Intent expired. The amount received was approximately the amount of the expenses the Company incurred in pursuing that business combination transaction.Subsequent Events
The Company’s management reviewed all material events that have occurred after the balance sheet date through the date which these financial statements were issued.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
Note 3 — Initial Public Offering
On September 19, 2016, the Company sold 5,000,000 Units at a price of $10.00 per Unit generating gross proceeds of $50,000,000 and net proceeds of $47,981,581 after deducting $2,018,419 of transaction costs. In addition, the Company granted the Underwriter the option to purchase an additional 750,000 Units solely to cover over allotments, if any, pursuant to a 45-day over-allotment option granted to the Underwriter. The underwriters exercised the over-allotment option in part and, on October 14, 2016, the underwriters purchased 310,109 Over-allotment Option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $3,101,090 and net proceeds of $3,008,057 after deducting $93,033 of transaction costs.
Each Unit consists of one share of common stock in the Company, and one Warrant (“Warrant”). Each Warrant entitles the holder to purchase one share of common stock at a price of $11.50 per share commencing on the later of 30 days after the Company’s completion of its initial Business Combination and expiring five years from the completion of the Company’s initial Business Combination. The Company may redeem the Warrants at a price of $0.01 per Warrant upon 30 days’ notice, only in the event that the last sale price of the common shares is at least $16.00 per sharedesignation for any 20 trading days within a 30-trading day period (“30-Day Trading Period”) ending on the third day prior to the date on which noticeseries of redemption is given, provided there is a current registration statement in effect with respect to the common shares underlying such Warrants during the 30 day redemption period. If the Company redeems the Warrants as described above, management will have the option to require all holders that wish to exercise Warrants to do so on a “cashless basis.” In accordance with the warrant agreement relating to the Warrants to be sold and issued in the Offering the Company is only required to use its best efforts to maintain the effectiveness of the registration statement covering the Warrants. If a registration statement is not effective within 90 days following the consummation of a Business Combination, Warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act of 1933, as amended. In the event that a registration statement is not effective at the time of exercise or no exemption is available for a cashless exercise, the holder of such Warrant shall not be entitled to exercise such Warrant for cash and in no event (whether in the case of a registration statement being effective or otherwise) will the Company be required to net cash settle the Warrant exercise. If an initial Business Combination is not consummated, the Warrants will expire and will be worthless.
Note 4 — Private Units
Simultaneously with the Offering, the Initial Shareholders of the Company purchased an aggregate of 421,107 Private Units at $10.00 per Private Unit (for an aggregate purchase price of $4,211,070) from the Company. All of the proceeds received from these purchases were placed in the Trust Account.
The Private Units are identical to the Units sold in the Offering except the Warrants included in the Private Units will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be held by the initial purchasers or their permitted transferees. Additionally,preferred stock, the holders of the Private Units have agreed (A)Company's Common Stock possess all voting power for the election of members of the Company's Board of Directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to vote the shares underlying their Private Units in favor of any proposed Business Combination, (B) not to propose, or vote in favor of, an amendment to the Company’s amended and restated certificate of incorporation with respect to the Company’s pre-Business Combination activities prior to the consummation of such a Business Combination unless the Company provides dissenting Public Stockholders with the opportunity to convert their public shares in connection with any such vote, (C) not to convert any shares underlying the Private Units into the right to receive cash from the Trust Account in connection with a stockholder vote to approve an initial Business Combination or a vote to amend the provisions of the Company’s amended and restated certificate of incorporation relating to shareholders’ rights or pre-Business Combination activity or sell their shares to the Company in connection with a tender offer the Company engages in and (D) that the shares underlying the Private Units shall not participate in any liquidating distribution upon winding up if a Business Combination is not consummated. The purchasers have also agreed not to transfer, assign or sell anyCompany's stockholders. Holders of the Private Units or underlying securities (except to the same permitted transferees as the insider shares and provided the transferees agree to the same terms and restrictions as the permitted transferees of the insider shares must agree to, each as described above) until the completion of an initial Business Combination.
Note 5 — Notes Payable
On July 1, 2015, the Company issued a $55,000 principal amount unsecured promissory note. The note was non-interest bearing and was payable on the consummation of the Offering. On September 26, 2016, the Company amended the agreement with lender and outstanding balance was amended to $27,500. The note is now due upon completion of an initial business combination. Due to the short-term nature of the note, the fair value of the note approximates the carrying amount.
Note 6 — Commitments
Underwriting Agreement
The Company entered into an agreement with the underwriters of the Offering (“Underwriting Agreement”). The Underwriting Agreement required the Company to pay an underwriting discount of 3.0% of the gross proceeds of the Offering as an underwriting discount and incur a deferred underwriting discount of up to 2.0% for an aggregate underwriting discount of 5.0% of the gross proceeds of the Offering, in each case as set forth in the Underwriting Agreement. The Company will pay the deferred underwriting fee at the closing of the Business Combination. The underwriters also purchased an interest in M SPAC Holdings I LLC, an entity controlled by the Company’s insiders, which entitles it to a beneficial interest in 63,184 insider shares.
The Underwriting Agreement granted Chardan Capital Markets, LLC a right of first refusal, for a period of thirty-six months from the closing of the Offering, to act as lead investment banker, lead book-runner, and/or lead placement agent with 33% of the economics or 25% if three investment banks are involved in the transaction, for any public or private equity and debt offerings during such period.
The Underwriting Agreement will provide that the Company will pay Chardan Capital Markets, LLC a warrant solicitation fee of five percent (5%) of the exercise price of each public warrant exercised during the period commencing on the later of 12 months from the closing of the Proposed Public Offering or 30 days after the completion of the Company’s initial business combination including warrants acquired by security holders in the open market. The warrant solicitation fee will be payable in cash. There is no limitation on the maximum warrant solicitation fee payable to Chardan Capital Markets, LLC except to the extent it is limited by the number of warrants outstanding.
