UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20202023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number: 001-37872
Priority Technology Holdings, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Delaware | | 47-4257046 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | |
| 2001 Westside Parkway | | |
| Suite 155 | | |
| Alpharetta, | Georgia | | 30004 |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant's telephone number, including area code: (800) 935-5961(404) 952-2107
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common stock,Stock, $0.001 par value | | PRTH | | Nasdaq GlobalCapital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," ''accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financials statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020,2023, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant's common stockCommon Stock held by non-affiliates of the registrant was approximately $30.0$69.9 million (based upon the closing sale price of the common stockCommon Stock on that date on The Nasdaq Capital Market).
As of March 24, 2021, 68,088,732 shares7, 2024, the number of common stock, par value $0.001 per share, were issued and 67,637,508 shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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 June 9, 2021,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 notno later than 120 days after its fiscal year ended December 31, 2020.
Priority Technology Holdings, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2020Table of Contents
Cautionary Note Regarding Forward-LookingForward-looking Statements
Some of the statements made in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management'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. The words "anticipate,"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 Annual 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, among other things, negatively impact our business, financial condition and results of the COVID-19 pandemic;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 processor;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 made in this Annual Report on Form 10-K.
The forward-looking statements contained in this Annual Report on Form 10-K are based on our current expectations and beliefs concerning future developments and their potential effects on us. You 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 on page 18in 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. 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.
Terms Used in thethis Annual Report on Form 10-K
As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to the terms "Company," "Priority," "we," "us" and "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.
ITEMItem 1. BUSINESSBusiness
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.
We are a leading provider of payment infrastructure for merchant acquiring, integrated payment software and automated payable solutions. We offer a single technology platform for integrated payments, low friction merchant boarding, underwriting, risk management and compliance monitoring to businesses, enterprises and distribution partners such as retail independent sales organizations ("ISOs"), financial institutions ("FIs"), wholesale ISOs, and independent software vendors ("ISVs"). The Company, then Priority Holdings, LLC, was foundedestablished in 2005 with a mission to build a merchant inspired payments platform that would advance the goals of our small and medium-size business clients ("SMBs"), enterprise clients, and distribution partners.
Since 2013, we havehas grown from a founder-financed technology startup to become the 38th largest U.S. merchant acquirer to become the 12th largest and the 5th5th largest non-bank merchant acquirer as ofin the end of 2020U.S. by volume, according to the Nilson Report issued in March 2021. In 20202023. Since inception, we have built a native technology platform that provides all forms of payments (card acquiring and 2019, we processed 457 millionissuing, ACH, check and 513 million transactions, respectively,wire) and $42.3 billion and $43.0 billion, respectively, in bankcard payment volume across approximately 223,000 and 203,000, respectively, merchants. Headquarteredembedded finance services that serve customers of any size. Priority maintains a global business platform with 983 employees operating from its headquarters in Alpharetta, Georgia near Atlanta, we had 479 employees as of December 31, 2020GA and are ledregional 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 an experienced groupleveraging 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 executives.
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) two1) market leading proprietary product platforms: the MX product line targeting the consumer payments marketplatforms in SMB, B2B and the commercial payments exchange ("CPX") product line targeting the commercial payments market, (2)Enterprise Payments verticals; 2) focused distribution engines dedicated to selling into business-to-consumer ("B2C")helping our partners monetize their merchant payment networks; and commercial payments business-to-business ("B2B") payments markets, and (3)3) a cost-efficient, agile payment and business processing infrastructure, knownpurpose-built to support our partners in operating in these distinct market verticals.
Priority's solutions are delivered via internally as Vortex.Clouddeveloped payment applications and Vortex.OS.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 linesuite provides technology-enabled payment acceptance and business management capabilities to merchants, enterprises and our distribution partners. The MX product line includes: (1) oursuite includes MX ISO/AgentConnect and VIMAS reseller technology systems (collectively referred to as "MX Connect") and (2) our 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 consumerSMB 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 linesuite 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 business,businesses; 2) quickly implement e-commerce or retail point-of-sale ("POS") solutions,POS solutions; and even3) handle automated clearing house ("ACH")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 boarding,onboarding, have resulted in strong processing volume and revenue growth.
The CPX platform, like the MX product line, provides a complete solution suite designed to monetize all types of B2B payments by maximizing automation for buyers and suppliers. CPX supports virtual card, purchase card, electronic fund transfer, ACH and check payments, intelligently routing each transaction via the optimal payment method. Underlying our MX and CPX platforms is the Company's Vortex.Cloud and Vortex.OS enterprise infrastructure, a curated cloud and application programming interface ("API") driven operating system built for scale and agility.
We developed an entirely virtual computing infrastructure in 2012. This infrastructure, known as Vortex.Cloud, is a highly-available, redundant, and audited payment card industry ("PCI"), Health Insurance Portability and Accountability Act ("HIPAA"), NACHA, and Financial Stability Oversight Council (the "FSOC") computing platform with centralized security and technical operations. We strive to enable Vortex.Cloud to maintain greater than 99% uptime. All computational and IP
assets of our operating companies are hosted and managed on Vortex.Cloud infrastructure. With Vortex.Cloud, we have constructed a uniform set of APIs, called Vortex.OS (operating system), that provide critical functionality to our payment divisions. The Vortex OS APIs provide electronic payments, security/crypto, data persistence, time series data (events), and artificial intelligence (AI). The MX and CPX product platforms leverage Vortex.OS and Vortex.Cloud for maximum scalability, high-availability, security, and access to advanced feature sets. The combined result is a purpose build infrastructure and product offering that produces solid organic growth and profit margin results. Furthermore, in addition to supporting a modern product stack, Vortex.Cloud and Vortex.OS enable the rapid inclusion of data and systems of acquisition targets for smooth consolidation to our operating infrastructure and accelerate achievement of revenue and cost synergies.
We sell our B2C merchant acquiring solutions primarily to SMBs through a growing and diverse reseller network, including ISOs, FIs, ISVs, Value-Added Resellers ("VARs") and other referral partners. We maintain stable, long-term relationships with our resellers, bolstered by the integration of MX Connect, a powerful customer relationship management ("CRM") and business operating system. MX Connect is used by our resellers and internal teams to manage their merchant base and accelerate the growth of their businesses through various value-added tools and resources which include marketing resources, automated onboarding, merchant underwriting, merchant activity monitoring and reporting. In addition, we offer ISVs and VARs a technology "agnostic" and feature rich API, providing developers with the ability to integrate electronic payment acceptance into their software and improve boarding efficiency for their merchant base. For the end user, MX Merchant provides a customizable, virtual terminal with proprietary business management tools and add-on applications that create an integrated merchant experience. MX Merchant's add-on applications include invoicing, website builder, inventory management and customer engagement and data analytics focused on targeted marketing among others. These proprietary business management tools and add-on applications, coupled with our omni-channel payment solutions, enable us to achieve attrition rates that, we believe, are well below industry average. MX Merchant can be deployed on hardware from a variety of vendors and operated either as a standalone product or integrated with third-party software. Through MX Merchant, we are well-positioned to capitalize on the trend towards integrated payments solutions, new technology adoption, and value-added service utilization in the SMB market. Our broad go-to-market strategy has resulted in a merchant base that is both industry and geographically diversified in the United States, resulting in low industry and merchant concentration.
In addition to our B2CSMB offering, we have diversified our source of revenues through our growing presence in the B2B market. We work withprovide automated AP offerings to our enterprise clients and leading financial institutions seeking to automate their accounts payable processes. We provide curated managed services and a robust suite of integrated accounts payable automation solutions to industry leading financial institutions and card networks such as Citibank, MasterCard, Visa and American Express, among others. Unlike the consumer payments business which advocates a variable cost indirect sales strategy, Priority Commercial Payments supports a direct sales model that provides turnkey merchant development, product sales, and supplier enablement programs.through our CPX platform. Our CPX platform offers clients a seamless bridge for buyer to supplier (payor to provider)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 Accounts Payable ("AP")AP automation solutions providesprovides: 1) suppliers with the benefits of cash acceleration,acceleration; 2) buyers with valuable rebate/discount revenue,revenue: and 3) the Company with stable sources of payment processing and other revenue. Considering thatAdditionally, 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 commercialAP suite, Priority acquired the assets of Plastiq Inc. through its subsidiary Plastiq, Powered by Priority, LLC, a leading B2B payments volumecompany, in the United States isthird 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 twice the sizeall aspects of consumer paymentsaccounts payable and substantially less penetratedreceivable. The flagship product, Plastiq Pay, pioneered a way for electronic payments, we believe that this market representsbusinesses 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 customer touch point, including a high growth opportunitywebsite, 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 us.
Our Integrated Partners component which offersEnterprise Payments segment provides embedded finance and BaaS solutions to customers that modernize legacy platforms and accelerate modern software partners looking to monetize 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 application program interfaces ("APIs")API resources. Integrated Partners connects businesses with other businesses and their customers in the real estate, hospitality, and health care marketplaces.
We generate revenue primarily from fees charged forpayment processing payment transactions, and to a lesser extent, from monthly subscription services and other solutions provided to merchants. Processingcustomers and interest income from the permissible investments of the deposits we hold. Payment processing fees are generated from the ongoing sales of our merchants underand are governed by multi-year merchant contracts, and thuscontracts. As a result, payment processing fees are highly recurring in nature. Due to the nature of our strong reseller-centric distribution model and differentiated technology offering, we can drive efficient scale and operating leverage, generating robust margins and profitability.
For the year ended December 31, 2020,2023, we generated revenue of $404.3$755.6 million, net incomeloss attributable to thecommon stockholders of Priority Technology Holdings, Inc. of $25.7$49.1 million and Consolidated Adjusted EBITDA (a non-GAAP liquidity measure)operating income of $63.8$81.5 million, compared to revenue of $371.9$663.6 million, net loss attributable to common stockholders of $33.6$39.0 million and Consolidated Adjusted EBITDAoperating income of
$72.1 $56.2 million for the year ended December 31, 2019. For a discussion of Consolidated Adjusted EBITDA and a reconciliation to net income (loss), the most directly comparable measure under GAAP, please see the section entitled "2022.
Industry Overview
The B2C payment processing industry provides merchants with credit, debit, gift, and 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 consumer use of electronic payments andElectronic Payments, advances in payment technology.technology and the disruption in banking by fintech providers. The proliferation of bankcards and the use of other payment technologies has made the acceptance of electronic paymentsElectronic Payments through multiple channels a virtual necessity for many businesses regardless of size, to remain competitive. ThisThe increased use and acceptance of bankcards and the availability of more sophisticated products and services has resulted in a highly competitive, and specialized industry.
Services to the SMB merchant market have been 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 that 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 / acquiring/payment processing industry:
•Trend Toward Electronic Transactions. – We believe the continued shift from cash/paper payments toward electronic / electronic/card payments will drive growth for merchant acquirers and processors as volume continues to grow correspondingly. We believe the continuedthis migration from cash to card and overall market growth will continue to provide tailwinds to the electronic paymentsElectronic Payments industry.
•Increasing DemandConvergence 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 Integrated Payments. Merchant acquirersnew alternatives to traditional payment options remains top of mind and big tech companies, fintechs, challenger banks and other non-bank entrants are increasingly differentiating themselves from competitors via innovative technology, including integrated POS solutions ("integrated payments"). Integrated payments referdriving 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 the integration of payment processingavoid contact with various software solutionsphysical infrastructure and applications that are sold by VARs and ISVs. Integrated software tools help merchants manage their businesses, streamline processes, lower costs, increase accuracy, and drive growthobjects, continues to create even more opportunities for businesses. The broader solutions delivered as part of an integrated payments platform have become an increasingly important consideration point for many SMBs, whereas pricing was historically the key factor influencing the selection of a merchant acquirer. Merchant acquirers that partner with VARs and ISVs to integrate payments with software or own the software outright may benefit most from new revenue streams and higher merchant retention.
•Mobile Payments.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 mobile
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.
•Migration to EMV. EMV, which stands for Europay, MasterCard and Visa, is the global payments standard that utilizes chip technology on cards designed to increase security. EMV technology employs dynamic authentication for each transaction, rendering any data copied from magnetic strip readers to produce counterfeit cards unusable. Demand for EMV ready terminals should remain resilient in the near term due to the following:
•The United States was one of the last countries to adopt EMV technology, leaving a large group of merchants still transitioning to the EMV standards; and
•U.S. merchants are penalized for failing to comply with EMV standards by bearing the chargeback risk when presented with an EMV enabled card when the terminal is non-compliant.
The large majority of our third-party products are EMV enabled, and we expect that most new hardware sales will be EMV enabled devices, although all hardware sales constitute only a small portion of our total revenue.
B2B payments is the largest payment market in the United StatesU.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,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.
Electronics Payments Overview
The payment processing and services industry provides the infrastructure and services necessary to enable the acceptance, processing, clearing and settlement of electronic payments predominantly consisting of credit card, debit card, ACH payments, gift cards and loyalty rewards programs. Characterized by recurring revenues, high operating leverage, and robust cash flow generation, the industry continues to benefit from the mass migration from cash and checks to electronic payments.
There are five key participants in the payment processing value chain: (i) card issuing banks, (ii) merchant acquirers, (iii) payment networks, (iv) merchant processors and (v) sponsor banks. Each of these participants performs key functions in the electronic payments process, while other entities, such as terminal manufacturers, gateway providers and independent sales organizations also play important functions within the value chain.
•Card Issuing Banks – Typically financial institutions that issue credit/debit cards to consumers (also underwrite the risk associated the cards), authorize (check for fraud and sufficient funds) transactions and transfer funds through the payment networks for settlement. Some card issuers do not have the ability to process transactions in-house, in which case the issuer may engage a card processor.
•Merchant Acquirers – Firms that sign up merchants to their platform through a variety of sales channels, enabling them to accept, process and settle electronic payments. Additionally, merchant acquirers provide other value-added services to help merchants run their businesses more efficiently, such as helping to select POS hardware and providing customer support and services.
•Payment Networks – Card brand companies, such as MasterCard or Visa, that set rules and provide the rails to route transactions and information between card issuers, merchant acquirers and payments processors in real-time over vast communication networks.
•Merchant Processors – Firms that provide the technology needed to allow for payment authorization, data transmission, data security and settlement functions. Oftentimes the term merchant acquirer and processor are used synonymously; however, they perform two distinct functions (sometimes provided by the same entity).
•Sponsor Banks – Financial Institutions that are acquiring members of Visa and MasterCard and provide sponsorship access to acquirers and processors to the card networks. Sponsor banks provide merchants the ultimate access to the card networks for their processing activity.
The industry also includes other third-party providers, including service, software and hardware companies that provide products and services designed to improve the experience for issuers, merchants and merchant acquirers. This category includes mobile payment enablers, terminal manufacturers, and ISV's.
Each electronic payment transaction consists of two key steps: the front-end authorization and back end settlement.
•Front End Authorization – The original request for payment authorization that occurs when the card is swiped or inserted at the POS or the data is entered into an online gateway.
•Back End Settlement – The settlement and clearing process consists of settling outstanding payables and receivables between the card issuing bank & merchant bank. This process is facilitated by a back-end processor that utilizes the network's platform to send outstanding payable information and funds between the two parties.
A credit or debit card transaction carried out offline or through signature debit is a two-message process, with the front end occurring at the POS and the back end occurring later as a part of a batch processing system that clears all of the day's payments from transaction occurring throughout the day. Credit and debit card transactions carried out with personal identification numbers consist of a single message, whereby the authorization and clearing occur immediately – the money is instantly debited from the cardholder's checking account, although the settlement of funds (the transfer to the merchant's account) may happen later as part of a batch process.
Competitive Strengths
We possess certain attributes that we believe differentiate us as a leading provider of merchant acquiring, and commercial payment and embedded finance solutions in the United States.U.S. Our key competitive strengths include:
Purpose-Built Proprietary Technology
We have strategically built our proprietary software to provide technology-enabled payment acceptance and business management solutions to merchants, enterprises and resellers. The MX product line is embedded into the critical day-to-day workflows and operations of both merchants and resellers, leading to highly "sticky" relationships and high retention. CPX provides a complete commercial solution suite that monetizes commercial payments and maximizes automation for buyers and suppliers. By integrating with Vortex.Cloud and Vortex.OS, MX and CPX can scale in a cost-effective and efficient manner, while enhancing features and functionality. Both product lines also support low friction merchant onboarding and an integrated value-added product offering for merchants, resellers and ISVs in the consumer and commercial payment space. Furthermore, in addition to supporting a modern user experience, Vortex.Cloud enables the rapid inclusion of data and systems of acquisition targets for smooth consolidation to our operating infrastructure and accelerates achievement of revenue and of cost synergies.
Diverse Reseller Community
– We maintain strong reseller relationships with approximately 1,3001,200 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 thisa one-to-many distribution model. Resellers leverage MX Connect's powerful CRM and business operating features to manage their internal sales teams and engage their merchant base through various value-added tools and resources, such as marketing resources, automated onboarding, merchant underwriting, merchant activity monitoring and reporting, to support the growth of their businesses. We believe that our ability to service our reseller partners through a comprehensive offering provides a competitive advantage that has allowed the companyCompany to build a large, diverse merchant base characterized by high retention. The strengthstrengths of our technology offering is manifestare 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
MX Merchant offers – 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 paymentsElectronic Payments (e.g., credit cards, debit cards, and ACH) at the point of sale ("POS"),POS, online, and via mobile payment technologies. In addition, through MX Merchant, weWe deliver innovative business management products and add-on features that meet the needs of SMBs across different vertical markets. ThroughAdditionally, with our MX Merchant platform,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 purpose-built proprietary technology platforms, MX and CPX, each serve a unique purpose within consumer and commercial payments, enabling the company to realize significant operating leverage within each business segment. Furthermore, the agility of our Vortex.Cloud and Vortex.OS enterprise infrastructure enables us to quickly and cost efficiently consolidate acquisitions to drive revenue and cost synergies. Our operating efficiency supports a low capital expenditure environment to develop product enhancements that drive organic growth across our consumerSMB, B2B and commercialEnterprise payment ecosystems, andas 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 with merchants and resellers in the payments industry. Since founding the Company, our leadership team has built strong, long-term relationships with reseller and enterprise partners by leveraging the MX and CPX product platforms to meet the needs of businesses in specific vertical markets. 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 Consumer Reseller Network and Merchant Base
We expect to grow through our existing reseller network and merchant base by capitalizing on the inherentorganic 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 continuescontinue 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 enablesenable 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 number 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 maintainmaintained a strong position within the reseller community with approximately 1,3001,200 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 MX Connect technology offering enables us to attract and retain high qualityhigh-quality resellers focused on growth.
Increase Margin per Merchant with Complementary Products and Services
We intend to drive the adoption of our value-added services and tools with our merchant base. MX Merchant allows merchants to add proprietary Priority applications as well as other third-party applications from the MX Merchant Marketplace to build customized payment solutions that are tailored to a merchant's business needs. As we continue to board new merchants and promote our MX Merchant solution, we can cross-sell these add-on applications. By increasing attachment rates, along with continued benefit from economies of scale, we expect to see improved margins per merchant. Merchants utilizing MX Merchant exhibit somewhat higher retention, contributing to our improving overall retention rates. We believe we are well-positioned to capitalize on the secular trend towards integrated payments solutions, new technology adoption and value-add service utilization in the SMB market.
Deploy Industry Specific Payment Technology
We intend to continue to enhance and deploy our technology-enabled payment solutions in attractive industries. Through MX Merchant, we have developed proprietary applications and added third-party tools that address the specific needs of merchants in certain verticals, including retail, health careour capabilities to collect, store and hospitality.send money into industry-specific verticals. We continue to identify and evaluate new, and 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 commercial payments market where we provide curated managed services and AP automation solutions to industry leading financial institutionsbusinesses, FIs and card networks such as Citibank, MasterCard, VisaMastercard and American Express.Visa. The Commercialcommercial payments market is the largest and one of the fastest growing payments marketmarkets in the United StatesU.S. by volume. We are well positioned to capitalize on the secular shift from check to electronic payments,Electronic Payments, which currently lags the consumer payments markets,market, by eliminating the friction between buyers and suppliers through our industry leading offering,offerings of CPX and drivingPlastiq. We believe this will drive strong growth and profitability.
Accretive Acquisitions
WeWith a consistent, long-term goal of maximizing stockholder value, we intend to selectively pursue strategic and tactical acquisitions that meet certain criteria, with a consistent long-term goal of maximizing stockholder value.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 Vortex.Cloud 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 consumer payment merchantsSMB segment through three primary sales channels: 1) Retail ISOs/AgentsISOs (Retail and Financial Institutions,Wholesale) and Agents; 2) Wholesale ISOs,FIs; and 3) Independent Software VendorsISVs and Value-Added Resellers.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
relationship. Merchants relationships. Our merchants utilize our diversecloud-based MX Merchant product suite to manage their business, increasingbusinesses and process transactions. This separate solution increases our ability to retain the merchant if the ISO were to leave the Company.
•Retail ISOs/Agents and Financial Institutions (i.e. community banks) – A non-risk bearing independent group ofOur B2B segment obtains its partner clients through: 1) direct sales agents, individual sales agents, or financial institutions (mostly community banks) that operates as a sales force on behalf of the Company. Retail resellers are not employed by us but rather are independently contracted to acquire merchants to utilize our payment processing and product offerings. While the reseller serves as the merchant's key contact, the processing contract is between us and the merchant and agreements with resellers include non-solicitation rights. We manage the transaction risk on behalf of retail resellers.
•Wholesale ISO – A risk bearing independent group of sales agents operating as a sales force on behalf of the Company. Wholesale ISOs are not employed by us but rather are independently contracted to acquire merchants to utilize our payment processing and product offerings. While the ISO serves as the merchant's key contact, the processing contract is between us and the merchant, and agreements with ISOs include non-solicitation rights. Wholesale ISOs are responsible and bear all transaction risk on their merchant portfolios. We underwrite all such merchants even though wholesale ISOs bear the risk.
•initiatives; 2) ISVs and VARs - ISVs develop and sell business management software solutions while VARs sell third-party software solutions to merchants as part of a bundled package that includes the computer systems which operates the software. We partner with ISVs and VARs that can integrate our capabilities into a variety of software applications (e.g. medical billing software). These integrated payment solutions create an extremely "sticky" customer relationship.
Priority Commercial Payments obtains its "buyer" clients through direct sales initiative and referral and business partnerships with integrated software partners,partnerships; 3) the card networks (MasterCard, Visa, American Express)(Mastercard and Visa); 4) large USU.S. banking institutions.institutions and 5) other card issuer referral partners. We support a direct vendor sales model that provides turnkeyturn-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 an emerging forcea 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 single reseller relationship contributes more than 10% of total bankcard processing volume, and that onesuch relationship represents approximately 17.1%14% of our total bankcard processing volume.
Security, Disaster Recovery and Back-up Systems
As a result of normalroutine 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 attempt 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 ("PCI DSS"), FSOC,standards; and HIPAA audits.2) the Payment Card Industry Security Standards Council. As such, we have a dedicated team responsible for responding to security incident response.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 many other events that could potentially jeopardize data availability, integrity and confidentiality. This team is responsible for investigating and reporting on all malicious activity in and around our information systems. 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 of the other.independently. If one site or servicedata center becomes impaired, the traffic is automatically redirected to the other automatically.other. Business Continuity Planningcontinuity planning drills are run each quarter to test fail-over and recovery as well as staff operations and readiness.
Third-PartyThird-party Processors and Sponsor Banks
We partner with various vendors in the payments value chain, to assist us in providing payment processing services to merchant clients, most notably processors and sponsor banks which sit between us (the merchant acquirer) and the card networks.networks, to assist us in providing payment processing services to merchant clients. Processing is a scale drivenscale-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 First DataFiserv or TSYS,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,Mastercard, through which the transaction information is routed in exchange for network fees.
To provide processing services, merchant acquirers like Priority we must be registered with the card networks (e.g., Visa and MasterCard)Mastercard). To register with a card network in the United States,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 Sutton 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 Atlantic Capital Bank and Fifth ThirdSouth 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)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 managementmonitoring capabilities have enabled us to maintain low credit loss performance. Our risk management strategies are informed by a team with decades of 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 isare our front-line underwriting policies that vet all resellers and merchants prior to their contractingcontractual arrangements with us. Our automated risk systems pull credit bureau reports,access: 1) guarantor information; 2) corporate ownership details, as well asdetails; 3) anti-money laundering Office of Foreign Assets Control ("OFAC")information; and, Financial Crimes Enforcement Network ("FinCEN")4) OFAC and FinCEN information from a variety of integrated data bases. Thisdatabases. The collected information is put into the hands ofdelivered to a tenured team of underwriters who conduct any 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 aremay 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 leveltransaction-level risk limits for volume, average ticket, transaction types and authorization codes among other items that are captured by our CYRIS risk module—module - a proprietary risk system that monitors and reports transaction risk activity to our risk team. This transaction leveltransaction-level risk module, housed within MX Connect, forms the foundational risk management framework that enables the companyCompany 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 andin addition to other risk mitigation actions. TheseThe risk mitigation actions can include non- authorizationinclude: 1) non-authorization of the transaction,transaction; 2) debit of reservesreserves; or even3) termination of the processing agreement. Merchants are periodically reviewed to assess any risk adjustments based upon their overall financial health and compliance with Networknetwork standards. Merchant transaction activity is investigated for instances of business activity changes or credit impairment (and improvement).
Loss Mitigation-– In instances where particular transactions and/or individual merchants are flagged for fraud, or in instances where the transaction activity is resulting in excessive chargebacks,charge-backs, several loss mitigation actions may be taken. These includeinclude: 1) charge-back dispute
resolution, resolution; 2) merchant and reseller funds (reserves or processed batches) withheld,withheld; 3) inclusion on Network Match List to notify the industry of a "bad actor", and even; 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 FDIC insured limits at risk.
Acquisitions and Dispositions of Businesses
Merger with Finxera Holdings, Inc.
On March 5, 2021, the CompanyMay 23, 2023, Plastiq, Powered by Priority, LLC, a subsidiary of PRTH, entered into an Agreementequity and Plan of Merger (the “Merger Agreement”)asset purchase agreement with Finxera Holdings,Plastiq, Inc. (“Finxera”), Prime Warrior Acquisition Corp., an indirect wholly owned subsidiaryto acquire substantially all of the Company (“Merger Sub”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 solely ininstant access to working capital to its capacity ascustomers and will complement the representativeCompany's existing supplier-funded B2B payments business. On May 24, 2023, Plastiq Inc. filed voluntary petitions for relief under Chapter 11 of Title 11 of the stockholders or optionholders of Finxera (the “Equityholder Representative”), Stone Point Capital LLC. Priority will acquire, through a merger of Merger Sub with and into Finxera, the Finxera business. Finxera is a provider of deposit account management payment processing services to the debt settlement industryUnited States Code in the United States.
The Merger Agreement provides that, among other things andpurchase was completed on the terms and subject to the conditionsJuly 31, 2023, for a total purchase consideration of the Merger Agreement, (a) Merger Sub will merge with and into Finxera (the “Merger”), with the separate existence of Merger Sub ceasing and Finxera continuing as the surviving entity of the Merger (the “Surviving Entity”); (b) at the effective time of the Merger (the “Effective Time”) each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the Surviving Entity; and (c) the shares of common stock of Finxera designated as “Class A Common Stock”, “Class B Common Stock” and preferred stock “Series C Participating Preferred Stock” issued and outstanding immediately prior to the closing of the transactions contemplated by the Merger Agreement (the “Closing”) will be converted into rights to receive certain cash and stockapproximately $37.0 million. The total purchase consideration and a contingent right to receive a portion of any payments made following the determination of the purchase price adjustments (a “Deferred Payment”).
Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of: (a) $425,000,000, plus (b) the aggregate value of the current assets of the Finxera and each of its subsidiaries (the “Group Companies”) less the aggregate value of the current liabilities of the Group Companies, in each case, determined on a consolidated basis without duplication, as of the close of business on the business day immediately preceding the date of the Closing (which may be a positive or negative number), plus (c) the sum of all cash and cash equivalents of the Group Companies as of the close of business on the business day immediately preceding the date of the Closing, minus (d) the amount of indebtedness of the Group Companies as of the close of the business day immediately prior to the date of the Closing, minus (e) the amount of unpaid transaction expenses, minus (f) 25% of the earnings of the Group Companies during the period between the signing of the Merger Agreement and the Closing.
Each option to purchase one or more shares of Class B Common Stock of Finxera issued pursuant to the Finxera Holdings, Inc. 2018 Equity Incentive Plan (the “Company Options”), vested as of immediately prior to the Closing (the “Vested Company Option”), that is issued and outstanding immediately prior to the Closing will be deemed to be exercised and converted into the right to receive a cash payment with respect to such Vested Company Option and a contingent right to receive a portion of any Deferred Payments.
Support Agreement
In accordance with the terms of the Merger Agreement, Thomas C. Priore, the Thomas Priore 2019 GRAT, the Thomas C. Priore Irrevocable Insurance Trust U/A/D 1/8/2010 (the “Stockholders”) and Finxera have entered into that certain Support Agreement, dated as of March 5, 2021 (the “Support Agreement”), pursuant to which each of the Stockholder (a) agrees to execute and deliver the Stockholders’ Agreement and the Registration Rights Agreement on the date of the Closing and (b) after the date of the Support Agreement and prior to the date of the Closing, shall not sell, assign, transfer or otherwise dispose of any of such Stockholder’s Company Common Shares, unless as a condition to such sale, assignment, transfer or other disposition, each such transferee executes and delivers a joinder agreement to the Support Agreement in a form reasonably acceptable to Finxera, provided, that such Stockholder shall be permitted to sell up to an aggregate of 5% of such Stockholder’s Company Common Shares upon written notice to Finxera.
Debt Commitment Letter
On March 5, 2021, Priority Holdings, LLC (“Holdings”) entered into that certain debt commitment letter (the “Debt Commitment Letter”) with Truist Bank and Truist Securities, Inc. (collectively, the “Debt Commitment Parties”), pursuant to which, among other things, the Debt Commitment Parties have committed to provide Holdings with (a) $300,000,000 of term loan commitments (the “Initial Term Loan Facility”); (b) $290,000,000 of delayed draw term loan commitments (the “Delayed Draw Term Loan Facility”); and (c) a $40,000,000 revolving credit facility (the “Revolving Credit Facility” and together with the Initial Term Loan Facility and the Delayed Draw Term Loan Facility, collectively, the “Debt Financing”), in each case on the terms and subject to the conditions set forth in the Debt Commitment Letter. The proceeds of the Initial Term Loan Facility and the Revolving Credit Facility will be used, among other things, to refinance certain of Holdings’ existing indebtedness, to pay fees and expenses in connection with such refinancing and for working capital and general corporate requirements. The proceeds of the Delayed Draw Term Loan Facility will be used to finance a portion of the cash consideration in connection with the Merger and to pay fees and expenses in connection therewith.
Equity Commitment Letter
On March 5, 2021, the Company entered into that certain preferred stock commitment letter (the “Equity Commitment Letter”) with Ares Capital Management LLC (“ACM”) and Ares Alternative Credit Management LLC (“AACM” and together with ACM, the “Equity Commitment Parties”), pursuant to which, among other things, the Equity Commitment Parties have agreed to purchase perpetual senior preferred equity securities (the “Preferred Stock”) of the Company (a) to be issued in connection with the refinancing and repayment in full of certain Credit and Guaranty Agreements as described in the Equity Commitment Letter (the “Closing Date Refinancing”) (the “Initial Preferred Stock” and the issuance and sale thereof and certain warrantsrepresenting 2.50% of the fully diluted Company Common Shares at the Closing, the “Initial Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $90.0included $28.5 million and (ii) in the case of AACM, $60.0 million, (b) to be issued in connection with the Merger (the “Acquisition Preferred Stock” and the issuance and sale thereof, the “Acquisition Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $30.0 million and (ii) in the case of AACM, $20.0 million and (c) available to be issued in connection with one or more acquisitions by the Company or its subsidiaries as permitted by the Equity Commitment Letter (the “Delayed Preferred Stock” and the issuance and sale thereof, the “Delayed Preferred Stock Financing” and together with the Initial Preferred Stock Financing and the Acquisition Preferred Stock Financing, the “Preferred Stock Financing”) an amount equal to (i) in the case of ACM, $30.0 million and (ii) in the case of AACM, $20.0 million.
The Company has also agreed to issue to the Equity Commitment Parties warrants to purchase shares of common stock of the Company equal to an aggregate of 2.5% of the outstanding shares of common stock at a nominal exercise price.
The Preferred Stock will require quarterly dividend payments initially equal to a LIBOR rate plus 12% per annum of the liquidation preference, of which at least LIBOR plus 5% is to be payable in cash and the remainder paidremaining consideration is in kind. Inthe nature of deferred or contingent consideration and certain circumstances, including ifequity interest in the Company does not payacquiring entity. The cash consideration for the minimum cash dividend,purchase was funded by borrowings from the required dividend may be increased.Company's revolving credit facility.
The Preferred Stock will be redeemable beginning two years after the first issuance of Preferred Stock at a price equal to 102% of the liquidation preference of the Preferred Stock plus any accrued and unpaid dividends or, beginning three years after the first issuance of Preferred Stock, at a price equalNote 2. Acquisitions for additional information related to the liquidation preference plus any accrued and unpaid dividends. Prior to two years after the first issuance, the Preferred Stock is redeemable at a make-whole rate. In the event of a change of control or liquidation event, the Company will be required to redeem the outstanding Preferred Stock.
The Preferred Stock will not have any voting rights except as required under Delaware law, but certain actions by the Company will require the consent of holders of a majority of the Preferred Stock. In addition, the Preferred Stock will include certain covenants restricting, among other things, restricted payments, the incurrence of indebtedness, acquisitions and investments.
Competition
The U.S. acquiring industry is highly competitive, with several large processors accounting for the majority of processing volume; whenvolume. When excluding banks, we ranked 5th5th among U.S. non-bank merchant acquiring as of 2020,acquirers, according to the 2020March 2023 Nilson Report issued in March 2021. When comparing top non-bank U.S. merchant acquirers by volume, FIS (which now includes Worldpay) held the leadership position at the end of 2020 followed by Global Payments (which now includes TSYS), and Fiserv (which now includes First Data).
Report.
The concentration at the top of the industry is partly reflects consolidation; however, wea result of consolidation. We believe that consolidation has also resulted in many large processors havingmaintaining multiple, inflexible legacy IT systems that are not well equippedwell-equipped to adjust to changing market requirements. We believe that the large 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, such as Priority.
Pricing has historically been the key factor influencing the selection of a merchant acquirer. However, providersProviders with more advanced tech-enabled services (primarily online and integrated offerings), have an advantage over providers who are 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 price,include: 1) price; 2) breadth of product offerings; 3) partnerships with financial institutions,FIs; 4) servicing capability,capability; 5) data securitysecurity; 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 small to medium-sizedSMB merchant market. According to the SMB Group, a markets insight firm for small and medium-sized businesses, the majority of small and medium-sized businesses recognize the upside tech-enabled solutions provide to daily operations and long-term growth potential. As small businesses increasingly demand integrated solutions tailored to specific business functions or industries, merchant processors are adopting payment enabledpayment-enabled software offerings that combine paymentsembedded 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 often higher processing margins. Through our MX Merchant platform, we are well-positioned to capitalize on the trend 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 subject to a variety of federal, state and local laws and regulations and the rules and standards of the payment 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")
The Dodd-Frank Act of 2010 resulted in significant structural and other changes to the regulation of the financial services industry. The Dodd-Frank Act directed the Board of Governors of the Federal Reserve System (the "Federal Reserve Board")Board to regulate the debit interchange transaction fees that a card issuer or payment card network receives or charges for an electronic debit transaction. Pursuant to the so-called "Durbin Amendment" to the Dodd-Frank Act, these fees must be "reasonable and proportional" to the cost 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$10.0 billion or more are capped at $0.21 per transaction and an ad valorem component of 5five basis points to reflect a portion of the issuer'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 operations.
In addition, the Dodd-Frank Act limits the ability of payment card networks to impose certain restrictions because it allows merchants to: (i)1) set minimum dollar amounts (not to exceed $10)$10.00) for the acceptance of a credit card (and allows federal governmental entities and institutions of higher education to set maximum amounts for the acceptance of credit cards); and (ii)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 thatrestrictions. These rules require a card issuer toto: 1) enable at least two unaffiliated networks on each debit card,card; 2) prohibit card networks from entering into exclusivity arrangementsarrangements; 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 Consumer Financial Protection Bureau (“CFPB”),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 United StatesU.S. financial system. The FSOC has the authority to require supervision and regulation of nonbank financial companies that the FSOC determines pose a systemic risk to the United StatesU.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 rules of Visa, MasterCard,Mastercard, American Express, Discover and other payment networks. In order to provide services, several of our subsidiaries are either registered as service providers for member institutions with MasterCard,Mastercard, Visa and other networks or are direct members of MasterCard,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 card networks for certain acts or omissions.
