- 7 -
2. Revenues
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Revenue Type: | | | | | | | |
Merchant card fees | | | | | $ | 127,952 | | | $ | 107,702 | |
Outsourced services and other services | | | | | 7,097 | | | 4,378 | |
Money transmission services revenue | | | | | 16,283 | | | — | |
Equipment | | | | | 1,907 | | | 1,217 | |
Total revenues(1),(2) | | | | | $ | 153,239 | | | $ | 113,297 | |
(1)Includes contracts with an original duration of one year or less and variable consideration under a stand-ready series of distinct days of service. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
(2)Approximately $0.1 million, $0.2 million of interest income for the three months ended March 31, 2022 and 2021, respectively, is included in other income, net on the Company's Unaudited Consolidated Statements of Operations and not reflected in the table above. Approximately $0.6 million of interest income for the three months ended March 31, 2022, is included in outsourced services and other services revenue in the table above.
Deferred revenues were not material for the three months ended March 31, 2022 and 2021.
Contract Assets and Contract Liabilities
Material contract assets and liabilities are presented net at the individual contract level in the Unaudited Consolidated Balance Sheets and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
2.Supplemental balance sheet information related to contracts from customers as of March 31, 2022 and December 31, 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consolidated Balance Sheet Location | | March 31, 2022 | | December 31, 2021 |
Liabilities: | | | | | | |
Contract liabilities, net (current) | | Customer deposits and advance payments | | $ | 1,280 | | | $ | 1,280 | |
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 not material for the periods ended March 31, 2022 and December 31, 2021.
3. Acquisitions
Finxera Acquisition
On September 17, 2021, (the "Closing Date"), the Company completed its acquisition of 100% of the equity interests of Finxera Holdings, Inc. ("Finxera").Finxera. Finxera is a provider of deposit account management and licensed money transmittertransmission services in the United States.U.S. The acquisition will allow 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 preliminary purchase price is $407.0 million and is subject to customary adjustments including final purchase accounting and working capital adjustments. 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 Closing Date,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 Closing DateSeptember 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 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 Closing Date.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 | 5,9635,198 | |
Current portion of notes receivable | 784 | |
Settlement assets and customer account balances | 498,811 | |
Property, equipment and software, net | 411712 | |
Goodwill | 252,062245,104 | |
Intangible assets, net(2) | 202,890211,400 | |
Other non-currentnoncurrent assets | 955 | |
Accounts payable and accrued expenses | (7,837) | |
Settlement and customer account obligations | (498,811) | |
Deferred income taxes, net | (43,395)(44,311) | |
Other non-currentnoncurrent liabilities | (5,208)(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 $148.4$154.9 million for referral partner relationships, $36.0$34.3 million for technology, $16.4$20.1 million for customer relationships and $2.1 million for money transmittertransmission licenses.
Goodwill of $252.1$245.1 million arising from the acquisition primarily consists of the expected synergies and other benefits from combining operations. Approximately $10.4$8.7 million of the goodwill attributable to the acquisition is expected to be deductible for income tax purposes. The goodwill was allocated 100% to the Company's Integrated PartnersEnterprise Payments reportable segment.
In 2020, Finxera acquired 2 businesses for which the purchase price included contingent consideration valued at $6.1 million. The Company's Unaudited Condensed Consolidated Financial Statements include the operating resultscontingent consideration payable is comprised of Finxeraearnout opportunities equal to 50% of certain revenues earned from the Closing Datecustomers assumed in these acquisitions. The associated earnout opportunities are to be measured and paid every six months and expire at various dates through September 30, 2021, which are reported as partDecember 31, 2023. As of March 31, 2022, $0.5 million of the Integrated Partners reportable segment. Revenues and operating income from Finxera during this period were $3.0$6.1 million of total contingent consideration has been paid. The remaining $5.6 million was accrued, of which $2.0 million and $1.0$3.6 million respectively.