Registration Rights
The Initial StockholdersCompany's Common Stock are entitled to registration rights with respectone vote per share on matters to their initial shares and the purchasersbe voted on by stockholders. Holders of the Private UnitsCompany's Common Stock will be entitled to registration rights with respectreceive such dividends and other distributions, if any, as may be declared from time to time by the Private Units (and underlying securities), pursuant to an agreement signed on September 13, 2016.Company's Board of Directors in its discretion. Historically, the Company has neither declared nor paid dividends. The holders of the majority of the initial shares are entitled to demand that the Company register these shares at any time commencing three months priorCompany's Common Stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the first anniversary of the consummation of a Business Combination. The holders of the Private Units (or underlying securities) are entitled to demand that the Company register these securities at any time after the Company consummates a Business Combination. In addition, the holders have certain “piggy-back” registration rights on registration statements filed after the Company’s consummation of a Business Combination.
Administrative Service Fee
The Company, commencing on September 13, 2016, has agreed to pay an affiliate of the Company’s executive officers a monthly fee of $10,000 for general and administrative services due on the first of each month. During the years ended December 31, 2017 and 2016, the Company incurred administrative fees of $120,000 and $35,667, respectively.
Note 7 — Stockholder’s Equity
Preferred Stock
Common Stock.
The Company is authorized to issue
1,000,000100,000,000 shares of preferred
shares with a par value of $0.001 per sharestock with such
designation,designations, voting and other rights and preferences as may be determined from time to time by the
Company’s boardBoard of
directors.Directors. As of December 31, 2017, there are no preferred shares2023, the Company has not issued or outstanding.
Common Stock
Amended and Restated Certificate of Incorporation
The Company’s Certificate of Incorporation was amended in connection with the Offering to reduce the Company’s authorizedany shares of common stock from 50,000,000preferred stock.
Share Repurchase Program
During the second quarter of 2022, PRTH's Board of Directors authorized a general share repurchase program under which the Company may purchase up to
30,000,000.The Company is authorized to issue 30,000,0002.0 million shares of common stock withits outstanding Common Stock for a par value of $0.001 per share.
On April 23, 2015, 1,437,500 shares of the Company’s common stock were sold to the Initial Stockholders at a price of approximately $0.02 per share for an aggregate of $25,000. This number includes an aggregatetotal of up to 187,500$10.0 million. Under the terms of this plan, the Company may purchase shares that are subjectthrough open market purchases, unsolicited or solicited privately negotiated transactions, or in another manner so long as it complies with applicable rules and regulations.
Share re-purchase activity under these programs was as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| in thousands, except share data, which is in whole units | 2023 | | 2022 |
Number of shares purchased(1) | — | | | 1,309,374 | |
| Average price paid per share | $ | — | | | $ | 4.42 | |
Total Investment(1) | $ | — | | | $ | 5,791 | |
(1)These amounts may differ from the repurchases of Common Stock amounts in the Consolidated Statements of Cash Flows due to forfeiture ifshares withheld for taxes and unsettled share repurchases at the over-allotment option is not exercised by the underwriters. All of these shares will be placed in escrow until (1) with respect to 50%end of the shares, the earlier of six months after the date of the consummation of an initial Business Combinationyear.
Warrants and
the date on which the closing price of the Company’s common stock equals or exceeds $12.50 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after the Company’s initial business combination and (2) with respect to the remaining 50% of the insider shares, six months after the date of the consummation of an initial Business Combination, or earlier, in either case, if, subsequent to an initial Business Combination, the Company consummates a liquidation, merger, share exchange or other similar transaction which results in all of the Company’s stockholders having the right to exchange their shares for cash, securities or other property. On November 11, 2016, 109,973 Founders’ shares were forfeited and cancelled.Purchase Options
As of December 31,
20172022 and
2016, there were 2,352,922 and 2,310,710 common shares issued and outstanding, which excludes 4,705,821 and 4,748,033 shares subject to possible conversion, respectively. The Company’s insiders have agreed (A) to vote their insider shares, private shares and any public shares acquired in or afterDecember 31, 2021, 3,556,470 warrants from the Offering in favor of any proposed Business Combination, (B) not to propose, or vote in favor of, an amendment to the Company’s certificate of incorporation that would affect the substance or timing of its obligation to redeem 100% of its public shares if it does not complete its initialoriginal business combination within 18 months fromin July 2018, were outstanding. These warrants allowed the closingholders to purchase shares of the Offering (or 21 months, as applicable), unlessCompany's Common Stock at an exercise price of $11.50 per share. These warrants expired on August 24, 2023 and no warrants were exercised.
Prior to July 25, 2018, a purchase option was sold to an underwriter for consideration of $100. The purchase option, which survived the
Company provides its public stockholders with the opportunity to redeem their shares of common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations, divided by the number of then outstanding public shares, (C) not to convert any shares (including the insider shares and private shares) into the right to receive cash from the Trust Account in connection with a stockholder vote to approve the Company’s proposed initial Business Combination (or sell any shares they hold to the Company in a tender offer in connection with a proposed initial Business Combination) or a vote to amend the provisions of the Company’s certificate of incorporation relating to the substance or timing of its obligation to redeem 100% of the Company’s public shares if it does not complete its initial business combination,
within 18 months fromallowed the
closing of the Offering (or 21 months, as applicable) and (D) that the insider shares and private shares shall not be entitled to be redeemed for a pro rata portion of the funds held in the Trust Account if a Business Combination is not consummated.
Purchase Option
The Company sold to the underwriters, for $100, a unit purchase optionholders to purchase up to a total of 300,000 units (each consisting of a share of Common Stock and a public warrant) exercisable at $12.00 per unitunit. The purchase option expired on August 24, 2023.