Banking Laws and Regulations
The Federal Financial Institutions Examination Council (the "FFIEC")FFIEC is an interagency body comprised of federal bank and credit union regulators such as the Federal Reserve Board, the Federal Deposit Insurance Corporation ("FDIC"),FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Bureau of Consumer Financial Protection.CFPB. The FFIEC examines large data processors in order 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 Federal Financial Institutions Examination CouncilFFIEC to be a technology service provider ("TSP")TSP based on the services we provide to financial institutions.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.
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 includeinclude: 1) the federal Gramm-Leach-Bliley Act of 1999, which applies to a broad range of financial institutionsFIs and to companies
that provide services to financial institutionsFIs in the United States,U.S.; 2) certain health care technology laws, including HIPAA and the Health Information Technology for Economic and Clinical Act,Act; and 3) the California Consumer Protection Act ("CCPA"),CCPA, which establishes a new privacy framework for covered businesses byby: i) creating an expanded definition of personal information,information; ii) establishing new data privacy rights for consumers in the State of California,California; iii) imposing special rules on the collection of consumer data from minors,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 casescases: 1) restrict the collection, processing, storage, use and disclosure of personal information,information; 2) require notice to individuals of privacy practices, and provide individuals with certain rights to prevent useuse; and 3) disclosure of protected information. These laws also impose requirements for safeguarding and removal or elimination of personal information.
Anti-Money LaunderingAML and Counter-TerrorismCounter-terrorism Regulation
The United StatesU.S. federal anti-money laundering laws and regulations, including the Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2001 (collectively, the "BSA"),BSA, and the "BSA"BSA implementing regulations administered by FinCEN, a bureau of the United StatesU.S. Department of the Treasury, require, among other things, each financial institution to: (1)1) develop and implement a risk-based anti-money laundering program; (2)2) file reports on large currency transactions; (3)3) file suspicious activity reports if the financial institution believes a customer may be violating U.S. laws and regulations; and (4)4) maintain transaction records. Given that a number of our clients are financial institutionsFIs that are directly subject to U.S. federal anti-
moneyanti-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 economic and trade sanctions programs that are administered by OFAC of the United StatesU.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 Act
and Telemarketing Sales Rule
We are subject to the Federal Telephone Consumer Protection ActTCPA and various state laws to the extent we place telephone calls and short message service ("SMS")SMS messages to clients and consumers. The Telephone Consumer Protection ActTCPA regulates certain telephone calls and SMS messages placed using automatic telephone dialing systems or artificial or prerecorded voices.
voices and can alter the way we do business. Additionally, as a provider of dedicated 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 certain prohibitions against advance payment of fees.
Escheat Laws
We are subject to U.S. federal and state unclaimed or abandoned property state laws in the United States that requiresrequire us to transfer to certain government authorities the unclaimed property of other that we hold when that property has been unclaimed for a certain period of time. Moreover, we are subject to audit by state and foreign regulatory authorities with regard to our escheatment practices.
Other Regulation
The Housing Assistance 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 laws, rules and regulations to which we are subject to and the regulatory 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 into 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, 2020,2023, we employed 479983 employees, of which 472974 were employed full-time. We have employees residing in 30 states acrossthroughout the country.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.
Well-being and Safety during COVID-19 Pandemic
The success of our business is connected to the well-being of our employees. Accordingly, we are committed to the health, safety and wellness of our employees. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees and the communities in which we operate. This included enabling all of our employees to seamlessly shift to work from home. Over the past few years, we have made investments in our operating environments and technology that support day-to-day execution by employees working from home which allowed for the smooth transition. Additional health and safety measures have been implemented for employees who have elected to work within office locations.
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. As part of this goal, we launched a Diversity and Inclusion roundtable series for all employees to participate. Inclusion and diversity remainsremain 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 reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, of 1934, as amended (the "Exchange Act"), are made available free of charge on our internet web sitewebsite at www.prth.com,www.prioritycommerce.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to the Securities and Exchange Commission (the "SEC").SEC. The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web sitewebsite is https://www.sec.gov/.www.sec.gov. The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
ITEMItem 1A. RISK FACTORS
Risk Factors
An investment in our common stockCommon 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 10-K and the documents incorporated by reference. Our business, prospects, financial condition or operating results could be harmed by any of these risks, as well as other 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
Our business has been and is likelyUnauthorized access to continue to be negatively affected by the recent COVID-19 outbreak.
The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, continues to adversely affect commercial activity and has contributed to significant declines in economic activity. In particular, the COVID-19 pandemic has affected a number of operational factors, including:
• merchant temporary closures and failures;
• continued and/our systems or worsening unemployment which may negatively influence consumer spending;
• third-party disruptions, including potential outages at network providers, and other suppliers; and
• increased cyber and payment fraud risk.
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided. The full effects of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and difficult to predict at this time, including, but not limited to, the duration and spread of the pandemic, its severity, the restrictive actions taken to contain the virus or treat its effects, its effects on our customers and how quickly and to what extent normal economic and operating conditions, operations and demand for our services can resume. Accordingly, while the COVID-19 pandemic could have an adverse effect on our revenues and financial results for reporting periods after 2020, the ultimate effects on our operations, financial condition and cash flows cannot be determined at this time.
Unauthorizedunauthorized disclosure of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise, could expose us to liability, protracted and costly litigation and damage our reputation.
Our services include the processing, transmission and storing of sensitive business and personal information about our merchants, 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 outsource certain functions or other agents (“("associated third parties”parties").We may have responsibility to the card networks, financial institutions,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. detect and all of which we are vulnerable to. We have been the target of brute force attempts to obtain unauthorized access to our 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 spread rapidly over the internet and could infiltrate our systems or those of our associated third parties. Additionally, denial of service or other attacks could be launched against us for a variety of purposes, 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 payment network requirements) require us to take certain protective measures to ensure the confidentiality 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 result 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 security measures, we are unable to assure that any security measures will not be subject to system or human error.
Our systems or our third-party providers’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 liable to third parties. Many of our contractual agreements with financial institutionsFIs 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 competition is likely to increase, which may adversely influence the prices we can charge to merchants for our services and the compensation we must pay to our distribution partners, and as a result, our profit margins.
The payment processing industry is highly competitive. We primarily compete in the small to medium-size ("SMB")SMB merchant industry. We compete with financial institutionsFIs and their affiliates, independent payment processing companies and ISOs. We also compete with many of these same entities for production through distribution partners. Many of our distribution partners are not exclusive to us but also have relationships with our competitors, such that we have to continually expend resources to maintain those relationships. Our growth will depend on the continued growth of payments with credit, debit and prepaid cards ("Electronic Payments"),Payments, particularly Electronic Payments to SMB merchants, and our ability to increase our market share through successful competitive efforts to gain new merchants and distribution partners.
Additionally, many financial institutionsFIs and their subsidiaries or well-established payment-enabled technology providers with which we compete, have substantially greater capital, technological, management and marketing resources than we have. These factors may allow 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 paymentsElectronic Payments services and payment enabledpayment-enabled software solutions. If these new entrants gain a greater share of total electronic paymentsElectronic 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 enabledpayment-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 closures, transfers of merchant accounts to our competitors, unsuccessful contract renewal negotiations and account closures that we initiate for various reasons such as heightened credit risks or contract breaches by merchants.Our referral partners are
a significant source of new business.If a referral partner or an ISO switches to another processor, terminates our services, internalizes payment processing that we perform, merges with or is acquired by one of our competitors, or shuts down or becomes insolvent, we may no longer receive new merchant referrals from such referral partner, and we risk losing existing merchants that were originally enrolled by the 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 cash 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 such increases in the future, which would increase our operating costs, reduce our profit margin, and adversely 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 standards could adversely affect our business, financial condition and results of operations.
Payment network rules are established and changed from time to time by each payment network as they may determine in their sole discretion and with or without advance notice to their participants. The timelines imposed by the payment networks or
sponsor banks for expected compliance with new rules have historically been, and may continue to be, highly compressed, requiring us to quickly implement changes to our systems which increases the risk of non-compliance with new standards.standards or the reduction of certain types of merchant activity. In addition, the payment networks could make changes to interchange or other elements of the pricing structure of the merchant acquiring industry that would have a negative impact on our results of operations.
In order toTo 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 loss of revenues, earnings, merchants and distribution partners if the new products and services do not perform as intended or are not accepted in the marketplace.
The electronic paymentsElectronic Payments industry in which we compete is subject to rapid technological changes and is characterized by new technology, product and service introductions, evolving industry standards, changing merchant needs and the entrance of non-traditional competitors. We are subject to the risk that our existing products and services become obsolete, and that we are unable to develop new products and services in response to industry demands. Our future success will depend in part on our ability to develop or adapt to technological changes and the evolving 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 delivery 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 merchants. Additionally, the market for alternative payment processing products and services is evolving, and we may develop 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 number of risks.These risks include valuation (negotiating a fair price for the business and assets), integration (managing the process of integrating the acquired business’business' people, products, technology, and other assets to realize the projected value and synergies), regulatory (obtaining any applicable regulatory or other government approvals), and due diligence (identifying risks to the prospects of the business, including undisclosed or unknown liabilities or restrictions). There can be no assurances that we will be able to complete 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 agree to the structure or purchase price of the transaction and our inability to finance the transaction on commercially acceptable terms. In addition, any potential acquisition can subject us to a variety of other risks:
•If we are unable to successfully integrate the benefits plans, duties and responsibilities and other factors of interest to management of employees of the acquired business, we could lose employees to our competitors in the region, which could significantly affect our ability to operate the business and complete the integration;
•If the integration process causes any delays with the delivery of our services, or the quality of those services, we could lose customers to our competitors;
• Any acquisition may otherwise cause disruption to the acquired company’scompany'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’scompany'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 paymentsElectronic 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.Electronic Payments. If our merchants make fewer sales of their products and services using electronic payments,Electronic Payments, or consumers spend less money through electronic payments,Electronic Payments, we will have fewer transactions to process at lower dollar amounts, resulting in lower revenue. In addition, a weakening 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 United StatesU.S. and around the world, may contribute to increased market volatility, may have long-term effects on the United States and may cause economic uncertainties or deterioration in the United States. The U.S. markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. 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.
Any new legislation that may be adopted in the United StatesU.S. could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve Board and the Financial Stability Oversight Council.FSOC. The United StatesU.S. may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States.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 United States.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 financial institutionsFIs 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 financial institutionsFIs to provide clearing services in connection with our settlement activities.If such financial institutionsFIs should stop providing clearing services, we must find other financial institutionsFIs 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 processingthese 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 bankruptcy 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 risk by requiring collateral and monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such obligations by one or more of our merchants could have a material adverse effect on our business.
If we fail to comply 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 influence on the networks, to alter the networks’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 changes in a card association or other network rules or standards, including interpretation and implementation of the 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 a merchant or an ISO fails to comply with the applicable requirements of the card associations and networks, we or the merchant or ISO could be subject to a variety of fines or penalties that may be levied 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 lower earnings for us. The termination of our registration, or any changes in the Visa 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 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 paymentsElectronic Payments industry and the markets in which we offer our services. In addition, our success depends in large part upon the reputation within the industry of our senior managers who have developed relationships with our distribution partners, payment networks and other payment processing and service providers. Further, in order for us to continue to successfully compete and grow, we must attract, recruit, develop and retain personnel who will provide us with expertise across the entire spectrum of our intellectual capital needs. Our success is also dependent on the skill and experience of our sales 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 provide succession plans capable of maintaining the continuity of our operations. The market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors.
We use third parties to provide services to us including IT related services and sales related functions. Should a cybersecurity related event or other act of negligence occur as a result of a third-party service provider, we may be liable for those actions.
Legal, Regulatory Compliance and Tax Risks
Legal proceedings could have a material adverse effect on our business, financial condition or results of operations.
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 insurance 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 paymentsElectronic 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 United StatesU.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 Fair Credit Reporting Act (the "FCRA"),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'sthird 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 covenantcovenants to which we agreed could have negative consequences on us, including, among other things, (1)(i) requiring us to dedicate a large portion of our cash flow from operations to servicing and repayment of the debt; (2)(ii) limiting funds available for strategic initiatives and opportunities, working capital and other general corporate needs and (3)(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 floatingvariable rate debt.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 agreementsagreement governing our Senior Credit Facilities containrevolving credit facility contains a total net leverage ratio financial covenant.See Item 7, “Management’s Discussion and Analysiscovenant that is applicable when 35% or more of Financial Condition and Results of Operations.”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 Senior Credit and Guaranty Agreement) could result in a default or event of default under our Senior 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 Senior Credit and Guaranty Agreement.Any acceleration of amounts due under the Senior 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 stockCommon Stock for the foreseeable future, you may not receive any return on investment unless you sell your common stockCommon 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 stockCommon Stock will be at the sole discretion of our boardBoard of directors.Directors. Our boardBoard of directorsDirectors 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 boardBoard of directorsDirectors 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 stockCommon Stock unless you sell our common stockCommon 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 boardBoard of directorsDirectors and thereby control our policies and operations, including the appointment of management, future issuances of our common stockCommon Stock or other securities, the payment of dividends, if any, on our common stock,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 stockCommon Stock entitled to vote generally in the election of directors, they will be able to appoint individuals to our boardBoard of directors.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 boardBoard of directorsDirectors 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 stockCommon Stock as part of a sale of the Company and ultimately might affect the market price of our common stock.
We may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.
We have the ability to redeem outstanding warrants (the "Warrants") at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, if the last reported sales price (or the closing bid price of our common stock in the event the common stock is not traded on any specific trading day) of the common stock equals or exceeds $16.00 per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the date we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the Warrants, we have an effective registration statement under the Securities Act covering the common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available or cashless exercise is exempt from the registration requirements under the Securities Act. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a warrant holder: (i) to exercise Warrants and pay the exercise price therefore at a time when it may be disadvantageous for you to do so, (ii) to sell Warrants at the then-current market price when you might otherwise wish to hold your Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, may be substantially less than the market value of your Warrants.
The liquidity of the Warrants may be limited.
There is a limited trading market for our Warrants, which might adversely affect the liquidity, market price and price volatility of the Warrants. In addition, our publicly-traded Warrants have been removed from quotation on The Nasdaq Global Market. As a result, investors in our Warrants may find it more difficult to dispose of or obtain accurate quotations as to the market value of our Warrants, and the ability of our stockholders to sell our Warrants in the secondary market has been materially limited.
Financial Risks
Changes in the method for determining the London Interbank Offered Rate ("LIBOR") and the potential replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, results of operations and cash flows.
The majority of our current indebtedness bears interest at a variable rate based on LIBOR, and we may incur additional indebtedness based on LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority ("FCA"), a regulator of
financial services firms and financial markets in the United Kingdom, stated that they will plan for a phase out of regulatory oversight of LIBOR interest rates indices. The FCA has indicated they will support the LIBOR indices through 2021, to allow for an orderly transition to an alternative reference rate. The ICE Benchmark Administration Limited recently announced that it will consult on its intention to extend the publication of most tenors LIBOR to June 30, 2023. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.At this time, it is not possible to predict when LIBOR will be replaced as the reference rate in the agreements governing the Company’s indebtedness or the effect any discontinuance, modification or other reforms to LIBOR, or the establishment of alternative reference rates such as SOFR, or any other reference rate, will have on the Company.If LIBOR ceases to exist or the methods of calculating LIBOR change from their current form, however, the Company’s borrowing costs may be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
N/ACommon 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 acrossthroughout the United States,U.S. and one office in India, all of which we lease.
Our key office locations include:
•corporate headquarters in Alpharetta, Georgia;GA;
•administrative office in Hicksville, NY; and
•administrative office in New York, NY.NY;
•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
ITEM 3. LEGAL PROCEEDINGS
We areThe Company is involved in certain other 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.
ITEMItem 4. MINE SAFETY DISCLOSURES
N/A
PART II.
ITEMItem 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Prior to the consummation of the Business Combination onOn July 25, 2018, MI Acquisitions' common stock, warrants and units were each listedour Common Stock began trading on The Nasdaq Capital Market under the symbol "MACQ," "MACQW" and "MACQU," respectively. Upon the consummation of the Business Combination and the change of the Company's name to Priority Technology Holdings, Inc., our common stock commenced trading on The Nasdaq Global Market under the symbol "PRTH" and our warrants and units commenced trading under the symbols "PRTHW" and "PRTHU," respectively.. As of March 6, 2019, our warrants and units were delisted from trading on The Nasdaq Global Market. Following their delisting, our warrants and units became available to be quoted in the over-the-counter market under the symbols "PRTHW" and "PRTHU," respectively.
Holders
As of March 24, 2021,7, 2024, we had 3269 holders of record of our common stock.Common Stock. This figure does not include the number of persons whose securities are held in nominee or "street" name accounts through brokers. With the exception of one holder, all of our outstanding warrants and units were held in nominee or "street" name accounts through brokers.
Dividends
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our common stock.Common Stock.
Equity Compensation 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 | | — | | $ | — | | | — | |
(1)Represents stock options and RSUs 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 pay an exercise price to receive the shares related to these awards.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases made by the Company of its Common Stock during the 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 satisfy employees' tax withholding obligations in connection with the vesting of restricted stock awards. The number of shares withheld was determined based on the fair market value on the vesting date.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.Item 6. Reserved
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. You should read the following selected financial data in conjunction with the sections entitled "Item 7 -7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| (in thousands, except per share amounts) | 2020 | | 2019 | | 2018 | | | | | | |
| | | | | | | | | | | |
| Statement of operations data: | | | | | | | | | | | |
| Revenues | $ | 404,342 | | | $ | 371,854 | | | $ | 375,822 | | | | | | | |
| Operating expenses | 383,481 | | | 364,670 | | | 359,429 | | | | | | | |
| Income from operations | 20,861 | | | 7,184 | | | 16,393 | | | | | | | |
| Interest expense | (44,839) | | | (40,653) | | | (29,935) | | | | | | | |
| Gain on sale of business, net | 107,239 | | | — | | | — | | | | | | | |
| Debt extinguishment and modification expenses | (1,899) | | | — | | | (2,043) | | | | | | | |
| Other income (expenses), net | 596 | | | 710 | | | (4,741) | | | | | | | |
| Income (loss) before income taxes | 81,958 | | | (32,759) | | | (20,326) | | | | | | | |
| Income tax expense (benefit) | 10,899 | | | 830 | | | (2,490) | | | | | | | |
| Net income (loss) | 71,059 | | | (33,589) | | | (17,836) | | | | | | | |
| Less earnings attributable to redeemable and redeemed non-controlling interests | (45,398) | | | — | | | — | | | | | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | $ | 25,661 | | | $ | (33,589) | | | $ | (17,836) | | | | | | | |
| | | | | | | | | | | |
| Common stockholders of Priority Technology Holdings, Inc.: | | | | | | | | | | | |
| Basic earnings (loss) per common share | $ | 0.38 | | | $ | (0.50) | | | $ | (0.29) | | | | | | | |
| | | | | | | | | | | |
| Diluted earnings (loss) per common share | $ | 0.38 | | | $ | (0.50) | | | $ | (0.29) | | | | | | | |
| | | | |
| | | | |
| | | | |
| | | |
| Year Ended December 31, | | | | | | |
| 2020 | | 2019 | | 2018 | | | | | | |
| Statement of cash flows data: | | | | | | | | | | | |
| Net cash provided by (used in): | | | | | | | | | | | |
| Operating activities | $ | 47,072 | | | $ | 39,364 | | | $ | 31,348 | | | | | | | |
| Investing activities | $ | 166,396 | | | $ | (97,747) | | | $ | (108,928) | | | | | | | |
| Financing activities | $ | (175,813) | | | $ | 75,017 | | | $ | 67,252 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | | | |
| | 2020 | | 2019 | | | | | | | | |
| Balance sheet data: | | | | | | | | | | | |
| Cash and restricted cash | $ | 88,120 | | | $ | 50,465 | | | | | | | | | |
| Total assets | $ | 417,829 | | | $ | 464,505 | | | | | | | | | |
| Total liabilities | $ | 516,393 | | | $ | 585,194 | | | | | | | | | |
| Total stockholders' deficit | $ | (98,564) | | | $ | (120,689) | | | | | | | | | |
| Shares of common stock outstanding | 67,391 | | 67,061 | | | | | | | | | |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain amounts in this section may not add mathematically due to rounding.
Results of Operations
This section includes a summarycertain components of our results of operations for the periods presented followed by a discussion of our results of operations for (i) the yearyears ended December 31, 20202023 (or "2020""2023") compared to the year ended, December 31, 20192022 (or "2019") and (ii) the year ended December 31, 2019 (or "2019") compared to the year ended December 31, 2018 (or "2018""2022"). We have derived this data, except key indicators forincluding merchant bankcard processing dollar values and transaction 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 statementsConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table shows our consolidated income statement data for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | | | | | | | |
| (dollars in thousands) | | 2020 | | 2019 | | $ Change | | % Change |
| | | | | | | | | |
| REVENUES | | $ | 404,342 | | | $ | 371,854 | | | $ | 32,488 | | | 8.7 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Costs of services | | 277,374 | | | 252,569 | | | 24,805 | | | 9.8 | % |
| | | | | | | | |
| Salary and employee benefits | | 39,507 | | | 42,214 | | | (2,707) | | | (6.4) | % |
| Depreciation and amortization | | 40,775 | | | 39,092 | | | 1,683 | | | 4.3 | % |
| Selling, general and administrative | | 25,825 | | | 30,795 | | | (4,970) | | | (16.1) | % |
| | | | | | | | |
| | | | | | | | |
| Total operating expenses | | 383,481 | | | 364,670 | | | 18,811 | | | 5.2 | % |
| | | | | | | | |
| Income from operations | | 20,861 | | | 7,184 | | | 13,677 | | | 190.4 | % |
| Operating margin | | 5.2 | % | | 1.9 | % | | | | |
| OTHER INCOME (EXPENSES): | | | | | | | | |
| | | | | | | | |
| Interest expense | | (44,839) | | | (40,653) | | | (4,186) | | | 10.3 | % |
| Debt extinguishment and modification expenses | | (1,899) | | | — | | | (1,899) | | | nm |
| Gain on sale of business, net | | 107,239 | | | — | | | 107,239 | | | nm |
| Other income, net | | 596 | | | 710 | | | (114) | | | (16.1) | % |
| | | | | | | | |
| | | | | | | | |
| Total other income (expenses), net | | 61,097 | | | (39,943) | | | 101,040 | | | 253.0 | % |
| | | | | | | | |
| Income (loss) before income taxes | | 81,958 | | | (32,759) | | | 114,717 | | | 350.2 | % |
| | | | | | | | |
| Income tax expense | | 10,899 | | | 830 | | | 10,069 | | | nm |
| | | | | | | | |
| Net income (loss) | | 71,059 | | | (33,589) | | | 104,648 | | | 311.6 | % |
| | | | | | | | |
| Less income attributable to redeemable and redeemed non-controlling interests | | (45,398) | | | — | | | (45,398) | | | nm |
| | | | | | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | | $ | 25,661 | | | $ | (33,589) | | | $ | 59,250 | | | 176.4 | % |
nm = not meaningful
The following table shows our segment income statement data and selected performance measures for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | | | | | | | |
| (dollars and volume amounts in thousands) | | 2020 | | 2019 | | $ Change | | % Change |
| | | |
| Consumer Payments: | | | | | | | | |
| Revenue | | $ | 367,816 | | | $ | 330,599 | | | $ | 37,217 | | | 11.3 | % |
| Operating expenses | | 329,424 | | | 298,362 | | | 31,062 | | | 10.4 | % |
| Income from operations | | $ | 38,392 | | | $ | 32,237 | | | $ | 6,155 | | | 19.1 | % |
| Operating margin | | 10.4 | % | | 9.8 | % | | | | |
| Depreciation and amortization | | $ | 35,002 | | | $ | 32,842 | | | $ | 2,160 | | | 6.6 | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 41,703,661 | | | $ | 42,303,880 | | | $ | (600,219) | | | (1.4) | % |
| Merchant bankcard transaction volume | | 455,240 | | | 511,852 | | | (56,612) | | | (11.1) | % |
| | | | | | | | |
| Commercial Payments: | | | | | | | | |
| Revenue | | $ | 20,922 | | | $ | 25,980 | | | $ | (5,058) | | | (19.5) | % |
| Operating expenses | | 19,999 | | | 26,871 | | | (6,872) | | | (25.6) | % |
| Income (loss) from operations | | $ | 923 | | | $ | (891) | | | $ | 1,814 | | | 203.6 | % |
| Operating margin | | 4.4 | % | | (3.4) | % | | | | |
| Depreciation and amortization | | $ | 306 | | | $ | 323 | | | $ | (17) | | | (5.3) | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 249,004 | | | $ | 312,342 | | | $ | (63,338) | | | (20.3) | % |
| Merchant bankcard transaction volume | | 99 | | | 109 | | | (10) | | | (9.2) | % |
| | | | | | | | |
| Integrated Partners: | | | | | | | | |
| Revenue | | $ | 15,604 | | | $ | 15,275 | | | $ | 329 | | | 2.2 | % |
| Operating expenses | | 14,200 | | | 14,550 | | | (350) | | | (2.4) | % |
| Income from operations | | $ | 1,404 | | | $ | 725 | | | $ | 679 | | | 93.7 | % |
| Operating margin | | 9.0 | % | | 4.7 | % | | | | |
| Depreciation and amortization | | $ | 4,299 | | | $ | 4,398 | | | $ | (99) | | | (2.3) | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 364,084 | | | $ | 386,101 | | | $ | (22,017) | | | (5.7) | % |
| Merchant bankcard transaction volume | | 1,316 | | | 1,380 | | | (64) | | | (4.6) | % |
| | | | | | | | |
| Income from operations of reportable segments | | $ | 40,719 | | | $ | 32,071 | | | $ | 8,648 | | | 27.0 | % |
| Corporate expenses | | 19,858 | | | 24,887 | | | (5,029) | | | (20.2) | % |
| Consolidated income from operations | | $ | 20,861 | | | $ | 7,184 | | | $ | 13,677 | | | 190.4�� | % |
| Corporate depreciation and amortization | | $ | 1,168 | | | $ | 1,529 | | | $ | (361) | | | (23.6) | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 42,316,749 | | | $ | 43,002,323 | | | $ | (685,574) | | | (1.6) | % |
| Merchant bankcard transaction volume | | 456,655 | | | 513,341 | | | (56,686) | | | (11.0) | % |
Impact of COVID-19 on Results and Trends
The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, continues to adversely affect consumer activity and has contributed to a decline in many aspects of macroeconomic activity in 2020 compared to 2019. The largest impact we experienced was within our Consumer Payments reportable segment (“Consumer Payments”), which is described below.
Our results of operations for most of the first quarter of 2020 were not significantly impacted by the COVID-19 pandemic since the economic consequences of the pandemic did not begin to materially impact consumer payment transactions in the United States until the last half of March 2020. Beginning in mid-March, the pandemic began to negatively impact our daily merchant bankcard processing dollar values (“processing dollars”) as the pandemic spread across the United States and restrictive shelter in place requirements were instituted. From mid-March 2020 through the end of April 2020, we experienced a significant decline of approximately 35% in processing dollars as compared with the comparable weeks in 2019. As a result, our processing dollars grew only 1.7% in the first quarter of 2020 compared with the first quarter of 2019.In the second quarter of 2020 we experienced a 16.4% decline in processing dollars compared with the second quarter of 2019. However, within the second quarter of 2020, the decline in processing dollars was greatest in April. In May and June of 2020, as shelter in place restrictions began to be lifted, we experienced a rebound in processing dollars that continued through the third quarter.With increased economic activity in the third quarter of 2020, we experienced growth in processing dollars of 6.3% as compared with the third quarter of 2019.
The level of new COVID-19 cases began to increase significantly throughout the United States during the fourth quarter of 2020, with certain states impacted more than others, and pandemic related economic factors impacted the growth rate of our processing dollars. In the fourth quarter of 2020, we experienced growth in processing dollars of 3.0% as compared with the fourth quarter of 2019.For the year ended December 31, 2020, processing dollars in Consumer Payments of $41.7 billion declined 1.4% from $42.3 billion in the year ended December 31, 2019.
Revenue growth in Consumer Payments was 11.3% for the year ended December 31, 2020 compared with the year ended December 31, 2019. In the first, second, third and fourth quarters of 2020, revenue growth was 8.9%, 0.3%, 20.0% and 15.3%, respectively, compared with the comparable quarters in 2019. During 2020, we benefited from our specialized merchant acquiring program. This program, which complies with the recently issued card association rules, helped mitigate the negative effects of the pandemic on overall revenue growth by adding $28.8 million to the Consumer Payments revenue in 2020, compared with $7.4 million in 2019.
In the first quarter of 2021, the distribution of COVID-19 vaccines in the United States began to accelerate.While this may be a positive development, the future impact of the pandemic on the overall economy and our results are beyond our ability to predict or control.
Revenue
Consolidated revenue
For the year ended December 31, 2020,2023, our consolidated revenue of $755.6 million increased by $32.5$92.0 million, or 8.7%13.9%, from $663.6 million for the year ended December 31, 2019 to $404.3 million.2022. This overall increase was driven by a $37.2 million, or 11.3%, increaseincreases in revenue from our Consumer Payments segmentmerchant card fee rates and a $0.3 million, or 2.2%, increase inequipment revenue, from our Integrated Partners segment, partially offset by a $5.1 million, or 19.5%, decrease in revenue in our Commercial Payments segment.
Revenue in Consumer Payments segment
Consumer Payments revenue for the year ended December 31, 2020 increased by $37.2 million, or 11.3%, compared to revenue for the year ended December 31, 2019 of $330.6 million. This increase was driven by $21.4 million, or 290.0%, revenue growth from our specialized merchant acquiring program.
Merchant bankcard processing dollar value for the year ended December 31, 2020 of $41.7 billion decreased by $0.6 billion, or 1.4%, compared to $42.3 billion for the year ended December 31, 2019. However, our merchant volume mix drove a 10.8% higher average ticket of $91.61 in 2020 compared to $82.65 in 2019. Current economic factors have impacted the merchant volume mix, including shifts in payment transaction activity among certain vertical industries, spending trends related to the COVID-19 pandemic that appear to have resulted in consumers conducting fewer payment transactions at higher average transaction values, and an increase in card-not-present transactions. Card-not-present volume generally offers more favorable pricing to us than other types of transactions. The trend of new merchant boarding remains within our historical range of 4,500 to 5,000 new merchants per month. During 2020, our monthly average of new merchants boarded was 4,669 compared with 4,612 in 2019.
Revenue in Commercial Payments segment
Commercial Payments revenue for the year ended December 31, 2020 of $20.9 million decreased by $5.1 million, or 19.5%, compared to revenue for the year ended December 31, 2019 of $26.0 million. The increase in revenue from our accounts payable automated solutions services was offset by a decrease in revenuescertain 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 diversification of merchant portfolio by one of the referral partners in our curated managed services programs.
RevenueSMB Payments segment, an increase in new enrollments and higher interest income in our Enterprise Payments segment and an increase in revenue from our accounts payable automated solutionsthe Plastiq business acquired during the year offset by a decrease in 2020 of $6.0 million increased $0.5 million, or 8.8%, compared to revenue in 2019 of $5.5 million. This increase was driven by increased business from existing customers. Revenue from our curated managed services business in 2020 of $14.9 million decreased by $5.5 million, or 27.1%, compared to revenue in 2019 of $20.5 million. This decrease was driven by a decline and curtailment in 2020 of a customer’s merchant financing program in response to the COVID related economic conditions and the changes in the customer's business model.
Revenue in Integrated PartnersB2B Payments segment
Integrated Partners revenue for the year ended December 31, 2020 of $15.6 million increased by $0.3 million, or 2.2%, compared to revenue for the year ended December 31, 2019 of $15.3 million. Priority Real Estate Technology, LLC ("PRET") comprised $13.4 million and $13.2 million of this segment's revenue in 2020 and 2019, respectively. PRET's RentPayment business, which was formed with a March 2019 asset acquisition, generated revenue of $12.0 million in 2020 and $11.7 million in 2019, respectively. Revenue from PRET’s RadPad and Landlord Station businesses, Priority PayRight Health Solutions ("PayRight") and Priority Hospitality Technology ("PHOT") comprised the remainder of this segment's revenue.
The sale of the RentPayment business in September 2020 as disclosed in Note 2, Disposal of Business, to the consolidated financial statements impacted our results after the third quarter of 2020 and will also impact the trend of future results of the Integrated Partners segment.
Consolidated Operating Expenses
Our consolidated operating expenses for the year ended December 31, 2020 of $383.5 million increased by $18.8, or 5.2%, compared to consolidated operating expenses for the year ended December 31, 2019 of $364.7 million. This overall increase was driven by higher costs of services and depreciation and amortization expense in 2020 compared to 2019. Costs of services of $277.4 million grew $24.8 million, or 9.8%, in 2020 resulting from higher revenues in the Consumer Payments segment. Consolidated depreciation and amortization expense of $40.8 million increased by $1.7 million, or 4.3%, in 2020, which was driven by additions to property, equipment and software, as well as intangible assets.
While costs of services and depreciation and amortization expense increased in 2020, we experienced decreases in salary and employee benefits and selling, general and administrative expenses compared to 2019. Consolidated salary and employee benefits expenses of $39.5 million decreased $2.7 million, or 6.4%, in 2020, which was driven by lower headcount and a $1.2 million decline in non-cash stock-based compensation. Consolidated selling, general and administrative expenses of $25.8 million decreased $5.0 million, or 16.1%, in 2020 driven by decreases in certain expenses management considers to be non-recurring in nature, lower office and travel-related costs due to the COVID-19 pandemic, decreased use of outside professionals due to in-sourcingwind down of certain managed services programs in Q4 2022.
Revenues by type for 2023 and an overall focus on cost containment.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 | | | | |
Income (Loss) from Operations
Consolidated income from operations
For the year ended December 31, 2020,2023, our consolidated income from operationsmerchant card fees revenue of $595.2 million increased by $13.7$42.2 million, or 190.4%7.6%, from the year ended December 31, 2019 to $20.9 million. This overall increase was driven by a $6.2 million, or 19.1%, increase income from operations in our Consumer Payments segment, a $1.8 million, or 203.6%, increase in income from operations in our Commercial Payments segment, and a $0.7 million, or 93.7%, increase in income from operations in our Integrated Partners segment. Corporate expense of $19.9 million in 2020 decreased by $5.0 million, or 20.2%, as compared to the year ended December 31, 2019.
Income from operations in Consumer Payments segment
Our Consumer Payments segment contributed $38.4 million of income from operations for the year ended December 31, 2020, an increase of $6.2 million, or 19.1%, from the $32.2$553.0 million for the year ended December 31, 2019.2022. This increase was the result of higher revenue, net of costs of services, of $9.0 million, and lower salary and employee benefit expenses of $1.8 millionprimarily driven by lower headcountrevenue from the Plastiq business that was acquired during the year and a $1.1 million decline in non-cash stock-based compensation. While these factors drove growth in income from operations, theymerchant card fee rate increases. These increases were partially offset by a $2.2 million increasedecrease in depreciation and amortization expensecertain fee-based revenue, a true up of an invoice from one of the partner banks for certain services provided in Q1 2022 and a $2.5 million increasedecline in selling, general and administrative expenses. The increase in depreciation and amortization expense was attributable to additions to intangible assets and property, equipment and software, while the growth in selling, general and administrative expenses wasprocessed merchant bankcard dollar value due to a $2.5 million increase in certain expenses management considers to be non-recurring in nature. Such expenses in 2020 totaled $1.9 million and are comprised of: $1.8 million for an impairment charge for an intangible asset and a $0.5 million allowance provision for a note receivable, partially offsetthe diversification of processor services by a non-cash reduction in expenseone of $0.4 million for a change in the fair valuereferral partners.
Money Transmission Services
Money transmission services revenue of $0.6 million for a change in the fair value of accrued contingent consideration related to the same two 2018 business combinations.
Income (loss) from operations in Commercial Payments segment
Our Commercial Payments segment contributed $0.9 million of income from operations for the year ended December 31, 2020 compared to a loss from operations of $0.9$98.1 million for the year ended December 31, 2019. This improvement was driven2023 increased by a $1.9$26.6 million decrease in selling, general and administrative expenses and a $0.8 million decrease in salaries and employee benefits expenses due to lower headcount and a $0.5 million decline in non-cash stock-based compensation. The decrease in selling, general and administrative expenses was driven by reduced travel and trade show expenses due to the COVID-19 pandemic. Also, selling, general and administrative expenses for 2019 included a $0.5 million allowance for uncollectible receivables which were substantially recovered in 2020. While these factors drove growth in incomeor 37.2%, from operations, they were partially offset by the decline in revenue attributable to our curated managed services programs.
Income from operations in Integrated Partners segment
Our Integrated Partners segment contributed $1.4 million of income from operations for the year ended December 31, 2020, an increase of $0.7 million compared to $0.7 million of income from operations for the year ended December 31, 2019. This increase was driven by lower operating expenses attributable to a $0.8 million decrease in salary and employee benefit expenses, a $0.3 million decrease in selling, general and administrative expenses, and a $0.1 million decrease in depreciation and amortization expense. Included in selling, general and administrative expenses for 2020 and 2019 are expenses related to transition services provided by YapStone, Inc. in connection with the assets acquired in March 2019 and sold in September 2020. These transition services were approximately $2.6 million in 2020 and $2.9 million in 2019. These operating expense decreases more than offset the increase in costs of services experienced in 2020, due in part to our new payment infrastructure as a service arrangement with the buyer of the RentPayment business.