For the threewere included in accounts payable and nine months ended September 30, 2021 we incurred $0.6 millionaccrued expenses and $9.2 million,other noncurrent liabilities, respectively, in acquisition related costs, which primarily consisted of consulting, legal, accounting and valuation expenses. These expenses were recorded in selling, general and administrative expenses inon the Company's Unaudited Condensed Consolidated StatementsBalance Sheet as of Operations.
The following unaudited pro forma financial information presents results as if the acquisition occurred on January 1, 2020. The historical consolidated financial information of the Company and Finxera has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the transaction and are factually supportable. Acquisition related costs of $38.8 million and $1.0 million for the nine months ended September 30, 2021 and the nine months ended September 30, 2020, respectively, are excluded from the pro forma information. The unaudited pro forma results do not reflect events that have occurred or may occur after the transaction, including the impact of any synergies expected to result from the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction occurred on January 1, 2020, nor is it necessarily an indication of future operating results.
| | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | | | Nine Months Ended September 30, |
| | | | | 2021 | | 2020 |
Revenues | | | | | $ | 420,499 | | | $ | 352,526 | |
Operating income | | | | | $ | 58,290 | | | $ | 37,381 | |
March 31, 2022.
Other Acquisitions
Based on their purchase prices and pre-acquisition operating results and assets, none of the other businesses acquired by the Company in 2021, as described below, met the materiality requirements for pro forma disclosures individually or collectively.
Wholesale Payments, Inc.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-outearnout 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 of September 30, 2021,March 31, 2022, the sellers earned $3.8 million of the $24.8 million, which was paid during the third quarter of 2021, increasing the total purchase price recorded at September 30, 2021 to $46.2 million, which was recorded to residual buyout intangible assets with a seven-year useful life amortized on a straight-line basis. As this is 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 was 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 of C&H 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 businessC&H was an Independent Sales Organization ("ISO")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 ConsumerSMB 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-outearnout 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 of the revolving credit facility under the Credit Agreement held by the Company and $4.5 million cash on hand. The purchase price was allocated to merchant portfolio intangible assets with a ten-year useful life amortized on a straight-line basis, fixed assets and other current assets, and goodwill. Transaction costs were not material and were expensed. 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.below.
| | | | | |
(in thousands) | |
Accounts receivable | $ | 214 | |
Prepaid expenses and other current assets | 209 | |
Property, equipment and software, net and other current assets | 283287 | |
Goodwill | 13,80813,804 | |
Intangible assets, net(1) | 25,400 | |
Other non-currentnoncurrent liabilities | (214) | |
Total purchase price | $ | 39,700 | |
(1)The intangible assets acquired consist of $20.2 million for merchant portfolio intangible assets with a ten-year useful life and $5.2 million for ISO partner relationships with a twelve-year useful life.
The goodwill for the Wholesale Payments, Inc. asset acquisition and the C&H Financial Services, Inc. business combination is deductible by the Company for income tax purposes.
3. Revenues
For all periods presented, substantially all of the Company's revenues from services were recognized over time. Revenues earned from the sales of payment equipment were typically recognized at a point in time.
The following table presents a disaggregation of the Company's consolidated revenues by type, followed by a description of the relationship of Based on their purchase prices and pre-acquisition operating results and assets, these types of revenues to the Company's reportable segments, for the three and nine months ended September 30, 2021 and September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Revenue Type | | | | | | | | |
Merchant card fees | | $ | 122,175 | | | $ | 102,481 | | | $ | 348,244 | | | $ | 277,253 | |
Outsourced services and other services | | 8,651 | | | 5,387 | | | 17,854 | | | 18,143 | |
Equipment | | 1,716 | | | 1,094 | | | 4,755 | | | 2,855 | |
Total revenues | | $ | 132,542 | | | $ | 108,962 | | | $ | 370,853 | | | $ | 298,251 | |
Revenues earned in these disaggregated categories consists of the following:
•Merchant card fees - revenues related to discount rates and interchange fees earned from payment services provided2 businesses acquired by the Company's Consumer Payments, Commercial Payments and Integrated Partners segments.