14. Stock-based Compensation
2018 Equity Incentive Plan
The 2018 Plan was approved by the Company's Board of Directors and shareholders in July 2018. The 2018 Plan provided for the issuance of up to 6,685,696 of the Company's Common Stock, and these shares were registered on a Form S-8 during 2018. Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, SARs, restricted stock awards, RSUs, other stock-based awards (including cash bonus awards) or any combination of the foregoing. Any current or prospective employees, officers, consultants or advisors that the Company's compensation committee (or, an aggregatein the case of non-employee directors, the Company's Board of Directors) selects, from time to time, are eligible to receive awards under the 2018 Plan. If any award granted under the 2018 Plan expires, terminates, or is canceled or forfeited without being settled or exercised, or if a SAR is settled in cash or otherwise without the issuance of shares, shares of the Company's Common Stock subject to such award will again be made available for future grants. In addition, if any shares are surrendered or tendered to pay the exercise price of $3,600,000) commencingan award or to satisfy withholding taxes owed, such shares will again be available for grants under the 2018 Plan. On March 17, 2022, the Company's Board of Directors unanimously approved an amendment to the 2018 Plan which was subsequently approved by our shareholders, to increase the number of shares authorized for issuance under the plan by 2,500,000 shares, resulting in 9,185,696 shares of the Company's Common Stock authorized for issuance under the plan. These additional shares were registered on Form S-8 in December 2022.
Stock-based compensation was as follows:
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| (in thousands) | 2023 | | 2022 | | 2021 | | |
| 2018 Equity Incentive Plan | | | | | | | |
| Restricted stock units compensation expense | $ | 6,423 | | | $ | 6,182 | | | $ | 2,561 | | | |
| Stock options compensation expense | 7 | | | 7 | | | 327 | | | |
| Liability-classified compensation expense | — | | | — | | | 325 | | | |
| Total stock-based compensation under the 2018 Equity Incentive Plan | 6,430 | | | 6,189 | | | 3,213 | | | |
| ESPP compensation expense | 50 | | | 39 | | | — | | | |
| Incentive units compensation expense | 288 | | | — | | | — | | | |
| Total | $ | 6,768 | | | $ | 6,228 | | | $ | 3,213 | | | |
For the year ended December 31, 2023, the Company recognized an income tax expense of approximately $0.1 million for stock-based compensation expense. For the years ended December 31, 2022 and 2021, the Company recognized and income tax benefit of approximately $0.7 million and $0.4 million, respectively, for stock-based compensation expense. No stock-based compensation has been capitalized.
A summary of the activity in stock units for the 2018 Plan is as follows:
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Common Stock available for issuance at January 1, 2021 | | 3,862,134 | |
| | |
| Stock options forfeited | | 50,589 | |
| Stock options expired | | 53,870 | |
| RSUs granted | | (711,987) | |
| RSUs forfeited | | 1,957 | |
Shares withheld for taxes(1) | | 106,477 | |
| Common Stock available for issuance at December 31, 2021 | | 3,363,040 | |
| New shares authorized for issuance | | 2,500,000 | |
| Stock options forfeited | | 221,733 | |
| RSUs granted | | (3,223,949) | |
| RSUs forfeited | | 353,196 | |
Shares withheld for taxes(1) | | 291,266 | |
| Common Stock available for issuance at December 31, 2022 | | 3,505,286 | |
| Stock options forfeited | | 129,380 | |
| | |
| RSUs granted | | (641,578) | |
| RSUs forfeited | | 263,600 | |
Shares withheld for taxes(1) | | 291,110 | |
| Common Stock available for issuance at December 31, 2023 | | 3,547,798 | |
(1)The number of shares surrendered to satisfy withholding taxes owed are subsequently added back to the shares available for grant under the 2018 Plan.
Details about the time-based equity-classified stock options granted under the plan are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-average Exercise Price | | Weighted-average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding, December 31, 2022 | 1,005,892 | | | $ | 6.88 | | | 5.7 years | | $ | 42 | |
| | | | | | | |
| | | | | | | |
Forfeited(1) | (129,380) | | | 6.95 | | | | | |
| | | | | | | |
| Outstanding, December 31, 2023 | 876,512 | | | 6.87 | | | 4.9 years | | $ | 16 | |
| | | | | | | |
| Exercisable at December 31, 2023 | 872,762 | | | $ | 6.89 | | | 5.0 years | | $ | 12 | |
(1)Forfeited includes awards for which the participant has been terminated but has 90 days from the date of termination to exercise the award based on the lateragreement.
There were no options granted in 2023, 2022, or 2021. The intrinsic value of options exercised in 2021 was $0.2 million and there were no options exercised in 2023 or 2022. As of December 31, 2023, there was $4.2 thousand of unrecognized compensation costs related to stock options, which is expected to be recognized over a remaining weighted-average period of 0.6 years.