Corporate Expense
Corporate expenses were $19.9$71.5 million for the year ended December 31, 2020, a decrease2022 and is primarily driven by an increase in customer enrollments.
Outsourced Services and Other Services
Outsourced services and other services revenue of $5.0 million, or 20.2%, from expenses of $24.9$49.6 million for the year ended December 31, 2019. This decrease in 2020 was driven by a $5.3 million decrease in selling, general and administrative expenses and a $0.4 million decrease in depreciation and amortization expense, partially
offset by a $0.6 million increase in salary and employee benefits expense largely attributable to a $0.4 million increase in non-cash stock-based compensation. Included in selling, general and administrative expenses in 2020 are certain legal and professional expenses management considers to be non-recurring in nature of $1.9 million, offset by litigation settlement income of $0.7 million. Such expenses in 2019 totaled of $6.4 million, offset by litigation settlement income of $0.4 million.
Interest Expense
The amortization of deferred financing costs and debt discounts, as well as certain administrative fees, increased our reported consolidated interest expense and the effective interest rates under our Senior and Subordinated Credit Agreements.
For the year ended December 31, 2020, consolidated interest expense2023 increased by $4.2$20.0 million, or 10.3%67.4%, to $44.8 million from $40.7$29.6 million for the year ended December 31, 2019. The additional expense in 20202022. This increase was primarily due to increasesgrowth in the applicable margins on the Seniorinterest income due to higher interest rates and Subordinated Credit Agreements that resulted from the Sixth Amendment in March 2020deposit balances, and increased borrowings under the revolving credit portion ofadditional revenues generated by our Senior Credit Agreement, partiallyPassport platform, offset by a $106.5decreased managed services revenue due to wind down of certain programs in Q4 2022.
Equipment
Equipment revenue of $12.7 million principal prepayment in late September 2020 of the term portion of our Senior Credit Agreement. For 2020, the effective interest rates on the term facility of our Senior and Subordinated Credit Agreements averaged 8.5% and 13.0%, respectively, compared to 7.2% and 10.8%, respectively, for 2019. Based on applicable margins and the LIBOR rate in effect on December 31, 2020, we expect the effective interest rates on the term facility of our Senior and Subordinated Credit Agreements to be approximately 8.2% and 12.8%, respectively, in 2021.
Debt Extinguishment and Modification Expenses
During September 2020, we wrote off unamortized deferred debt costs and discounts of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Agreements. In the first quarter of 2020, we expensed $0.4 million of third-party costs incurred in connection with the Sixth Amendment to the Senior and Subordinated Credit Agreements.
Gain on Sale of Business
As disclosed in Note 2,Disposal of Business, to the consolidated financial statements, during late September 2020 our consolidated PRET subsidiary sold the RentPayment business, which is substantially all of the assets acquired from YapStone, Inc. in March 2019. Based on efforts and changes made by us since the March 2019 acquisition of these assets, the assets constituted a business, as defined by GAAP, when sold in September 2020 for $179.4 million, net of a working capital adjustment. After removing the carrying values of the disposed business and incurring costs related to the transaction, PRET recognized a pre-tax gain of $107.2 million. PRET had non-controlling interests ("NCIs"), and based on the cash waterfall provisions in PRET's governing agreement, the NCIs were entitled to $45.1 million of the $107.2 million pre-tax gain, which is included in Net Income Attributable to Non-Controlling Interests on our consolidated statement of operations for the year ended December 31, 2020. The $45.12023, increased by $3.3 million, was distributed in cash toor 34.2%, from $9.4 million for the NCIs, and the $45.1 million of payments along with the $5.7 million redemption payment made to one of the NCIs, resulted in the redemption of all NCIs of PRET.The working capital adjustment and the allocation of net proceeds described above remain subject to final adjustment with the buyer and PRET members, respectively. Any remaining payments made or received by the Company will be recorded in the period in which such amounts are finalized.
Other, net
For the yearsyear ended December 31, 20202022. The increase was primarily due to increased sales of point-of-sale equipment.
Operating Expenses
Operating expenses for 2023 and 2019, Other, net was composed primarily2022 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 interest income earned on notes receivable from certain independent sales organizations and another entity.
Income Tax Expense
We became part of a C-Corporation reporting tax group on July 25, 2018 in connection with the Business Combination. On July 25, 2018, we recognized a net deferred income tax asset of $47.5 million, which also resulted in a credit to our additional paid-in capital within our consolidated stockholders' deficit. The net deferred tax asset is the result of the difference between the initial tax bases in the assets and liabilities and their respective carrying amounts for financial statement purposes.
We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets. ASC 740, Income Taxes ("ASC 740"), requires that all sources of future taxable income be considered in making this determination. The Tax Cuts and Jobs Act of 2017 amended section 163(j) of the Internal Revenue Code. Section 163(j), as amended, limits the business interest deduction to 30% of adjusted taxable income ("ATI"). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes,Services (excludes depreciation and amortization ("EBITDA"). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes ("EBIT"), without adjusting foramortization)
Costs of services (excludes depreciation and amortization. Any business interest in excessamortization) of the annual limitation is carried forward indefinitely. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides$480.3 million for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020.
With respect to recording a deferred tax benefit for the carryforward of business interest expense, GAAP applies a "more likely than not" threshold for assessing recoverability. Adjustments to the valuation allowance are a component of income tax expense (benefit) in our statements of operations. An increase in the valuation allowance for deferred income taxes will increase income tax expense (or reduce an otherwise income tax benefit), and a decrease in the valuation allowance will decrease income tax expense (or increase an otherwise income tax benefit).
On the basis of our assessment, for the yearsyear ended December 31, 2020 and 2019, we decreased and2023 increased the valuation allowance for deferred income taxes by $2.9$43.6 million, and $9.3or 10.0%, from $436.8 million respectively, associated with excess business interest for the then-current reporting periods. Changesyear ended December 31, 2022, primarily due to the valuation allowance for 2018 were not material. We will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may changecorresponding increase in future periods.
revenues. For the year ended December 31, 2020, our consolidated income tax expense was $10.9 million, resulting in2023, costs of services (excluding depreciation and amortization) as a consolidated effective income tax ratepercentage of 13.3%. Approximately $12.3 million of consolidated income tax expensetotal revenues decreased to 63.6% as compared to 65.8% for the year ended December 31, 20202022. This decrease was attributableprimarily due to the gain on the business sale (see Note 2, Disposalincrease in interest and money transmission revenues which do not have significant cost of Business). Forservices. Salary and employee benefits
Salary and employee benefits expense of $80.0 million for the year ended December 31,
2019, our consolidated income tax expense was $0.82023 increased by $14.9 million,
resultingor 22.9%, from $65.1 million for the year ended December 31, 2022, primarily due to higher wages, an increase in
an effective consolidated income tax benefit rate of 2.5%. See Note 11, Income Taxes,stock-based compensation and increased headcount from acquisitions and to our consolidated financial statements in Part II, Item 8support overall growth of the Annual Report on Form 10-K.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 the depreciation of new assets placed in service.
Selling, general and administrative
Selling, general and administrative expenses of $45.4 million for the year 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 20202023 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 Non-Controlling Interests (NCIs)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) | | | | |
In addition to the $45.1 million discussed above for the NCIs of PRET, we attributedDividends and paid $250 thousand to the NCIs of PHOT for the year ended December 31, 2020. No amounts were attributable or paid to any NCIs in prior years. See Note 4,Asset Acquisitions, Asset Contributions,and Business Combinations, to the consolidated financial statements.
Net Income (Loss)
Consolidated net incomeaccretion attributable to theredeemable senior preferred stockholders of Priority Technology Holdings, Inc. for the year ended December 31, 2020 was $25.7 million compared to a net loss of $33.6$47.7 million for the year ended December 31, 20192023, 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 aforementioned reasons.
year and increase in carrying value of redeemable senior preferred stocks (as a result of accumulated accrued dividend).
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table shows our consolidated income statement data for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | | | | | | | |
| (dollars in thousands) | | 2019 | | 2018 | | $ Change | | % Change |
| | | | | | | | | |
| REVENUES | | $ | 371,854 | | | $ | 375,822 | | | $ | (3,968) | | | (1.1) | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Costs of services | | 252,569 | | | 269,284 | | | (16,715) | | | (6.2) | % |
| | | | | | | | |
| Salary and employee benefits | | 42,214 | | | 38,324 | | | 3,890 | | | 10.2 | % |
| Depreciation and amortization | | 39,092 | | | 19,740 | | | 19,352 | | | 98.0 | % |
| Selling, general and administrative | | 30,795 | | | 32,081 | | | (1,286) | | | (4.0) | % |
| | | | | | | | |
| Total operating expenses | | 364,670 | | | 359,429 | | | 5,241 | | | 1.5 | % |
| | | | | | | | |
| Income from operations | | 7,184 | | | 16,393 | | | (9,209) | | | (56.2) | % |
| Operating margin | | 1.9 | % | | 4.4 | % | | | | |
| | | | | | | | |
| OTHER (EXPENSES) INCOME: | | | | | | | | |
| Interest expense | | (40,653) | | | (29,935) | | | (10,718) | | | 35.8 | % |
| Other, net | | 710 | | | (6,784) | | | 7,494 | | | 110.5 | % |
| | | | | | | | |
| | | | | | | | |
| Total other expenses, net | | (39,943) | | | (36,719) | | | (3,224) | | | 8.8 | % |
| | | | | | | | |
| Loss before income taxes | | (32,759) | | | (20,326) | | | (12,433) | | | 61.2 | % |
| | | | | | | | |
| Income tax expense (benefit) | | 830 | | | (2,490) | | | 3,320 | | | nm |
| | | | | | | | |
| Net loss | | $ | (33,589) | | | $ | (17,836) | | | $ | (15,753) | | | 88.3 | % |
nm = not meaningful
The following table shows our segment income statement data and selected performance measures for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | |
| | | | | | | | |
| (dollars and volume amounts in thousands) | | 2019 | | 2018 | | $ Change | | % Change |
| | | |
| Consumer Payments: | | | | | | | | |
| Revenue | | $ | 330,599 | | | $ | 347,013 | | | $ | (16,414) | | | (4.7) | % |
| Operating expenses | | 298,362 | | | 300,011 | | | (1,649) | | | (0.5) | % |
| Income from operations | | $ | 32,237 | | | $ | 47,002 | | | $ | (14,765) | | | (31.4) | % |
| Operating margin | | 9.8 | % | | 13.5 | % | | | | |
| Depreciation and amortization | | $ | 32,842 | | | $ | 17,945 | | | $ | 14,897 | | | 83.0 | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 42,303,880 | | | $ | 37,892,474 | | | $ | 4,411,406 | | | 11.6 | % |
| Merchant bankcard transaction volume | | 511,852 | | | 465,584 | | | 46,268 | | | 9.9 | % |
| | | | | | | | |
| Commercial Payments: | | | | | | | | |
| Revenue | | $ | 25,980 | | | $ | 27,056 | | | $ | (1,076) | | | (4.0) | % |
| Operating expenses | | 26,871 | | | 28,008 | | | (1,137) | | | (4.1) | % |
| Loss from operations | | $ | (891) | | | $ | (952) | | | $ | 61 | | | (6.4) | % |
| Operating margin | | (3.4) | % | | (3.5) | % | | | | |
| Depreciation and amortization | | $ | 323 | | | $ | 557 | | | $ | (234) | | | (42.0) | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 312,342 | | | $ | 257,308 | | | $ | 55,034 | | | 21.4 | % |
| Merchant bankcard transaction volume | | 109 | | | 118 | | | (9) | | | (7.6) | % |
| | | | | | | | |
| Integrated Partners: | | | | | | | | |
| Revenue | | $ | 15,275 | | | $ | 1,753 | | | $ | 13,522 | | | nm |
| Operating expenses | | 14,550 | | | 3,722 | | | 10,828 | | | nm |
| Income (loss) from operations | | $ | 725 | | | $ | (1,969) | | | $ | 2,694 | | | nm |
| Operating margin | | 4.7 | % | | (112.3) | % | | | | |
| Depreciation and amortization | | $ | 4,398 | | | $ | 145 | | | $ | 4,253 | | | nm |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 386,101 | | | $ | 5,516 | | | $ | 380,585 | | | nm |
| Merchant bankcard transaction volume | | 1,380 | | | 55 | | | 1,325 | | | nm |
| | | | | | | | |
| Income from operations of reportable segments | | $ | 32,071 | | | $ | 44,081 | | | $ | (12,010) | | | (27.2) | % |
| Corporate expenses | | 24,887 | | | 27,688 | | | (2,801) | | | (10.1) | % |
| Consolidated income from operations | | $ | 7,184 | | | $ | 16,393 | | | $ | (9,209) | | | (56.2) | % |
| Corporate depreciation and amortization | | $ | 1,529 | | | $ | 1,093 | | | $ | 436 | | | 39.9 | % |
| | | | | | | | |
| Key Indicators: | | | | | | | | |
| Merchant bankcard processing dollar value | | $ | 43,002,323 | | | $ | 38,155,298 | | | $ | 4,847,025 | | | 12.7 | % |
| Merchant bankcard transaction volume | | 513,341 | | | 465,757 | | | 47,584 | | | 10.2 | % |
nm = not meaningful
| | | | | | | | | | | | | | | | | | | | | | | |
| (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
Consolidated revenue
For the year ended December 31, 2019, our consolidated revenue decreased by $4.0 million, or 1.1%, from the year ended December 31, 2018 to $371.9 million. This decrease was driven by a $16.4 million, or 4.7%, decrease in revenueRevenue from our ConsumerSMB Payments segment and a $1.1 million, or 4.0%, decrease in revenue from our Commercial Payments segment, partially offset by a $13.5 million increase in revenue from our Integrated Partners segment. Consolidated merchant bankcard processing dollar value and merchant bankcard transactions increased 12.7% and 10.2%, respectively.
Revenue in Consumer Payments segment
For the year ended December 31, 2019, the $16.4 million decrease in Consumer Payments revenue was primarily attributable to a decrease in revenue of $51.9 million from certain subscription-billing e-commerce merchants, largely offset by revenue resulting from the overall increases in merchant bankcard processing dollar value and merchant bankcard transactions of 11.6% and 9.9%, respectively, compared to the year ended December 31, 2018. The higher merchant bankcard processing dollar value and transaction volume in 2019 were mainly due to the continuation of higher consumer spending trends in 2019 and positive net onboarding of new merchants. Additionally, the average dollar amount per bankcard transaction increased to $82.65, or 1.5%, in 2019 from $81.39 in 2018.
Our revenue in the Consumer Payments segment for the year ended December 31, 2019 was negatively affected by the closure of high-margin accounts with certain subscription-billing e-commerce merchants. The closure of merchants in this channel was due to industry-wide changes for enhanced card association compliance. This revenue was $7.4 million and $59.3 million for the years ended December 31, 2019 and 2018, respectively.
Revenue in Commercial Payments segment
For the year ended December 31, 2019, the $1.1 million decrease in Commercial Payments revenue was attributable to a $2.3 million decrease in revenue from our curated managed services program, partially offset by a $1.2 million increase in revenue from our accounts payable automated solutions. The managed services decline was largely driven by lower incentive revenue and the accounts payable automated solutions increase was driven by customer additions and higher merchant bankcard processing dollar value.
Revenue in Integrated Partners segment
For the year ended December 31, 2019, the $13.5 million increase in our Integrated Partners revenue was due primarily to a $12.3 million increase in revenue from PRET. PRET's revenue growth included $11.7 million from a March 2019 asset acquisition. Revenue from PayRight and PHOT, which commenced operations in April 2018 and February 2019, respectively, comprised the remainder of this reportable segment’s $1.2 million revenue growth.
Consolidated Operating Expenses
Our consolidated operating expenses for the year ended December 31, 2019 of $364.7 million increased by $5.2 million, or 1.5%, from consolidated operating expenses for the year ended December 31, 2018 of $359.4 million. This overall increase was driven primarily by a $19.4 million, or 98.0%, increase in amortization and depreciation expense related to asset acquisitions that occurred in late 2018 and 2019. Consolidated salary and employee benefits increased $3.9 million, or 10.2%, related to increases in corporate and operations headcount and higher headcount from business and asset acquisitions in 2019 and 2018, as well as a $2.0 million increase in non-cash stock-based compensation in 2019 compared to 2018. These increases were partially offset by a $16.7 million, or 6.2%, decrease in consolidated costs of services in correlation with lower revenues in 2019 and due to lower residual expenses in 2019 resulting from buyouts of residual commission rights in 2019 and 2018. Consolidated selling, general, and administrative expenses decreased by $1.3 million, or 4.0%, driven by a decrease in certain
expenses management considers to be non-recurring in nature related to transaction costs associated with the Business Combination and conversion to a public company, such as legal, accounting and other advisory and consulting expenses. These expenses were $8.3 million and $12.4 million for the years ended December 31, 2019 and 2018, respectively.
Income (Loss) from Operations
Consolidated income from operations
Consolidated income from operations decreased $9.2 million, or 56.2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. Our consolidated operating margin for year ended December 31, 2019 was 1.9% compared to 4.4% for the year ended December 31, 2018. The consolidated margin decrease was the result of higher depreciation and amortization expense of $19.4 million and a $3.9 million increase in salaries and employee benefits, partially offset by lower costs of services of $16.7 million and a $1.3 million decrease in selling, general and administrative expenses.
Income from operations in Consumer Payments segment
Our Consumer Payments reportable segment earned $32.2 million in income from operations for the year ended December 31, 2019, a decrease of $14.8 million, or 31.4%, from $47.0$582.9 million for the year ended December 31, 2018. This decrease largely reflected the increase in depreciation and amortization expense of $14.9 million in 2019 related to asset acquisitions that occurred in late 2018 and 2019. The loss of certain subscription-billing e-commerce merchants in 2019 due to industry-wide changes for enhanced card association compliance, which contributed $3.5 million and $21.3 million of income from operations in the years ended December 31, 2019 and 2018, respectively, was largely offset by income resulting from the growth in merchant bankcard processing dollar value and transaction volume.
Loss from operations in Commercial Payments segment
Our Commercial Payments reportable segment incurred a $0.9 million loss from operations for the year ended December 31, 2019,2023, compared to a $1.0 million loss from operations for the year ended December 31, 2018. This improvement was driven by a $0.6 million increase in revenue, net of costs of services, partially offset by increases in salaries and employee benefits and selling, general and administrative expenses, which included a $0.5 million allowance for uncollectible receivables in 2019 which were substantially recovered in 2020.
Income (loss) from operations in Integrated Partners segment
Our Integrated Partners segment earned income from operations of $0.7$562.2 million for the year ended December 31, 2019 compared2022. 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 losspercentage of merchant bankcard processing dollar value during 2023 increased to 0.95% from operations of $2.00.92% 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, 2018.2023, 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 wind 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 operationsthe 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 2019depreciation 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 permissible 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 $43.1 million, or 139.1%, was primarily to a 2019 asset acquisition, which included $4.0driven by the increase in revenue.
Depreciation and Amortization
Depreciation and amortization expense from our Enterprise Payments segment was $23.8 million of increased depreciation expense and $2.9 million of transitional acquisition integration costs.
Corporate Expense
Corporate expenses werefor the year ended December 31, 2023, compared to $24.9 million for the year ended December 31, 2019, a2022. The decrease of $2.8$1.1 million, or 10.1%4.6%, over expenseswas primarily driven by full amortization of $27.7 million forcertain intangible assets in the prior year ended December 31, 2018. This decrease was driven primarilyoffset by a $6.4 million decreasedepreciation expense on assets placed in certain expenses management considers to be non-recurring in nature that were associated with our Business Combination, conversion to a public company, and certain legal matters. These expenses were $6.0 million and $12.4 million forservice during the years ended December 31, 2019 and 2018, respectively.year.
Interest Expense
Consolidated interest expense, including amortization of deferred debt issuance costs and discounts, increased by $10.7 million, or 35.8%, to $40.7 million in 2019 from $29.9 million in 2018. This increase was primarily due to higher debt obligations in 2019 driven by acquisition-related borrowings.
Other, net
Other, net increased $7.5 million from a net expense of $6.8 million in the year ended December 31, 2018 to net income of $0.7 million in the year ended December 31, 2019. The 2018 amount included $3.5 million expense from the change in fair value of a prior warrant liability and $3.3 million of debt modification and other net costs.
Income Tax Expense (Benefit)
We became part of a C-Corporation reporting tax group on July 25, 2018 in connection with the Business Combination. On July 25, 2018, we recognized a net deferred income tax asset of $47.5 million, which also resulted in a credit to our additional paid-in capital within our consolidated stockholders' deficit. The net deferred tax asset is the result of the difference between the initial tax bases in the assets and liabilities and their respective carrying amounts for financial statement purposes.
For the year ended December 31, 2019, our consolidated income tax expense was $0.8 million, resulting in an effective consolidated income tax benefit rate of 2.5%. See Note 11, Income Taxes, to our consolidated financial statements in Part II, Item 8 of the Annual Report on Form 10-K.
For the year ended December 31, 2018, our consolidated income tax benefit was $2.5 million, resulting in an effective consolidated income tax rate of 12.5%. This income tax benefit was based on the pre-tax loss incurred after July 25, 2018. On a pro-forma basis assuming C-Corporation status for the full year 2018, our income tax benefit would have been $3.2 million, resulting in a pro-forma effective income tax rate of 15.6%. Our annualized pro-forma effective income tax rate for 2018 was less than the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the tax code.
Net loss
Our consolidated net loss for the year ended December 31, 2019 was $33.6 million compared to a net loss of $17.8 million for the year ended December 31, 2018 for the aforementioned reasons.
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 debt service.to service our debt.
Our working capital, defined as current assets less current liabilities, was a negative $13.0$29.2 million at December 31, 20202023 and a positive $1.2$22.5 million at December 31, 2019.2022. As of December 31, 2020,2023, we had cash totaling $9.2and cash equivalents with a balance of $39.6 million compared to $3.2$18.5 million at December 31, 2019.2022. These cash and cash equivalent balances do not include restricted cash of $78.9$11.9 million and $47.2$10.6 million at December 31, 20202023 and 2019,December 31, 2022, respectively, which reflects cash accounts holding customer
settlement funds and cash reserves for potential losses at December 31, 2020 and December 31, 2019.losses. The current portion of long-term debt included in current liabilities was $19.4$6.7 million and $6.2 million at December 31, 2020 compared with $4.0 million at December 31, 2019.2023 and 2022, respectively.
At December 31, 2020,2023, we had availability of approximately $25.0$65.0 million under our revolving credit arrangement.
The following tables and narrative reflect our changes in cash flows for the comparative annual periods.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | | 2020 | | 2019 | | |
| | | | | |
| Net cash provided by (used in): | | | | | | |
| Operating activities | | $ | 47,072 | | | $ | 39,364 | | | |
| Investing activities | | 166,396 | | | (97,747) | | | |
| Financing activities | | (175,813) | | | 75,017 | | | |
| Net increase in cash and restricted cash | | $ | 37,655 | | | $ | 16,634 | | | |
| | | | | | | | | | | | | |
| 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, which includes restricted cash, was $47.1 million and $39.4 million for the years ended December 31, 2020 and 2019, respectively. The $7.7 million, or 19.6%, increase in 2020 was principally the result of an increase in restricted cash balances, as well as an increase in cash generated from operations, partially offset by changes in assets and liabilities and the payment of $5.4 million of transaction costs related to the sale of the RentPayment business in 2020.
Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $166.4 million compared to cash used of $97.7 million for the years ended December 31, 2020 and 2019, respectively. Cash used in investing activities includes cash for the acquisitions of merchant portfolios, residual buyouts, and purchases of property, equipment and software. For the years ended December 31, 2020 and 2019, we invested $5.6 million and $82.9 million, respectively, in merchant portfolios and residual buyouts. Cash used for purchases of property, equipment, and software for the year ended December 31, 2020 was $7.5 million compared to $11.1 million for the year ended December 31, 2019. For 2020, cash used for investing activities was offset by cash received of $179.4 million from the sale of the RentPayment business. See Note 2, Disposal of Business, in Item 8 of the Annual report on Form 10-K.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $175.8 million for the year ended December 31, 2020, compared to cash provided of $75.0 million in the year ended December 31, 2019. The amount for 2020 included $110.5 million in principal repayments on the term facility for our Senior Credit Agreement, $51.1 million of cash payments to the non-controlling interests of PRET and PHOT, and repayment of the revolving facility under our Senior Credit Agreement. The amount for 2019 included net borrowings under our Senior Credit Agreement consisting of $11.5 million under the revolving facility and a $69.7 million delayed draw under the term facility that was used to acquire certain assets from YapStone, Inc. in March 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | | 2019 | | 2018 |
| | | |
| Net cash provided by (used in): | | | | |
| Operating activities | | $ | 39,364 | | | $ | 31,348 | |
| Investing activities | | (97,747) | | | (108,928) | |
| Financing activities | | 75,017 | | | 67,252 | |
| Net increase (decrease) in cash and restricted cash | | $ | 16,634 | | | $ | (10,328) | |
Cash Provided by Operating Activities
Net cash provided by operating activities was $39.4$81.3 million and $31.3$70.5 million for the years ended December 31, 20192023 and 2018,December 31, 2022, respectively. The $8.0$10.8 million, or 25.6%,15.2% increase in 20192023 was principally the result of increases in restricted cash balances and cash generated from operations, partially offsetdriven by changes in the operating assets and liabilities in 2019.liabilities.
Cash Used in Investing Activities
Net cash used in investing activities was $97.7$55.7 million and $108.9compared to cash used investing activities of $36.5 million for the years ended December 31, 20192023 and 2018,2022, respectively. Cash flowNet cash used to acquire businesses in investing activities includes the acquisitions2023 was $28.2 million compared to net cash used of merchant portfolios, residual buyouts, purchases of$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 businesses. For the years ended December 31, 2019 and 2018, we invested $82.9intangible assets was $6.6 million and $90.9compared to $8.0 million respectively, in merchant portfolios and residual buyouts. We used $0.22022. Net payments received of $0.4 million for business acquisitionson loans to ISOs for the year ended December 31, 2019,2023, compared to $7.5$4.7 million related to the funding of new loans to ISOs in 2018. Cash used for purchases of property, equipment, and software for the year ended December 31, 2019 was $11.1 million, an increase of $0.6 million from the year ended December 31, 2018. The increase in purchases was driven primarily by capitalization of internally developed software.2022.
Cash Provided by Financing Activities
Net cash provided by financing activities was $75.0$210.1 million infor the year ended December 31, 20192023, compared to $67.3$8.5 million for the year ended December 31, 2022. The net cash provided by for 2023 included changes in 2018. Cash flowsthe net obligations for funds held on the behalf of customers of $211.1 million, $49.8 million related to proceeds from the increase of the Term Facility and $44.0 million related to additional 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 Term 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 Term Facility and the revolving credit facility. The net cash provided by financing activities for 2022 included borrowings from the yearsrevolving 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, 2019 and 2018 resulted primarily from proceeds received from additional borrowings under our term debt in and revolving credit facility. Proceeds received in 2018 also included cash received from the Business Combination and equity recapitalization.
Long-Term Debt
As of December 31, 2020,2023, we had outstanding long-term debt excluding amountsobligations, including the current portion and net of unamortized debt discount of $638.7 million, compared to $605.1 million for the year ended December 31, 2022, resulting in an increase 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 of $382.0 million compared to $484.0 million at December 31, 2019, a decrease of $101.9 million. The debt balance consisted of outstanding term debt of $279.4 million under the Senior Credit Facility and $102.6 million in term debt under the Subordinated Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Group, L.P. (the "GS Credit Facility") including accrued payment-in-kind ("PIK") interest through December 31, 2020. Additionally, under the Senior Credit Facility, we have a $25.0 million revolving credit facility, which had $11.5 million drawn and outstanding as of December 31, 2019. There were no such2023. Minimum amortization of the term facility are equal quarterly
installments in aggregate annual amounts outstanding asequal to 1.0% of December 31, 2020.the original principal, with the balance paid upon maturity. The outstanding principal amounts under the Senior Credit Facilityterm facility matures in April 2027 and the Subordinated GS Credit Facility mature in January 2023 and July 2023, respectively. The $25 million revolving credit facility expires in January 2022.
The Senior Credit Facility and the subordinated GS Credit Facility are secured by substantially all of our assets, however, the parent entity, Priority Technology Holdings, Inc., is neither a borrower nor guarantor to the Senior Credit Facility or the GS Credit Facility.
On March 18, 2020, we modifiedJune 30, 2023, the Senior 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 GSamended terms, the outstanding borrowings under the Credit Amendment (collectively,Agreement interest will accrue using the "Sixth Amendment"). AsSOFR 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, 2020, financial covenants, as amended, under the Senior Credit Facility required the Total Net Leverage Ratio, as defined in the agreement, not to exceed 7.75:1.00 at December 31, 2020. The Total Net Leverage Ratio steps down thereafter.
As of December 31, 2020, we were in compliance with our financial covenants. Noncompliance in the future could have a material adverse impact on our financial condition, including giving the lenders the right to accelerate the debt repayment schedule and restricting access to2023, for the revolving credit facility. Based upon current projections,facility based on one-month SOFR was 10.20% and for the Company expects to be in compliance with its debt covenants for at least the foreseeable future. For additional information about the risks associated with our debt agreements and related covenants, refer to the "Risk Factors Related to Our Indebtedness" in Item 1A, Risk Factors, in Part I of this Annual Reportterm facility based on Form 10-K.
Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment (incorporated Exhibits 10.3.4 and 10.4.4 to this Annual Report on Form 10-K) and summarized below:
•Increase in the revolving credit facility:The Total Net Leverage Ratio means, at any date of determination,amendments also resulted in an increase in the ratio of Consolidated Total Debt for such date,Company’s revolving credit facility from $40.0 million to Consolidated Adjusted EBITDA.$65.0 million.
•Consolidated Total Debt isThe 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.
If the aggregate principal amount of indebtedness minusoutstanding revolving loans and letters of credit under the aggregate amount of unrestricted cash at the balance sheet date.
•Consolidated Adjusted EBITDA is consolidated net income plus any applicable items determined in accordance with clauses (i)(b) through (i)(v)Credit Agreement exceeds 35% of the Consolidated Adjusted EBITDA definition, minus any applicable items determined in accordancetotal revolving facility thereunder, the loan parties are required to comply with clauses (ii)(a) through (ii)(g) of the Consolidated Adjusted EBITDA definition in Section 1.01 of the Sixth Amendment ("Applicable Adjustments").
Under the provisions of the Sixth Amendment, calculation of Consolidated Adjusted EBITDA at each interim quarterly measurement period in 2020 is determined as the current year-to-date Consolidated Adjusted EBITDA annualized. For interim quarterly and full year measurement periods commencing in January 2021, calculation of Consolidated Adjusted EBITDA is determinedcertain restrictions on a last twelve months basis.
Consolidated Adjusted EBITDA is a non-GAAP liquidity measure. For determining theits Total Net Leverage Ratio, at December 31, 2020, Consolidated Adjustedwhich is defined in the Credit Agreement as the ratio of consolidated total debt less unrestricted cash to consolidated adjusted EBITDA was calculated as follows(as defined in accordance with the referenced clause definitions from Section 1.01 ofCredit Agreement). If applicable, the Sixth Amendment:
| | | | | |
(in thousands) | |
Year Ended December 31, 2020 |
| |
| |
| |
| |
Consolidated Net Income Attributable to Stockholders of Priority Technology Holdings, Inc. (GAAP) | $ | 25,661 | |
Applicable Adjustments: | |
Gain on sale of business, less amounts attributable and paid to NCIs (clause (ii)(c)) | (62,091) | |
Interest expense (clause (i)(b)) | 44,839 | |
Depreciation and amortization (clause (i)(d) and (i)(e)) | 40,775 | |
Income tax expense (clause (i)(c)) | 10,899 | |
Non-cash share-based compensation (clause (i)(j)) | 2,430 | |
Acquisition transition services (clause (i)(k)) | 2,628 | |
Debt extinguishment and modification expenses (clause (i)(f) and (i)(h)) | 1,899 | |
Impairment of intangible asset (clause (i)(f)) | 1,753 | |
Provision for allowance for note receivable (clause (i)(f)) | 467 | |
Change in fair value of contingent consideration for business combinations (clause (ii)(a)) | (360) | |
Write-off of equity-method investment (clause (i)(f)) | 211 | |
Certain legal fees and expenses (clause (i)(m)) | 1,796 | |
Litigation recoveries (clause (i)(k)) | (719) | |
Professional, accounting and consulting fees (clause (i)(k)) | 145 | |
Other professional and consulting fees (clause (i)(h)) | 1,500 | |
Other adjustments (clause (i)(k)) | 161 | |
Pro forma impact of disposal | (8,221) | |
Consolidated Adjusted EBITDA (non-GAAP) | $ | 63,773 | |
At December 31, 2020, themaximum 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 5.85:1.00, calculated as follows:in compliance with the covenants in the Credit Agreement.
| | | | | |
(in thousands, except ratio) | |
| December 31, 2020 |
| |
Consolidated Total Debt: | |
Current portion of long-term debt | $ | 19,442 | |
Long-term debt, net of discounts and deferred financing costs | 357,873 | |
Unamortized debt discounts and deferred financing costs | 4,725 | |
| 382,040 | |
Less unrestricted cash | (9,241) | |
Consolidated Net Debt | $ | 372,799 | |
| |
Total Net Leverage Ratio | 5.85 | x |
| |
Contractual Obligations
The following table sets forth our contractual obligations and commitments for the periods indicated as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Payments Due by Period |
| Contractual Obligations | | Total | | | | Less than
1 year | | 1 to 3 years | | 3 to 5 Years | | More than
5 years |
| | | |
| Operating leases | | $ | 9,168 | | | | | $ | 1,356 | | | $ | 2,663 | | | $ | 2,761 | | | $ | 2,388 | |
| Debt principal (a) | | 382,040 | | | | | 19,442 | | | 362,598 | | | — | | | — | |
| Interest on debt (b) | | 74,026 | | | | | 25,683 | | | 48,343 | | | — | | | — | |
| Contingent consideration (c) | | 2,133 | | | | | 2,133 | | | — | | | — | | | — | |
| Processing minimums (d) | | 7,000 | | | | | 7,000 | | | — | | | — | | | — | |
| | | $ | 474,367 | | | | | $ | 55,614 | | | $ | 413,604 | | | $ | 2,761 | | | $ | 2,388 | |
(a) Reflects contractual principal payments on term debt outstanding at December 31, 2020 and excludes any amount for the revolving credit facility which had no outstanding balance at December 31, 2020. Does not include future "payment-in-kind" ("PIK") interest that will be added to the principal outstanding for the GS Credit Facility as this interest is included in Interest on debt in (b). See Note 10, Long-Term Debt and Warrant Liability.
(b) Reflects interest payable and future PIK interest on term debt under the Senior Credit Facility and the subordinated GS Credit Facility. Amounts based on outstanding balances and interest rates as of December 31, 2020. Does not include any interest that may be payable in the future for the revolving credit facility which had no outstanding borrowings at December 31, 2020. See Note 10, Long-Term Debt and Warrant Liability.
(d) Reflects minimum annual spend commitments with third-party processor partners. In the event we fail to meet the minimum annual spend commitment, we are required to pay the difference between the minimum and the actual dollar amount spent in the year. See Note 12, Commitments and Contingencies.
Based on outstanding principal balances, including PIK interest, at December 31, 2020 approximately 73% of the Borrowers' $382 million of term debt matures in January 2023 and approximately 27% matures in July 2023. Based on current market conditions and the financial conditions and forecasts of the entities and guarantors that compose the Borrowers, we currently believe the term debt can be refinanced on or before the maturity dates at amounts and terms that are similar or favorable to those existing at December 31, 2020.
On March 5, 2021, we entered into a debt commitment letter with Truist Bank and Truist Securities, Inc., pursuant to which Truist has committed to provide Priority with a new Term Loan Facility and Revolving Credit Facility, which will replace existing Senior Loan facilities.Critical Accounting Estimates Also, on March 5, 2021, the Company entered into a preferred stock commitment letter with Ares Capital Management LLC and Ares Alternative Credit Management LLC to issue preferred stock, the proceeds of which will be partially used to repay our Subordinated Debt Facility. See Note 21, Subsequent Events, to the consolidated financial statements, for additional information.
Off-Balance Sheet Arrangements
We have not entered into any transactions with third parties or unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or other obligations.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 1, Nature of Business and Accounting Policies. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in 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 policies,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.
Revenue Recognition
We adopted the provisions of ASC 606, Revenue from Contracts with Customers, effective for the annual reporting period ended December 31, 2019. We used the full retrospective adoption and transition method, and accordingly, all periods presented in this Form 10-K reflect the provisions of ASC 606.
Under the provisions of ASC 606, we recognize revenue when we satisfy a performance obligation by transferring a service or good to the customer in an amount to which we expect to be entitled (i.e., transaction price) allocated to the distinct or services or goods.