•Outsourced services and other services - business process outsourcing services and revenues from Automated Clearing House (ACH) services, services provided to certain business customers of American Express and auxiliary services provided by our Commercial Payments segment. The Integrated Partners segment includes revenues from licensed money transmitter services.
- 10 -Company in 2021, as described above, did not meet the materiality requirements for pro forma disclosures individually or collectively.
•Equipment - revenues from sales of point-of-sale equipment and other payment-processing equipment sold to customers in the Company's Consumer Payments segment.
Transaction Price Allocated to Future Performance Obligations
ASC 606, Revenue from Contracts with Customers ("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. 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.
Contract Assets and Contract Liabilities
A contract with a customer creates legal rights and obligations. 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 Company's Unaudited Condensed Consolidated Balance Sheets and are classified as current or non-current based on the nature of the underlying contractual rights and obligations.
Supplemental balance sheet information related to contracts from customers as of September 30, 2021 and December 31, 2020 was as follows: | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consolidated Balance Sheet Location | | September 30, 2021 | | December 31, 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Contract liabilities, net (current) | | Customer deposits and advance payments | | $1,494 | | $1,494 |
Substantially all of these balances are recognized as revenue within twelve 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 not material for the three and nine months ended September 30, 2021 and September 30, 2020.
4. Settlement Assets and Customer Account Balances and Related Obligations
ConsumerSMB Payments Segment
In the Company's ConsumerSMB 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 requiresrequire possession of funds during the settlement process to be withby a member bank which controls the clearing transactions. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company. Therefore, neither is recognized in the Company's Unaudited Consolidated Balance Sheets. Member banks held merchant funds of $113.8$105.7 million and $103.8$102.1 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, 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 Unaudited 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 and customer account balances in the Company's Unaudited 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 three and nine months ended September 30,March 31, 2022 and 2021 were $0.6$1.1 million and $1.6 million, respectively. Expenses for merchant losses for the three and nine months ended September 30, 2020 were $1.5 million and $3.6$0.4 million, respectively.
B2B Payments Segment
In the Company's CommercialB2B Payments segment, the Company earns revenues from certain of its services by processing transactions for financial institutionsFIs 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 For the Benefit Of ("FBO")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, and the associated obligations related to these funds are not liabilities of the Company; therefore,Company. Therefore, neither is recognized in the Company's Unaudited Consolidated Balance Sheets. Bank-owned FBO accounts held funds of $86.7$57.6 million and $45.5 million at September 30,March 31, 2022 and December 31, 2021, which was the result of a transfer of customer restricted cash from Company-owned bank accounts to bank-owned FBO accounts due to a change in our business practice for certain types of customer deposits and cash advance payments.respectively. Company-owned bank accounts held $8.3$6.4 million and $21.4 million at September 30, 2021March 31, 2022 and $72.9 million at December 31, 2020;2021, respectively, which are included withinin restricted cash and settlement obligations in the Company's Unaudited Condensed Consolidated Balance Sheets.
Integrated PartnersEnterprise Payments Segment
In the Company's Integrated PartnersEnterprise Payments segment, revenue is derived primarily from enrollment fees, monthly subscription fees and transaction-based fees andfrom licensed money transmitter services fees.transmission services. As part of its licensed money transmittertransmission services, the Company accepts deposits from consumers and subscribers which are held in bank accounts maintained by the Company on behalf of consumers 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 and therefore,demand. As such, the Company recorded these balances and related obligations as current assets and current liabilities. The nature of these balances are 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 account balances and the related obligations as settlement and customer account obligations in the Company's Unaudited Condensed Consolidated Balance Sheets.