Equity-classified Restricted Stock Units
Below is a summary of the consummationCompany's equity-classified RSUs for the periods presented:
| | | | | | | | | | | | | | | | |
| | Underlying Common Shares | | Weighted-average Grant Date Fair Value | | |
| Service-based vesting: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Unvested at January 1, 2021 | | 596,401 | | | $ | 3.18 | | | |
Granted(1) | | 647,512 | | | $ | 6.63 | | | |
| Forfeited | | (1,957) | | | $ | 7.92 | | | |
| Vested | | (362,706) | | | $ | 3.65 | | | |
| Unvested at December 31, 2021 | | 879,250 | | | $ | 5.51 | | | |
Granted(1) | | 2,878,948 | | | $ | 6.14 | | | |
| Forfeited | | (353,196) | | | $ | 6.04 | | | |
| Vested | | (822,602) | | | $ | 5.44 | | | |
| Unvested at December 31, 2022 | | 2,582,400 | | | $ | 5.70 | | | |
Granted(1) | | 641,578 | | | $ | 3.81 | | | |
| Forfeited | | (226,100) | | | $ | 5.44 | | | |
| Vested | | (1,028,782) | | | $ | 5.60 | | | |
| Unvested at December 31, 2023 | | 1,969,096 | | | $ | 5.68 | | | |
| | | | | | |
| Performance-based vesting: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Unvested at January 1, 2021 | | 139,598 | | | $ | 2.56 | | | |
Granted(2) | | 64,475 | | | $ | 6.90 | | | |
| Vested | | (104,620) | | | $ | 7.24 | | | |
| Unvested at December 31, 2021 | | 99,453 | | | $ | 4.46 | | | |
Granted(2) | | 64,366 | | | $ | 5.00 | | | |
| | | | | | |
| Vested | | (64,366) | | | $ | 6.90 | | | |
| Unvested at December 31, 2022 | | 99,453 | | | $ | 3.24 | | | |
| Granted | | 345,000 | | | $ | 5.31 | | | |
| Forfeited | | (37,500) | | | $ | 5.31 | | | |
| Vested | | (116,958) | | | $ | 5.12 | | | |
| Unvested at December 31, 2023 | | 289,995 | | | $ | 5.31 | | | |
| | | | | | |
(1)Includes 143,605 shares with an estimated fair value of a Business Combination$0.5 million, 228,347 shares with an estimated fair value of $1.1 million and six months from September 13, 2016. The unit purchase option expires five years from September 13, 2016. The units issuable upon exercise55,689 shares with an estimated fair value of this option are identical$0.5 million issued to non-employees in December 31, 2023, 2022 and 2021, respectively.
(2)Includes only the portions of grants for which the performance goals have been determined and communicated to the Units being offeredgrant recipient. Any grants for which the required performance goals have not been determined and communicated to the grant recipient are not considered to have been granted for accounting purposes.
As of December 31, 2023, there was $9.6 million and $1.2 million of unrecognized compensation costs for equity-classified service-based RSUs and performance-based RSUs, respectively, which are expected to be recognized over a remaining weighted-average period of 2.0 years and 2.0 years, respectively. The total fair value of RSUs and PSUs that vested in 2023, 2022, and 2021 was $1.3 million, $0.9 million and $3.2 million, respectively.
Employee Stock Purchase Plan
On April 16, 2021, the 2021 Stock Purchase Plan was authorized by the Company's Board of Directors. The maximum number of shares available for purchase under the 2021 Stock Purchase Plan is 200,000 shares. The shares issued under the 2021 Stock Purchase Plan may be authorized but unissued or reacquired shares of Common Stock. All employees of the Company who work more than 20 hours per week and have been employed by the Company for at least 30 days may participate in the Offering. 2021 Stock Purchase Plan.
Under the 2021 Stock Purchase Plan, participants are offered, on the first day of the offering period, the option to purchase shares of Common Stock at a discount on the last day of the offering period. The offering period shall be for a period of three months, and the first offering period began during the first quarter of 2022. The 2021 Stock Purchase Plan provides eligible employees the opportunity to purchase shares of the Company's Common Stock on a quarterly basis through payroll deductions at a price equal to 95% of the lesser of the fair value on the first and last trading day of each quarter.
15. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution savings plan that covers substantially all of its eligible employees. Under the plan, the Company contributes safe-harbor matching contributions to eligible plan participants on an annual basis. The Company may also contribute additional discretionary amounts to plan participants. The Company's contributions to the plan were $2.0 million, $1.7 million and $1.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company offers a comprehensive medical benefit plan to eligible employees. All obligations under the plan are fully insured through third-party insurance companies. Employees participating in the medical plan pay a portion of the costs for the insurance benefits.
16. Commitments and Contingencies
Minimum Annual Commitments with Third-party Processors
The Company has agreedmulti-year agreements with third parties to grantprovide certain payment processing services to the holdersCompany. The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed payment transactions. Some of these agreements have minimum annual requirements for processing volumes. Based on existing contracts in place at December 31, 2023, the Company is committed to pay minimum processing fees under these agreements of approximately $21.6 million in 2024 and $21.6 million in 2025.
Annual Commitment with Vendor
Effective January 1, 2022, the Company entered into a three-year business cooperation agreement with a vendor to resell its services. Under the agreement, the Company purchased vendor services worth $1.5 million for the year ended December 31, 2023, and is committed to purchase vendor services worth $2.3 million in 2024.
The Company committed to capital contributions to fund the operations of certain subsidiaries totaling $26.0 million and $22.0 million as of December 31, 2023 and 2022, respectively. The Company is obligated to make the contributions within 10 business days of receiving notice for such contribution from the subsidiary. As of December 31, 2023 and 2022, the Company contributed $11.8 million and $6.9 million, respectively.