At contract inception, we assess the services and goods promised in our contracts with customers and identify the performance obligation for each promise to transfer to the customer a service or good that is distinct. For substantially all of our services, the nature of our promise to the customer is to stand ready to accept and process the transactions that customers request on a daily basis over the contract term. Since the timing and quantity of transactions to be processed is not determinable, the services comprise an obligation to stand ready to process as many transactions as the customer requires. Under a stand-ready obligation, the evaluation of the nature of our performance obligation is focused on each time increment rather than the underlying activities. Therefore, we have determined that our services comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.
When third parties are involved in the transfer of services or goods to the customer, we consider the nature of each specific promised service or good and applies judgment to determine whether we control the service or good before it is transferred to the customer or whether we are acting as an agent of the third party. We follow the requirements of ASC 606-10, Principal Agent Considerations, which states that the determination of whether an entity should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. To determine whether or not we control the service or good, we assess indicators including: 1) whether we or the third party is primarily responsible for fulfillment; 2) if we or the third party provides a significant service of integrating two or more services or goods into a combined item that is a service or good that the customer contracted to receive; 3) which party has discretion in determining pricing for the service or good; and 4) other considerations deemed to be applicable to the specific situation.
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 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.
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 Long-LivedLong-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 fair 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. Where deemed appropriate, we may performChanges in these estimates and assumptions or a significant decrease in earnings could materially affect the annual assessment using the optional qualitative method. Effective for the annual reporting period ending December 31, 2020, we voluntarily changed the date for our annual goodwill impairment assessment from November 30 to October 1. Both dates occur in our fourth quarter. We believe this prospective change does not represent a material change to a method of applying an accounting principle, even though the carryingfair value of goodwill is material to our consolidated financial statements. This change had no effect on our results of operations, financial condition, or cash flows for any reporting period. By using the October 1 annual assessment date, we believe that we will be able to utilize more readily available data from both internal and external sources and have additional time to evaluate the data prior to finalizing our year-end consolidated financial statements and disclosures. This changecould result in the date for thea goodwill impairment charge.
The annual impairment assessment for goodwill does not change our requirements to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amountvalue 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 unamortized balance of the asset group.
We amortize the cost of our acquired intangible assets over their estimated useful lives using either a straight-line or an accelerated method that most accurately reflects the estimated pattern in which the economic benefitsbenefit of the respective asset is consumed.
Business Combinations
Potential ImpactsWe allocate the purchase price of Recently Issued Accounting Standards
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 potential impactsfair 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 pending adoptionstime. Management uses all available information when estimating the fair values of recently issued accounting standards may have on ourthe 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 financial position, results of operations, or cash flows see Note 1, Natureor 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 Businessacquired assets and Accounting Policies, underassumed liabilities. Our estimates of fair value are based upon assumptions the header "Recently Issued Standards Not Yet Adopted."
ITEMItem 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
Interest rate risk
Our Seniordebt facilities under our Credit Facility bearsAgreement bear interest at either a variablebase rate based on LIBOR (withor a LIBOR "floor"SOFR rate plus an applicable margin per year, subject to a SOFR rate floor of 1.0% beginning March 8, 2020) plus a fixed margin.1.00% per year. As of December 31, 2020,2023, we had $279.4$654.4 million in outstanding borrowings under our Senior Credit Facility.Agreement. Ignoring the 1.0% LIBOR1.00% SOFR floor, a hypothetical 1%1.00% increase or decrease in the applicable LIBORSOFR rate on our outstanding indebtedness under the Senior Credit FacilityAgreement would have increasedincrease or decreaseddecrease cash interest expense on our indebtedness by approximately $2.8$6.7 million per annum.
year. We do not currently hedge against interest rate risk.
Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRIORITY TECHNOLOGY HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndex to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Priority Technology Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Priority Technology Holdings, Inc. (“the Company”)(the Company) as of December 31, 2020,2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders' deficit and non-controlling interests and cash flows for each of the yearthree years in the period ended December 31, 2020,2023, and the related notes (collectively(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020,2023 and 2022, and the results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2020,2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 auditaudits 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Atlanta, Georgia
March 31, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Priority Technology Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Priority Technology Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 2019, the related consolidated statements of operations, changes in stockholders' deficit and cash flows for each of the two years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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.
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/ RSM USErnst & Young LLP
We have served as the Company'sCompany’s auditor from November 20, 2014 to June 5,since 2020.
Atlanta, Georgia
March 30, 202012, 2024
Priority Technology Holdings, Inc.
Consolidated Balance Sheets
As of December 31, 2020 and 2019(in thousands, except share data)
| | (in thousands, except share and per share amounts) | | |
| December 31, 2020 | | December 31, 2019 | |
| ASSETS | | | | |
| December 31, 2023 | |
| December 31, 2023 | |
| December 31, 2023 | |
| Assets | |
| Assets | |
| Assets | |
| Current assets: | Current assets: | | |
| Cash | $ | 9,241 | | | $ | 3,234 | | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Restricted cash | Restricted cash | 78,879 | | | 47,231 | | |
| Accounts receivable, net of allowances of $574 and $803, respectively | 41,321 | | | 37,993 | | |
| Restricted cash | |
| Restricted cash | |
| Accounts receivable, net of allowances of $5,289 and $1,143, respectively | |
| Accounts receivable, net of allowances of $5,289 and $1,143, respectively | |
| Accounts receivable, net of allowances of $5,289 and $1,143, respectively | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 3,500 | | | 3,897 | | |
| Current portion of notes receivable, net of allowances of $467 and $0, respectively | 2,190 | | | 1,326 | | |
| | Settlement assets | 753 | | | 533 | | |
| Prepaid expenses and other current assets | |
| Prepaid expenses and other current assets | |
| Current portion of notes receivable, net of allowances of $0 and $0, respectively | |
| Current portion of notes receivable, net of allowances of $0 and $0, respectively | |
| Current portion of notes receivable, net of allowances of $0 and $0, respectively | |
| Settlement assets and customer/subscriber account balances | |
| Settlement assets and customer/subscriber account balances | |
| Settlement assets and customer/subscriber account balances | |
| Total current assets | Total current assets | 135,884 | | | 94,214 | | |
| | Total current assets | |
| Total current assets | |
| Notes receivable, less current portion | |
| Notes receivable, less current portion | |
| Notes receivable, less current portion | Notes receivable, less current portion | 5,527 | | | 4,395 | | |
| Property, equipment and software, net | Property, equipment and software, net | 22,875 | | | 23,518 | | |
| Property, equipment and software, net | |
| Property, equipment and software, net | |
| Goodwill | |
| Goodwill | |
| Goodwill | Goodwill | 106,832 | | | 109,515 | | |
| Intangible assets, net | Intangible assets, net | 98,057 | | | 182,826 | | |
| Deferred income tax assets, net | 46,697 | | | 49,657 | | |
| Other non-current assets | 1,957 | | | 380 | | |
| Intangible assets, net | |
| Intangible assets, net | |
| Deferred income taxes, net | |
| Deferred income taxes, net | |
| Deferred income taxes, net | |
| Other noncurrent assets | |
| Other noncurrent assets | |
| Other noncurrent assets | |
| Total assets | Total assets | $ | 417,829 | | | $ | 464,505 | | |
| | LIABILITIES AND STOCKHOLDERS' DEFICIT | | |
| Total assets | |
| Total assets | |
| Liabilities, Redeemable Senior Preferred Stock and Stockholders' Deficit | |
| Liabilities, Redeemable Senior Preferred Stock and Stockholders' Deficit | |
| Liabilities, Redeemable Senior Preferred Stock and Stockholders' Deficit | |
| Current liabilities: | |
| Current liabilities: | |
| Current liabilities: | Current liabilities: | | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | $ | 29,821 | | | $ | 26,965 | | |
| Accounts payable and accrued expenses | |
| Accounts payable and accrued expenses | |
| Accrued residual commissions | |
| Accrued residual commissions | |
| Accrued residual commissions | Accrued residual commissions | 23,824 | | | 19,315 | | |
| Customer deposits and advance payments | Customer deposits and advance payments | 2,883 | | | 4,928 | | |
| | Customer deposits and advance payments | |
| Customer deposits and advance payments | |
| Current portion of long-term debt | Current portion of long-term debt | 19,442 | | | 4,007 | | |
| Settlement obligations | 72,878 | | | 37,789 | | |
| | Current portion of long-term debt | |
| Current portion of long-term debt | |
| Settlement and customer/subscriber account obligations | |
| Settlement and customer/subscriber account obligations | |
| Settlement and customer/subscriber account obligations | |
| Total current liabilities | Total current liabilities | 148,848 | | | 93,004 | | |
| | Long-term debt, net of current portion, discounts and deferred financing costs | 357,873 | | | 485,578 | | |
| | Other non-current liabilities | 9,672 | | | 6,612 | | |
| Total non-current liabilities | 367,545 | | | 492,190 | | |
| Total current liabilities | |
| Total current liabilities | |
| Long-term debt, net of current portion, discounts and debt issuance costs | |
| Long-term debt, net of current portion, discounts and debt issuance costs | |
| Long-term debt, net of current portion, discounts and debt issuance costs | |
| Other noncurrent liabilities | |
| Other noncurrent liabilities | |
| Other noncurrent liabilities | |
| | Total liabilities | Total liabilities | 516,393 | | | 585,194 | | |
| | Commitments and contingencies | 0 | | 0 | |
| Total liabilities | |
| | Total liabilities | |
Commitments and contingencies (Note 16) | |
Commitments and contingencies (Note 16) | |
Commitments and contingencies (Note 16) | |
| Redeemable senior preferred stock, net of discounts and issuance costs: | |
| Redeemable senior preferred stock, net of discounts and issuance costs: | |
| 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 | |
| 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 | |
| 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 | |
| Stockholders' deficit: | Stockholders' deficit: | | |
| Preferred stock, par value $0.001 per share; 100,000,000 authorized; 0 shares issued and outstanding at December 31, 2020 and 2019. | 0 | | | 0 | | |
| Common stock, par value of $0.001 per share; 1.0 billion shares authorized; 67,842,204 shares issued and 67,390,980 shares outstanding at December 31, 2020; and 67,512,167 shares issued and 67,060,943 shares outstanding at December 31, 2019. | 68 | | 68 | | |
| Stockholders' deficit: | |
| 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 | |
| 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 | |
| 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. | |
| 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. | |
| 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. | |
| Treasury stock at cost, 2,632,166 and 2,341,056 shares at December 31, 2023 and December 31, 2022, respectively | |
| Treasury stock at cost, 2,632,166 and 2,341,056 shares at December 31, 2023 and December 31, 2022, respectively | |
| Treasury stock at cost, 2,632,166 and 2,341,056 shares at December 31, 2023 and December 31, 2022, respectively | |
| Additional paid-in capital | Additional paid-in capital | 5,769 | | | 3,651 | | |
| Treasury stock, at cost (451,224 shares) | (2,388) | | | (2,388) | | |
| Additional paid-in capital | |
| Additional paid-in capital | |
| Accumulated other comprehensive income | |
| Accumulated other comprehensive income | |
| Accumulated other comprehensive income | |
| Accumulated deficit | Accumulated deficit | (102,013) | | | (127,674) | | |
| Total deficit attributable to stockholders of Priority Technology Holdings, Inc. | (98,564) | | | (126,343) | | |
| Non-controlling interest | 0 | | | 5,654 | | |
| Accumulated deficit | |
| Accumulated deficit | |
| Total stockholders' deficit attributable to stockholders of PRTH | |
| Total stockholders' deficit attributable to stockholders of PRTH | |
| Total stockholders' deficit attributable to stockholders of PRTH | |
| Non-controlling interests in consolidated subsidiaries | |
| Non-controlling interests in consolidated subsidiaries | |
| Non-controlling interests in consolidated subsidiaries | |
| Total stockholders' deficit | Total stockholders' deficit | (98,564) | | | (120,689) | | |
| Total liabilities and stockholders' deficit | $ | 417,829 | | | $ | 464,505 | | |
| Total stockholders' deficit | |
| Total stockholders' deficit | |
| Total liabilities, redeemable senior preferred stock and stockholders' deficit | |
| Total liabilities, redeemable senior preferred stock and stockholders' deficit | |
| Total liabilities, redeemable senior preferred stock and stockholders' deficit | |
Priority Technology Holdings, Inc.
Inc.Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2020, 2019, and 2018(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | Year Ended December 31, | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | | | | | | | | |
| | | | | | | | | | | | | | |
| REVENUES | $ | 404,342 | | $ | 371,854 | | | $ | 375,822 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | | | | | | | |
| Costs of services | 277,374 | | 252,569 | | | 269,284 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Salary and employee benefits | 39,507 | | 42,214 | | | 38,324 | | | | | | | | | | |
| Depreciation and amortization | 40,775 | | 39,092 | | | 19,740 | | | | | | | | | | |
| Selling, general and administrative | 25,825 | | 30,795 | | | 32,081 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total operating expenses | 383,481 | | 364,670 | | | 359,429 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income from operations | 20,861 | | 7,184 | | | 16,393 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Interest expense | (44,839) | | (40,653) | | | (29,935) | | | | | | | | | | |
| Debt extinguishment and modification expenses | (1,899) | | 0 | | | (2,043) | | | | | | | | | | |
| Gain on sale of business, net | 107,239 | | 0 | | | 0 | | | | | | | | | | |
| Other income (expense), net | 596 | | 710 | | | (4,741) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total other income (expenses), net | 61,097 | | (39,943) | | | (36,719) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) before income taxes | 81,958 | | (32,759) | | | (20,326) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income tax expense (benefit) | 10,899 | | 830 | | | (2,490) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net income (loss) | 71,059 | | | (33,589) | | | (17,836) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Less income attributable to redeemable and redeemed non-controlling interests | (45,398) | | | 0 | | | 0 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | $ | 25,661 | | | $ | (33,589) | | | $ | (17,836) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Income (loss) per common share for stockholders of Priority Technology Holdings, Inc.: | | | | | | | | | | | | | | |
| Basic | $ | 0.38 | | $ | (0.50) | | | $ | (0.29) | | | | | | | | | | |
| Diluted | $ | 0.38 | | $ | (0.50) | | | $ | (0.29) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | |
| Basic | 67,158 | | 67,086 | | | 61,607 | | | | | | | | | | |
| Diluted | 67,263 | | 67,086 | | | 61,607 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| PRO FORMA (C-corporation basis): | | | | | | | | | | | | | | |
| Pro forma income tax benefit (unaudited) | | | | | $ | (3,169) | | | | | | | | | | |
| Pro forma net loss (unaudited) | | | | | $ | (17,157) | | | | | | | | | | |
| Loss per common share: basic and diluted (unaudited) | | | | | $ | (0.28) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
Inc.Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interests
For the Years Ended December 31, 2020, 2019, and 2018(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| (in thousands) | 2020 | | | | | | | | | | | | | | | | | 2019 | | 2018 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock amount | $ | 0 | | | | | | | | | | | | | | | | | | $ | 0 | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock shares outstanding: | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | 67,061 | | | | | | | | | | | | | | | | | | 67,038 | | | 73,110 | | | |
| Member redemptions | 0 | | | | | | | | | | | | | | | | | | 0 | | | (12,565) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Pro-rata adjustments and forfeitures | 0 | | | | | | | | | | | | | | | | | | 0 | | | (724) | | | |
| Conversion of MI Acquisitions, Inc. shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | 6,667 | | | |
| Founders' Shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | (175) | | | |
| Vesting of share-based compensation | 330 | | | | | | | | | | | | | | | | | | 54 | | | 250 | | | |
| Common stock issued for business combinations | 0 | | | | | | | | | | | | | | | | | | 0 | | | 475 | | | |
| Warrant redemptions | 0 | | | | | | | | | | | | | | | | | | 420 | | | 0 | | | |
| Shares repurchased | 0 | | | | | | | | | | | | | | | | | | (451) | | | 0 | | | |
| Ending balance | 67,391 | | | | | | | | | | | | | | | | | | 67,061 | | | 67,038 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock amounts outstanding: | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 68 | | | | | | | | | | | | | | | | | | $ | 67 | | | $ | 73 | | | |
| Member redemptions | 0 | | | | | | | | | | | | | | | | | | 0 | | | (13) | | | |
| Conversion of MI Acquisitions, Inc. shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | 7 | | | |
| Vesting of share-based compensation | (a) | | | | | | | | | | | | | | | | | 1 | | | (a) | | |
| Warrant redemptions | — | | | | | | | | | | | | | | | | | | (a) | | — | | | |
| Ending balance | $ | 68 | | | | | | | | | | | | | | | | | | $ | 68 | | | $ | 67 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Treasury Stock shares: | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | 451 | | | | | | | | | | | | | | | | | 0 | | | 0 | | | |
| Repurchases of common stock | 0 | | | | | | | | | | | | | | | | | | 451 | | | 0 | | | |
| Ending balance | 451 | | | | | | | | | | | | | | | | | 451 | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Treasury Stock amounts: | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | (2,388) | | | | | | | | | | | | | | | | | | $ | 0 | | | $ | 0 | | | |
| Repurchases of common stock | 0 | | | | | | | | | | | | | | | | | | (2,388) | | | 0 | | | |
| Ending balance | $ | (2,388) | | | | | | | | | | | | | | | | | | $ | (2,388) | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Additional Paid-In Capital: | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 3,651 | | | | | | | | | | | | | | | | | | $ | 0 | | | $ | 0 | | | |
| Distributions to members | 0 | | | | | | | | | | | | | | | | | | 0 | | | (7,075) | | | |
| Member redemptions | 0 | | | | | | | | | | | | | | | | | | 0 | | | (36,548) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Equity-classified share-based compensation | 2,118 | | | | | | | | | | | | | | | | | | 3,652 | | | 1,063 | | | |
| Vesting of share-based compensation | (a) | | | | | | | | | | | | | | | | | (1) | | | 0 | | | |
| Conversion of MI Acquisitions, Inc. shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | 49,382 | | | |
| Founders' Shares | 0 | | | | | | | | | | | | | | | | | | 0 | | | (2,118) | | | |
| Recapitalization costs | 0 | | | | | | | | | | | | | | | | | | 0 | | | (9,704) | | | |
| Common stock issued for business combinations | 0 | | | | | | | | | | | | | | | | | | 0 | | | 5,000 | | | |
| Ending balance | $ | 5,769 | | | | | | | | | | | | | | | | | | $ | 3,651 | | | $ | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
Inc.Consolidated Statements of Changes in Stockholders' Deficit continuedand Non-Controlling Interests
For the Years Ended December 31, 2020, 2019, and 2018
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| | | | | | | |
| Accumulated Deficit: | | | | | | | |
| Beginning balance | $ | (127,674) | | | $ | (94,085) | | | $ | (95,978) | | | |
| Member redemptions | 0 | | | 0 | | | (28,342) | | | |
| Net deferred income tax asset related to loss of partnership status | 0 | | | 0 | | | 47,485 | | | |
| Equity-classified shared-based compensation | 0 | | | 0 | | | 586 | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | 25,661 | | | (33,589) | | | (17,836) | | | |
| | | | | | | |
| Ending balance | $ | (102,013) | | | $ | (127,674) | | | $ | (94,085) | | | |
| | | | | | | |
| Non-Controlling Interests (NCIs): | | | | | | | |
| Beginning balance | $ | 5,654 | | | $ | 0 | | | $ | 0 | | | |
| Issuance of NCI in subsidiary | 0 | | | 5,654 | | | 0 | | | |
| Redemption of NCI in subsidiary | (5,654) | | | 0 | | | 0 | | | |
| Earnings attributable to redeemable and redeemed NCIs | 45,398 | | | 0 | | | 0 | | | |
| Earnings distributed to redeemable and redeemed NCIs | (45,398) | | | 0 | | | 0 | | | |
| Ending balance | $ | 0 | | | $ | 5,654 | | | $ | 0 | | | |
| | | | | | | |
| Deficit attributable to stockholders of Priority Technology Holdings, Inc. | $ | (98,564) | | | $ | (126,343) | | | $ | (94,018) | | | |
| NCIs | 0 | | | 5,654 | | | 0 | | | |
| Total stockholders' deficit balance | $ | (98,564) | | | $ | (120,689) | | | $ | (94,018) | | | |
(a) Rounds to less than one thousand dollars. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Cash Flows | | |
| For the Years Ended December 31, 2020, 2019, and 2018 | | |
| | | | | | | |
| Year Ended December 31, | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | $ | 71,059 | | | $ | (33,589) | | | $ | (17,836) | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | |
| Gain recognized on sale of business | (107,239) | | | 0 | | | 0 | | | |
| Transaction costs for sale of business | (5,383) | | | 0 | | | 0 | | | |
| Depreciation and amortization of assets | 40,775 | | | 39,092 | | | 19,740 | | | |
| Equity-classified and liability-classified share-based compensation | 2,430 | | | 3,652 | | | 1,649 | | | |
| Amortization of debt issuance costs and discounts | 2,396 | | | 1,667 | | | 1,418 | | | |
| | | | | | | |
| Equity in losses and impairment of unconsolidated entities | 211 | | | 23 | | | 865 | | | |
| Deferred income tax expense (benefit) | 5,905 | | | (8,537) | | | (2,871) | | | |
| Change in allowance for deferred tax assets | (2,945) | | | 9,302 | | | (66) | | | |
| Change in fair value of warrant liability, net | 0 | | | 0 | | | 3,458 | | | |
| Change in fair value of contingent consideration | (360) | | | (620) | | | 0 | | | |
| Write-off of deferred loan costs and discount | 1,523 | | | 0 | | | 0 | | | |
| Payment-in-kind interest | 8,573 | | | 5,126 | | | 4,897 | | | |
| Impairment charges for intangible asset | 1,753 | | | 0 | | | 0 | | | |
| Other non-cash items, net | 233 | | | (831) | | | 211 | | | |
| Change in operating assets and liabilities (net of business combinations and disposal): | | | | | | | |
| Accounts receivable | (5,160) | | | (1,736) | | | 8,180 | | | |
| Settlement assets and obligations, net | 34,870 | | | 27,284 | | | 6,016 | | | |
| Prepaid expenses and other current assets | 65 | | | (1,230) | | | 171 | | | |
| | | | | | | |
| Notes receivable | (2,230) | | | (390) | | | 4,862 | | | |
| Customer deposits and advance payments | (2,045) | | | 1,646 | | | (1,571) | | | |
| Accounts payable and other accrued liabilities | 1,343 | | | (1,061) | | | 1,531 | | | |
| | | | | | | |
| | | | | | | |
| Other assets and liabilities, net | 1,298 | | | (434) | | | 694 | | | |
| Net cash provided by operating activities | 47,072 | | | 39,364 | | | 31,348 | | | |
| | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Sale of business | 179,416 | | | 0 | | | 0 | | | |
| Acquisitions of businesses | 0 | | | 0 | | | (7,508) | | | |
| Additions to property, equipment and software | (7,461) | | | (11,118) | | | (10,562) | | | |
| Notes receivable loan funding | 0 | | | (3,500) | | | 0 | | | |
| Acquisitions of intangible assets | (5,559) | | | (82,945) | | | (90,858) | | | |
| Other investing activity | 0 | | | (184) | | | 0 | | | |
| | | | | | | |
| Net cash provided by (used in) investing activities | 166,396 | | | (97,747) | | | (108,928) | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 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.Inc.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Cash Flows, continued | | |
| For the Years Ended December 31, 2020, 2019, and 2018 | | |
| | | | | | | |
| Year Ended December 31, | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of long-term debt, net of issue discount | 0 | | | 69,650 | | | 126,813 | | | |
| Repayments of long-term debt | (110,507) | | | (3,828) | | | (2,834) | | | |
| Profit distributions to non-controlling interests of subsidiaries | (45,398) | | | 0 | | | 0 | | | |
| Redemption of non-controlling interest in subsidiary | (5,654) | | | 0 | | | 0 | | | |
| Borrowings under revolving line of credit | 7,000 | | | 14,000 | | | 8,000 | | | |
| Repayments of borrowings under revolving line of credit | (18,505) | | | (2,500) | | | (8,000) | | | |
| Debt issuance and modification costs (paid) refunded | (2,749) | | | 83 | | | (425) | | | |
| Repurchases of common stock | 0 | | | (2,388) | | | 0 | | | |
| Distributions from equity | 0 | | | 0 | | | (7,075) | | | |
| Redemptions of equity interests | 0 | | | 0 | | | (76,211) | | | |
| Recapitalization proceeds | 0 | | | 0 | | | 49,389 | | | |
| Redemption of warrants | 0 | | | 0 | | | (12,701) | | | |
| Recapitalization costs | 0 | | | 0 | | | (9,704) | | | |
| Net cash (used in) provided by financing activities | (175,813) | | | 75,017 | | | 67,252 | | | |
| | | | | | | |
| Net increase (decrease) in cash and restricted cash | 37,655 | | | 16,634 | | | (10,328) | | | |
| Cash and restricted cash at beginning of year | 50,465 | | | 33,831 | | | 44,159 | | | |
| Cash and restricted cash at end of year | $ | 88,120 | | | $ | 50,465 | | | $ | 33,831 | | | |
| | | | | | | |
| Reconciliation of cash and restricted cash: | | | | | | | |
| Cash | $ | 9,241 | | | $ | 3,234 | | | $ | 15,631 | | | |
| Restricted cash | 78,879 | | | 47,231 | | | 18,200 | | | |
| Total cash and restricted cash | $ | 88,120 | | | $ | 50,465 | | | $ | 33,831 | | | |
| | | | | | | |
| Supplemental cash flow information: | | | | | | | |
| Cash paid for interest | $ | 33,433 | | | $ | 33,091 | | | $ | 23,350 | | | |
| Cash paid for income taxes, net of refunds | $ | 8,370 | | | $ | 0 | | | $ | 0 | | | |
| Recognition of initial net deferred income tax asset | $ | 0 | | | $ | 0 | | | $ | 47,478 | | | |
| | | | | | | |
| Non-cash investing and financing activities: | | | | | | | |
| Payment-in-kind interest added to principal of debt obligations | $ | 8,573 | | | $ | 5,126 | | | $ | 4,897 | | | |
| Purchases of property, equipment and software through accounts payable | $ | 0 | | | $ | 23 | | | $ | 50 | | | |
| Payment of accrued contingent consideration for asset acquisition from offset of accounts receivable from same entity | $ | 1,686 | | | $ | 0 | | | $ | 0 | | | |
| Intangible assets acquired by issuing non-controlling interest in a subsidiary | $ | 0 | | | $ | 5,654 | | | $ | 0 | | | |
| Accruals for asset acquisition contingent consideration | $ | 8,332 | | | $ | 2,133 | | | $ | 0 | | | |
| Notes receivable from sellers used as partial consideration for business acquisitions | $ | 0 | | | $ | 0 | | | $ | 560 | | | |
| Common stock issued as partial consideration in business acquisitions in Consumer Payments segment | $ | 0 | | | $ | 0 | | | $ | 5,000 | | | |
| Cash consideration payable for business acquisition | $ | 0 | | | $ | 0 | | | $ | 184 | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 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.
Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ACCOUNTING POLICIESNature of Business and Significant Accounting Policies
The Business
Headquartered in Alpharetta, Georgia, Priority Technology Holdings, Inc. and subsidiaries (together,GA, the "Company")Company began operations in 2005 with a mission to build a merchant inspiredmerchant-inspired payments platform that would advance the goals of its customers and partners. Today, the Company isOur 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 of merchant acquiring and commercial payment solutions, offering unique product capabilities to small and medium size businesses, ("SMBs") and enterprises and distribution partners in the United States. 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:
•ConsumerSMB payments processing solutions for business-to-consumer ("B2C")B2C transactions through independent sales organizations ("ISOs"), financial institutions, independent software vendors ("ISVs"),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.
•CommercialB2B payments solutions such as automated vendor payments and professionally curated managed services to industry leading financial institutionsFIs and networks. Our proprietary business-to-business ("B2B") Commercial Payment Exchange (CPX)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.
•Institutional services (also known as Managed Services) solutions that provide audience-specific programs for institutional partners and other third parties looking to leverage the Company's professionally trained and managed call center teams for customer onboarding, assistance, and support, including marketing and direct-sales resources.
•Integrated partnersEnterprise payments solutions for ISVs and other third-partiesthird parties that allow them to leverage the Company's core payments engine via robust application program interfaces ("APIs")API resources and high-utility embeddable code.
•Consultingcode and consulting and development solutions focused on the increasing demand for integrated payments solutions for transitioning to the digital economy.
The Company provides its services through 3three reportable segments: (1) Consumer Payments, (2) Commercial Payments,1) SMB Payments; 2) B2B Payments; and (3) Integrated Partners.3) Enterprise Payments. For additional information about our reportable segments, see Note 18, 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 financial institutionsFIs ("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 debit cards. Card association rules require that vendors and processors be sponsored by a member bank and register with the card associations. The Company has multiple sponsorship bank agreements and is itself a registered ISO with Visa®.Visa. The Company is also a registered member service provider with MasterCard®.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.
Corporate History and Recapitalization
MI Acquisitions, Inc. ("MI Acquisitions") was incorporated under the laws of the state of Delaware as a special purpose acquisition company ("SPAC") whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities. MI Acquisitions completed an initial public offering ("IPO") in September 2016, and MI Acquisitions' common stock began trading on The Nasdaq Capital Market with the symbol MACQ. In addition, MI Acquisitions completed a private placement to
certain initial stockholders of MI Acquisitions. MI Acquisitions received gross proceeds of approximately $54.0 million from the IPO and private placement.
On July 25, 2018, MI Acquisitions acquired all of the outstanding member equity interests of Priority Holdings, LLC ("Priority") in exchange for the issuance of MI Acquisitions' common stock (the "Business Combination") from a private placement. As a result, Priority, which was previously a privately-owned company, became a wholly-owned subsidiary of MI Acquisitions. Simultaneously with the Business Combination, MI Acquisitions changed its name to Priority Technology Holdings, Inc. and its common stock began trading on The Nasdaq Global Market with the symbol PRTH.
As a SPAC, MI Acquisitions had substantially no business operations prior to July 25, 2018. For financial accounting and reporting purposes under accounting principles generally accepted in the United States ("U.S. GAAP"), the acquisition was accounted for as a "reverse merger," with no recognition of goodwill or other intangible assets. Under this method of accounting, MI Acquisitions was treated as the acquired entity whereby Priority was deemed to have issued common stock for the net assets and equity of MI Acquisitions consisting mainly of cash of $49.4 million, accompanied by a simultaneous equity recapitalization (the "Recapitalization") of Priority. The net assets of MI Acquisitions are stated at historical cost and, accordingly, the equity and net assets of the Company have not been adjusted to fair value. As of July 25, 2018, the consolidated financial statements of the Company include the combined operations, cash flows, and financial positions of both MI Acquisitions and Priority. Prior to July 25, 2018, the results of operations, cash flows, and financial position are those of Priority. The units and corresponding capital amounts and earnings per unit of Priority prior to the Recapitalization have been retroactively revised as shares reflecting the exchange ratio established in the Recapitalization.
The Company's President, Chief Executive Officer and Chairman controls a majority of the voting power of the Company's outstanding common stock. As a result, the Company is a "controlled company" within the meaning of the corporate governance standards of the Nasdaq Stock Market, LLC ("Nasdaq").
Emerging Growth Company
The Company is an "emerging growth company" (EGC), as definedalso offers money transmission services in 46 U.S. states, the Jumpstart Our Business Startups ActDistrict of 2012 ("JOBS Act"). The Company may remain an EGC until December 31, 2021. However, if the Company's non-convertible debt issued within a rolling three-year period or if its revenue for any year exceeds $1.07 billion, the Company would cease to be an EGC immediately, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year. As an EGC, the Company is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, the Company as an EGC may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for publicColumbia and private companies until those standards apply to private companies. As such, the Company's financial statements may not be comparable to companies that comply with public company effective dates.
Basis of Presentation and Consolidation
The accompanying consolidated financial statementsConsolidated Financial Statements include thosethe accounts of the Company and its controlledmajority-owned subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in "Other non-current assets" in the accompanying consolidated balance sheets. 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 exercise 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 Company's ownership interest while the Company retains its controlling
interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any 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, 2023, include the post-acquisition results of the Plastiq business which was acquired through Chapter 11 bankruptcy process on July 31, 2023.
Use of Estimates
The preparation of consolidated financial statementsConsolidated Financial Statements in conformity with U.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 consolidated financial statementsConsolidated Financial Statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.
Components of Revenues and Expenses
Revenues
Costs of Services
Costs of services primarily consist of residual payments to ISOs and other direct costs of providing payment services. The residual payments represent commissions paid to ISOs and are generally based upon a percentage of the net revenues generated from merchant transactions. Other costs of services consist of third-party costs related to the Company's commercial payment services, ACH processing services, salaries that are reimbursed under cost-plus business process outsourcing services, and the cost of equipment (point of sale terminals).
Selling, General and Administrative
Selling, general and administrative expenses include mainly professional services, advertising, rent, office supplies, software licenses, utilities, state and local franchise and sales taxes, litigation settlements, executive travel, insurance, and expenses related to the Business Combination.
Interest Expense
Interest expense consists of interest on outstanding debt and amortization of deferred financing costs and original issue discounts.
Other, net
Other, net is composed of interest income, changes in fair value of warrant liabilities, and equity in losses and impairment of unconsolidated entities. Interest income consists mainly of interest received pursuant to notes receivable from independent sales agents and another entity (see Note 6, Notes Receivable). Equity in loss and impairment of unconsolidated entities consists of the Company's share of the income or loss of its equity method investment as well as any impairment charges related to such investments. At December 31, 2020, the Company no longer has any investments that are accounted for under the equity method. Changes in fair value of warrant liability relates to a warrant that was fully redeemed in 2018.
Debt Extinguishment and Modification Expenses
Debt extinguishment expenses represents the write-offs of unamortized deferred financing costs and original issue discount relating to the extinguishment, including partial extinguishment, of debt. Debt modification expenses represents amounts paid to third parties to modify existing debt agreements when those amounts are not eligible for capitalization.
Earnings Attributable to Redeemable and Redeemed Non-Controlling Interests
Represents the earnings and gains that are attributable to the non-controlling equity interests of certain of the Company's consolidated subsidiaries based on the operating agreements of the subsidiaries. See the "Non-Controlling" section under the following header for "Significant Accounting Policies."
Net Income (Loss) Attributable to Stockholders of Priority Technology Holdings, Inc.
Represents the net income or loss attributable to the stockholders of Priority Technology Holdings, Inc. after subtracting earnings, gains, or losses of consolidated subsidiaries that are attributable to the non-controlling equity interests of the subsidiaries.
Comprehensive Income (Loss)
Comprehensive income (loss) represents the sum of net income (loss) and other amounts that are not included in the consolidated statement of operations as the amounts have not been realized. For the years ended December 31, 2020, 2019, and 2018, there were no differences between the Company's net income (loss) and comprehensive income (loss). Therefore, no separate Statements of Other Comprehensive Income (Loss) are included in the financial statements for the reporting periods.
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 uses the 5-step model in ASC 606 to determine when and how much revenue to recognize:
Step 1 - Identify the contract with the customer
Step 2 - Identify the performance obligation
Step 3 - Determine the transaction price
Step 4 - Allocate the transaction price to the performance obligation
Step 5 - Recognize revenue when (or as) the Company satisfies the performance obligation
Instead of evaluating each contract with a customer on an individual basis, the Company electshas elected the permitted practical expedient that allows it to use the portfolio approach for many of its contracts since this approach’sapproach'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 meets specified criteria from its disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance.
Deferred revenues are not material for any reporting period.
The Company's reportable segments are organized byIn delivering payment services to the customer, the Company provides through distinct business units. Set forth below ismay also provide a description of the Company's revenue recognition polices by segment.
Consumer Payments - Revenue in this segment represents merchant card fee revenues, which involves promiseslimited 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 receive related payment services. When combined with the underlying payment services, relatedthe license and the payment services provided to the electroniccustomer 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 acceptance, processing,for the transaction and request funds settlement of credit, debit and electronic benefit payment transactionsfrom the card issuing financial institution through the payment networks. Merchants, whonetwork. When third parties are involved in the Company’stransfer 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 charged rates which are basedtransferred to our customer, and on various factors, includingthat basis, we do not control those services prior to being transferred to our customer. As a result, we present our revenues net of the type of bankinterchange fees retained by the card card brand, merchant charge volume, the merchant's industryissuing FIs and the merchant's risk profile. 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 merchant contracts involve three parties: the Company, the merchant and the sponsoring bank. The Company's sponsoring banks collect the gross merchant discount from the card holder’sholder's issuing bank, pay the interchange fees and assessments to the payment networks and credit card associations, retain their fees, and pay to the Company the remainingnet 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 recognizes its revenue netalso provides cost-plus-fee turn-key business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of the amounts retained by these third parties. The
Company incurs internal costs and costs of other third parties related to processing services. Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services.
Commercial Payments - This segment provides business-to-business ("B2B") automated payment services for customers, including virtual payments, purchase cards, electronic funds transfers, ACH payments, and check payments.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 andfees, sponsor bank fees. In this segment,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 portionmerchant of record, therefore, considered as the principal and accordingly presents its revenue is rebatedon a gross basis. The Company also offers volume rebates as an incentive to certain customers,increase business and thesecustomer engagement. These rebates are reportedpresented as a reductionnet of revenue. Additionally, thisTransaction processing costs, including interchange fees, are presented as costs of revenue.