The Company's settlement assets and customer account balances and settlement and customer account obligations at September 30, 2021 and December 31, 2020 were as follows:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
Settlement Assets: | Settlement Assets: | | | | Settlement Assets: | | | |
Card settlements due from merchants, net of estimated losses | Card settlements due from merchants, net of estimated losses | $ | 862 | | | $ | 753 | | Card settlements due from merchants, net of estimated losses | $ | 1,228 | | | $ | 537 | |
Customer Account Balances: | Customer Account Balances: | | Customer Account Balances: | |
Cash and cash equivalents | Cash and cash equivalents | 459,453 | | | — | | Cash and cash equivalents | 497,388 | | | 468,934 | |
Time deposits | Time deposits | 20,000 | | | — | | Time deposits | — | | | 10,000 | |
Total settlement assets and customer account balances | Total settlement assets and customer account balances | $ | 480,315 | | | $ | 753 | | Total settlement assets and customer account balances | $ | 498,616 | | | $ | 479,471 | |
| Settlement and Customer Account Obligations: | Settlement and Customer Account Obligations: | | Settlement and Customer Account Obligations: | |
Customer account obligations | Customer account obligations | $ | 479,453 | | | $ | — | | Customer account obligations | $ | 497,388 | | | $ | 478,935 | |
Due to customer payees(1) | Due to customer payees(1) | 9,873 | | | 72,878 | | Due to customer payees(1) | 6,343 | | | 21,356 | |
Total settlement and customer account obligations | Total settlement and customer account obligations | $ | 489,326 | | | $ | 72,878 | | Total settlement and customer account obligations | $ | 503,731 | | | $ | 500,291 | |
5. Disposal of Business
On September 1, 2020, Priority Real Estate Technology LLC ("PRET"), a majority-owned and consolidated subsidiary of the Company, entered into an asset purchase agreement (the "Sale Agreement") with MRI Payments LLC and MRI Software LLC (together, "MRI" or the buyer) to sell certain(1)The related assets and certain associated obligations of the real estate services business. The sale was completed on September 22, 2020 after receiving regulatory approval, resulting in a gain of $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 ("NCI") 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 NCI, respectively. The initial allocation of net proceeds remained subject to final adjustment with the PRET members at December 31, 2020. During the first quarter of 2021, it was determined that an additional $0.5 million of the excess proceeds was due to the NCI, which wasare included in other expenses, net in therestricted cash on our Unaudited Condensed Consolidated Statement of Operations.
- 13 -Balance Sheets.
Pro Forma Information
The following pro forma information is provided for the business (the RentPayment component) that was sold under the Sale Agreement, excluding the gain recognized on the sale transaction:
| | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2020 |
Revenues | | $ | 3,883 | | | $ | 12,118 | |
Operating income(1) | | $ | 307 | | | $ | 1,805 | |
Net income(2) | | $ | 259 | | | $ | 1,765 | |
Net income attributable to the stockholders of Priority Technology Holdings, Inc.(3) | | $ | 259 | | | $ | 1,765 | |
Income per common share for stockholders of Priority Technology Holdings, Inc. - Basic and Diluted(3) | | $ | — | | | $ | 0.03 | |
(1)Historical financial results are not being reported as discontinued operations.
(2)Pro forma income tax expense is based on the following consolidated effective tax rates of Priority Technology Holdings, Inc.: 15.5% for the three months ended September 30, 2020; 2.2% for the nine months ended September 30, 2020. These rates exclude the effect of the $107.2 million gain on the sale recognized during the nine months ended September 30, 2020.
(3)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.