Merchant Reserves
Contingent Consideration
The following table provides a reconciliation of the unit purchase option, demandbeginning and “piggy back” registration rights for periods of five and seven years, respectively, from September 13, 2016, including securities directly and indirectly issuable upon exerciseending balance of the unit purchase option. Company's contingent consideration liabilities related to completed acquisitions:
| | | | | |
| (in thousands) | Contingent Consideration Liabilities |
| January 1, 2022 | $ | 10,686 | |
| Accretion of contingent consideration | 864 | |
| Fair value adjustments due to changes in estimates of future payments | 1,195 | |
| Payment of contingent consideration | (4,666) | |
| December 31, 2022 | $ | 8,079 | |
| Addition of contingent consideration (related to asset acquisition) | 263 | |
| Addition of contingent consideration due to resolution of contingency | 7,000 | |
| Addition of contingent consideration (related to business combination) | 8,419 | |
| Accretion of contingent consideration | 1,658 | |
| Fair value adjustments due to changes in estimates of future payments | (19) | |
| Payment of contingent consideration | (9,909) | |
| Adjustment for receivable due to residual shortfall | (2,053) | |
| |
| |
| |
| |
| December 31, 2023 | $ | 13,438 | |
Legal Proceedings
The Company is involved in certain legal proceedings and claims which arise in the ordinary course of business. In the opinion of the Company and based on consultations with inside and outside counsel, the results of any of these matters, individually and in the aggregate, are not expected to have a material effect on the Company's results of operations, financial condition or cash flows. As more information becomes available, and the Company determines that an unfavorable outcome is probable on a claim and that the amount of probable loss that the Company will incur on that claim is reasonably estimable, the Company will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact the Company's results of operations, financial condition and cash flows.
The Company is involved in a case that was filed on October 11, 2023 and is currently pending in the United States District Court for the Northern District of California (the “Complaint”).The Complaint is a putative class action against The Credit Wholesale Company, Inc. (“Wholesale”), Priority Technology Holdings, Inc., Priority Payment Systems (“PPS”), LLC and Wells Fargo Bank, N.A. (“Wells Fargo”).The Complaint alleges that Wholesale is an agent of Priority, PPS and Wells Fargo and that it made non-consensual recordation of telephonic communications with California businesses in violation of California Invasion of Privacy Act (the “Act”). The Complaint seeks to certify a class of affected businesses and an award of $5,000 per violation of the Act. As of March 12, 2024, the financial impact, if any, of the outcome of this legal proceeding is neither probable nor estimable.
Concentration of Risks
The Company's revenue is substantially derived from processing Visa and Mastercard bankcard transactions. Because the Company is not a member bank, to process these bankcard transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card association.
A majority of the Company's cash and restricted cash is held in certain FIs, substantially all of which is in excess of federal deposit insurance corporation limits. The Company does not believe it is exposed to any significant credit risk from these transactions.
17. Fair Value
Fair Value Measurements
The Company's contingent consideration derived from business combinations are classified within Level 3 of the fair value hierarchy due to the uncertainty of the fair value measurement created by the absence of quoted market prices, the inherent lack of liquidity and unobservable inputs used to measure fair value which require judgement. The Company uses valuation techniques including discounted cash flow analysis based on cash flow projections and Monte Carlo simulations to estimate fair value based on projection period and assumed growth rates. A change in inputs in the valuation techniques used might result in a significantly higher or lower fair value measurement than what is reported. The current portion of contingent consideration is included in accounts payable and accrued expenses on the Company's Consolidated Balance Sheets and the noncurrent portion of contingent consideration is included in other noncurrent liabilities on the Company's Consolidated Balance Sheets.
Contingent consideration liabilities related to certain of the Company's acquisitions are uncertain due to the utilization of unobservable inputs and management's judgement in determining the likelihood of achieving the earn-out criteria or the years ended December 31, 2023 and 2022. These liabilities measured at fair value on a recurring basis consisted of the following:
| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands) | Fair Value Hierarchy | | 2023 | | 2022 |
| Contingent consideration, current portion | Level 3 | | $ | 5,951 | | | $ | 6,079 | |
| Contingent consideration, noncurrent portion | Level 3 | | 7,487 | | | 2,000 | |
| Total contingent consideration | | | $ | 13,438 | | | $ | 8,079 | |
During the year ended December 31, 2023, there were no transfers into, out of, or between levels of the fair value hierarchy.
Fair Value Disclosures
Notes Receivable
Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company provides for allowances when it believes that certain notes receivable may not be collectible. The carrying value of the Company's notes receivable, net approximates fair value was approximately $5.2 million and $4.7 million at December 31, 2023 and December 31, 2022, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.
Debt Obligations
Outstanding debt obligations (see Note 10. Debt Obligations) are reflected in the unit purchase option, inclusive ofCompany's Consolidated Balance Sheets at carrying value since the receipt of a $100 cash payment, as an expense of the Offering resulting in a charge directlyCompany did not elect to stockholders’ equity. The Company estimates that theremeasure debt obligations to fair value at the end of this unit purchase option was approximately $2,695,000 (or $8.98 per unit) using a Black-Scholes option-pricing model. each reporting period. The fair value of the
unit purchase optionterm loan facility was estimated to be
granted to the placement agent is estimated as of the date of grant using the following assumptions: (1) expected volatility of 149%, (2) risk-free interest rate of 1.22%approximately $651.9 million and
(3) expected life of five years. The unit purchase option may be exercised for cash or on a “cashless” basis, at the holder’s option (except in the case of a forced cashless exercise upon the Company’s redemption of the Warrants, as described in Note 3), such that the holder may use the appreciated value of the unit purchase option (the difference between the exercise prices of the unit purchase option and the underlying Warrants and the market price of the Units and underlying common stock) to exercise the unit purchase option without the payment of any cash. The Company will have no obligation to net cash settle the exercise of the unit purchase option or the Warrants underlying the unit purchase option. The holder of the unit purchase option will not be entitled to exercise the unit purchase option or the Warrants underlying the unit purchase option unless a registration statement covering the securities underlying the unit purchase option is effective or an exemption from registration is available. If the holder is unable to exercise the unit purchase option or underlying Warrants, the unit purchase option or Warrants, as applicable, will expire worthless. Note 8 — Income Tax
The Company’s deferred tax assets are as follows$606.1 million at December 31, 20172023 and 2016:
| | | December 31, 2017 | | | December 31, 2016 | |
| Deferred tax asset | | | | | | | | |
| Net operating loss carryforward | | $ | 51,046 | | | | 50,339 | |
| Valuation Allowance | | | (51,046 | ) | | | (50,339 | ) |
| Deferred tax asset, net of allowance | | $ | - | | | | - | |
The income tax provision (benefit) consists2022, respectively, and was estimated using binding and non-binding quoted market prices in an active secondary market, which considers the credit risk and market related conditions, and is within Level 2 of the following at December 31, 2017fair value hierarchy.