Enterprise Payments– The Company's Enterprise Payments segment provides outsourced business process services by providing a sales force to certain enterprise customers. Such business process services are provided on a cost-plus fee arrangement and revenue is recognized to the extent of billable rates times hours worked and other reimbursable costs incurred. For most performance obligations associated with outsourced services that are satisfied over time, the Company applies the permitted practical expedient known as the “invoice practical expedient” that allows the Company to recognize revenue in the amount of consideration to which the Company has the right to invoice when that amount corresponds directly to the value transferred to the customer.
Integrated Partners - The Integrated Partners segment earns revenue by providing services foruses payment-adjacent technologies thatto facilitate the acceptance of electronicElectronic 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 customers who conduct businessthe customer account balances, which may be maintained by the Company in the rental real estate, rental storage, medical,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 hospitality industries. 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’ssegment'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 variable 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 held at financial institutions that is owned by the Company.Company that is held in financial institutions. 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,
Accounts receivable areis stated net of allowance for doubtful accountscurrent 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 the 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
Allowance for Doubtful Accounts Receivable and Notes ReceivableExpected Losses
The Company recordsutilizes 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 doubtful accounts and/or notes receivable when it is probable that the account receivable balance or the note receivable balance will not be collected, based upon loss trendscurrent conditions and an analysisfuture trends. The Company may also utilize a mix of individual accounts. Accounts receivablequalitative and notes receivable are written off when deemed uncollectible. Recoveries of accounts receivable and notes receivable, if any, previously written off are recognized when received.quantitative risk factors within its estimation. The allowance for doubtfulexpected loss from accounts receivable was $0.6$5.3 million and $0.8$1.1 million at December 31, 20202023 and 2019,2022, respectively. TheAs of December 31, 2023 and 2022, there was no allowance for doubtfulexpected loss on notes receivable. SeeNote 5. Notes Receivable. As of December 31, 2023 and 2022, the allowance 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 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 to measure expected losses for accrued interest on notes receivable was $0.5 million and 0 at December 31, 2020 and 2019, respectively.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 Customercustomer deposits and advance payments on the Company's consolidated balance sheetsConsolidated Balance Sheets and amounts associated with obligations expected to be satisfied after one year are reported as a component of Other non-currentother noncurrent liabilities on the Company's consolidated balance sheets.Consolidated Balance Sheets. These payments are subsequently recognized in the Company's consolidated statementsConsolidated Statements of operationsOperations 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’sCompany's operations. These upfront payments are deferred by the Company and are subsequently amortized against expense
in its statementConsolidated Statements of operationsOperations and Comprehensive Loss as the related costs are incurred by the Company in accordance with the agreement with the vendor.
Property and Equipment Including Leases
Property and equipment are stated at cost, except for property and equipment acquired in a merger or 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.
The Company has multiple operating leases related to office space. Operating leases do not involve transfer of risks and rewards of ownership of the leased asset to the lessee, therefore the Company expenses the costs of its operating leases. The Company may make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and equipment. Leasehold improvements are generally amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.
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 the 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 computeror obtain internal-use software and implementation costs are accounted for internal usein accordance with ASC 350-40, Internal-Use Software. The Company uses an agile development methodology in which feature-by-feature updates are capitalized once: (1)made to its software. The costs incurred in the preliminary project stage is completed, (2) management authorizes and commits to funding a specific software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualificationsstages of development are expensed as incurred. Capitalization ofOnce an application has reached the development stage, internal and external costs ceases when the project is substantially complete and ready for its intended use. Post-implementation costs relatedincurred to the internal use computerdevelop internal-use software are expensed as incurred. Internal use software development costs arecapitalized and amortized using the straight-line method over itsthe estimated useful life of the software, which generally rangesrange from threetwo 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, 2020, 2019,2022 and 2018, there was 0 impairment associated with internal use software. 2021.
For the years ended December 31, 2020, 2019,2023, 2022 and 2018,2021, the Company capitalized software development costs of $7.1$21.3 million, $8.2$16.8 million and $6.7$7.8 million, respectively. As of December 31, 20202023 and 2019,2022, capitalized software development costs, net of accumulated amortization, totaled $16.4$40.6 million and $14.9$28.1 million, respectively, and isare included in property, equipment and software, net on the consolidated balance sheets. Consolidated Balance Sheets.
Amortization expense for capitalized software development costs for the years ended December 31, 2020, 2019,2023, 2022 and 20182021 was $5.3$9.4 million, $4.1$6.9 million and $2.6$5.9 million, respectively, and are included in depreciation and amortization in the accompanying consolidated statements of operations.
Settlement Assets and Obligations
Settlement processing assets and obligations recognized on the Company's consolidated balance sheet represent intermediary balances arising in the Company's settlement process for merchantsConsolidated Statements of Operations and other customers. See Note 5, Settlement Assets and Obligations.
Debt Issuance and Modification Costs
Eligible debt issuance costs associated with the Company's credit facilities are deferred and amortized to interest 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 the Company's consolidated balance sheets as a direct reduction in the carrying value of the associated debt liability.
Business Combinations
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 purchaseComprehensive Loss.
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.
Non-Controlling Interests
The Company issued non-voting profit-sharing interests in 3 of its subsidiaries that were formed in 2018 or 2019 to acquire the operating assets of certain businesses (see Note 4,Asset Acquisitions, Asset Contributions, and Business Combinations). The Company is the majority owner of these subsidiaries and therefore the profit-sharing interests are deemed to be non-controlling interests ("NCI").
To estimate the initial fair value of a profit-sharing interest, the Company utilized future cash flow scenarios with focus on those cash flow scenarios that could result in future distributions to the NCIs. Profits or losses are attributed to an NCI based on the hypothetical-liquidation-at-book-value method that utilizes the terms of the profit-sharing agreement between the Company and the NCIs.
As the majority owner, the Company has call rights on the profit-sharing interests issued to the NCIs. These call rights can be executed only under certain circumstances and execution is always voluntary 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.
Based on the LLC agreements for these three subsidiaries, in certain instances the NCIs are entitled to certain earnings of the respective subsidiary. Prior to 2020, no earnings were attributable to any NCIs. All material earnings attributable to the NCIs for the year ended December 31, 2020 were simultaneously distributed to the NCIs.
As disclosed in Note 2, Disposal of Business, the NCIs of one of these subsidiaries, Priority Real Estate Technology, LLC, were fully redeemed during the year ended December 31, 2020. At December 31, 2020, the NCIs of one of the other subsidiaries, Priority PayRight Health Solutions, LLC, have also been fully redeemed and only one of the subsidiaries, Priority Hospitality Technology, LLC, has NCIs at December 31, 2020. See Note4, Asset Acquisitions, Asset Contributions, and Business Combinations.
Goodwill
The Company tests goodwill for impairment for its reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. 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.
Other Intangible Assets
Other Intangibleintangible assets are initially recorded at cost upon acquisition by the Company.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 subsequently 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,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, and non-compete agreements.
Merchant portfolios
Merchant portfolios consist of the acquired rights to a portfolio of merchants such as those acquired from Direct Connect Merchant Services, LLC, and YapStone, Inc. The Company amortizes the cost of its acquired merchant portfolios over their estimated useful lives, which generally range from five years to six years using a straight-line amortization method.
Customer Relationships
Customer relationships represent the cost of the acquired customer relationship, which typically consists of a portfolio of merchants or contracted business relationships. The Company amortizes the cost of its acquired customer relationships over their estimated useful lives, which generally range from 10 years to 15 years, using either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
ISO Relationships
ISO relationships represent the cost of acquired relationships with ISOs. The Company amortizes the cost of its acquired ISO relationships over their estimated useful lives, which generally range from 11 years to 25 years, using an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Residual Buyouts
Most of the Company's merchant customers in its Consumer Payments reportable segment are associated with independent ISOs, and these ISOs typically have a right to receive commissions from the Company based on the revenue earned by the associated merchants. The Company may occasionally decide to pay an ISO an agreed-upon amount in exchange for the ISO's surrender of its right to receive future commissions from the Company. The amount that the Company pays for these residual buyouts is capitalized and subsequently amortized over the expected life of the underlying merchant relationships. These amortization periods generally range between 1 year and 9 years and the Company uses either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Technology
Technology intangible assets represent acquired technology, such as proprietary software and website domains. The Company amortizes the cost of acquired technology over their estimated useful lives, which generally range between 6 years and 7 years, using a straight-line amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Trade Names and Non-Compete Agreements
These intangible assets are amortized over their estimated useful lives, which generally ranging between 5 years and 12 years, using a straight-line amortization method. All non-compete agreements were fully amortized at December 31, 2020 and 2019.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 amountvalue 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 unamortized balancecarrying 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, 20192023, 2022 and 2018. For2021. 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 provide 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 interest 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 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, 2020,2023, 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 recognized impairment chargesincluded costs related to this restructuring within selling, general and administrative operating expenses and depreciation and amortization within its Consolidated Statement of $1.8Operations 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 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
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 independent sales organizations ("ISOs")ISOs and independent sales agents based on a percentage of the net revenues generated from the Company's merchant customers.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 $240.2$415.1 million, $213.8$396.2 million and $230.2$330.2 million, respectively, for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, and are included in costs of services in the accompanying consolidated statementsConsolidated Statements of operations.
ISO Deposit and Loss Reserve
ISOs may partner with the Company in an executiveexclusive 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 sheetsConsolidated Balance Sheets as other liabilities, which are directly offset by restricted cash accounts owned by the Company.Company of $6.4 million and $5.1 million as of December 31, 2023 and 2022, respectively.
Share-BasedStock-based Compensation
The Company recognizes the cost resulting from all share-basedstock-based payment transactions in the financial statements at grant date fair value. Share-basedStock-based compensation expense is recognized over the requisite service period and is reflected in salary and employee benefits expense on the Company's consolidated statementsConsolidated Statements of operations.Operations and Comprehensive Loss. Awards generally vest over twothree or threefour years and may not vest evenly over the vesting period. The effects of forfeitures are recognized as they occur.
The Company measures a liability award under a share-basedstock-based compensation payment arrangement based on the award’saward'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 Equity Incentive 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 Volatilityvolatility -– Measure of the amount by which a stock price has fluctuated or is expected to fluctuate. Due toIn 2018, when the Company's outstanding stock options were granted, there was a relatively short amount of time that the Company's common stockCommon Stock (Nasdaq: PRTH) haswere traded on a public market, the Company usesutilized volatility data for the common stocksCommon Stock of a peer group of comparable public companies. An increase in the expected volatility willwould 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. As a newly-public company,In 2018, when the Company's outstanding stock options were granted, the Company lackslacked sufficient exercise information for its stock option plan.plan since it was a newly public company. Accordingly, the Company usesused a method permitted by the Securities and Exchange Commission ("SEC")SEC whereby the expected term iswas 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 useduses 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.
Time-Based Restricted Stock Awards
Time-based restricted stock awardsThe fair value of time-based restricted stock awards is determined based on the quoted closing price of the Company's common stockCommon Stock on the business day prior to the grant date of grant 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 equitystock awards based on the quoted closing price of the Company's common stockCommon Stock on the business day prior to the grant date, of grant, adjusted for any market-based vesting criteria, and records shared-basedstock-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 share-basedstock-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 RSUrestricted stock awards in which the performance goals have been established and communicated to the award recipient.
Non-voting Incentive Units
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.Common Stock. Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account, labeled Treasury Stock.treasury stock. The equity accounts that were originally credited for the original share issuance, common stockCommon Stock and additional paid-in capital, remain intact. See Note 14, 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 (Loss) Perper Share
Basic earnings (loss) per share ("EPS")EPS is computed by dividing net income (loss) available to common stockholdersCommon Stockholders by the weighted-average number of shares of common stockCommon Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution, if any, that could occur if securities or other contracts to issue common stockCommon Stock were exercised or converted into common stock,Common Stock, using the more dilutive of the two-class method or if-converted method. Diluted EPS excludes potential shares of common stockCommon Stock if their effect is anti-dilutive. If there is a net loss in any period, basic and diluted EPS are computed in the same manner.
The two-class method determines net income (loss) per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Prior to redemption in July 2018, the Goldman Sachs warrants were deemed to be participating securities because they had a contractual right to participate in non-forfeitable dividends on a one-for-one basis with the Company's common stock. Accordingly, the Company applied the two-class method for EPS when computing net income (loss) per common share. For periods beginning after September 30, 2018, EPS using the two-class method is no longer required due to the redemption of the Goldman Sachs warrant. See Note 10, Long-term Debt and Warrant Liability13. Stockholders' Deficit.
Income Taxes
Prior to July 25, 2018, Priority was a "pass-through" entity for income tax purposes and had no material income tax accounting reflected in its financial statements since taxable income and deductions were "passed through" to Priority's unconsolidated owners. As a limited liability company, Priority Holdings, LLC elected to be treated as a partnership for the purpose of filing income tax returns, and as such, the income and losses of Priority Holdings, LLC flowed through to its members. Accordingly,
no provisions for federal and most state income taxes was provided in the consolidated financial statements. However, periodic distributions were made to members to cover company-related tax liabilities.
MI Acquisitions was a taxable "C-Corp" for income tax purposes. As a result of Priority's acquisition by MI Acquisitions, the combined Company is now a taxable "C-Corp" that reports all of Priority's income and deductions for income tax purposes. Accordingly, subsequent to July 25, 2018, the consolidated financial statements of the Company reflect the accounting for income taxes in accordance with Financial Accounting Standards Board 's ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC 740").
The Company accounts 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 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 the 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 valuevalues 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.
New AccountingThe 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 Reporting Standards
Prior to July 25, 2018, Priority was definedliabilities 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 non-public entity for purposescomponent of applying transition guidance related to new or revised accounting standards under U.S. GAAP, and as such was typically required to adopt new or revised accounting standards subsequent to the required adoption dates that applied to public companies. MI Acquisitions was classified as an EGC. Subsequent to the Business Combination, the Company will cease to be an EGC no later than December 31, 2021. The Company will maintain the election available to an EGC to use any extended transition period applicable to non-public companies when complying with a new or revised accounting standards. Therefore, as long as the Company retains EGC status, the Company can continue to elect to adopt any new or revised accounting standards on the adoption date (including early adoption) required for a private company.accumulated other comprehensive income (loss).
Accounting Standards Adopted in 2020
Disclosures for Fair Value Measurements (ASU 2018-13)
On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 eliminated, added, and modified certain disclosure requirements for fair value measurements as partA substantial portion of the Financial Accounting Standards Board's ("FASB") disclosure framework project. Certain amendments must be applied prospectively while othersCompany's revenues and receivables are applied on a retrospective basisattributable to all periods presented. As disclosure guidance,merchants. For the adoption of this ASU had no effect on the Company's results of operations, financial position, or cash flows for the yearyears ended December 31, 2020. Note 17, Fair Value, reflects the disclosure provisions2023, 2022 and 2021, no individual merchant customer accounted for 10% or more of ASU 2018-13.
Share-Based Payments to Non-Employees (ASU 2018-07)
In June 2018, the FASB issued ASU 2018-07, Share-based Payments to Non-Employees, to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. As an EGC, the ASU was effective for the Company's annual reporting period that began on January 1, 2020 and will be effective for interim periods beginning first quarterconsolidated revenues. Most of 2021. The adoption of ASU 2018-07 had no material effect on the Company's resultsmerchant 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 operations, financial position, or cash flows fora "wind down" period. For the yearyears ended December 31, 2020.
Share-Based2023, 2022 and 2021, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's SMB Payments to Customers (ASU 2019-08)
In November 2019, the FASB issued ASU 2019-08, Stock Compensationreportable segment that represented approximately 15%, 21% and Revenue from Contracts with Customers ("ASU 2019-08"). ASU 2019-08 applies to share-based payments granted in conjunction with the sale of goods and services to a customer that are not in exchange for a distinct good or service. Entities apply ASC 718 to measure and classify share-based sales incentives, and reflect the measurement of such incentives, as a reduction22%, respectively, of the transaction priceCompany's consolidated revenues.
As of December 31, 2023, the Company's settlement assets and also recognize such incentives in accordance with the guidance in ASC 606 on consideration payablecustomer /subscriber account balances of $745.6 million includes cash and cash equivalents of $710.8 million related to a customer. Entities that receive distinct goods or services from a customer account for the share-based paymentbalances which are maintained in the same manner as they account for other purchases from suppliers (i.e., by applying the guidance in ASC 718). Any excess of the fair-value-based measure of the share-based payment award over the fair value of the distinct goods or services received is reflected as a reduction to the transaction price and recognized in accordanceFDIC insured accounts with the guidance in ASC 606 on consideration payable to a customer. ASU 2019-08 was effective for the Company at the same time it adopted ASU 2018-07, which was for its annual reporting period that began January 1, 2020 and will be effective for interim periods beginning first quarter 2021. The adoption of ASU 2018-07 had no material effect on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2020.
Accounting Standards Adopted in 2019
Revenue Recognition (ASC 606) and Related Costs to Obtain or Fulfill a Contracts with Customers (ASC 340-40)
For the annual reporting period that beganon January 1, 2019, the Company adopted ASU 2014-09 and the other clarifications and technical guidance issued by the Financial Accounting Standards Board ("FASB") related to this new revenue standard that
have been collectively codified in ASC 606, Revenue from Contracts with Customers, and the related ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, (together, "ASC 606"). As an emerging growth company, the Company adopted ASC 606 under the extended transition provisions available to a non-public business entity. Accordingly, the Company was not required to report under the new standards until the Company’s annual reporting period for the year ended December 31, 2019.
In reporting the effects of the adoption of ASC 606 in its consolidated financial statements and related disclosures, the Company elected the full retrospective transition method. Under this method, all annual periods presented herein in these consolidated financial statements and related disclosures have been retrospectively recasted to reflect the provisions of ASC 606. In connection with the Company’s evaluation and adoption of ASC 606, the classification of certain transactions previously presented in revenue at their gross amounts were re-evaluated under the principal-agent guidance were retrospectively recasted within the Company’s statements of operations to a net presentation. There were no other adjustments as the result of the adoption of ASC 606 and, accordingly, no adjustment was required to the Company’s beginning retained earnings (deficit) at January 1, 2017 to reflect the cumulative effect of initially applying the new standards. The adoption of ASC 606 resulted only in offsetting reclassifications between revenues and costs of services within the same reporting periods. Accordingly, these reclassifications did not have any impact on income from operations, income (loss) before income taxes, net income (loss), assets, liabilities, stockholders’ deficit, or cash flows for any period.
Gains and Losses from Derecognition of Non-Financial Assets (ASU 2017-05)
Concurrent with the adoption of ASC 606, the Company was also required to adopt the provisions of ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Non-financial Assets ("ASU 2017-05"). ASU 2017-05 clarifies that the guidance in ASC 610-20 on accounting for derecognition of a non-financial asset and an in-substance non-financial asset applies only when the asset or asset group does not meet the definition of a business or is not a non-for-profit entity. Non-financial assets include, but are not limited to, intangible assets, property and equipment. This ASU also clarifies that the provisions of ASC 606 apply if an entity transfers an asset to a customer. If an asset transfer in within the scope of ASU 2017-05, an entity measures its gain or loss on derecognition of each distinct asset as the difference between the amount of consideration received and the carrying amount of the distinct asset. The adoption of ASU 2017-05 had no impact on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2019. However, the application of ASU 2017-05 to future transactions could be material.
Measurements of Certain Equity Investments (ASU 2016-01)
Under ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, entities have to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient in ASC 820 to estimate fair value using the net asset value per share (or its equivalent) of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company early adopted the provisions of ASU 2016-01 on April 1, 2019 and applied them to an acquired warrant to purchase equity of another entity, the same entity that borrowed $3.5 million from the Company during 2019 under a $10.0 million loan and loan commitment agreement. The carrying value, at cost, and fair value of the warrant were not material.FIs. See Note 13, 4. Settlement Assets and Customer/Subscriber Account Balances and Related Party MattersObligations.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.
Statement of Cash Flows (ASU 2016-15)Recently Adopted Accounting Standards
Credit Losses
In AugustJune 2016, the FASB issued ASU No. 2016-15, Statement2016-13, Measurement of Cash Flows (Topic 230). This ASU represents a consensus of the FASB's Emerging Issues Task ForceCredit Losses on eight separate issues that each impact classifications on the statement of cash flows. In particular, issue number three addresses the classification of contingent consideration payments made after a business combination. Under ASU 2016-15, cash payments made soon after an acquisition's consummation date (i.e., approximately three months or less) will be classified as cash outflows from investing activities. Payments made thereafter will be classified as cash outflows from financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities. As an EGC, this ASU was effective for the Company's annual reporting period beginning in 2019 and was effective for interim periods beginning in 2020. The Company made no payments in 2020 or 2019 for contingent consideration related to business combinations.
Income Taxes for Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other InventoryFinancial Instruments ("ASU 2016-16"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 2016-16 removes2016-13 replaces the prohibition in ASC 740 againstcurrent "incurred loss" model with an "expected loss" model. Under the immediate"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 current and deferred income tax effectsasset that reflects all future events that leads to a loss being realized, regardless of intra-entity transfers of assets other than inventory.whether it is probable that the future event will occur. The Company adopted ASU is intended to reduce2016-13 effective January 1, 2023 using the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. ASU 2016-16 was effective for the Company's annual reporting period ended December 31, 2019 and interim periods beginning in 2020.modified-retrospective approach. The adoptionimplementation of ASU 2016-162016-13 did not have a material effect on the Company's results of operations, financial position, or cash flows. However, any future inter-entity transfers of assets within scope of this ASU may be affected.
Accounting Standards Adopted in 2018
Modifications to Share-Based Compensation Awards (ASU 2017-09)
As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-09, Compensation-Stock Compensation Topic 718 - Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms and conditions of share-based payment awards must be accounted for as modifications. Entities apply the modification accounting guidance if the value, vesting conditions, or classification of an award changes. The Company has not modified any share-based payment awards since the adoption of ASU 2017-09, therefore this new ASU has had no impact on the Company's financial position, operations, or cash flows. ShouldAudited Consolidated Financial Statements. Additionally, the Company modify share-based payment awards inmodified its accounting policy to conform with the future, it will applyrequirements of the provisionsadoption of ASU 2017-09.this standard.
Balance Sheet Classification of Deferred Income Taxes (ASU 2015-17)
In connection withMarch 2020, the Business Combination and Recapitalization, the Company prospectively adopted the provisions ofFASB issued ASU No. 2015-17,2020-04, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), during the third quarter of 2018. ASU 2015-17 simplifies the balance sheet presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities for each tax-paying jurisdiction as non-current on the balance sheet. Prior guidance required the deferred taxes for each tax-paying jurisdiction to be presented as a net current asset or liability and net non-current asset or liability.
Definition of a Business (ASU 2017-01)
On October 1, 2018, the Company prospectively adopted the provisions of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 assists entities in determining if acquired assets constitute the acquisition of a business or the acquisition of assets for accounting and reporting purposes. The guidance requires an entity to evaluate if substantially allFacilitation of the fair valueEffects 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 gross assets acquired is concentratedexpected 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 a single identifiable asset or a group of similar identifiable assets; if so,Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the set of transferred assets and activities is not a business. In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a
business.discounting transition. The Company's December 2018 acquisition of certain assets of Direct Connect Merchant Services, LLC was not deemed to be the acquisition of a business under ASU 2017-01 because substantially all of the fair value was concentrated in a single identifiable group of similar identifiable assets.
Accounting for Share-Based Payments to Employees (ASU 2016-09)
For its annual reporting period beginning January 1, 2018, the Company adopted the provisionsoptional expedients of ASU 2016-09,Topic 848 on June 30, 2023 upon the amendments of its Credit Agreement (see Improvements to Employee Share-Based Payment Accounting Note 10. Debt Obligations("ASU 2016-09") and the Certificate of Designation (see Note 11. Redeemable Senior Preferred Stock and Warrants), which amends ASC Topic 718, Compensation–Stock Compensation. This adoption hadtransitioned the following effects:
Consolidated Statement of Operations - ASU 2016-09 imposes a new requirementCompany's reference rates from LIBOR to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations. This change is required to be applied prospectively uponSOFR. The adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption. This particular provision of ASU 2016-09 had nothis standard did not have a material effectimpact on the Company's financial position, operations, or cash flows.
Consolidated Statement of Cash Flows - ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments, such as excess income tax benefits, are to be reported as operating activities on the statement of cash flows, a change from the prior requirement to present windfall income tax benefits as an inflow from financing activities and an offsetting outflow from operating activities. This particular provision of ASU 2016-09 had no material effect on the Company's financial position, operations, or cash flows.
Additionally, ASU 2016-09 clarifies that:
•All cash payments made to taxing authorities on an employee's behalf for withheld shares at settlement are presented as financing activities on the statement of cash flows. This change must be applied retrospectively. This particular provision of ASU 2016-09 had no material effect on the Company's financial position, operations, or cash flows.
•Entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated or recognized when they occur. Estimates of forfeitures will still be required in certain circumstances, such as at the time of modification of an award or issuance of a replacement award in a business combination. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings. The Company made a policy election to recognize the impact of forfeitures when they occur. This policy election primarily impacted the Company's new equity compensation plans originating in 2018 (see Note 15, Share-Based Compensation), thus not requiring a cumulative effect adjustment to opening retained earnings for these new plans. For the Company's previously existing equity compensation plan (the Management Incentive Plan), see Note 15,Share-Based Compensation. The amount of the cumulative effect upon adoption of ASU 2016-09 was not material and therefore has not been reflected in opening retained earnings on the Company's consolidated balance sheets or consolidated statements of changes in stockholders' deficit.
Recently Issued Accounting Standards Pending AdoptionTransaction 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 variable 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 following standardsCompany 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 pending adoptionaccrued and will likely applypaid 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 future periodsexcess 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 Company's current business activities.nature of the underlying contractual rights and obligations.
Implementation Costs IncurredThe Company pays certain bonuses to it's ISOs for boarding incremental merchants which the Company expects to obtain benefit from in Cloud Computing Arrangements (ASU 2018-15)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.
In August 2018,Cash and cash equivalents includes highly liquid instruments with an original maturity of three months or less, and cash owned by the FASB issued ASU 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements ("ASU 2018-15"),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangementCompany that is aheld in financial institutions. Restricted cash is held by the Company in financial institutions for the purpose of in-process customer settlements or reserves held per contact terms.
service contractAccounts 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 the 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 requirementsunderlying asset pool. A broad range of factors are considered during the estimation of the allowance including historical losses, adjustments for capitalizing implementationcurrent conditions and future trends. The Company may also 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 allowance 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 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 to 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 the 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 hosting arrangements that includeand 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 license). As an EGC, this ASU will be effectiveare 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 Company's annual reporting period beginning January 1,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 will$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 effectiveincreased for interim periods beginning in 2022.contingent consideration when due to the seller and such amounts can be estimated. The amendments are applied either retrospectively or prospectively to all implementation costs incurred afterportion of any unpaid purchase price that is contingent on future activities is not initially recorded by the Company on the date of adoption,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 provide 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 interest 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 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 included 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 yetmeet 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 independent 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 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 (Loss) per Share
Basic EPS is computed by dividing net income (loss) available to Common Stockholders by the weighted-average number of shares of Common Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution, if any, that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock, using the more dilutive of the two-class method or if-converted method. Diluted EPS excludes potential shares of Common Stock if their effect is anti-dilutive. If there is a net loss in any period, basic and diluted EPS are computed in the same manner. See Note 13. Stockholders' Deficit. Income Taxes
The Company accounts 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 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 the 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 determinationpolicy 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 retrospectiveuse 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 prospective adoption method. Basedliabilities 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 operationsmarket 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 adoptionCanadian subsidiary of ASU 2018-15the Company is not expected to havethe Canadian Dollar. Accordingly, assets and liabilities denominated in a material effectforeign currency are translated into U.S. dollars at the current exchange rate on the Company's results of operations, financial position, or cash flows.
Reference Rate Reform (ASU 2020-04)
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitationlast day of the Effectsreporting 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 Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdensaccumulated other comprehensive income (loss).
Concentration of Risk
A substantial portion of the expected market transition fromCompany's revenues and receivables are attributable to merchants. For the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financial Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contact at the modification date or reassess a previous accounting determination. ASU 2021-01 ASU 2020-04 can be adopted at any time beforeyears ended December 31, 2022. The provisions of ASU 2020-04 may impact the Company if future debt modifications or refinancings utilize one2023, 2022 and 2021, no individual merchant customer accounted for 10% or more of the reference rates coveredCompany's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other reseller partners. If the provisionsCompany'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 this ASU.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.
In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. As an EGC, this standard is effective for the Company's annual and interim reporting periods beginning 2022. The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but it is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.
Credit Losses (ASU 2016-13 and ASU 2018-19)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new guidance will changechanges how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replacereplaces 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 "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the potential impact thatadopted ASU 2016-13 mayeffective January 1, 2023 using the modified-retrospective approach. The implementation of ASU 2016-13 did not have on the timing of recognizing future provisions for expected lossesa material impact on the Company's accounts receivable and notes receivable. SinceAudited Consolidated Financial Statements. Additionally, the Company was a smaller reporting company ("SRC") on November 15, 2019,modified its accounting policy to conform with the Company must adoptrequirements of the adoption of this new standard no later than the beginning of 2023 for annual and interim reporting periods.standard.
Goodwill Impairment Testing (ASU 2017-04)
In January 2017,March 2020, the FASB issued ASU No. 2017-04,2020-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (i.e., step 2Facilitation of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge basedEffects of Reference Rate Reform on the excess of a reporting unit's carrying amount over its fair value (i.e.Financial Reporting, measure the charge based on the current step 1). Any impairment charge will be limitedwhich provides temporary optional expedients and exceptions to the amount of goodwill allocatedGAAP guidance on contract modifications and hedge accounting to an impactedease the financial reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1burdens of the goodwill impairment test,expected market transition from the LIBOR and another interbank offered rates to alternative reference rates, such as the SOFR. An entity will still be ablethat makes this election would not have to performremeasure the currentcontract 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 qualitative goodwill impairment assessment before determining whetherexpedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to proceedderivatives 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 Step 1. UponSOFR. The adoption the ASU will be applied prospectively. Since the Company wasof this standard did not have a SRC on November 15, 2019, the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods. Thematerial impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.Consolidated Financial Statements.
Simplifying the Accounting for Income Taxes (ASU 2019-12)
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 will affect several topics of income tax accounting, including: tax-basis step-up in goodwill obtained in a transaction that is not a business combination; intra-period tax allocation; ownership changes in investments when an equity method investment becomes a subsidiary of an entity; interim-period accounting for enacted changes in tax law; and year-to-date loss limitation in interim-period tax accounting. This ASU is effective for the Company on January 1, 2022. We are evaluating the effect of ASU 2019-12 on our consolidated financial statements.
Concentration of Risk
A substantial portion of the Company's revenues and receivables are attributable to merchants. For the years ended December 31, 2020, 2019, and 2018, no one 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 referral 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, 2020, 2019, and 2018, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 21%, 18%, and 14%, respectively, of the Company's consolidated revenues.
A majority of the Company's cash and restricted cash is held in certain financial institutions, 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.
Reclassifications
Certain prior year amounts in these consolidated financial statements have been reclassified to conform to the current year presentation, with no net effect on the Company's income from operations, income (loss) before income tax expense (benefit), net income (loss), stockholders' deficit, or cash flows from operations, investing, or financing activities.
2. DISPOSAL OF BUSINESS
On September 1, 2020, PRET, a majority-owned and consolidated subsidiary of the Company, entered into an asset purchase agreement (the "Agreement") with MRI Payments LLC and MRI Software LLC (together, "MRI" or the buyer) to sell certain assets from PRET's real estate services business. The buyer also agreed to assume certain obligations associated with the assets. The transaction contemplated by the Agreement was completed on September 22, 2020 after receiving regulatory approval. Prior to execution of the Agreement, the buyer was not a related party of PRET or the Company.
The assets covered by the Agreement were substantially the same assets that PRET acquired in March 2019 from YapStone, Inc. and these assets constituted PRET's RentPayment component, which was part of the Integrated Partners reporting unit, operating segment and reportable segment. These assets consist of contracts with customers, an assembled workforce, technology-related assets, Internet domains, trade names and trademarks. The buyer also assumed obligations under an in-place and off-balance-sheet operating lease for office space. Since PRET's acquisition of these assets from YapStone, Inc. in March 2019, PRET and the Company have made operational changes that resulted in these assets becoming a business as defined by the provisions of ASU 2017-01, Clarifying the Definition of a Business, before their sale to MRI.
Proceeds received by PRET were $179.4 million, net of $0.6 million for a working capital adjustment. The gain amounted to $107.2 million as follows:
| | | | | | | | |
(in thousands) | | |
| | |
Gross cash consideration from buyer | | $ | 180,000 | |
Less working capital adjustment paid in cash | | (584) | |
Net proceeds from buyer | | 179,416 | |
| | |
Transaction costs incurred | | (5,383) | |
Assets sold: | | |
Intangible assets | | (62,158) | |
Other assets sold, net of obligations assumed | | (716) | |
Goodwill assigned to business sale | | (2,683) | |
Other intangible assets | | (1,237) | |
Pre-tax gain on sale of business | | $ | 107,239 | |
PRET is a limited liability company and is a pass-through entity for income tax purposes. Income tax expenses associated with the gain attributable to the stockholders of the Company were estimated to be approximately $12.3 million.
Allocation of net proceeds, after transaction costs, to the PRET members included return of each member's invested capital in PRET and excess proceeds were distributed in accordance with the distribution provisions of the PRET LLC governing agreement. The Company's invested capital amounted to $71.8 million, which included the assets sold, goodwill and other intangible assets. The non-controlling interest's invested capital was $5.7 million. Approximately $51.4 million and $45.1 million of the excess proceeds were distributed to the Company and the non-controlling interests, respectively.
The working capital adjustment of $584 thousand and the allocation of net proceeds described above remain subject to final adjustment with the buyer and PRET members, respectively. Any remaining payments made or received by the Company will be recorded in the period in which such amounts are finalized.
As disclosed in Note10, Long-TermDebt and Warrant Liability, $106.5 million of cash received by the Company was used on September 25, 2020 to reduce the outstanding balance of the term loan facility under the Company's Senior Credit Facility.
Operating Lease Obligation
The buyer assumed an in-place operating lease in Dallas, Texas which expires on November 1, 2024. The Company has not adopted ASC 842; therefore this lease obligation was not reflected in the Company's balance sheet prior to the assumption by the buyer. The Company was relieved of minimum lease payment obligations totaling $0.5 million for the remainder of the current lease term.
Continuing Operations
Based on historical financial results, the Company does not believe the sale of the RentPayment component represents a strategic shift. Therefore, in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, the Company will not classify or report the business that was sold as discontinued operations in its consolidated financial statements for any reporting period. The Company will continue to serve the rental property market through its ongoing PRET operations.
Pro Forma Information
The following unaudited pro forma information is provided for the business (the RentPayment component) that was sold under the Agreement, excluding the gain recognized on the sale transaction:
| | | | | | | | | | | | | | | |
| | | | | | | |
| | | | Year Ended December 31, |
| (in thousands) | | | | | 2020 | | 2019 |
| | | | | | | |
| Revenues | | | | | $ | 12,042 | | | $ | 11,694 | |
Income from operations (1) | | | | | $ | 1,825 | | | $ | 2,275 | |
Net income (2) (3) | | | | | $ | 1,725 | | | $ | 2,218 | |
Net income attributable to the stockholders of Priority Technology Holdings, Inc. (4) | | | | | $ | 1,725 | | | $ | 2,218 | |
| | | | | | | |
Income per common share for stockholders of Priority Technology Holdings, Inc. - Basic and Diluted (4) | | | | | $ | 0.03 | | | $ | 0.03 | |
(1) Historical financial results are not being reported as discontinued operations.
(2) Does not reflect interest expense on the borrowings used to acquire the YapStone assets in March 2019.
(3) Pro forma income tax expense based on the following consolidated effective tax rates of Priority Technology Holdings, Inc.: 5.5% and 2.5% for the years ended December 31, 2020 and 2019, respectively. These rates exclude the effect of the $107.2 million net gain on the sale recognized during the year ended December 31, 2020.
(4) Prior to the September 2020 sale transaction that resulted in the gain on the sale, no earnings or losses of the PRET LLC were attributable to the NCIs of PRET.
3. REVENUE
For all periods presented, most of the Company’s revenues were recognized over time. Revenues and commissions earned from the sales of payment equipment are typically recognized at a point in time.
Nature of our Customer Arrangements
The Company’s payment services customers contract with the Company for payment services, which the Company provides in exchange for consideration for completed transactions. Some of these payment services are performed by third parties.
The Company’s consumer payment services enable the Company’s customers to accept card, electronic, and digital-based payments at the point of sale. These services may include authorization services, settlement and funding services, customer support and help-desk functions, chargeback resolution, payment security services, consolidated billing and statements, and online reporting. The Company also earns revenue and commissions from resale of electronic point-of-sale (“POS”) equipment.