6.5. Goodwill and Other Intangible Assets
Goodwill
The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying separately-identifiable tangible and intangible assets acquired and the liabilities assumed. The Company's goodwill relates to the following reporting units at September 30, 2021as of March 31, 2022 and December 31, 2020.2021:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | | (in thousands) | March 31, 2022 | | December 31, 2021 | |
Consumer Payments | $ | 120,640 | | | $ | 106,832 | | | |
Integrated Partners | 252,062 | | | — | | | |
SMB Payments | | SMB Payments | $ | 120,636 | | | $ | 120,636 | | |
Enterprise Payments | | Enterprise Payments | 245,104 | | | 245,104 | | |
Total | Total | $ | 372,702 | | | $ | 106,832 | | | Total | $ | 365,740 | | | $ | 365,740 | | |
The following table summarizes the changes in the carrying value of goodwill for the periods ended September 30, 2021 and December 31, 2020:
| | | | | |
(in thousands) | Amount |
Balance at December 31, 2020 | $ | 106,832 | |
Changes in the value of goodwill | — | |
Balance at March 31, 2021 | 106,832 | |
C&H Financial Services, Inc. acquisition | 17,246 | |
Balance at June 30, 2021 | 124,078 | |
Measurement period adjustment from C&H Financial Services, Inc. acquisition | (3,438) | |
Finxera acquisition | 252,062 | |
Balance at September 30, 2021 | $ | 372,702 | |
The Company considered the market conditions for triggering events including those generated by the COVID-19 pandemic and concluded that thereThere were no indicators of impairment of the Company's goodwilllosses for the three and nine months ended September 30,March 31, 2022 and 2021.
The Company testsperformed its most recent annual goodwill for impairment on an annual basis, or when events occur or circumstances indicatetest as of October 1, 2021, using the optional qualitative method. Under the qualitative method, we examined the factors most likely to affect our valuations. As a result, we have concluded that it remains more likely than not that the fair value of aeach of our reporting unit may be below itsunits exceeds their carrying value. Theamounts. As of March 31, 2022, the Company will continue to monitoris not aware of any triggering events including the economic impact of COVID-19 on its ongoing assessment of goodwill. The Company expects to perform its next annual goodwill impairment test during the fourth quarter of 2021 using market data and a discounted cash flow analysis. The Company concluded there was no impairment as of September 30, 2021 or December 31, 2020. As such, there was no accumulated impairment loss as of September 30, 2021 and December 31, 2020.that have occurred since October 1, 2021.
Other Intangible Assets
As of September 30, 2021At March 31, 2022 and December 31, 2020,2021, other intangible assets consisted of the following:
| (in thousands, except weighted-average data) | | (in thousands, except weighted-average data) | March 31, 2022 | | Weighted-average Useful Life |
| | September 30, 2021 | | Weighted Average Useful Life (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
(in thousands) | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | |
Other intangible assets: | Other intangible assets: | | | | | | | | Other intangible assets: | | | | | | | |
ISO and referral partner relationships | | ISO and referral partner relationships | $ | 175,300 | | | $ | (14,771) | | | $ | 160,529 | | | 14.8 |
Residual buyouts | | Residual buyouts | 126,225 | | | (61,054) | | | 65,171 | | | 6.3 |
Customer relationships | | Customer relationships | 95,566 | | | (74,046) | | | 21,520 | | | 8.0 |
Merchant portfolios | Merchant portfolios | $ | 76,016 | | | $ | (27,817) | | | $ | 48,199 | | | 4.0 | Merchant portfolios | 76,016 | | | (33,942) | | | 42,074 | | | 6.7 |
Customer relationships | 91,866 | | | (67,609) | | | 24,257 | | | 8.4 | |
Residual buyouts(1) | 125,840 | | | (51,160) | | | 74,680 | | | 6.4 | |
Non-compete agreements(2) | 3,390 | | | (3,390) | | | — | | | 0.0 | |
Technology | | Technology | 48,690 | | | (15,921) | | | 32,769 | | | 9.9 |
Non-compete agreements | | Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 0.0 |
Trade names | Trade names | 2,870 | | | (1,830) | | | 1,040 | | | 11.6 | Trade names | 2,870 | | | (1,949) | | | 921 | | | 11.7 |
Technology(2) | 50,390 | | | (14,164) | | | 36,226 | | | 9.8 | |
ISO and referral partner relationships | 168,800 | | | (8,597) | | | 160,203 | | | 13.8 | |
Money transmitter licenses(3) | 2,090 | | | — | | | 2,090 | | | |
Money transmission licenses(1) | | Money transmission licenses(1) | 2,100 | | | — | | | 2,100 | | |
Total gross carrying value | Total gross carrying value | $ | 521,262 | | | $ | (174,567) | | | $ | 346,695 | | | Total gross carrying value | $ | 530,157 | | | $ | (205,073) | | | $ | 325,084 | | | 10.0 |
(1)These assets have an indefinite useful life.