The carrying values of the other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and
2016:| | | Year Ended
December 31, 2017 | | | Year Ended
December 31, 2016 | |
| Federal | | | | | | | | |
| Current | | $ | - | | | $ | - | |
| Deferred | | | (26,219 | ) | | | (36,718 | ) |
| State and Local | | | | | | | | |
| Current | | | | | | | - | |
| Deferred | | | (3,296 | ) | | | (9,874 | ) |
| Change in valuation allowance | | | 29,515 | | | | 46,592 | |
| Income tax provision (benefit) | | $ | - | | | $ | - | |
the lack of a market for these debt obligations.
18. Segment Information
The Company's three reportable segments included SMB Payments, B2B Payments and Enterprise Payments. The Company has adoes not have dedicated assets assigned to any particular reportable segment and such information is not available and continues to be aggregated.
More information about our three reportable segments:
•SMB Payments: Provides full-service acquiring and payment-enabled solutions for B2C transactions, leveraging Priority's proprietary software platform, distributed through ISO, direct sales and vertically focused ISV channels in addition.
•B2B Payments:Provides market-leading AP automation solutions to corporations, software partners and industry leading FIs (including Citibank and Mastercard) in addition to working improving cash flow by providing instant access to working capital.
•Enterprise Payments: Provides embedded finance and treasury solutions to enterprise customers to modernize legacy platforms and accelerate software partners' strategies to monetize payments.
Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.
Information on reportable segments and reconciliations to consolidated revenues, consolidated depreciation and amortization, and consolidated operating income are as follows:
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| (in thousands) | Years Ended December 31, | | |
| 2023 | | 2022 | | 2021 | | |
| Revenues: | | | | | | | |
| SMB Payments | $ | 582,870 | | | $ | 562,237 | | | $ | 475,630 | | | |
| B2B Payments | 40,726 | | | 18,890 | | | 17,138 | | | |
| Enterprise Payments | 132,016 | | | 82,514 | | | 22,133 | | | |
| Consolidated revenues | $ | 755,612 | | | $ | 663,641 | | | $ | 514,901 | | | |
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| Depreciation and amortization: | | | | | | | |
| SMB Payments | $ | 41,036 | | | $ | 43,925 | | | $ | 41,144 | | | |
| B2B Payments | 2,221 | | | 744 | | | 294 | | | |
| Enterprise Payments | 23,753 | | | 24,892 | | | 7,158 | | | |
| Corporate | 1,385 | | | 1,120 | | | 1,101 | | | |
| Consolidated depreciation and amortization | $ | 68,395 | | | $ | 70,681 | | | $ | 49,697 | | | |
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| Operating income: | | | | | | | |
| SMB Payments | $ | 46,482 | | | $ | 54,866 | | | $ | 52,884 | | | |
| B2B Payments | (2,535) | | | 208 | | | 135 | | | |
| Enterprise Payments | 73,964 | | | 30,937 | | | 6,763 | | | |
| Corporate | (36,387) | | | (29,846) | | | (26,689) | | | |
| Consolidated operating income | $ | 81,524 | | | $ | 56,165 | | | $ | 33,093 | | | |
A reconciliation of total operating income of reportable segments to the Company's net operating loss (“NOL”) of approximately $243,100. These NOLs, if not utilized, expire beginning(loss) income is provided in 2035. the following table:
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| (in thousands) | Years Ended December 31, | | |
| 2023 | | 2022 | | 2021 | | |
| Total operating income of reportable segments | $ | 117,911 | | | $ | 86,011 | | | $ | 59,782 | | | |
| Corporate | (36,387) | | | (29,846) | | | (26,689) | | | |
| Interest expense | (76,108) | | | (53,554) | | | (36,485) | | | |
| Debt modification and extinguishment costs | — | | | — | | | (8,322) | | | |
| Gain on sale of business | — | | | — | | | 7,643 | | | |
| Other income, net | 1,736 | | | 589 | | | 202 | | | |
| Income tax (expense) benefit | (8,463) | | | (5,350) | | | 5,258 | | | |
| Net (loss) income | $ | (1,311) | | | $ | (2,150) | | | $ | 1,389 | | | |
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19. (Loss) Earnings per Common Share
The ultimate realizationfollowing tables set forth the computation of the net operating loss is dependent uponCompany's basic and diluted earnings (loss) per common share:
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| (in thousands except per share amounts) | Years Ended December 31, | | | | | | |
| 2023 | | 2022 | | 2021 | | | | | | |
| Numerator: | | | | | | | | | | | |
| Net (loss) income | $ | (1,311) | | | $ | (2,150) | | | 1,389 | | | | | | | |
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | (47,744) | | | (36,880) | | | (18,009) | | | | | | | |
| Less: NCI preferred unit redemptions | — | | | — | | | (8,021) | | | | | | | |
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| Net loss attributable to common stockholders | $ | (49,055) | | | $ | (39,030) | | | $ | (24,641) | | | | | | | |
| Denominator: | | | | | | | | | | | |
| Basic: | | | | | | | | | | | |
Weighted-average common shares outstanding(1) | 78,333 | | | 78,233 | | | 71,902 | | | | | | | |
| Basic (loss) earnings per common share | $ | (0.63) | | | $ | (0.50) | | | $ | (0.34) | | | | | | | |
| Diluted: | | | | | | | | | | | |
Weighted-average common shares outstanding(1) | 78,333 | | | 78,233 | | | 71,902 | | | | | | | |
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| Diluted weighted-average common shares outstanding | 78,333 | | | 78,233 | | | 71,902 | | | | | | | |
| Diluted (loss) earnings per common share | $ | (0.63) | | | $ | (0.50) | | | $ | (0.34) | | | | | | | |
Potentially anti-dilutive securities that were excluded from (loss) earnings per common share that could potentially be dilutive in future taxable income, if any,periods are as follows: | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Equivalents at December 31, | | | | |
| (in thousands) | 2023 | | 2022 | | 2021 | | | | |
Outstanding warrants on common stock(1) | — | | | 3,556 | | | 3,556 | | | | | |
Outstanding options and warrants issued to adviser(2) | — | | | 600 | | | 600 | | | | | |
Restricted stock awards(3) | 1,180 | | | 2,440 | | | 442 | | | | | |
| Liability-classified restricted stock units | — | | | — | | | 129 | | | | | |
Outstanding stock option awards(3) | 900 | | | 1,098 | | | 1,313 | | | | | |
| Total | 2,080 | | | 7,694 | | | 6,040 | | | | | |
(3)Granted under the 2018 Plan.