The Company’s commercial payment services enable 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. In addition, the Company provides cost-plus-fee turnkey business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of electronic payments.
The Company's Integrated Partners segment uses payment-adjacent technologies to facilitate the acceptance of electronic payments from customers in the rental real estate, medical, and hospitality industries.
Revenue Recognition
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 to the customer a service or good that is distinct. For substantially all of the Company's services, the nature of the Company’s promise to the customer is to stand ready to accept and process the transactions that customers request on a daily basis over the contract term. Since the timing and quantity of transactions to be processed is not determinable, the services comprise an obligation to stand ready to process as many transactions as the customer requires. Under a stand-ready obligation, the evaluation of the nature of the Company’s performance obligation is focused on each time increment rather than the underlying activities. Therefore, the Company has determined that its services comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.
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. The Company follows the requirements of ASC 606-10, Principal Agent Considerations, which states that the determination of whether an entity should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. To determine whether or not the Company controls the service or good, it assesses indicators including: 1) whether the Company or the third party is primarily responsible for fulfillment; 2) if the Company or the third party provides a significant service of integrating two or more services or goods into a combined item that is a service or good that the customer contracted to receive; 3) which party has discretion in determining pricing for the service or good; and 4) other considerations deemed to be applicable to the specific situation.
Based on assessments of these indicators, the Company concluded:
•Promises to customers to provide certain payment services is distinct from the other payment services provided by the card-issuing financial institutions, payment networks, and sponsor banks. The Company does not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card-issuing financial institutions, payment networks, and sponsor banks before those services are transferred to the customer, and on that basis, the Company does not control those services prior to being transferred to the customer. The Company has either no or little discretion in setting the price that the customer pays for these specific services. The Company therefore acts as agent for these payment services provided by the card-issuing financial institutions, payment networks, and sponsor banks.
•For other promises to customers to provide other significant payment services such as onboarding, underwriting, processing, customer service, and fraud detection/prevention services, the Company has discretion in setting the price that the customer ultimately pays for these services and the Company either is responsible for fulfillment or has shared responsibility. If a third party is partially responsible for fulfillment, the Company provides a significant service of integrating two or more services, which may include services from other parties, and directs their use to create a combined item that is a specified service requested by the customer. For services that involve these other parties, the Company has direct contractual relationships with these parties.
Substantially all of the Company’s payment services are priced as a percentage of transaction value or a specified fee per transaction, or a combination of both. Given the nature of the promise and the underlying fees based on unknown quantities or outcomes of services to be performed over the contract terms with customers, the total consideration is determined to be variable consideration. The variable consideration for payment services is usage-based and therefore it specifically relates to efforts to satisfy the payment services obligation. Said another way, the variability is satisfied each day the service is provided to the customer. The Company directly ascribes variable fees to the distinct day of service to which it relates, and considers the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, the Company measures revenue for payment services on a daily basis based on the services that are performed on that day.
Once the Company determines the performance obligations and the transaction price, including an estimate of any variable consideration, the Company then allocates the transaction price to each performance obligation in the contract using a relative standalone selling price method. The Company determines standalone selling price based on the price at which the service or good is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by considering all reasonably available information, including market conditions, trends or other company-specific or customer-specific factors. Substantially all of the performance obligations described above that involve services are satisfied over time. Equipment sales are generally transferred to the customer at a point in time.
In delivering payment services to the customer, the Company may also provide a limited license agreement to the customer for 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 receive 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, satisfied over time based on days elapsed.
Interest income is reported separately on the Company’s statements of operations within Other, net and was approximately $0.8 million, $0.6 million, and $0.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
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’sCompany's most significant performance obligations consist of variable 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.
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
For new, renewed, or anticipated contracts with customers, the Company does not incur material amounts of incremental costs to obtain such contracts, as those costs are defined by ASC 340-40.
Fulfillment costs, as defined by ASC 340-40, typically benefit only the period (typically a month in duration) in which they are incurred and therefore are expensed in the period incurred (i.e., not capitalized) unless they meet criteria to be capitalized under other accounting guidance.
The Company accrues and pays commissions to most of its ISOs,commission expense based on variable merchant payment volumes and for certain ISOs the Company also pays (through a higher commission rate) them to provide customer service and other services directlyprovided 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 merchant customers.Consolidated Statements of Operations and Comprehensive Loss. The ISO is typically an independent contractor or agent of the Company. Although certain ISOs may have merchant portability rights, the merchant meets the definition of a customer for the Company even if the ISO has merchant portability rights. Since payments to ISOs are dependent substantially on variable merchant payment volumes generated after the merchant enters into a new or renewed contract, these payments to ISOs are not deemed to be a cost to acquire a new contract since the ISO payments are based on factors that will arise subsequent to the event of obtaining a new or renewed contract. Also, payments to ISOs pertain only to a specific month’s activity. For payments made, or due, to an ISO, the expenses are reported within costs of services on our statements of operations.
The Company from time-to-time may occasionally elect to buy out all or a portion of an ISO’sISO's rights to receive future commission payments related to certain merchants. Amounts paid to the ISO for these residual buyouts are capitalized byand amortized over the Companyuseful life on a straight-line basis under the accounting guidance for intangible assets and included in intangible assets, net on our consolidated balance sheets.Consolidated Balance Sheets.
Contract AssetsThe 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 Contract Liabilities
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 rightsright and obligations.obligation. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company’sCompany'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 sheetConsolidated Balance Sheets and are classified as current or non-currentnoncurrent based on the nature of the underlying contractual rights and obligations.
Supplemental balance sheet information relatedThe Company pays certain bonuses to contractsit's ISOs for boarding incremental merchants which the Company expects to obtain benefit from customersin future periods. These bonuses are recorded as ofcontract acquisition costs and are amortized over five years. Net contract acquisition costs were $6.6 million and $2.1 million at December 31, 20202023 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Consolidated Balance Sheet Location | | December 31, 2020 | | December 31, 2019 |
| | | | | | |
| | | | | | |
| | | | | | |
| Liabilities: | | | | | | |
| Contract liabilities, net (current) | | Customer deposits and advance payments | | $ | 1,494 | | | $ | 1,912 | |
The balance2022, respectively. Amortization expense for the contract liabilities was approximately $1.8 million and $2.2 million at January 1, 2019 and January 1, 2018, respectively. The changes in the balances during the years ended December 31, 2020, 2019, and 2018 were due to the timing of advance payments received from the customer.
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 not materialacquisition costs for the years ended December 31, 2020, 2019, or 2018.
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type for the years ended December 31, 2020, 20192023 and 2018:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| | | | | | | |
| Revenue Type: | | | | | | | |
| Merchant card fees | $ | 377,346 | | | $ | 339,450 | | | $ | 343,791 | | | |
| Outsourced services and other services | 23,103 | | | 28,712 | | | 29,099 | | | |
| | | | | | | |
| Equipment | 3,893 | | | 3,692 | | | 2,932 | | | |
| Total revenues | $ | 404,342 | | | $ | 371,854 | | | $ | 375,822 | | | |
4. ASSET ACQUISITIONS, ASSET CONTRIBUTIONS, AND BUSINESS COMBINATIONS
Asset Acquisitions
YapStone
In March 2019, the Company, through one of its subsidiaries, PRET, acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone, Inc. under an asset purchase and contribution agreement. The purchase price for the YapStone net assets2022 was $65.0 million in cash plus a non-controlling interest ("NCI") in PRET issued to YapStone, Inc. with a fair value that was estimated to be approximately $5.7 million. The total purchase price was assigned to customer relationships, except for $1.0 million and $1.2 million which were assigned to a software license agreement and a services
agreement, respectively. The $65.0 million of cash was funded from the Company's Senior Credit Facility. PRET is part of the Company's Integrated Partners reportable segment.
During the third quarter of 2020, substantially all of the YapStone net assets were sold to a third party. See Note 2,Disposal of Business, to the consolidated financial statements. Approximately $45.1 million of PRET's 2020 earnings through the disposal date, which were composed mostly of gain recognized on the sale, were attributed and distributed in cash to the NCI during the third quarter 2020 pursuant to the profit-sharing agreement between the Company and the NCI. At the time of the sale, the NCI was also redeemed in cash for its $5.7 million interest in PRET.
For the year ended December 31, 2019, no earnings of PRET were allocated to the NCI.
Residual Portfolio Rights Acquired
On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. Of the $15.2 million, $5.0 million was funded from the Senior Credit Facility, $10.0 million was funded from revolving credit facility under the Senior Credit Facility, and cash on hand was used to fund the remaining amount. This acquisition became part of the Company's Consumer Payments reportable segment. The purchase price was subject to a potential increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers over a three-year period. Additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset and amortization expense is adjusted to reflect the new carrying value at the original purchase date. The first period for determining contingent consideration ended in March 2020, and the Company paid the seller $2.1 million of additional cash consideration, partially offset by an amount owed to the Company by the seller. At December 31, 2020, it became apparent that the Company would owe the seller an additional $2.1 million for the second period for determining contingent consideration ending March 2021, and the Company recorded this estimated amount in its consolidated financial statements as of December 31, 2020.
Direct Connect
In December 2018, the Company acquired a merchant portfolio for $44.8 million from Direct Connect Merchant Services, LLC. The purchase price included cash contingent consideration of up to approximately $7.3 million, determinable over a period that ended on December 31, 2019. At December 31, 2019, the Company determined that it did 0t owe the contingent consideration.
Asset Assignments and Contributions
Merchant Portfolio Rights and Reseller Agreement
In October 2019, the Company simultaneously entered into 2 agreements with another entity. These 2 related agreements 1) assign to the Company certain perpetual rights to a merchant portfolio and 2) form a 5-year reseller arrangement whereby the Company will offer and sell to its customer base certain online services to be fulfilled by the other entity. NaN cash consideration was paid to, or received from, the other entity at execution of either agreement. It was not initially determinable if the Company would have to pay any amount as consideration for the merchant portfolio rights due to the provisions of the related reseller agreement. The Company does not anticipate any net losses under the 2 contracts. Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both: 1) the actual financial performance of the acquired merchant portfolio rights and 2) actual sales and variable wholesale costs for the online services sold by the Company under the reseller arrangement. Prior to December 31, 2020, amounts paid to the other entity were accounted for as either 1) standard costs of the services sold by the Company under the 5-year reseller agreement or 2) consideration for the merchant portfolio rights.
At December 31, 2020, the Company believes it has accumulated the additional data and historical experience that it deems necessary in order to reasonably estimate an amount of cash that the Company believes it will ultimately have to transfer as remaining consideration for the merchant portfolio rights. Accordingly, at December 31, 2020 the Company accrued
approximately $6.2 million of estimated remaining cash consideration and additional accumulated costs for the merchant portfolio. At December 31, 2020, the Company has recorded aggregate costs, including both actual costs and estimated remaining consideration, totaling $11.1 million. As of December 31, 2019, the Company had recorded aggregate actual costs of approximately $1.1 million. Amortization expense was adjusted to reflect the new carrying value at the original purchase date. As of December 31, 2020 and 2019, accumulated amortization was $2.8 million and $0.1$0.2 million, respectively. The merchant portfolio has an estimated remaining life of 3.5 years at December 31, 2020.
The Company will continue to review its estimate of the remaining consideration to be funded and adjust the value of the intangible asset and accrual for its obligation accordingly.
eTab and Cumulus (Related Party)
In February 2019, a subsidiary of the Company, PHOT, received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements. No material liabilities were assumed by PHOT. These contributed assets were composed substantially of technology-related assets. Prior to these transactions, eTab was 80% owned by the Company's Chairman and Chief Executive Officer. No cash consideration was paid to the contributors of the eTab or Cumulus assets on the date of the transactions. As consideration for these contributed assets, the contributors were issued redeemable preferred equity interests in PHOT. Under these redeemable preferred equity interests, the contributors are eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6% per annum) on any of the $4.5 million amount that has not been distributed to them. The Company's Chairman and Chief Executive Officer owns 83.3% of the redeemable preferred equity interests in PHOT. Once a total of $4.5 million plus the preferred yield has been distributed to the holders of the redeemable preferred equity interests, the redeemable preferred equity interests will cease to exist. The Company determined that the contributor's carrying value of the eTab net assets (as a common control transaction under GAAP) was not material. Under the guidance for a common control transaction, the contribution of the eTab net assets did not result in a change of entity or the receipt of a business, therefore the Company's financial statements for prior periods have not been adjusted to reflect the historical results attributable to the eTab net assets. Additionally, no material amount was estimated for the fair value of the contributed Cumulus net assets. PHOT is a part of the Company's Integrated Partners reportable segment.
Pursuant to the limited liability company agreement of PHOT, any material future earnings generated by the eTab and Cumulus assets that are attributable to the holders of the preferred equity interests will be reported by the Company as a form of non-controlling interests classified as mezzanine equity on the Company's consolidated balance sheet until $4.5 million and the preferred yield have been distributed to the holders of the preferred equity interests. Subsequent changes, if material, in the value of the NCI will be reported as an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the non-controlling interests in mezzanine equity. For the year ended December 31, 2020, a total of $250,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this same amount was also distributed in cash to the NCIs during the same reporting period. Accordingly, there is no material amount to classify as mezzanine equity on the Company's consolidated balance sheet at December 31, 2020.
Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through December 31, 2019, and therefore no recognition of the NCI was reflected in the Company's consolidated financial statements for reporting periods prior to 2020.
Business Combinations in 2018
PayRight
In April 2018, Priority PayRight Health Solutions, LLC ("PPRHS"), a subsidiary of the Company, purchased the majority of the operating assets and certain operating liabilities of PayRight Health Solutions LLC ("PayRight"). This asset purchase was deemed to be a business under ASC 805. This purchase allowed PPRHS to gain control over the PayRight business and therefore the Company's consolidated financial statements include the financial position, results of operations, and cash flows of PayRight from the date of acquisition. PayRight utilizes technology assets to deliver customized payment solutions to the health care industry. The results of the acquired business and goodwill of $0.3 million from the transaction are being reported by the
Company as part of its Integrated Partners reportable segment. The acquisition resulted in the recognition of intangible and net tangible assets with a fair value of $0.6 million. The Company transferred total consideration with a fair value of $0.9 million consisting of: $0.5 million in cash and forgiveness of amounts owed to the Company by PayRight; $0.3 million fair value of the Company's previous equity-method investment in PayRight described in the following paragraph; and $0.1 million of other consideration. Certain PayRight sellers were provided profit-sharing rights in PayRight as non-controlling interests "NCIs"), however, based on this arrangement no losses or earnings were allocated to the NCIs for the years ended December 31, 2020, 2019 and 2018. At December 31, 2020, all of the NCIs' interest have been redeemed for amounts that were not material.
Previously, in October 2015, the Company purchased a non-controlling interest in the equity of PayRight, and prior to April 2018 the Company accounted for this investment using the equity method of accounting. At January 1, 2018, the Company's carrying value of this investment was $1.1 million. Immediately prior to PPRHS' April 2018 purchase of substantially all of PayRight's business assets, the Company's existing non-controlling investment in PayRight had a carrying value of approximately $1.1 million with an estimated fair value on the acquisition date of approximately $0.3 million. The Company recorded an impairment loss of $0.8 million during the second quarter of 2018 for the difference between the carrying value and the fair value of the non-controlling equity-method investment in PayRight. The loss is reported within Other, net in the Company's consolidated statements of operationsAmortization expense for the year ended December 31, 2018.2021, was immaterial.
RadPadCash and Landlord Station
In July 2018, the Company's subsidiary PRET, acquired substantially all of the operating assets of RadPad Holdings, Inc. ("RadPad") and Landlord Station, LLC ("Landlord Station"). RadPad is a marketplace for the rental real estate market. Landlord Station offers a complementary tool set that focuses on facilitation of tenant screening and other services to the fast-growing independent landlord market. These asset purchases were deemed to be a business under ASC 805. Due to the related nature of the two sets of business assets, same acquisition dates, and how the Company intends to operate them under the "RadPad" name and operating platform within PRET, the Company deemed them to be one business for accounting and reporting purposes. PRET is reported within the Company's Integrated Partners reportable segment.
Total consideration paid for RadPad and Landlord Station was $4.3 million consisting of $3.9 million in cash plus forgiveness of pre-existing debt owed by the sellers to the Company of $0.4 million. Net tangible and separately-identifiable intangible assetsequivalents includes highly liquid instruments with an initial fair valueoriginal maturity of $2.1 million were acquired along with goodwill with an initial value of $2.2 million. During the fourth quarter of 2018, the Company received additional information about the fair values of assets acquiredthree months or less, and liabilities assumed. Accordingly, measurement period adjustments were made to the opening balance sheet to decrease net assets acquired and increase goodwill by $0.2 million.
NCIs in PRET were issued to certain sellers of the RadPad and Landlord Station assets in the form of residual profit interests and distribution rights. However the fair value of these NCIs was deemed to not be material at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the operating agreement for PRET. Under the terms of PRET's operating agreement, no material earnings or losses related to RadPad or Landlord Station were attributable to the NCIs for the years ended December 31, 2019 or 2018.
As disclosed in Note 2, Disposal of Business, to the consolidated financial statements, in third quarter 2020 PRET sold substantially all of its assets, composed mostly of the assets acquired from YapStone, Inc. in March 2019, to a third party. This disposal by PRET resulted in the redemptions of PRET's NCIs, including the NCIs that originated from PRET's July 2018 acquisition of the RadPad and Landlord Station assets.
Priority Payment Systems Northeast
In July 2018, the Company acquired substantially all of the operating assets of Priority Payment Systems Northeast, Inc. ("PPS Northeast"). This purchase of these net assets was deemed to be a business under ASC 805. Prior to this acquisition, PPS Northeast was an independent brand-licensed office of the Company where it developed expertise in software-integrated payment services designed to manage turnkey installations of point-of-sale and supporting systems, as well as marketing programs that place emphasis on online ordering systems and digital marketing campaigns. PPS Northeast is reported within the Company's Consumer Payments reportable segment.
Initial consideration of $3.5 million consisted of $0.5 million plus 285,117 shares of common stock of the Company with a fair value of approximately of $3.0 million. In addition, contingent consideration in an amount up to $0.5 million was deemed to have a fair value of $0.4 million at acquisition date. If earned, the seller can receive this contingent consideration in either cash or additional shares of the Company's common stock, as mutually agreedowned by the Company and seller, over a two-year period from the date of the acquisition. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.0 million were acquired along with goodwill with an initial value of $1.9 million, including the $0.4 million estimated fair value of the contingent consideration due to the seller. Transaction costs were not material and were expensed. As of December 31, 2020, the Company has determined that it will owe no contingent consideration to the seller, and accrued contingent consideration of approximately $0.2 million was credited to the Company's statements of operations for both years ended December 31, 2020 and 2019.
Priority Payment Systems Tech Partners
In August 2018, the Company acquired substantially all of the operating assets of M.Y. Capital, Inc. and Payments In Kind, Inc., collectively doing business as Priority Payment Systems Tech Partners ("PPS Tech"). These related asset purchases were deemed to be a business under ASC 805. Due to the related nature of the two sets of business assets and how the Company intends to operate them, the Company deemed them to be one business for accounting and reporting purposes. Prior to this acquisition, PPS Tech was an independent brand-licensed office of the Company where it developed a track record and extensive network in the integrated payments and B2B marketplaces. PPS Tech is reported within the Company's Consumer Payments reportable segment.
Initial consideration of $5.0 million consisted of $3.0 million plus 190,078 shares of common stock of the Company with a fair value of approximately $2.0 million. In addition, contingent consideration in an amount up to $1.0 million was deemed to have a fair value of $0.6 million at acquisition date. If earned, the seller would have received half of any contingent consideration in cash and the other half in a number of shares of common stock of the Company equal to the portion of the earned contingent consideration payable in shares of common stock of the Company, over a two-year period from the date of acquisition. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.2 million were acquired along with goodwill with an initial value of $3.4 million, including the $0.6 million estimated fair value of the contingent consideration due to the seller. Transaction costs were not material and were expensed. As of December 31, 2020, the Company has determined that it will owe no contingent consideration to the seller, and accrued contingent consideration of approximately $0.2 million and $0.4 million was credited to the Company's statement of operations for the years ended December 31, 2020 and 2019, respectively.
Other Information
Based on their purchase prices and pre-acquisition operating results and assets, none of the business combinations consummated by the Company in 2018, as described above, met the materiality requirements for disclosure of pro-forma financial information, either individually or in the aggregate. The measurement periods, as defined by ASC 805, Business Combination ("ASC 805"), is closed for these 2018 business combinations.
Goodwill for all 2018 business combinations is deductible by the Company for income tax purposes.
5. SETTLEMENT ASSETS AND OBLIGATIONS
Consumer Payments Segment
In the Company’s Consumer 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 restrict non-members, such as the Company, from performing funds settlement or accessing merchant settlement funds. Instead, these funds must be in the possession of a member bank until the merchant is funded. The Company has agreements with member banks which allow the Company to route transactions under the member bank's control to clear transactions through the card networks. Timing
differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants. 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 approximately $103.8 million and $79.8 million at December 31, 2020 and 2019, 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. 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 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 actual and estimated merchant losses for the years ended December 31, 2020, 2019, and 2018 were $4.1 million, $3.1 million, and $3.1 million, respectively.
Commercial Payments Segment
In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing ACH transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in bank accounts controlled by the Company until such time as the ACH transactions are made. The Company recognizes thesefinancial institutions. Restricted cash balances within restricted cash and settlement obligations in its consolidated balance sheets.
The Company's settlement assets and obligations at December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | |
| | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 | | |
| | | | | |
| Settlement Assets: | | | | | |
| Card settlements due from merchants, net of estimated losses | $ | 753 | | | $ | 446 | | | |
| Card settlements due from processors | 0 | | | 87 | | | |
| Total Settlement Assets | $ | 753 | | | $ | 533 | | | |
| | | | | |
| Settlement Obligations: | | | | | |
| Card settlements due to merchants | $ | 0 | | | $ | 44 | | | |
| Due to ACH payees (1) | 72,878 | | | 37,745 | | | |
| Total Settlement Obligations | $ | 72,878 | | | $ | 37,789 | | | |
(1) Amounts due to ACH payees areis held by the Company in restricted cash.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 the 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
6. NOTES RECEIVABLE
The Company hasNotes receivable are primarily comprised of notes receivable from ISOs and another entity (see Note 13, Related Party Matters) totaling approximately $7.7 million and $5.7 million as of December 31, 2020 and 2019, respectively. These notes receivable are reported as current
and non-current on the Company's consolidated balance sheet. The notes bear a weighted-average interest rate of 13.1% and 12.4% as of December 31, 2020 and 2019, respectively.
Underunder the terms of the agreements
with ISOs, 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.
The noteNotes receivable
due from another entityare recorded at the unpaid principal balance. Interest on notes receivable is
secured by business assetsrecognized on a monthly basis and
a personal guarantee.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 also utilize a mix of qualitative and quantitative risk factors within its estimation. The allowance for doubtful noteexpected loss from accounts receivable is shown net of the current outstanding principal balances for notes receivable on the consolidated balance sheetwas $5.3 million and the $0.5$1.1 million provision for doubtful note receivable is included within selling, general and administrative expense on the consolidated statement of operations and within other noncash items, net on the consolidated statement of cash flows.
Principal contractual maturities on the notes receivable, including payment-in-kind interest, at December 31,
2020 were2023 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 allowance 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 the beginning and ending amount of allowance for expected losses is as follows:follows for the year ended December 31, 2023: | | | | | | | | |
| (in thousands) | | |
| | |
| Year Ended December 31, | | Maturities |
| 2021 | | $ | 2,657 | |
| 2022 | | 1,463 | |
| 2023 | | 132 | |
| 2024 | | 3,970 | |
| | |
| Total principal due | | 8,222 | |
| Discount (long-term) | | (38) | |
| Allowance for doubtful note receivable (current) | | (467) | |
| Notes receivable, net | | $ | 7,717 | |
| | | | | | | | | | | | | |
| (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) | |
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company records goodwillhas elected not to 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 acquisitionupfront 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 maderecorded 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 the purchase price is greater thangains 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 fair value assignedpreliminary 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 underlying separately-identifiable tangiblesoftware that result in added functionality, in which case such costs are capitalized and intangible assets acquired andamortized using the liabilities assumed. The Company's goodwillstraight-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 allocated to reporting units as follows:
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | December 31, 2019 | | |
| | | | | |
| Consumer Payments | $ | 106,832 | | | $ | 106,832 | | | |
| Integrated Partners | 0 | | | 2,683 | | | |
| | $ | 106,832 | | | $ | 109,515 | | | |
The following table summarizes the changes in the carrying valueaccelerated depreciation for internal-use software of goodwill$0.3 million from certain restructuring costs. There were no impairment charges associated with internal-use software for the years ended December 31, 2020, 20192022 and 2018:
| | | | | |
(in thousands) | Amount |
| |
Balance at January 1, 2018 (all Consumer Payments) | $ | 101,532 | |
Additions for the year ended December 31, 2018: | |
PayRight (Integrated Partners) | 298 | |
RadPad/Landlord Station (Integrated Partners) | 2,385 | |
PPS Northeast (Consumer Payments) | 1,920 | |
PPS Tech (Consumer Payments) | 3,380 | |
Balance at December 31, 2019 and 2018 | 109,515 | |
| |
| (2,683) | |
Balance at December 31, 2020 | $ | 106,832 | |
For business combinations consummated during the yearyears ended December 31, 2018, goodwill is deductible2023, 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 income tax purposes.
There were no impairment lossescapitalized software development costs for the years ended December 31, 2020, 2019, or 2018. The Company performed its most recent annual goodwill impairment test as of October 1, 2020, as noted below, using the optional qualitative method. On October 1, 20202023, 2022 and December 31, 2020, only one of the Company's reporting units, Consumer Payments, had goodwill assigned to it due to the 2020 events described2021 was $9.4 million, $6.9 million and $5.9 million, respectively, and are included in Note 2, Disposal of Business.
Effective for the annual reporting period ended December 31, 2020, the Company voluntarily changed the date for its annual goodwill impairment assessment from November 30 to October 1. Both dates occur in the Company’s fourth quarter. The Company believes this prospective change does not represent a material change to a method of applying an accounting principle, even though the carrying value of goodwill is material to the Company’s consolidated financial statements. This change had no effectdepreciation and amortization on the Company’s resultsConsolidated Statements of operations, financial condition, or cash flows for any reporting period. By using the October 1 annual assessment date, the Company believes that it will be able to utilize more readily available data from both internalOperations and external sources and have additional time to evaluate the data prior to finalizing its year-end consolidated financial statements and disclosures. Based on the last quantitative assessment performed asComprehensive Loss.
Other Intangible Assets
The Company's otherOther intangible assets includeare 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 residual buyouts.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 provide 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 interest 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 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, 2020,2023, 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 recognizedincluded costs including accrued contingent consideration,related to this restructuring within selling, general and administrative operating expenses and depreciation and amortization within its Consolidated Statement of $10.0 millionOperations and $3.5 millionComprehensive Loss for merchant portfolios and residual buyouts, respectively. For the year ended December 31, 2019,2023. 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 independent 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 costs,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 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 accruedthe 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 (Loss) per Share
Basic EPS is computed by dividing net income (loss) available to Common Stockholders by the weighted-average number of shares of Common Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution, if any, that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock, using the more dilutive of the two-class method or if-converted method. Diluted EPS excludes potential shares of Common Stock if their effect is anti-dilutive. If there is a net loss in any period, basic and diluted EPS are computed in the same manner. See Note 13. Stockholders' Deficit. Income Taxes
The Company accounts 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 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 the 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 $69.8accounts 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 portfolios (including $68.7 million related to the asset acquisition from YapStone, Inc.), $19.9portfolio intangible assets with a ten-year useful life and $5.2 million for residual buyouts,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 $1.0variable 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 technology intangibles.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.
See
4. Settlement Assets and Business Combinations,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 information about contingent considerationsales 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 acquisitions consummatedthese funds are not liabilities of the Company. Therefore, neither is recognized in 2019the Company's Consolidated Balance Sheets. Member banks held merchant funds of $98.0 million and 2018.$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.
See
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 that were disposedacquired 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, 2020.2023, 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.
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, 20202023 and December 31, 2019,2022, other intangible assets consisted of the following:
| | As of December 31, | |
| (in thousands) | 2020 | | 2019 | |
| | Capitalized: | | |
| (in thousands, except weighted-average data) | | (in thousands, except weighted-average data) | December 31, 2023 | | Weighted-average
Useful Life |
| Gross Carrying Value | |
| Other intangible assets: | |
| Other intangible assets: | |
| Other intangible assets: | |
| ISO and referral partner relationships | |
| ISO and referral partner relationships | |
| ISO and referral partner relationships | | $ | 182,339 | | | $ | (36,506) | | | $ | 145,833 | | | 14.7 |
| Residual buyouts | | Residual buyouts | 135,164 | | | (92,699) | | | 42,465 | | | 6.3 |
| Customer relationships | | Customer relationships | 109,017 | | | (92,781) | | | 16,236 | | | 8.4 |
| Merchant portfolios | Merchant portfolios | $ | 55,816 | | | $ | 114,554 | | | Merchant portfolios | 83,350 | | | (56,139) | | (56,139) | | | 27,211 | | 27,211 | | | 6.5 | | 6.5 |
| Customer relationships | 40,740 | | | 40,740 | | |
| Residual buyouts | 116,112 | | | 112,731 | | |
| Technology | | Technology | 57,639 | | | (22,712) | | | 34,927 | | | 9.0 |
| Non-compete agreements | Non-compete agreements | 3,390 | | | 3,390 | | | Non-compete agreements | 3,390 | | | (3,390) | | (3,390) | | | — | | — | | | 0.0 | | 0.0 |
| Trade names | Trade names | 2,870 | | | 2,870 | | | Trade names | 7,104 | | | (2,526) | | (2,526) | | | 4,578 | | 4,578 | | | 11.7 | | 11.7 |
| Technology | 14,390 | | | 15,390 | | |
| ISO relationships | 15,200 | | | 15,200 | | |
| Total capitalized | $ | 248,518 | | | $ | 304,875 | | |
| | Less accumulated amortization: | | |
| Merchant portfolios | $ | (19,471) | | | $ | (12,655) | | |
| Customer relationships | (30,267) | | | (25,836) | | |
| Residual buyouts | (72,659) | | | (59,796) | | |
| Non-compete agreements | (3,390) | | | (3,390) | | |
| Trade names | (1,651) | | | (1,273) | | |
| Technology | (13,951) | | | (12,758) | | |
| ISO relationships | (7,319) | | | (6,341) | | |
| Total accumulated amortization | $ | (148,708) | | | $ | (122,049) | | |
| | Accumulated allowance for impairment | $ | (1,753) | | | $ | 0 | | |
| | Net carrying value | $ | 98,057 | | | $ | 182,826 | | |
Money transmission licenses(1) | |
| Total gross carrying value | |
| Total gross carrying value | |
| Total gross carrying value | | $ | 580,103 | | | $ | (306,753) | | | $ | 273,350 | | | 9.7 |
| | | | | | | | | | | | | | | | | | | | | | | |
| (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 |
The weighted-average amortization periods for intangible assets held at December 31, 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| Useful Life | | Amortization Method | | Weighted-Average Life |
| | | | | |
Merchant portfolios | 5 - 6 years | | Straight-line | | 5.5 years |
Residual buyouts | 1 - 9 years | | Straight-line and double declining | | 6.8 years |
Non-compete agreements | 3 years | | Straight-line | | 3.0 years |
Trade names | 5 -12 years | | Straight-line | | 11.6 years |
Technology | 6 - 7 years | | Straight-line | | 6.1 years |
ISO relationships | 11 - 25 years | | Sum-of-years digits | | 23.7 years |
Customer relationships | 10 - 15 years | | Straight-line and sum-of-years digits | | 11.0 years |
Amortization expense for intangible assets was $33.1 million, $32.4 million, and $14.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
| | | | | | | | | | | | | | | | | |
| 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, 20202023, for the next five years and thereafter is:
| | (in thousands) | (in thousands) | | (in thousands) | | Estimated Amortization Expense |
| Estimated |
| Year Ending December 31, | Year Ending December 31, | | Amortization Expense |
| 2021 | | $ | 28,216 | |
| 2022 | | 27,066 | |
| 2023 | | 21,280 | |
| 2024 | |
| 2024 | |
| 2024 | 2024 | | 10,126 | |
| 2025 | 2025 | | 3,671 | |
| 2026 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | | 7,698 | |
| Total | | $ | 98,057 | |
Total(1) | |
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. In the Company's Consumer Payments segment, a residual buyout intangible asset with a net carrying value of $2.2 million was deemed to be impaired at December 31, 2020. The fair value of this intangible asset was estimated to be approximately $0.5 million, resulting in the recognition of an impairment charge of $1.8 million and this amount is included in selling, general and administrative expenses on the Company' consolidated statement of operations for the year ended December 31, 2020. This impairment was the result of diminished cash flows generated by the merchant portfolio.
The Company also considered the market conditions generated by the COVID-19 pandemicand other factors and concluded that there were no additional impairment indicators present at December 31, 2020.2023.
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | |
8. PROPERTY, EQUIPMENT AND SOFTWARE
The Company's property, equipment,9. Accounts Payable and software balance primarily consists of furniture, fixtures, and equipment used in the normal course of business, computer software developed for internal use, and leasehold improvements. Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist the reporting of merchant processing transactions and other related information.
A summary of property, equipment and software as of December 31, 2020 and December 31, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| As of December 31, | | | | |
| (in thousands) | 2020 | | 2019 | | | | Estimated Useful Life |
| Furniture and fixtures | $ | 2,795 | | | $ | 2,787 | | | | | 2 - 7 years |
| Equipment | 10,216 | | | 10,101 | | | | | 3 - 7 years |
| Computer software | 44,320 | | | 37,440 | | | | | 3 - 5 years |
| Leasehold improvements | 6,250 | | | 6,367 | | | | | 5 - 10 years |
| | 63,581 | | | 56,695 | | | | | |
| Less accumulated depreciation | (40,706) | | | (33,177) | | | | | |
| Property, equipment and software, net | $ | 22,875 | | | $ | 23,518 | | | | | |
Depreciation expense totaled $7.7 million, $6.6 million, and $5.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company accrues for certain expenses that have been incurred and not paid, which are classified within accounts payable and accrued expenses in the accompanying consolidated balance sheets.
The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at December 31, 2020 and December 31, 2019 consisted of the following:
| | | | | | | | | | | | | |
| | | | | |
| As of December 31, | | |
| (in thousands) | 2020 | | 2019 | | |
| Accounts payable - trade | $ | 4,308 | | | $ | 6,968 | | | |
| | | | | |
| Accrued card network fees | $ | 8,041 | | | $ | 6,950 | | | |
| | | | | |
10. LONG-TERM DEBT AND WARRANT LIABILITY
Long-term debt owed by certain subsidiaries (the "Borrowers") of the Company consisted of the following as of December 31, 2012 and December 31, 2019:
| | | | | | | | | | | | | |
| As of December 31, 2020 | | |
| (dollar amounts in thousands) | 2020 | | 2019 | | |
| | | | | |
| Senior Credit Agreement: | | | | | |
| Term Loan - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00% beginning March 8, 2020) plus 6.50% and 5.0% at December 31, 2020 and 2019, respectively (actual rate of 7.50% and 6.71% at December 31, 2020 and 2019, respectively) | $ | 279,417 | | | $ | 388,837 | | | |
| | | | | |
| Revolving credit facility - $25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50% and 5.0% at December 31, 2020 and 2019, respectively (actual rate of 6.65% and 6.71% at December 31, 2020 and 2019, respectively). | 0 | | | 11,500 | | | |
| | | | | |
Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus an applicable margin at December 31, 2020 and 2019 (actual rate of 12.50% and 10.50% at December 31, 2020 and 2019, respectively) | 102,623 | | | 95,142 | | | |
| | | | | |
| Total debt obligations | 382,040 | | | 495,479 | | | |
| | | | | |
| Less: current portion of long-term debt | (19,442) | | | (4,007) | | | |
| Less: unamortized debt discounts and deferred financing costs | (4,725) | | | (5,894) | | | |
| | | | | |
| Total long-term debt, net | $ | 357,873 | | | $ | 485,578 | | | |
Substantially all of the Company's assets are pledged as collateral under the credit agreements. The Company is neither a borrower nor a guarantor of the credit agreements. The Company's subsidiaries that are borrowers or guarantors under the credit agreements are referred to as the "Borrowers."
| | | | | | | | | | | | | |
| (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 | | | |
Long-Term10. Debt Obligations
On January 3, 2017, the Company refinanced existing long-termOutstanding debt whereby the Borrowers entered into a credit agreement with a syndicate of lenders (the "Senior Credit Agreement"). The Senior Credit Agreement had an original maximum borrowing amount of $225.0 million, consisting of a $200.0 million term loan and a $25.0 million revolving credit facility. As partobligations consisted of the debt refinancing on January 3, 2017, the Borrowers also entered into a Credit and Guaranty Agreement (the "GS Credit Agreement") with Goldman Sachs Specialty Lending Group, L.P. ("Goldman Sachs" or "GS") for an $80.0 million term loan, the proceeds of which were used to refinance the amounts previously outstanding with Goldman Sachs. The Company determined that the 2017 debt refinancing should be accounted for as a debt extinguishment.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 | |
Amendments
The following table summarizes changes made as the results of key amendments to the 2017 credit agreements through December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | GS Credit | | | | |
| | Senior Credit Agreement | | Agreement | | Discounts and Costs |
| | | | | | | | | | |
| | | Additional | | | | | | | |
| | Additional | Revolving | | | | | | | |
| | Principal | Line | Amendment | | Principal | | Issue | Costs | Costs |
| Amendment | | Established | Established | Type | | Established (a) | | Discount | Expensed (b) | Capitalized |
| | | | | | | | | | |
| January 2017 | | $ | 200.0 | | $ | 25.0 | | Extinguishment | | $ | 80.0 | | | $ | 3.7 | | $ | 1.8 | | $ | 3.3 | |
| January 2018 | | 67.5 | | — | | Modification | | 0 | | | $ | 0.4 | | $ | 0.8 | | $ | 0.7 | |
| December 2018 | | 130.0 | | — | | Modification | | 0 | | | $ | 0.3 | | $ | 1.2 | | $ | 0.1 | |
| March 2020 | | 0 | | — | | Modification | | 0 | | | $ | 0 | | $ | 0.4 | | $ | 2.7 | |
| | $ | 397.5 | | $ | 25.0 | | | | $ | 80.0 | | | | | |
(a) The GS Credit Agreement allows for payment-in-kind interest which subsequently increases the amount outstanding. Beginning with the Sixth Amendment, the Senior Credit Agreement began to allow certain amounts of interest to be treated as payment-in-kind interest and added to the outstanding borrowings balance, as discussed below under the header "Changes to Applicable Interest Rate Margins."