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except weighted-average data) | December 31, 2021 | | Weighted-average Useful Life |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
Other intangible assets: | | | | | | | |
ISO and referral partner relationships | $ | 175,300 | | | $ | (11,679) | | | $ | 163,621 | | | 14.8 |
Residual buyouts(1) | 126,225 | | | (56,186) | | | 70,039 | | | 6.4 |
Customer relationships | 95,566 | | | (70,883) | | | 24,683 | | | 8.1 |
Merchant portfolios | 76,016 | | | (30,879) | | | 45,137 | | | 6.7 |
Technology(2) | 48,690 | | | (15,039) | | | 33,651 | | | 9.9 |
Non-compete agreements(2) | 3,390 | | | (3,390) | | | — | | | 0.0 |
Trade names | 2,870 | | | (1,890) | | | 980 | | | 11.6 |
Money transmission licenses(3) | 2,100 | | | — | | | 2,100 | | | |
Total gross carrying value | $ | 530,157 | | | $ | (189,946) | | | $ | 340,211 | | | 9.7 |
(1)Additions to Residualresidual buyouts were offset by certain assets that became fully amortized in 2021 but are still in service.
(2)Certain assets in the group became fully amortized in 2021 but are still in service.
(3)These assets have an indefinite useful life.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Weighted Average Useful Life (Years) |
(in thousands) | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
Other intangible assets: | | | | | | | |
Merchant portfolios | $ | 55,816 | | | $ | (19,471) | | | $ | 36,345 | | | 5.5 |
Customer relationships | 40,740 | | | (30,267) | | | 10,473 | | | 11.0 |
Residual buyouts | 114,359 | | | (72,659) | | | 41,700 | | | 6.8 |
Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 3.0 |
Trade names | 2,870 | | | (1,651) | | | 1,219 | | | 11.6 |
Technology | 14,390 | | | (13,951) | | | 439 | | | 6.1 |
ISO relationships | 15,200 | | | (7,319) | | | 7,881 | | | 23.7 |
Total gross carrying value | $ | 246,765 | | | $ | (148,708) | | | $ | 98,057 | | | |
Amortization expense for finite-lived intangible assets was $10.2$15.1 million and $25.9$7.0 million for the three and nine months ended September 30,March 31, 2022 and 2021, respectively, and $8.3 million and $25.2 million for the three and nine months ended September 30, 2020,
respectively. Amortization expense for future periods could differ due to new intangible asset acquisitions, changes in useful lives of existing intangible assets 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. 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 pandemic and concluded that there were no additional impairment indicators present at September 30, 2021.March 31, 2022.
7.