20. Subsequent Events
In February 2019, PHOT, a subsidiary of the Company,
received contributions of certain assets from its Chairman and
may be limited in any one period by applicable tax rules. Although management believes that the Company will have sufficient future taxable incomeCEO and issued redeemable preferred units as consideration. Part of these preferred units were later assigned to
absorb the net loss carryovers before the expiration of the carryover period, there may be circumstances beyond the Company’s control that limit such utilization. Accordingly, management has determined that full valuation allowances of the deferred tax asset are appropriate as of December 31, 2017.Internal Revenue Code Section 382 imposes limitations on the use of NOL carryovers when the stock ownership of one or more 5% shareholders (shareholders owning more than 5% of the Company’s outstanding capital stock) has increased on a cumulative basis more than 50 percentage points within a period of two years. Management cannot control the ownership changes occurring as a result of public trading of the Company’s Common Stock. Accordingly, there is a risk of an ownership change beyond the control of the Company that could trigger a limitation of the use of the loss carryover.
The deferred tax asset reflected in the tables above resulted from applying an effective combined federal and state tax rate of 23.6% to the net operating losses from fiscal 2015. Effective tax rates differ from statutory rates.
A reconciliation of the statutory tax rate to the Company’s effective tax rates as of December 31, 2017 and 2016 is as follows:
| | | Year Ended
December 31, 2017 | | | Year Ended
December 31, 2016 | |
| Statutory federal income tax rate | | | -21.0 | % | | | -34.0 | % |
| State taxes, net of federal tax benefit | | | -2.6 | % | | | -8.6 | % |
| Change in valuation allowance | | | 23.6 | % | | | 42.6 | % |
| Income tax provision (benefit) | | | 0.0 | % | | | 0.0 | % |
Note 9 — Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company evaluated subsequent events through the date when the financial statements were issued.
On February 26, 2018, the Company entered into a Contribution Agreement dated February 26, 2018 with Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC to acquire all of the outstanding equity interests of Priority Holdings, LLC, a leading provider of B2C and B2B payment processing solutions. On March 26, 2018,other related parties. In May 2021, the Company entered into an Amendedexchange agreement wherein these preferred units were exchanged for 1,428,358 equity shares and Restated Contribution Agreement with$814,219 in cash. On October 31, 2023, a lawsuit was filed alleging that the Interest Holders (as amendedBoard breached its fiduciary duties by approving the transaction. The Company denied any wrongdoing. The lawsuit was settled on January 30, 2024, wherein the Company agreed to unwind the exchange transaction and restated,pay $0.4 million to settle all claims. The unwinding of this transaction does not meet the “Purchase Agreement”).
Upon the closingrecognition criteria as of December 31, 2023, and therefore considered as non-recognized subsequent event.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
N/A
Item 9A. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
transactions contemplated in the Purchase Agreement, M I will acquire (the “Acquisition”) 100% of the issued and outstanding equity securities of Priority, as well as assume certain of Priority’s debt, in exchange for a number of shares of our common stock equalExchange Act, designed to
Priority’s equity value (which the Purchase Agreement defines as of the signing date as $947,835,000 enterprise value of Priority less the net debt of Priority at closing, subjectprovide reasonable assurance that information required to
certain adjustments as described below) divided by $10.30. If Priority acquires any businesses prior to the closing of the Acquisition that increase Priority’s Adjusted EBITDA in aggregate by more than $9 million, Priority’s enterprise value will increase by multiplying the incremental increase in Adjusted EBITDA of such acquisition by 12.5, provided that estimated synergies related to any such acquisitions included in the Adjusted EBITDA calculation of Priority shall be
capped at 20% of the Adjusted EBITDA of the applicable acquisition with respect to the 12-month period immediately preceding the consummation of such acquisition. In connection with the Acquisition, we will change our name to Priority Technology Holdings, Inc. In addition, any cash that Priority spends to acquire any technology assets, up to $5,000,000, to purchase securities from the Founders pursuant to the Promote Agreement described below or to extend the time we have to complete a business combination, such amounts will be included in the calculation of net debt as cash and cash equivalents(which would reduce the amount of net debt, effectively increasing the assumed enterprise value of Priority and increasing the number of shares that would be issued to the Interest Holders).An additional 9.8 million shares may be issued as earn out consideration to the Interest Holders and members of management or other service providers of the post-Acquisition company—4.9 million shares for the first earn out and 4.9 million shares for the second earn out. For the first earn out, Adjusted EBITDA must be no less than $82.5 million for the year ending December 31, 2018 and the stock price must have traded in excess of $12.00 for any 20 trading days within any consecutive 30-day trading period at any time on or before December 31, 2019. For the second earn out, Adjusted EBITDA must be no less than $91.5 million for the year ending December 31, 2019 and the stock price must have traded in excess of $14.00 for any 20 trading days within any consecutive 30-day trading period at any time between January 1, 2019 and December 31, 2020. In the event that the first earn out targets are not met, the entire 9.8 million shares may be issued if the second earn out targets are met.