(b) Reported within "Debt extinguishment and modification expenses" on the Company's consolidated statements of operations.
The Senior Credit Agreement and the GS Credit Agreement were also amended on November 14, 2017. This amendment allows for loan advances of less than $5.0 million and for certain liens on cash securing the Company's funding obligations under a new product involving a virtual credit card program. This amendment did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.
Additionally, two amendments were executed in 2019 that concerned procedural changes to the quarterly and annual reporting for lenders and did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.
Senior Credit Agreement
Outstanding borrowings under the Senior Credit Agreement accrue interest using either a base rate (as defined) or a LIBOR rate plus an applicable margin, or percentage per annum, as provided in the amended credit agreement. For the term loan facility of the Senior Credit Facility, the Sixth Amendment provides for a LIBOR "floor" of 1.0% per annum. Accrued interest is payable quarterly. The revolving credit facility incurs a commitment fee on any undrawn amount of the $25.0 million credit line, which equates to 0.5% per annum for the unused portion.
GS Credit Agreement
Outstanding borrowings under the GS Credit Agreement accrue interest at 5.0%, plus an applicable margin, or percentage per annum, as indicated in the amended credit agreement. Accrued interest is payable quarterly at 5.0% per annum, and the accrued interest attributable to the applicable margin is capitalized as payment-in-kind ("PIK") interest each quarter.
Senior Credit Agreement - Partial Pay Down of Term Debt and Changes to Applicable Interest Rate Margins in 2020
Under the Sixth Amendment, the interest rate margins for the Senior Credit Agreement and the GS Credit Agreement increased incrementally by 1.0% on June 16, 2020, and then increased incrementally by 0.5% on each of the dates July 16, August 15, and September 14, 2020 because the Borrowers did not make a permitted accelerated principal payment of at least $100.0 million under the term loan facility of the Senior Credit Agreement on or before those dates as described in the Sixth Amendment (the "$100.0 million principal prepayment"). The additional interest expense incurred by the Borrowers due to the increases in the applicable margin for the revolving credit facility under the Senior Credit Agreement was paid in cash and such increases for the term facility of the Senior Credit Facility and the GS Credit Agreement were accounted for as PIK interest at the election of the Borrowers.
On September 25, 2020, the Borrowers made the $100.0 million principal prepayment plus an additional $6.5 million principal prepayment to reduce the outstanding indebtedness under the term loan facility of the Senior Credit Agreement. This $106.5 million prepayment resulted in simultaneous reductions in the applicable interest rate margins under the Senior Credit Agreement and the GS Credit Agreement, which prospectively eliminates and reverses the applicable margin increases described in the preceding paragraph.
Under the terms of the Senior Credit Agreement and the GS Credit Agreement, the future applicable interest rate margins may vary based on the Borrowers' future Total Net Leverage Ratio (as defined) in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings. The Senior Credit Agreement and the GS Credit Agreement also have incremental margins that would apply to the future applicable interest rates if the Borrowers are deemed to be in violation of the terms of the credit agreement.
Contractual Maturities
Principal outstandingBased on terms and conditions existing at December 31, 20202023, future minimum principal payments for termlong-term debt under the Senior Credit Agreement and the GS Credit Agreement are scheduled to be paid as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Principal Due |
| Senior Credit Agreement | | GS Credit Agreement | | Total |
| Year Ending December 31, | Term | Revolver | | Term | |
| | | | | | |
2021 (current) | $ | 19,442 | | $ | 0 | | | $ | 0 | | | $ | 19,442 | |
| 2022 | 38,884 | | 0 | | | 0 | | | 38,884 | |
| 2023 | 221,091 | | 0 | | | 102,623 | | | 323,714 | |
| | | | | | |
| Total | $ | 279,417 | | $ | 0 | | | $ | 102,623 | | | $ | 382,040 | |
| | | | | | | | | | | | | | | | | | | | |
| (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 Senior Credit Agreement. No such prepayments were due
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 years endedcalculation 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, 20202023, for the revolving credit facility based on one-month SOFR was 10.20% and 2019.for the term facility based on one-month SOFR was 11.21%.
UnderFourth Amendment to the SeniorApril 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 prepaymentsaccrue 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 with a 1.0% penalty for certain prepayments. Under the GS Credit Agreement, prepayment of outstanding principal is subject to a 4.0%1.00% penalty for certain prepayments occurring priormade in connection with repricing transactions.
Proceeds from the Initial Term Loan were used to March 18, 2021 and 2.0% for certain prepayments occurring between March 18, 2021 and March 18, 2022. Such penalties will be based onpartially fund the principal amount that is prepaid, subject to the termsrefinancing of the Company's existing credit agreements.
On March 5, 2021,facilities as of April 27, 2021. Proceeds from the Company entered into a debt commitment letter with Truist Bank and Truist Securities, Inc., pursuant to which Truist has committed to provide Priority with a newDelayed Draw Term Loan Facility and Revolving Credit Facility, which will replace existing Senior loan facilities. Also, on March 5, 2021, the Company entered into a preferred stock commitment letter (the “Equity Commitment Letter”) with Ares Capital Management LLC and Ares Alternative Credit Management LLC to issue preferred stock, the proceeds of which will be partiallywere used to entirelyfund the Company's acquisition of Finxera. Proceeds from the Fourth Amendment were used to repay our Subordinated Debt Facility. See Note 21, Subsequent Events,the balance of the revolving credit facility (used to acquire Plastiq business) and added additional cash for additional information.
PIK Interest
The principal amount borrowed and outstanding under the GS Credit Agreement was $80.0 million at December 31, 2020 and December 31, 2019. Included in the outstanding principal balance at December 31, 2020 and December 31, 2019 was accumulated PIK interest of $22.6 million and $15.1 million, respectively. For the years ended December 31, 2020 and 2019, the payment-in-kind (PIK) interest under the GS Credit Agreement added $7.5 million and $5.1 million, respectively, to the principal amount outstanding under the GS Credit Agreement.
Interest Expense and Amortization of Deferred Loan Costs and Discounts
Deferred financing costs and debt discountdiscounts are being 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 net long-term debt inon the Company's consolidated balance sheets.Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| (in thousands) | | 2023 | | 2022 | 2021 |
Interest expense(1) | | $ | 76,108 | | | $ | 53,554 | | $ | 36,485 | |
| | | | | |
| | | | | |
Interest expense including fees for undrawn amounts under the revolving credit facility andincluded amortization of deferred financing costs and debt discounts was $44.8of $3.8 million, $40.7$3.5 million and $29.9$4.0 million for the years ended December 31, 2020, 20192023, 2022 and 2018, respectively. Interest expense increased due to the amortization of deferred financing costs and debt discounts by $2.4 million, $1.7 million, and $1.4 million for the years ended December 31, 2020, 2019, and 2018,2021, respectively.
Interest expense forAs a result of the year ended December 31, 2019 also included a $0.4Third Amendment in June 2023, the Company incurred $0.8 million fee for the $70.0 million delayed principal draw under December 2018 amendment to the Senior Credit Agreement, which occurred during the first quarter of 2019.
Debt Extinguishment and Debt Modification Expenses
In addition to the $0.4 million of expenses associated with amounts paid to third parties related to the debt modification that occurred in March 2020, debt modification and extinguishment expenses for the year ended December 2020 also included the write off of certain previously deferred loan costs. The $106.5Fourth 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, principal repayment made in September 2020will 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 term facility of the SeniorFourth Amendment were expensed as incurred.
Debt Covenants
The Credit Agreement was deemed to be a partial extinguishment of debt that was permitted and contemplated by the existing debt agreement, as previously amended. As a result, a proportional amount of unamortized loan costs and discount in the amount of $1.5 million were removed and expensed during the year ended December 31, 2020.
Covenants
The Senior Credit Agreement and the GS Credit Agreement, as amended, containcontains 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 Company's subsidiariesloan 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.
Thelenders representing a majority of the commitments, be declared immediately due and payable. Events of default include the failure of the Company is alsoto 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, which is defined in the credit agreements as the ratio of consolidated total debt of the Borrowers to the Company's consolidated adjusted EBITDA (as defined in the Senior Credit Agreement and GS Credit Agreement). The maximum permitted Total Net Leverage Ratio was 7.75:1.00 at December 31, 2020. As of December 31, 2020, the Company remained in compliance with the covenants.
The table below sets forthRatio. If applicable, the maximum permitted Total Net Leverage Ratio for the indicated test periods:
| | | | | | | | |
Test Period Ending | | Total Net Leverage Ratio Maximum Permitted |
| | |
| | |
December 31, 2020 | | 7.75 : 1.00 |
March 31, 2021 | | 7.71 : 1.00 |
June 30, 2021 | | 7.44 : 1.00 |
September 30, 2021 | | 7.19 : 1.00 |
December 31, 2021 | | 7.00 : 1.00 |
March 31, 2022 | | 6.75 : 1.00 |
June 30, 2022 | | 6.72 : 1.00 |
September 30, 2022 to December 31, 2022 | | 6.50 : 1.00 |
Each test period thereafter | | 5.50 : 1.00 |
Redeemed Goldman Sachs Warrant ("GS Warrant")
In connection with the prior GS Credit Agreement, Priority Holdings, LLC issued a warrant to GS to purchase 1.0% of Priority Holdings, LLC's outstanding Class A common units.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 part of the 2017 debt amendment, the 1.0% warrant with GS was extinguished and Priority Holdings, LLC issued a new warrant to GS to purchase 1.8% of Priority Holding, LLC's outstanding Class A common units. As of December 31, 2017, the warrant had a fair value of $8.7 million and was presented as a warrant liability in the accompanying consolidated balance sheets.
On January 11, 2018, the 1.8% warrant was amended to provide GS with a warrant to purchase 2.2% of Priority Holdings, LLC's outstanding Class A common units. The change in the warrant percentage was the result of anti-dilution provisions in the warrant agreement, which were triggered by Priority Holdings, LLC's Class A common unit redemption that occurred during the first quarter of 2018. The warrant had a term of 7 years and an exercise price of $0. Since the obligation was based solely on the fact that the 2.2% interest in equity of Priority Holdings, LLC was fixed and known at inception as well as the fact that GS could exercise the warrant with a settlement in cash any time prior to the expiration date of December 31, 2023, the warrantCompany was recorded as a liabilityin compliance with the covenants in the Company's historical financial statements prior to redemption on July 25, 2018. On July 25, 2018, Priority Holdings, LLC and GS agreed to redeem the warrant in full in exchange for $12.7 million in cash.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 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.
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
Business Combination as disclosed in Note 1, Nature of Business and Accounting Policies, the partnership tax status was terminated on July 25, 2018. Under the former partnership status, Priority Holdings, LLC was a dual member limited liability company and as such its financial statements reflected no income tax provisions as a pass-through entity. As a resultissuance of the Business Combination, for income tax purposes Priority Holdings, LLC became a disregarded subsidiarywarrants, 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 Company,warrants. Under this agreement the successor entity to MI Acquisitions, Inc., whereby its operations became taxable. For all periods subsequent to the Business Combination, the income tax provision reflects the taxable statusholders of the Company asrelated shares of Common Stock were granted piggyback rights to be included in certain underwritten offerings of Common Stock and the right to demand a corporation. The initial net deferred tax asset from the Business Combination is the resultshelf registration of the difference between initial tax basis, generally substituted tax basis, and the reflective carrying amountsshares of Common Stock issued upon exercise of the assetswarrants. 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 liabilities for financial statement purposes. The net deferred tax asset as of July 25, 2018 was approximately $47.5 million, which wastherefore were recorded at their inception date relative fair value and classifiedare included in additional paid-in capital on the Company's consolidated balance sheet in accordance with ASU 2015-17 and as an adjustment to Additional Paid-In Capital inConsolidated Balance Sheet.
the Company's consolidated statement of changes in stockholders' deficit. In addition, the Company's consolidated financial statement for the year ended December 31, 2018 presented herein reflects unaudited pro-forma income tax disclosure amounts to illustrate the income tax effects had the Company been subject to federal and state income taxes for the full year 2018.
12. Income Taxes
Components of consolidated income tax (benefit) expense (benefit) for the years ended December 31, 2020, 2019, and 2018 waswere as follows:
| | For the Year Ended December 31, | |
| | (in thousands) | (in thousands) | 2020 | | 2019 | | 2018 | |
| | (in thousands) | |
| (in thousands) | |
| 2023 | |
| 2023 | |
| 2023 | |
| U.S. current income tax expense (benefit) | |
| U.S. current income tax expense (benefit) | |
| U.S. current income tax expense (benefit) | U.S. current income tax expense (benefit) | | |
| Federal | Federal | $ | 4,766 | | | $ | (11) | | | $ | 29 | | |
| Federal | |
| Federal | |
| State and local | State and local | 3,173 | | | 75 | | | 418 | | |
| Total current income tax expense | $ | 7,939 | | | $ | 64 | | | $ | 447 | | |
| | State and local | |
| State and local | |
| Foreign | |
| Foreign | |
| Foreign | |
| Total current income tax expense (benefit) | |
| Total current income tax expense (benefit) | |
| Total current income tax expense (benefit) | |
| U.S. deferred income tax expense (benefit) | |
| U.S. deferred income tax expense (benefit) | |
| U.S. deferred income tax expense (benefit) | U.S. deferred income tax expense (benefit) | | |
| Federal | Federal | $ | 3,875 | | | $ | 1,920 | | | $ | (2,541) | | |
| Federal | |
| Federal | |
| State and local | State and local | (915) | | | (1,154) | | | (396) | | |
| Total deferred income tax expense (benefit) | $ | 2,960 | | | $ | 766 | | | (2,937) | | |
| | State and local | |
| State and local | |
| Foreign | |
| Foreign | |
| Foreign | |
| Total deferred income tax (benefit) expense | |
| Total deferred income tax (benefit) expense | |
| Total deferred income tax (benefit) expense | |
| Total income tax expense (benefit) | Total income tax expense (benefit) | $ | 10,899 | | | $ | 830 | | | $ | (2,490) | | |
| Total income tax expense (benefit) | |
| Total income tax expense (benefit) | |
The Company's consolidated effective income tax rate was 13.3%118.3% for the year ended December 31, 2020,2023, compared to ana 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 of 2.5% for the year ended December 31, 2019. For the year ended December 31, 2018, the Company's consolidated effective income tax rate was 12.5%135.9%. The effective rate for 20202023 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 effective rate for 2019 differed from the statutory federal rate of 21% primarily due to valuation allowance changes against certain business interest carryover deferred tax assets. The effective rate for 2018 differed from the statutory federal rate of 21% primarily due to the partnership status of Priority Holdings, LLC. for periods prior to July 25, 2018.
The following table provides a reconciliation of the consolidated income tax (benefit) expense (benefit) at the statutory U.S. federal tax rate to actual consolidated income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018:expense:
| | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | | | |
| | | | | | | | | |
| U.S. federal statutory (benefit) | $ | 17,211 | | | $ | (6,879) | | | $ | (4,268) | | | | | |
| Non-controlling interests | (5,626) | | | 0 | | | 0 | | | | | |
| Earnings as dual-member LLC | 0 | | | 0 | | | 1,643 | | | | | |
| State and local income taxes, net | 1,140 | | | (1,564) | | | (2) | | | | | |
| Excess tax benefits pursuant to ASU 2016-09 | (37) | | | 309 | | | 140 | | | | | |
| Valuation allowance changes | (2,945) | | | 9,302 | | | (66) | | | | | |
| Intangible assets | 1,056 | | | 0 | | | 0 | | | | | |
| Nondeductible items | 233 | | | 125 | | | 86 | | | | | |
| Tax credits | (283) | | | (323) | | | (123) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other, net | 150 | | | (140) | | | 100 | | | | | |
| Income tax expense (benefit) | $ | 10,899 | | | $ | 830 | | | $ | (2,490) | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| (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 carrying amount of the Company's assets and liabilities, tax credits and their respective tax bases, and loss carry forwards. The significant components of consolidated deferred income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | |
| | | | | | | | | |
| (in thousands) | 2020 | | 2019 | | | | | | |
| | | | | | | | | |
| Deferred Tax Assets: | | | | | | | | | |
| Accruals and reserves | $ | 1,499 | | | $ | 1,566 | | | | | | | |
| Intangible assets | 49,558 | | | 53,600 | | | | | | | |
| Net operating loss carryforwards | 436 | | | 4,114 | | | | | | | |
| Interest limitation carryforwards | 6,295 | | | 9,266 | | | | | | | |
| | | | | | | | | |
| Other | 2,115 | | | 1,877 | | | | | | | |
| | | | | | | | | |
| Gross deferred tax assets | 59,903 | | | 70,423 | | | | | | | |
| Valuation allowance | (7,200) | | | (10,144) | | | | | | | |
| Total deferred tax assets | 52,703 | | | 60,279 | | | | | | | |
| | | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | | |
| Prepaid assets | (973) | | | (521) | | | | | | | |
| Investments in partnership | (19) | | | (5,408) | | | | | | | |
| Property and equipment | (5,014) | | | (4,693) | | | | | | | |
| Total deferred tax liabilities | (6,006) | | | (10,622) | | | | | | | |
| | | | | | | | | |
| Net deferred tax assets | $ | 46,697 | | | $ | 49,657 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 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, Income Taxes ("ASC 740"), the Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. As of December 31, 20202023 and 2019,2022, the Company had a consolidated valuation allowance of approximately $7.2$19.4 million and $10.1$15.5 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and Business Combinationbusiness 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 its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." A reconciliation of the beginning and ending 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, 20202023 and 2019,2022, the net amountsbalance of our unrecognized tax benefits were not material.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 uncertain tax benefits could decrease during the next 12 months by up to $0.1 million due to the expiration of statutes of limitations.
The Company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. Tax periods for 2017December 31, 2020 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2016December 31, 2019 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.
At December 31, 2020, the Company has utilized all of its federal NOL carryforwards of approximately $26.5 million. Also, at2023 and December 31, 2020 and 2019,2022, the Company had state NOL carryforwards of approximately $6.2$17.9 million and $19.5$13.4 million, respectively, with expirations dates ranging from 2023 to 2044.
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted. The Tax Act included a number of changes to existing U.S. tax laws. The most notable provisions of the Tax Act that impacted the Company included a reduction of the U.S. corporate income tax rate from 35% to 21% and the limitations on interest deductibility, both effective January 1, 2018, as well as immediate expensing for certain assets placed into service after September 27, 2017. The Company did not experience any material impacts of the provisions of the Tax Act for the year ended December 31, 2018 other than the impact of the reduction
of the U.S. corporate rate from 35% to 21% and the limitation on interest deductibility. As of December 31, 2018, the Company had completed the accounting for the income tax effects of all elements of the Tax Act in accordance with the SEC's Staff Accounting Bulletin No. 118.
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 adjusted taxable income “ATI”,ATI, as defined. In March 2020, the Coronavirus Aid, Relief, and Economic SecurityCARES Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020. As a result of its earnings and the enactment of the CARES Act during 2020,December 31, 2023, the Company has fully utilized its federal, and the majority of its state,had interest deduction limitation carryforwards of $21.2$78.1 million.
13. Stockholders' Deficit
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of the 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 a vote of the Company's stockholders. Holders of the Company's Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of the Company's Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the Company's Board of Directors in its discretion. Historically, the Company has neither declared nor paid dividends. The holders of the Company's Common Stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the Common Stock.
The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of December 31, 2023, the Company has not issued any shares of preferred 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 2.0 million shares of its outstanding Common Stock for a total of up to $10.0 million. Under the terms of this plan, the Company may purchase shares through 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 shares withheld for taxes and unsettled share repurchases at the end of the year.
Warrants and Purchase Options
As of December 31, 2022 and December 31, 2021, 3,556,470 warrants from the original business combination in July 2018, were outstanding. These warrants allowed the holders to purchase shares of the Company'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 business combination, allowed the holders 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 unit. 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, in 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 an 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 $11.0$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) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| 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 agreement.
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 Company'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 $0.5 million, 228,347 shares with an estimated fair value of $1.1 million and 55,689 shares with an estimated fair value of $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 grant 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 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, 20192023, 2022 and 2018,2021, 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.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company has various operating leases for office space16. Commitments and equipment. These leases range in terms from 2 years to 16 years. Most of these leases are renewable at expiration, subject to terms acceptable to the lessors and the Company.
Future minimum lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows at December 31, 2020:
| | | | | | | | |
| | (in thousands) |
| Due In | | Amount Due |
| 2021 | | $ | 1,356 | |
| 2022 | | 1,307 | |
| 2023 | | 1,356 | |
| 2024 | | 1,394 | |
| 2025 | | 1,367 | |
| Thereafter | | 2,388 | |
| Total | | $ | 9,168 | |
Total rent expenses for the years ended December 31, 2020, 2019, and 2018 was $2.5 million, $2.0 million, and $1.9 million, respectively, which is included in selling, general and administrative expenses in the Company's consolidated statements of operations.
Minimum Annual Commitments with Third-PartyThird-party Processors
The Company has multi-year agreements with third parties to provide certain payment processing services to the Company. The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed paymentspayment transactions. Some of these agreements have minimum annual requirements for processing volumes. As ofBased on existing contracts in place at December 31, 2020,2023, the Company is committed to pay minimum processing fees under these agreements of approximately $7.0$21.6 million overin 2024 and $21.6 million in 2025.
Annual Commitment with Vendor
Effective January 1, 2022, the next year.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.
Merchant Reserves
Commitment to Lend
Contingent Consideration
See Note 4,Asset Acquisitions, Asset Contributions, The following table provides a reconciliation of the beginning and Business Combinations, for information aboutending balance of the Company's contingent consideration liabilities related to acquisitions consummated in 2019 and 2018.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.
13. RELATED PARTY MATTERS
Contributed Assets of eTab and Cumulus
Loan with Warrant
During 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity. The Company loanedis involved in a case that was filed on October 11, 2023 and is currently pending in the entityUnited States District Court for the Northern District of California (the “Complaint”).The Complaint is a totalputative 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 $3.5 million during 2019,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 commitment to loan up to $10.0 million based on certain growth metricsclass of affected businesses and an award of $5,000 per violation of the entity and continued compliance byAct. As of March 12, 2024, the entity with the terms and covenants of the agreement. The Company's commitment to make additional advances under the loan agreement is dependent upon such advances not conflicting with covenants or restrictions underfinancial impact, if any, of the outcome of this legal proceeding is neither probable nor estimable.
Concentration of Risks
The Company's debt orrevenue 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 applicable agreements. Amounts loaned to this entitythings, that the Company abide by the Company are secured byby-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 the assetswhich is in excess of the entity and by a personal guarantee. The note receivable has an interest rate of 12.0% per annum and is repayable in full in May 2024.federal deposit insurance corporation limits. The Company also received a warrantdoes not believe it is exposed to purchase a non-controlling interest in this entity's equity at a fixed amount. The loan agreement also gives the Company certain rights to purchase some or all of this entity's equity in the future, at the entity's then-current fair value. The fair values of the warrant, loan commitment, and purchase right were not material at inception or at December 31, 2020.
Prior Management Services Agreement
During the year ended December 31, 2018, Priority Holdings, LLC had a management services agreement with PSD Partners LP, which is owned by Mr. Thomas Priore, the Company's President, Chief Executive Officer and Chairman. The Company incurred total expenses of $1.1 million for the year ended December 31, 2018 related to management service fees, annual bonus
payout, and occupancy fees, which are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations.
Due from Members of Priority Holdings, LLC
As noted in Note 1, Nature of Business and Accounting Policies, on July 25, 2018 the owners of Priority Holdings, LLC contributed their member equity interests in exchange for the issuance of MI Acquisitions Inc.'s common stock, and MI Acquisitions, Inc. simultaneously changed its name to Priority Technology Holdings, Inc. Subsequent to July 25, 2018, the Company has made cash payments to, and received cash refund payments from, the former owners of Priority Holdings, LLC, mostly related to pass-through tax amounts for periods prior to July 25, 2018. At December 31, 2020 and 2019, the net amounts receivableany significant credit risk from these parties were approximately $0.2 million and $0.2 million, respectively.
Underwriting Commissions
During the year ended December 31, 2018, the Company paid and capitalized in additional paid-in capital underwriting commissions of $8.0 million related to the recapitalization. See Note 14, Stockholders' Deficit.
Call Right
The Company's President, Chief Executive Officer and Chairman was given the right to require any of the founders of MI Acquisitions to sell all or a portion of their Company securities at a call-right purchase price, payable in cash. The call right purchase price for common stock will be based on the greater of: 1) $10.30; 2) a preceding volume-weighted average closing price (as defined in the governing document); or 3) a subsequent volume-weighted average closing price (as defined in the governing document). The call right purchase price for warrants will be determined by the greater of: 1) a preceding volume-weighted average closing price (as defined in the governing document) of the called security or 2) a subsequent volume-weighted average closing price of the called security. For the Company, the call right does not constitute a financial instrument or derivative under GAAP since it does not represent an asset or obligation of the Company, however the Company discloses it as a related party matter.
14. STOCKHOLDERS' DEFICIT
As disclosed in Note 1, Nature of Business and Accounting Policies, on July 25, 2018, the Company executed the Business Combination which was accounted for as a "reverse merger" between Priority Holdings, LLC and MI Acquisitions, resulting in the Recapitalization of the Company's equity. The combined entity was renamed Priority Technology Holdings, Inc.Common and Preferred Stock
For periods prior to July 25, 2018, equity has been retroactively revised to reflect the number of shares received as a result of the Recapitalization.
The equity structure of the Company was as follows as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (shares in thousands) | December 31, 2020 | | December 31, 2019 | | |
| Authorized | | Issued | | Outstanding | | Authorized | | Issued | | Outstanding | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Common stock, par value $0.001 | 1,000,000 | | | 67,842 | | 67,391 | | 1,000,000 | | | 67,512 | | 67,061 | | | | |
| Preferred stock, par value $0.001 | 100,000 | | | 0 | | | 0 | | | 100,000 | | | 0 | | | 0 | | | | | |
The difference between the issued and outstanding common stock at December 31, 2020 and 2019 is due to 451,224 shares of treasury stock held by the Company.
In connection with the Business Combination and Recapitalization, the following occurred in 2018:
•In exchange for the 4.6 million common units of Priority Holdings, LLC, 60.1 million shares of common stock were issued in a private placement that resulted in the Company receiving approximately $49.4 million. The 60.1 million shares exclude 0.5 million shares issued as partial consideration in 2 business acquisitions (see Note 4,Asset Acquisitions, Asset Contributions, and Business Combinations) and includes 3.0 million shares issued in connection with the 2014 Management Incentive Plan (see Note 15, Share-Based Compensation).•Approximately 4.9 million shares of common stock were deemed to have been issued through share conversion in exchange for the publicly-traded shares of MI Acquisitions that originated from MI Acquisitions' 2016 IPO.
•$2.1 million was paid to MI Acquisitions' founding shareholders (the "MI Founders") in exchange for 421,107 units and 453,210 shares of common stock held by the MI Founders. Each unit consisted of 1 share and 1 warrant of MI Acquisitions.
•The MI Founders forfeited 174,863 shares of their common stock.
At December 31, 2018, the Company had 67,038,304 shares of common stock outstanding, of which: 1) 60,071,200 shares were issued in the Recapitalization through the private placement; 2) 874,317 shares were transferred to the sellers of Priority Holdings, LLC that were purchased from the MI Founders; 3) 4,918,138 shares were issued in MI Acquisitions' 2016 IPO; 4) 699,454 shares were issued to the MI Founders; and 5) 475,195 shares were issued as partial consideration for 2 business acquisitions. Certain holders of common stock from the private placement may be subject to holding period restrictions under applicable securities laws.
During the second quarter of 2019, the Company repurchased a total of 451,224 shares of its common stock at an average price of $5.29 per share. Total cash paid by the Company was approximately $2.4 million. The repurchases were authorized under a December 2018 resolution by the Company's board of directors, which expired during the second quarter of 2019.
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of the 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 a vote of the Company's stockholders. Holders of the Company's common stock are entitled to 1 vote per share on matters to be voted on by stockholders. Holders of the Company's common stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the Company's board of directors in its discretion. Since the Business Combination and Recapitalization, the Company has neither declared nor paid dividends. The holders of the Company's common stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the common stock.
The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of December 31, 2020, the Company has not issued any shares of preferred stock.
Warrants issued by MI Acquisitions
Prior to July 25, 2018, MI Acquisitions issued warrants that allow the holders to purchase up to 5,731,216 shares of the Company's common stock at an exercise price of $11.50 per share, subject to certain adjustments (5,310,109 of these warrants were designated as "public warrants" and 421,107 were designated as "private warrants"). The warrants, which survived the Business Combination, may be exercised before August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018. The Company has the option to redeem all (and not less than all) of the outstanding public warrants at any time from and after the warrants become exercisable, and prior to their expiration, at the price of $0.01 per warrant; provided that the last sales price of the Company's common stock has been equal to or greater than $16.00 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events), for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given and
provided further that (i) there is a current registration statement in effect with respect to the shares of common stock underlying the public warrants for each day in the 30-day trading period and continuing each day thereafter until the redemption date or (ii) the cashless exercise is exempt from the registration requirements under the Securities Act of 1933, as amended. The warrants are classified as equity for accounting purposes.
In August 2018, the Company was informed by Nasdaq that Nasdaq intended to delist the Company's outstanding warrants and units due to an insufficient number of round lot holders for the public warrants. The Company subsequently filed a Registration Statement on Form S-4 with the SEC for the purpose of offering holders of the Company's outstanding 5,310,109 public warrants and 421,107 private warrants the opportunity to exchange each warrant for 0.192 shares of the Company's common stock. The exchange offer expired in February 2019 resulting in approximately 2.2 million warrants being tendered during 2019 in exchange for approximately 0.4 million shares of the Company's common stock plus cash in lieu of fractional shares. Nasdaq proceeded to delist the remaining outstanding warrants and units, which were comprised of one share of common stock and one warrant, from The Nasdaq Global Market at the open of business on March 6, 2019. The delisting of the remaining outstanding warrants and units had no impact on the Company's financial statements.
Purchase option issued by MI Acquisitions
Prior to July 25, 2018, a purchase option was sold to an underwriter by MI Acquisitions for consideration of $100. The purchase option, which survived the Business Combination, allows the holder 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 unit. The purchase option expires on August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018. The purchase option is classified as equity for accounting purposes. No exercises have occurred through December 31, 2020.
2018 Business Combination and Recapitalization Costs
In connection with the Business Combination and Recapitalization, the Company incurred $13.3 million in fees and expenses, of which $9.7 million of recapitalization costs were charged to Additional Paid in Capital in 2018 since these costs were less than the cash received in conjunction with the Recapitalization costs and were directly related to the issuance of equity for the Recapitalization. These costs are presented as Recapitalization costs in the accompanying consolidated statements of changes in stockholders' deficit. The remaining $3.6 million of expenses were related to the Business Combination and are presented in selling, general and administrative expenses in the accompanying consolidated statements of operations.
2018 Equity Events for Priority Holdings, LLC that Occurred Prior to July 25, 2018 (date of Business Combination)
On January 31, 2017, Priority entered into a redemption agreement with one of its minority unit holders to redeem their former Class A common membership units for a total redemption price of $12.2 million. Priority accounted for the Common Unit Repurchase Obligation as a liability because it was required to redeem these former Class A common units for cash. The liability was recorded at fair value at the date of the redemption agreement, which was equal to the redemption value. Under this agreement, Priority redeemed $3.0 million of 69,450 former Class A common units in April 2017. The remaining $9.2 million was redeemed through the January 17, 2018 redemption of 115,751 former Class A common units for $5.0 million and the February 23, 2018 redemption of 96,999 former Class A common units for $4.2 million.
In addition to the aforementioned redemptions, Priority redeemed 295,834 former Class A common units for $25.9 million on January 17, 2018 and 445,410 former Class A common units for $39.0 million on January 19, 2018. As a result of the aforementioned redemptions, Priority was 100% owned by Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC until July 25, 2018.
The former Class A common units redeemed in January and February 2018 were then canceled by Priority. The redemption transactions and the amended and restated operating agreement resulted in one unit-holder gaining control and becoming the majority unit holder of the Company. These changes in the equity structure of Priority were recorded as capital transactions.
For the year ended December 31, 2018, Priority recorded distributions to its members of $7.1 million prior to the Business Combination.
15. SHARE-BASED COMPENSATION
During 2020, 2019 and 2018, the Company had 3 share-based compensation plans: 2018 Equity Incentive Plan; Earnout Incentive Plan; and 2014 Management Incentive Plan. Total share-based compensation expense, for both equity-classified and liability-classified awards, was approximately $2.4 million, $3.7 million, $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively, which is included in salary and employee benefits in the accompanying consolidated statements of operations. For the years ended December 31, 2020, 2019 and 2018, the Company recognized an income tax benefit of approximately $0.4 million, $0.5 million and $0.1 million, respectively, for share-based compensation expense.
For the years ended December 31, 2020, 2019, and 2018, share-based compensation was recognized by plan as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year Ended December 31, | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| | | | | | | |
| Plan: | | | | | | | |
| 2018 Equity Incentive Plan | $ | 2,430 | | | $ | 2,385 | | | $ | 187 | | | |
| Earnout Incentive Plan | 0 | | | 0 | | | 0 | | | |
| 2014 Management Incentive Plan | 0 | | | 1,267 | | | 1,462 | | | |
| Total | $ | 2,430 | | | $ | 3,652 | | | $ | 1,649 | | | |
NaN share-based compensation has been capitalized. Beginning in 2018, the Company elected to recognize the effects of forfeitures on compensation expense as the forfeitures occur for all plans.
2018 Equity Incentive Plan
The 2018 Equity Incentive Plan ("2018 Plan") was approved by the Company's board of directors and shareholders in July 2018. The 2018 Plan provides 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, stock appreciation rights ("SARs"), restricted stock awards, restricted stock units RSU), other share-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, in 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 an award or to satisfy withholding taxes owed, such shares will again be available for grants under the 2018 Plan.
A summary of the activity in stock units for the 2018 Plan that occurred during the years ended December 31, 2020, 2019 and 2018 is as follows:
| | | | | | | | |
6,685,696 | | | Common stock authorized for the 2018 Plan |
(2,044,815) | | | Stock options granted in December 2018 |
7,558 | | | Stock option grants forfeited in 2018 |
(202,200) | | | RSUs granted in 2018 |
4,446,239 | | | Common stock available for issuance under the 2018 Plan at December 31, 2018 |
| | |
326,173 | | | Stock option grants forfeited in 2019 |
(36,657) | | | RSUs granted in 2019 |
60,421 | | | RSUs forfeited in 2019 |
4,796,176 | | | Common stock available for issuance under the 2018 Plan at December 31, 2019 |
| | |
(15,000) | | | Stock options granted in 2020 |
220,045 | | | Stock option grants forfeited in 2020 |
(1,031,740) | | | RSUs granted in 2020 |
(128,624) | | | RSU granted in 2020 with performance goals that have not been determined |
21,277 | | | RSUs forfeited in 2020 |
3,862,134 | | | Common stock available for issuance under the 2018 Plan at December 31, 2020 |
The above table does not reflect a liability-classified award with an estimated fair value of $0.8 million included in accounts payable and accrued expenses in the consolidated balance sheet at December 31, 2020.
Stock Options
Substantially all stock options grants were granted in December 2018 when the Company issued stock option grants to substantially all of the Company's employees at the time, excluding the Company's executive officers. The stock options issued in December 2018 vest as follows: 50% on July 27, 2019; 25% on July 27, 2020; and 25% on July 27, 2021. 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 date of grant.
Details about the time-based equity-classified stock options granted under the plan are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Weighted- | | | | |
| | Options for | average | | Weighted-average | | Aggregate |
| | number of | exercise | | remaining | | intrinsic value |
| | shares | price | | contractual terms | | (in thousands) |
| | | | | | | |
| Outstanding, January 1, 2018 | | 0 | | 0 | | | | | |
| Granted in 2018 | | 2,044,815 | | $ | 6.95 | | | | | |
| Exercised in 2018 | | 0 | | 0 | | | | | |
| Forfeited in 2018 | | (7,558) | | $ | 6.95 | | | | | |
| Expired in 2018 | | 0 | | 0 | | | | | |
| Outstanding, December 31, 2018 | | 2,037,257 | | $ | 6.95 | | | 9.6 years | | $ | 2,139 | |
| | | | | | | |
| Granted in 2019 | | 0 | | 0 | | | | | |
| Exercised in 2019 | | 0 | | 0 | | | | | |
| Forfeited or expired in 2019 | | (326,173) | | $ | 6.95 | | | | | |
| Outstanding, December 31, 2019 | | 1,711,084 | | $ | 6.95 | | | 8.6 years | | $ | 0 | |
| | | | | | | |
| Granted in 2020 | | 15,000 | | $ | 2.47 | | | | | |
| Exercised in 2020 | | 0 | | 0 | | | | | |
| Forfeited or expired in 2020 | | (220,045) | | $ | 6.95 | | | | | |
| Outstanding, December 31, 2020 | | 1,506,039 | | $ | 6.91 | | | 7.8 years | | $ | 203 | |
| | | | | | | |
| Vested and Expected to Vest | | 1,506,039 | | $ | 6.91 | | | 7.8 years | | $ | 203 | |
| Exercisable at December 31, 2020 | | 1,125,755 | | $ | 6.95 | | | 7.8 years | | $ | 101 | |
NaN stock options have been exercised as of December 31, 2020. For the years ended December 31, 2020, 2019 and 2018, compensation expense of $0.8 million, $2.0 million and $0.2 million was recognized for stock option grants. As of December 31, 2020, there was approximately $0.4 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a remaining weighted-average period of 0.7 years.
The table below presents the assumptions used to calculate the fair value of the stock options issued in 2020 and 2018:
| | | | | | | | | | | |
| 2020 | | 2018 |
| | | |
| Expected volatility | 94 | % | | 30 | % |
| Risk-free interest rate | 0.5 | % | | 2.4 | % |
| Expected term (years) | 7.5 | | 4.3 |
| Dividend yield | 0 | % | | 0 | % |
| Exercise price | $2.47 | | $6.95 |
NaN stock options were granted in 2019.
Equity-Classified Restricted Stock Units
| | | | | | | | | | | | | | | | | | | | |
| | Underlying | | Weighted-average | | (in thousands) |
| | Common | | Grant-date | | Aggregate |
| | Shares | | Fair Value | | Fair Value |
| | | | | | |
| Service-based vesting: | | | | | | |
| | | | | | |
| Unvested at January 1, 2018 | | 0 | | | | | |
| Granted in 2018 | | 107,142 | | | $ | 7.00 | | | $ | 750 | |
| | | | | | |
| Unvested at December 31, 2018 | | 107,142 | | | | | |
| | | | | | |
| Granted in 2019 | | 36,657 | | | $ | 6.82 | | | $ | 250 | |
| Vested in 2019 | | (53,571) | | | | | $ | 171 | |
| Forfeited in 2019 | | (36,657) | | | $ | 6.82 | | | |
| Unvested at December 31, 2019 | | 53,571 | | | | | |
| | | | | | |
| Granted in 2020 | | 892,142 | | | $ | 2.93 | | | $ | 2,617 | |
| Forfeited in 2020 | | (21,277) | | | $ | 2.35 | | | |
| Vested in 2020 | | (328,035) | | | | | $ | 1,150 | |
| Unvested at December 31, 2020 | | 596,401 | | | | | |
| | | | | | |
| | | | | | |
| Performance-based vesting: | | | | | | |
| | | | | | |
| Unvested at January 1, 2018 | | 0 | | | | | |
| Granted in 2018 | | 95,057 | | | $ | 10.52 | | | $ | 1,000 | |
| | | | | | |
| Unvested at December 31, 2018 | | 95,057 | | | | | |
| | | | | | |
| | | | | | |
| Forfeited in 2019 | | (23,674) | | | $ | 10.52 | | | |
| Unvested at December 31, 2019 | | 71,383 | | | | | |
| | | | | | |
| Granted in 2020 (a) (b) | | 139,598 | | | $ | 2.56 | | | $ | 358 | |
| Forfeited in 2020 | | (71,383) | | | $ | 10.52 | | | |
| | | | | | |
| Unvested at December 31, 2020 | | 139,598 | | | | | |
(a) Includes only the portions of grants for which the performance goals have been determined and communicated to the grant recipient. For the portions of any grants for which the required performance goals have not been determined and communicated to the grant recipient, a grant has not yet occurred for accounting purposes.
(b) Does not include a liability-classified performance-based RSU award with an estimated fair value of $0.8 million.
As of December 31, 2020, there was approximately $1.6 million and $0.2 million of unrecognized compensation cost for equity-classified service-based RSUs and performance-based RSUs, respectively, and these costs are expected to be recognized over a weighted-average period of 2.2 years and 2.6 years, respectively.
Liability-Classified Share-Based Arrangement
In March 2020, the compensation committee of the Company's board of directors provided performance goals and achievement criteria to its CEO and Chairman. If these performance goals are met, the Company has committed to issue an RSU grant with a target fair value of $0.8 million on the future grant date, which occurred in the first quarter of 2021. The Company began accruing compensation expense in 2020 and through December 31, 2020 has accrued an aggregate of $0.3 million for this liability-classified award.
Earnout Incentive Plan
The Company's Earnout Incentive Plan (the "EIP") expired on December 31, 2019. NaN shares were issued under the EIP. During the fourth quarter of 2019, a total of 95,057 RSUs expired under the EIP with a grant-date fair value of $10.52 each (these grants were in addition to the 95,057 RSUs issued under the 2018 Plan, as previously noted above). Prior to December 31, 2019, it was not probable that the performance metrics would be achieved, thus 0 compensation expense was recognized for these RSUs for any reporting period.
2014 Management Incentive Plan
The Priority Holdings Management Incentive Plan (the "MIP") was established in 2014 to issue share-based compensation awards to selected employees. Simultaneously with the Business Combination and Recapitalization (see Note 14, Stockholders'Deficit), the fair value of the outstanding equity awards under the MIP were exchanged for approximately 3.0 million shares of common stock of Priority Technology Holdings, Inc. having approximately the same fair value. As such, this exchange was not deemed to be a modification for accounting purposes. During the year ended December 31, 2019, the Company elected to accelerate vesting for all remaining unvested awards under the MIP, resulting in accelerated compensation expense. Compensation expense under the MIP was approximately $1.3 million and $1.5 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2020 and 2019, there was 0 unrecognized compensation cost for the MIP and 0 grants remain outstanding under this plan.
16. 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 $1.3 million, $1.3 million, and $0.9 million for the years ended December 31, 2020, 2019, and 2018, 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.
17. FAIR VALUEFair Value
Fair Value Measurements
The following is a description of the valuation methodologies used forCompany's contingent consideration for business combinations and for the Goldman Sachs warrant prior to its July 2018 redemption (see Note 10, Long-Term Debt and Warrant Liability), both of which were initially recorded and remeasured at fair value at the end of each reporting period. The contingent consideration forderived from business combinations are related to acquisitions made in 2018 and the contingency periods have expired at December 31, 2020. The Goldman Sachs warrant was fully redeemed in July 2018. Accordingly, at December 31, 2020, the Company no longer has any fair value estimates that are remeasured at the end of each reporting period.
Redeemed Goldman Sachs Warrant
Prior to its redemption in July 2018, the Goldman Sachs warrant was classified as level 3 in the fair value hierarchy. Historically, the fair value of the Goldman Sachs warrant was estimated based on the fair value of Priority Holdings, LLC using a weighted-average of values derived from generally accepted valuation techniques, including market approaches, which consider the guideline public company method, the guideline transaction method, the recent funding method, and an income approach, which considers discounted cash flows. Priority Holdings, LLC adjusted the carrying value of the warrant to fair value as determined by the valuation model and recognized the change in fair value as an increase or decrease in interest and other expense. On July 25, 2018, the Goldman Sachs warrant was fully redeemed in exchange for $12.7 million cash, which resulted in a gain of $0.1 million, as the value of the Goldman Sachs warrant immediately prior to the cancellation was $12.8 million.
Contingent Consideration for Business Combinations
The initial estimated fair value of approximately $1.0 million for the contingent consideration related to the 2018 business combinations for PPS Tech and PPS Northeast (see Note 4,Asset Acquisitions,Asset Contributions, and Business Combinations) were based on a weighted payout probability at the measurement date, which falls within Level 3 onof the fair value hierarchy since these recurring fair value measurements are based on significant unobservable inputs. The probabilities useddue to estimate the payout probabilityuncertainty of the contingent consideration for the 2 business combinations ranged between 15% and 35% for one and between 5.0% and 80% for the other. The weighted average probabilities were based on present value of estimated projections for financial metrics for the remaining earnout periods. At December 31, 2019 and 2018, the fair value measurement created by the absence of thisquoted 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 was estimatedis 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 be an aggregatecertain of approximately $0.4 millionthe Company's acquisitions are uncertain due to the utilization of unobservable inputs and $1.0 million, respectively. Duringmanagement's judgement in determining the likelihood of achieving the earn-out criteria or the years ended December 31, 20202023 and 2019, the carrying values of these contingent consideration arrangements were reduced by approximately $0.4 million and $0.6 million, respectively, and these amounts are reported within selling, general and administrative expense on the Company's consolidated statements of operations. The Company paid no amounts under either of these earnout arrangements which expired during the year ended December 31, 2020.
The following table shows a reconciliation of the beginning and ending balances for2022. These liabilities measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 inconsisted 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 for the years ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | |
| (in thousands) | Warrant Liability | | Contingent Consideration |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Balance at January 1, 2018 | $ | 8,701 | | | $ | 0 | |
| Extinguishment of GS 1.8% warrant liability (Note 10) | (8,701) | | | 0 | |
| GS 2.2% warrant liability (Note 10) | 12,182 | | | 0 | |
| Adjustment to fair value included in earnings | 591 | | | 0 | |
| Extinguishment of GS 2.2% warrant liability (Note 10) | (12,701) | | | 0 | |
| Change in fair value of warrant liability | (72) | | | 0 | |
| Earnout liabilities arising from business combinations (Note 4) | 0 | | | 980 | |
| Balance at December 31, 2018 | 0 | | | 980 | |
| Adjustment to fair value included in earnings | 0 | | | (620) | |
| Balance at December 31, 2019 | 0 | | | 360 | |
| Adjustment to fair value included in earnings | 0 | | | (360) | |
| Balance at December 31, 2020 | $ | 0 | | | $ | 0 | |
There were no transfers among the fair value levels during the years ended December 31, 2020, 2019, or 2018.
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 all of itscertain notes receivable aremay not be collectible. The faircarrying value of the Company's notes receivable, net approximates fair value was approximately $5.2 million and $4.7 million at December 31, 20202023 and December 31, 2019 was approximately $7.7 million and $5.7 million,2022, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.
Debt Obligations
The Borrower's outstandingOutstanding debt obligations (see Note 10, Long-Term 10. Debt and Warrant LiabilityObligations) are reflected in the Company's consolidated balance sheetsConsolidated Balance Sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.
The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at December 31, 2020 and 2019 was estimated to be approximately $278.0$651.9 million and $381.0$606.1 million respectively. The fair value of these notes with a notional valueat December 31, 2023 and carrying value (gross of deferred costs2022, respectively, and discounts) of $279.4 million and $388.8 million, respectively, was estimated using binding and non-binding quoted market prices in an active secondary market, which considers the Borrowers' credit risk and market related conditions, and is within Level 32 of the fair value hierarchy.
The carrying values of the Borrowers' other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of a market for these debt obligations.
18. SEGMENT INFORMATION
The Company has 3Company's three reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's President, Chief Executive Officer and Chairman. The Consumerincluded SMB Payments, operating segment is 1 reportable segment. The CommercialB2B Payments and Institutional Services (aka Managed Services) operating segments are aggregated into 1Enterprise Payments. The Company does not have dedicated assets assigned to any particular reportable segment Commercial Payments. The Integrated Partners operating segmentand such information is 1 reportable segment.
Priornot available and continues to second quarter of 2019, the Integrated Partners operating segment was aggregated with the Commercial Payments and Institutional Services operating segments and reported as 1 aggregated reportable segment, Commercial Payments. As of the second quarter of 2019, the Integrated Partners operating segment is no longer aggregated into the Commercial Payments operating segment. All comparative periods have been adjusted to reflect the current 3 reportable segments.be aggregated.
More information about our 3three reportable segments:
•ConsumerB2B Payments – represents consumer-related services:Provides market-leading AP automation solutions to corporations, software partners and offerings including merchant acquiringindustry leading FIs (including Citibank and transaction processing services including the proprietary MX enterprise suite. Either through acquisition of merchant portfolios or through resellers, the Company becomes a party or enters into contracts with a merchant and a sponsor bank. PursuantMastercard) in addition to the contracts, for each card transaction, the sponsor bank collects payment from the credit, debit or other payment card issuing bank, net of interchange fees dueworking improving cash flow by providing instant access to the issuing bank, pays credit card association (e.g., Visa, MasterCard) assessments and pays the transaction fee due to the Company for the suite of processing and related services it provides to merchants, with the remainder going to the merchant.
•CommercialEnterprise Payments –represents services provided: Provides embedded finance and treasury solutions to certain enterprise customers including outsourced sales force to those customersmodernize legacy platforms and accounts payable automation servicesaccelerate software partners' strategies to commercial customers.
•Integrated Partners - represents payment adjacent services that are provided primarily to the rental real estate and rental storage, medical and hospitality industries. Integrated Partners had no material operations prior to 2018 and sold a significant portion of its business in September 2020.
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 income (loss) from operations, and consolidated depreciation and amortization, and consolidated operating income are as follows for the years presented:follows:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| Revenues: | | | | | | | |
| Consumer Payments | $ | 367,816 | | | $ | 330,599 | | | $ | 347,013 | | | |
| Commercial Payments | 20,922 | | | 25,980 | | | 27,056 | | | |
| Integrated Partners | 15,604 | | | 15,275 | | | 1,753 | | | |
| Consolidated revenues | $ | 404,342 | | | $ | 371,854 | | | $ | 375,822 | | | |
| | | | | | | |
| Income (loss) from operations: | | | | | | | |
| Consumer Payments | $ | 38,392 | | | $ | 32,237 | | | $ | 47,002 | | | |
| Commercial Payments | 923 | | | (891) | | | (952) | | | |
| Integrated Partners | 1,404 | | | 725 | | | (1,969) | | | |
| Corporate | (19,858) | | | (24,887) | | | (27,688) | | | |
| Consolidated income from operations | $ | 20,861 | | | $ | 7,184 | | | $ | 16,393 | | | |
| | | | | | | |
| Depreciation and amortization: | | | | | | | |
| Consumer Payments | $ | 35,002 | | | $ | 32,842 | | | $ | 17,945 | | | |
| Commercial Payments | 306 | | | 323 | | | 557 | | | |
| Integrated Partners | 4,299 | | | 4,398 | | | 145 | | | |
| Corporate | 1,168 | | | 1,529 | | | 1,093 | | | |
| Consolidated depreciation and amortization | $ | 40,775 | | | $ | 39,092 | | | $ | 19,740 | | | |
| | | | | | | | | | | | | | | | | | | |
| (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 | | | |
| | | | | | | |
| 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 | | | |
| | | | | | | |
| 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 from operations of reportable segments to the Company's net income (loss) attributable to stockholders of Priority Technology Holdings, Inc.income is provided in the following table:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| | | | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | |
| | | | | | | |
| Total income from operations of reportable segments | $ | 40,719 | | | $ | 32,071 | | | $ | 44,081 | | | |
| Less Corporate | (19,858) | | | (24,887) | | | (27,688) | | | |
| Less interest expense | (44,839) | | | (40,653) | | | (29,935) | | | |
| Less debt modification and extinguishment expense | (1,899) | | | 0 | | | (2,043) | | | |
| Add gain on sale of business | 107,239 | | | 0 | | | 0 | | | |
| Add (less) other, net | 596 | | | 710 | | | (4,741) | | | |
| Income tax (expense) benefit | (10,899) | | | (830) | | | 2,490 | | | |
| Net income (loss) | 71,059 | | | (33,589) | | | (17,836) | | | |
| Less earnings attributable to non-controlling interests | (45,398) | | | 0 | | | 0 | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | $ | 25,661 | | | $ | (33,589) | | | $ | (17,836) | | | |
Total assets, all located in the United States, by reportable segment reconciled to consolidated assets as of December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | |
| (in thousands) | As of December 31, | | |
| | | | | |
| 2020 | | 2019 | | |
| | | | | |
| Consumer Payments | $ | 261,675 | | | $ | 274,136 | | | |
| Commercial Payments | 81,106 | | | 45,152 | | | |
| Integrated Partners | 3,991 | | | 74,386 | | | |
| Corporate | 71,057 | | | 70,831 | | | |
| Total consolidated assets | $ | 417,829 | | | $ | 464,505 | | | |
Assets in Corporate at December 31, 2020 and 2019 primarily represent prepaid expenses and other current assets; property, equipment and software; and net deferred income tax assets. Substantially all assets related to business operations are assigned to one of the Company's 3 reportable segments even though some of those assets result in Corporate expenses. | | | | | | | | | | | | | | | | | | | |
| (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 | | | |
| | | | | | | |
| | | | | | | |
19. EARNINGS (LOSS) PER COMMON SHARE
As a result of the Recapitalization, the Company has retrospectively adjusted the weighted-average Class A units outstanding prior to July 25, 2018 by multiplying them by the exchange ratio used to determine the number of Class A common stock into which they converted.
The following tables set forth the computation of the Company's basic and diluted earnings (loss) per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| (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) | | | | | | | |
| | | | | | | | | | | |
| 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 | | | | | | | |
| | | | | | | | | | | |
| Diluted weighted-average common shares outstanding | 78,333 | | | 78,233 | | | 71,902 | | | | | | | |
| Diluted (loss) earnings per common share | $ | (0.63) | | | $ | (0.50) | | | $ | (0.34) | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| | | | | | | | | | | |
| (in thousands except per share amounts) | 2020 | | 2019 | | 2018 | | | | | | |
| | | | | | | | | | | |
| Numerator: | | | | | | | | | | | |
| Net income (loss) | $ | 71,059 | | | $ | (33,589) | | | $ | (17,836) | | | | | | | |
| Less: Income allocated to participating securities | 0 | | | 0 | | | (45) | | | | | | | |
| Less: Earnings attributable to non-controlling interests | (45,398) | | | 0 | | | 0 | | | | | | | |
| Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. | $ | 25,661 | | | $ | (33,589) | | | $ | (17,881) | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic: | | | | | | | | | | | |
| Weighted-average common stock shares outstanding | 67,158 | | | 67,086 | | | 61,607 | | | | | | | |
| Basic earnings (loss) per common share | $ | 0.38 | | | $ | (0.50) | | | $ | (0.29) | | | | | | | |
| | | | | | | | | | | |
| Fully Diluted: | | | | | | | | | | | |
| Weighted-average common stock shares outstanding | 67,158 | | | 67,086 | | | 61,607 | | | | | | | |
| Weighted-average dilutive common shares outstanding | 105 | | | 0 | | | 0 | | | | | | | |
| Weighted-average common shares for fully-diluted earnings (loss) per share | 67,263 | | | 67,086 | | | 61,607 | | | | | | | |
| | | | | | | | | | | |
| Fully-diluted earnings (loss) per common share | $ | 0.38 | | | $ | (0.50) | | | $ | (0.29) | | | | | | | |
Anti-dilutivePotentially anti-dilutive securities that were excluded from (loss) earnings (loss) per common share that could potentially be dilutive in future periods are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| As of December 31, | | | | |
| (in thousands) | 2020 | | 2019 | | 2018 | | | | |
| | | | | | | | | |
| Stock options (1) | 1,506 | | | 1,711 | | | 2,091 | | | | | |
| Restricted stock units (1) | 280 | | | 125 | | | 202 | | | | | |
| Liability-classified restricted stock units (1) | 107 | | | 0 | | | 0 | | | | | |
| Earnout incentive awards subject to vesting (2) | 0 | | | 0 | | | 95 | | | | | |
| Warrants on common stock (3) | 3,556 | | | 3,556 | | | 5,731 | | | | | |
| Options and warrants issued to underwriter (3) | 600 | | | 600 | | | 600 | | | | | |
| Earnout incentive awards subject to issuance (2) | 0 | | | 0 | | | 9,705 | | | | | |
| Total | 6,049 | | | 5,992 | | | 18,424 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | | | | | |
(1) Granted under the 2018 Equity Incentive Plan. SeeThe warrants were exercisable at $11.50 per share and expired on August 24, 2023. Refer to Note 15,Share-Based Compensation. (2) Plan expired on December 31, 2019 with no shares issued.
(3)Granted under the 2018 Plan.
20. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)In February 2019, PHOT, a subsidiary of the Company, received contributions of certain assets from its Chairman and CEO and issued redeemable preferred units as consideration. Part of these preferred units were later assigned to other related parties. In May 2021, the Company entered into an exchange agreement wherein these preferred units were exchanged for 1,428,358 equity shares and $814,219 in cash. On October 31, 2023, a lawsuit was filed alleging that the Board 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 pay $0.4 million to settle all claims. The unwinding of this transaction does not meet the recognition criteria as of December 31, 2023, and therefore considered as non-recognized subsequent event.
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| (in thousands, except per share amounts) | | 2020 |
| | 1Q | | 2Q | | 3Q | | 4Q | | Year |
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| Revenues | | $ | 96,933 | | | $ | 92,356 | | | $ | 108,962 | | | $ | 106,091 | | | $ | 404,342 | |
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| Operating expenses | | 93,374 | | | 88,325 | | | 101,920 | | | 99,862 | | | 383,481 | |
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| Income from operations | | 3,559 | | | 4,031 | | | 7,042 | | | 6,229 | | | 20,861 | |
| Interest expense | | (10,315) | | | (11,668) | | | (13,471) | | | (9,385) | | | (44,839) | |
| Gain on sale of business | | 0 | | | 0 | | | 107,239 | | | 0 | | | 107,239 | |
| Debt extinguishment and modification expenses | | (376) | | | 0 | | | (1,523) | | | 0 | | | (1,899) | |
| Other, net | | 30 | | | 194 | | | 190 | | | 182 | | | 596 | |
| Income tax (benefit) expense | | (1,233) | | | 415 | | | 13,737 | | | (2,020) | | | 10,899 | |
| Net (loss) income | | (5,869) | | | (7,858) | | | 85,740 | | | (954) | | | 71,059 | |
| Income attributable to non-controlling interests | | 0 | | | 0 | | | (45,348) | | | (50) | | | (45,398) | |
| Net (loss) income attributable to stockholders of Priority Technology Holdings, Inc. | | $ | (5,869) | | | (7,858) | | | $ | 40,392 | | | $ | (1,004) | | | $ | 25,661 | |
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| Basic and diluted (loss) income per common share (1) | | $ | (0.09) | | | $ | (0.12) | | | $ | 0.60 | | | $ | (0.01) | | | $ | 0.38 | |
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| (in thousands, except per share amounts) | | 2019 |
| | 1Q | | 2Q | | 3Q | | 4Q | | Year |
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| Revenues | | $ | 87,646 | | | $ | 92,142 | | | $ | 93,883 | | | $ | 98,183 | | | $ | 371,854 | |
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| Operating expenses | | 86,680 | | | 89,706 | | | 91,158 | | | 97,126 | | | 364,670 | |
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| Income from operations | | 966 | | | 2,436 | | | 2,725 | | | 1,057 | | | 7,184 | |
| Interest expense | | (9,363) | | | (10,776) | | | (10,463) | | | (10,051) | | | (40,653) | |
| Other, net | | 227 | | | 138 | | | 158 | | | 187 | | | 710 | |
| Income tax (benefit) expense | | (1,724) | | | 5,928 | | | (1,736) | | | (1,638) | | | 830 | |
| Net loss | | $ | (6,446) | | | $ | (14,130) | | | $ | (5,844) | | | $ | (7,169) | | | $ | (33,589) | |
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| Basic and diluted loss per common share (1) | | $ | (0.10) | | | $ | (0.21) | | | $ | (0.09) | | | $ | (0.11) | | | $ | (0.50) | |
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(1) May not be additive to the net (loss) income per common share amounts for the year due to the calculation provision of ASC 260, Earnings Per Share.
21. SUBSEQUENT EVENTS
Merger with Finxera Holdings, Inc.
On March 5, 2021, the Company entered into a definitive merger agreement to acquire Finxera Holdings, Inc. (“Finxera”). Finxera is a provider of deposit account management payment processing services to the debt settlement industry.The transaction is expected to closeItem 9. Changes in the third quarter of 2021, subject to customary closing conditions, regulatory approvals, shareholder approval for both companies, and Finxera having delivered all required consents of banking departments or other governmental entities related to its money transmitter licenses or an arrangement sufficient to enable Finxera to continue operating the business in any material jurisdictions in compliance with all applicable law without a money transmitter license. In the event that the condition is waived for a material jurisdiction pursuant to the above, the Company’s closing stock consideration will be reduced by $10 million,Disagreements With Accountants on Accounting and if a non-material jurisdiction, Finxera will take all steps necessary to ensure compliance with applicable law.
Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of: (a) $425 million, plus (b) the aggregate value of the current assets of the Finxera and each of its subsidiaries (the “Group Companies”) less the aggregate value of the current liabilities of Group Companies, in each case, determined on a consolidated basis without duplication, as of the close of business on the business day immediately preceding the date of the Closing (which may be a positive or negative number), plus (c) the sum of all cash and cash equivalents of the Group Companies as of the close of business on the business day immediately preceding the date of the Closing, minus (d) the amount of indebtedness of the Group Companies as of the close of the business day immediately prior to the date of the Closing, minus (e) the amount of unpaid transaction expenses, minus (f) 25% of the earnings of the Group Companies during the period between the signing of the Merger Agreement and the Closing.
If the merger agreement is terminated by the Company because the transactions have not been consummated by February 28, 2022, and every condition to consummate the transactions contemplated by the merger agreement has been satisfied and the merger has not been consummated, or if the Company is in material breach of the representations, warranties or covenants in the merger agreement, then the Company may be required to pay Finxera a $22.5 million termination fee.
Debt Commitment Letter
In connection with the definitive merger agreement, Priority entered into a debt commitment letter with Truist Bank and Truist Securities, Inc. to provide Priority with $300 million of term loan commitments, $290 million of delayed draw term loan commitments, and a $40 million revolving credit facility, subject to the conditions set forth in the debt commitment letter. The proceeds of the term loan facility and the revolving credit facility will be used to refinance existing Senior loan facilities, to pay fees and expenses in connection with the refinancing, and for working capital and general corporate requirements. The proceeds of the delayed draw term loan facility will be used to finance a portion of the merger consideration and paying fees and expenses related to the merger.
The availability of loans under the term loan commitments and the revolving credit facility is subject to certain conditions including, but not limited to, prior or substantially simultaneous completion of the transactions contemplated by the equity commitment letter (as described below), either a successful marketing period in connection with the syndication of the initial term loan facility and the revolving credit facility or substantially simultaneous satisfaction of the conditions precedent for the delayed draw term loan facility, and certain other customary closing conditions.
The availability of loans under the delayed draw term loan facility is subject to certain conditions including, but not limited to, completion of the merger in accordance with the merger agreement substantially concurrently with the borrowing under the delayed draw term loan facility, substantially simultaneous occurrence of the issuance of common equity of the Company as merger consideration, pro forma leverage below a particular threshold, and certain other customary closing conditions.
Equity Commitment Letter
Additionally in connection with the definitive merger agreement, the Company entered into a preferred stock commitment letter with Ares Capital Management LLC (“ACM”) and Ares Alternative Credit Management LLC (“AACM” and together with
ACM, the “Equity Commitment Parties”), pursuant to which, among other things, the Equity Commitment Parties have agreed to purchase perpetual senior preferred equity securities (the “Preferred Stock”) of the Company (a) to be issued in connection with the refinancing and repayment in full of certain Credit and Guaranty Agreements as described in the Equity Commitment Letter (the “Closing Date Refinancing”) (the “Initial Preferred Stock” and the issuance and sale thereof and certain warrantsrepresenting 2.50% of the fully diluted Company Common Shares at the Closing, the “Initial Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $90.0 million and (ii) in the case of AACM, $60.0 million, (b) to be issued in connection with the Merger (the “Acquisition Preferred Stock” and the issuance and sale thereof, the “Acquisition Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $30.0 million and (ii) in the case of AACM, $20.0 million and (c) available to be issued in connection with one or more acquisitions by the Company or its subsidiaries as permitted by the Equity Commitment Letter (the “Delayed Preferred Stock” and the issuance and sale thereof, the “Delayed Preferred Stock Financing” and together with the Initial Preferred Stock Financing and the Acquisition Preferred Stock Financing, the “Preferred Stock Financing”) an amount equal to (i) in the case of ACM, $30.0 million and (ii) in the case of AACM, $20.0 million.The Company has also agreed to issue to the Equity Commitment Parties warrants to purchase shares of common stock of the Company equal to an aggregate of 2.5% of the outstanding shares of common stock at a nominal exercise price.
The Preferred Stock will require quarterly dividend payments initially equal to a LIBOR rate plus 12% per annum of the liquidation preference, of which at least LIBOR plus 5% is to be payable in cash and the remainder paid in kind. In certain circumstances, including if the Company does not pay the minimum cash dividend, the required dividend may be increased.The Preferred Stock will be redeemable beginning two years after the first issuance of Preferred Stock at a price equal to 102% of the liquidation preference of the Preferred Stock plus any accrued and unpaid dividends or, beginning three years after the first issuance of Preferred Stock, at a price equal to the liquidation preference plus any accrued and unpaid dividends. Prior to two years after the first issuance, the Preferred Stock is redeemable at a make-whole rate. In the event of a change of control or liquidation event, the Company will be required to redeem the outstanding Preferred Stock.The Preferred Stock will not have any voting rights except as required under Delaware law, but certain actions by the Company will require the consent of holders of a majority of the Preferred Stock. In addition, the Preferred Stock will include certain covenants restricting, among other things, restricted payments, the incurrence of indebtedness, acquisitions and investments.
The Equity Commitment Parties’ commitment to provide the initial preferred stock financing is subject to certain conditions including but not limited to, the occurrence of the debt commitment refinancing, execution and delivery of the definitive documentation for the preferred stock financing, delivery by the Company to the investors of evidence of a bound buyer-side representation and warranty insurance policy, and certain other customary closing conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
N/A
Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
a)(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 Securities Exchange Act, of 1934 (the "Exchange Act"), designed to provide reasonable assurance that information required to be disclosed by the Company in 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) and chief, our principal financial officer (CFO) and, as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2020.2023. 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, 2020.2023.
b)(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 Securities 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 generally accepted accounting principles.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 U.S. generally accepted accounting principles,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 inherent 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 conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020.2023. 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 maintained effective internal control over financial reporting as of December 31, 2020.2023.
(c) Remediation of Material Weakness
In previous years, management determined that the Company did not maintain effective internal control over financial reporting due to the lack of sufficient accounting and financial reporting resources, deficiencies in certain aspects of our financial statement review and close processes, and functional limitations of the accounting and financial reporting system. Specifically,
the Company did not maintain adequate reconciliation processes and management oversight related to the accounting for certain settlement activities with the Company’s sponsor banks, merchants and ISOs and for the accounting for certain chargeback revenues and related costs in the correct accounting periods in accordance with U.S. GAAP. Also, certain accounting entries lacked sufficient supporting documentation and evidence of review. These control deficiencies constituted material weaknesses.
As a result of identifying material weaknesses in internal control over financial reporting, we implemented numerous improvements to remediate these control weaknesses. These improvements included:
•Accounting and financial reporting resources - in December 2018 the Company hired an experienced Chief Financial Officer with significant public accounting and reporting experience and during 2019, the Company hired additional accounting and finance resources with requisite expertise and significant experience in public accounting, financial reporting and internal controls;
•Financial statement review and closing processes – we implemented policies and procedures to ensure consistent application of adequate controls are performed in the monthly, quarterly and annual financial statement closing process, and personnel exercising these controls are adequately trained to perform these functions;
•Functional limitations of the accounting and financial reporting system – enhanced financial statement preparation and analysis capabilities have been achieved through implementation of automated software that remediated weaknesses in the accounting system;
•Reconciliation processes and management oversight related to the accounting for certain settlement activities – we implemented policies and procedures to ensure consistent application of adequate controls are performed in the reconciliation of all settlement accounts and personnel exercising these controls are adequately trained to perform these functions;
•Supporting documentation and review of accounting entries - we implemented policies and procedures to consistently ensure all journal entries are supported by adequate documentation and are reviewed and approved by supervisory personnel.
After completing our testing of the design and operating effectiveness of these new control procedures, we concluded that we have remediated the previously identified material weaknesses as of December 31, 2020.
d) Attestation Report of Independent Registered Public Accounting Firm
Not applicable due to the Company’sCompany's status as an Emerging Growth Company and a non-accelerated filer.
(d)Changes in Internal Control over Financial Reporting
During 2022, the Company implemented 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’sCompany's internal control over financial reporting during the fourth quarter of 2020year 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 INFORMATIONRule 10b5-1 Director and Officer Trading Arrangements
N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
ITEMItem 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 20212024 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.
ITEMItem 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.
ITEMItem 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.
ITEMItem 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.
ITEMItem 14. PRINCIPAL ACCOUNTING 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.
ITEMItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(2) Financial Statement SchedulesSchedule
N/A
(b) Exhibits
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| | Credit and Guaranty Agreement, dated as of January 3, 2017 by and among Pipeline CynergyPriority Technology Holdings, LLC, Priority Institutional Partner Services, LLC, Priority Payment Systems Holdings LLC, Priority Holdings, LLC, the Credit Parties, the Lenders and SunTrust Bank (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, filed July 31, 2018).Inc. 2021 Employee Stock Purchase Plan | |
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| | Credit and Guaranty Agreement, dated as of November 14, 2017 byApril 27, 2021, among the Loan Parties name therein and among Pipeline Cynergy Holdings, LLC, Priority Institutional Partner Services, LLC, Priority Payment Systems Holdings LLC, Priority Holdings, LLC, the other Guarantors, the Lenders and SunTrust Bank (incorporated by reference to Exhibit 10.4.1 to the Company's Current Report on Form 8-K, filed July 31, 2018).Truist Bank. | |
| | Second Amendment to the Credit and Guaranty Agreement, dated as of January 11, 2018 by and among Pipeline Cynergy Holdings, LLC, Priority Institutional Partner Services, LLC, Priority Payment Systems Holdings LLC, Priority Holdings, LLC, the other Guarantors, each 2018 Converting Lender, each new 2018 Refinancing Term Lender, each 2018 Incremental Term Loan Lenders, each Revolving Credit Lender and SunTrust Bank (incorporated by reference to Exhibit 10.4.2 to the Company's Current Report on Form 8-K, filed July 31, 2018). | |
| | Third Amendment to the Credit and Guaranty Agreement, dated as of December 24, 2018 by and among Pipeline Cynergy Holdings, LLC, Priority Institutional Partner Services, LLC, Priority Payment Systems Holdings LLC, Priority Holdings, LLC, the other Guarantors, each 2018-2 Incremental Term Loan Lender, each Delayed Draw Term Loan Lender, other Lender party thereto and SunTrust Bank (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed December 26, 2018). | |
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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.
ITEMItem 16. FORMForm 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 31, 202112, 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 31, 202112, 2024 |
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/s/ Michael VollkommerTimothy M. O'Leary Michael VollkommerTimothy M. O'Leary
| | Chief Financial Officer
(Principal Financial Officer) | March 31, 202112, 2024 |
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/s/ Pamela TefftRajiv Kumar Pamela TefftRajiv Kumar
| | ControllerSenior Vice President and
Chief Accounting Officer
(Principal Accounting Officer) | March 31, 202112, 2024 |
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| /s/ John Priore | | Vice-ChairmanDirector | March 31, 202112, 2024 |
| John Priore | | | |
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/s/ Michael Passilla Michael Passilla | | Director | March 31, 202112, 2024 |
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/s/ Marietta C. Davis Marietta C. Davis | | Director | March 31, 202112, 2024 |
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/s/ Christina M. Favilla Christina M. Favilla | | Director | March 31, 202112, 2024 |
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/s/ Stephen W. HippMarc Crisafulli Stephen W. HippMarc Crisafulli
| | Director | March 31, 202112, 2024 |