Concurrently with the Purchase Agreement, our founding stockholders (the “Founders”) and Priority entered into a purchase agreement (the “Promote Agreement”) pursuant to which Priority agreed to purchase 421,107 of the units issued to the Founders in a private placement immediately prior to M I’s initial public offering, and 453,210 shares of common stock of M I issued to the Founders for an aggregate purchase price of approximately $2.1 million. In addition, pursuant to the Promote Agreement, the Founders will forfeit 174,863 founder’s shares at the closing of the Acquisition, which shares may be reissued to the Founders if one of the earn outs described above is achieved.
In addition, the Founders and Thomas C. Priore, the Executive Chairman of Priority (“TCP”), entered into a letter agreement (the “Letter Agreement”) pursuant to which the Founders granted TCP (i) the right to purchase the Founders’ remaining shares of our common stock at the prevailing market price subject to certain conditions including a floor of $10.30 per share and (ii) a right of first refusal on the shares.
On March 13, 2018, the Company issued promissory notes in the aggregate principal amount of$132,753 to its sponsors (M SPAC LLC, M SPAC Holdings I, LLC and M SPAC Holdings II, LLC). The $132,753 receiveddisclosed by the Company upon issuancein reports that it files or submits under the Exchange Act is recorded, processed, summarized or reported within the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to our management, including our principal executive officer (CEO), our principal financial officer (CFO) and, as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of the notes was deposited intoCEO and CFO, has evaluated the Company’s trust accounteffectiveness of the Company's disclosure controls and procedures as of December 31, 2023. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023.
(b) Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the benefitSecurities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that:
(i) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the Company's assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are made only in accordance with authorizations of the Company's management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its public stockholdersinherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in order to extendconditions, or that theperiod degree of timecompliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) the Internal Control - Integrated Framework (2013). Based on this assessment, management determined that the Company hasmaintained effective internal control over financial reporting as of December 31, 2023.
(c)Attestation Report of Independent Registered Public Accounting Firm
Not applicable due to completethe Company's status as a business combination for an additional one month, from March 19, 2018 to April 19, 2018. The notes do not bear interest and are payable five business days after the datenon-accelerated filer.
(d)Changes in Internal Control over Financial Reporting
During 2022, the Company completesimplemented new general ledger, accounts payable, consolidation and financial reporting systems. The implementation involved changes to certain processes and related internal controls over financial reporting. The Company has reviewed the system and controls affected and has made the appropriate changes as necessary.
There were no changes in the Company's internal control over financial reporting during the year ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
Rule 10b5-1 Director and Officer Trading Arrangements
On June 16, 2023, Sean Kiewiet, an officer of the Company as defined in Section 16 of the Exchange Act, adopted a
business combination.Rule 10b5-1 trading arrangement as defined in Item 408(a) of Regulation S-K. F-16
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| Officer or Director Name and Title | | Action | | Plan Type | | Date | | Number of Shares to be sold | | Expiration |
Sean Kiewiet, Chief Strategy Officer | | Adopted | | Rule 10b5-1 | | June 16, 2023 | | 620,000 | | December 31, 2024 |
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PART III.
Item 10. Directors, Executive Officers and Corporate Governance
The information called for by Item 10 is incorporated herein by reference to the definitive proxy statement relating to the Company's 2024 Annual Meeting of Stockholders. We intend to file such definitive proxy statement with the SEC pursuant to Regulation 14A within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10.
Item 14. Principal Accountant Fees and Services
The information called for by Item 14 is incorporated herein by reference to the definitive proxy statement referenced above in Item 10.
PART IV.
Item 15. Exhibit and Financial Statement Schedules
(2) Financial Statement Schedule
N/A
(b) Exhibits
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| | Earnout Agreement, dated July 31, 2023, by and among Plastiq, Powered by Priority, LLC, Plastiq Inc., PLV Inc., Nearside Business Corp., Blue Torch Finance, LLC and Priority Holdings, LLC. | |
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| 101.INS * | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH * | | XBRL Taxonomy Extension Schema Document | |
| 101.CAL * | | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB * | | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE * | | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF * | | XBRL Taxonomy Extension Definition Linkbase Document | |
* Filed herewith
** Furnished herewith
† Indicates exhibits that constitute management contracts or compensation plans or arrangements.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRIORITY TECHNOLOGY HOLDINGS, INC.
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| March 12, 2024 | /s/ Thomas C. Priore Thomas C. Priore President, Chief Executive Officer and Chairman (Principal Executive Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | Date |
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/s/ Thomas C. Priore Thomas C. Priore | | President, Chief Executive Officer and Chairman
(Principal Executive Officer) | March 12, 2024 |
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/s/ Timothy M. O'Leary Timothy M. O'Leary | | Chief Financial Officer
(Principal Financial Officer) | March 12, 2024 |
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/s/ Rajiv Kumar Rajiv Kumar | | Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer) | March 12, 2024 |
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| /s/ John Priore | | Director | March 12, 2024 |
| John Priore | | | |
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/s/ Michael Passilla Michael Passilla | | Director | March 12, 2024 |
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/s/ Marietta C. Davis Marietta C. Davis | | Director | March 12, 2024 |
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/s/ Christina M. Favilla Christina M. Favilla | | Director | March 12, 2024 |
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/s/ Marc Crisafulli Marc Crisafulli | | Director | March 12, 2024 |