6. Property, Equipment and Software
Property,A summary of property, equipment and software, net as of September 30, 2021March 31, 2022 and December 31, 2020 consisted of2021 was as follows:
| | | | | | | | | | | | | | | |
(in thousands, except useful lives) | March 31, 2022 | | December 31, 2021 | | | | |
Computer software | $ | 54,939 | | | $ | 52,715 | | | | | |
Equipment | 12,874 | | | 12,255 | | | | | |
Leasehold improvements | 6,835 | | | 6,467 | | | | | |
Furniture and fixtures | 3,035 | | | 2,819 | | | | | |
Property, equipment and software | 77,683 | | | 74,256 | | | | | |
Less: accumulated depreciation | (52,286) | | | (49,023) | | | | | |
Property, equipment and software, net | $ | 25,397 | | | $ | 25,233 | | | | | |
Depreciation expense totaled $2.2 million and $2.1 million for the following:
| | | | | | | | | | | | | |
(in thousands) | September 30, 2021 | | December 31, 2020 | | |
Furniture and fixtures | $ | 2,883 | | | $ | 2,795 | | | |
Equipment | 12,275 | | | 10,216 | | | |
Computer software | 50,307 | | | 44,320 | | | |
Leasehold improvements | 6,360 | | | 6,250 | | | |
Property, equipment and software | 71,825 | | | 63,581 | | | |
Less: accumulated depreciation | (46,910) | | | (40,706) | | | |
Property, equipment and software, net | $ | 24,915 | | | $ | 22,875 | | | |
three months ended March 31, 2022 and 2021, respectively.Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist within the reporting of merchant processing transactions and other related information.
Depreciation expense for property, equipment and software totaled $2.2
7. Notes Receivable
The Company had notes receivable of $2.7 million and $6.3$0.4 million for the threeas of March 31, 2022 and nine months ended September 30,December 31, 2021, respectively, which are reported as current portion of notes receivable and $2.0 million and $5.7 million fornotes receivable less current portion on the three and nine months ended September 30, 2020, respectively.
8. Accounts Payable and Accrued Expenses
Company's Unaudited Consolidated Balance Sheets. The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at either September 30, 2021 or December 31, 2020 consistedcarrying value of the following:
| | | | | | | | | | | |
(in thousands) | September 30, 2021 | | December 31, 2020 |
| | | |
Accrued expenses | 18,752 | | | 14,451 | |
Accrued card network fees | 9,775 | | | 8,041 | |
| | | |
| | | |
Company's notes receivable approximates fair value. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of notes receivable. The notes receivable carried weighted-average
9.interest rates of 14.6% and 13.8% as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, the Company had no allowance for doubtful notes receivable.
As of March 31, 2022, the principal payments for the Company's notes receivable are due as follows:
| | | | | |
(in thousands) | |
Twelve month period ending March 31, | |
2023 | $ | 652 | |
2024 | 549 | |
2025 | 526 | |
2026 | 463 | |
2027 | 489 | |
| |
Total | $ | 2,679 | |
8. Debt Obligations
Outstanding debt obligations as of September 30, 2021March 31, 2022 and December 31, 20202021 consisted of the following:
| | | | | | | | | | | |
(in thousands) | September 30, 2021 | | December 31, 2020 |
Credit and Guaranty Agreement: | | | |
Term facility - matures April 27, 2027, interest rate of 6.75% at September 30, 2021 | $ | 618,450 | | | $ | — | |
Revolving credit facility - $40.0 million line, matures April 27, 2026, interest rate of 5.75% at September 30, 2021 | 30,000 | | | — | |
Senior Credit Agreement: | | | |
Term facility - Original maturity at January 3, 2023, interest rate of 7.50% at December 31, 2020 | — | | | 279,417 | |
| | | |
Term Loan - Subordinated, original maturity at July 3, 2023, interest rate of 12.50% at December 31, 2020 | — | | | 102,623 | |
Total debt obligations | 648,450 | | | 382,040 | |
Less: current portion of long-term debt | (6,200) | | | (19,442) | |
Less: unamortized debt discounts and deferred financing costs | (22,293) | | | (4,725) | |
| | | |
Long-term debt, net | $ | 619,957 | | | $ | 357,873 | |
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Term facility - matures April 27, 2027, interest rate of 6.75% at March 31, 2022 and December 31, 2021 | $ | 615,350 | | | $ | 616,900 | |
Revolving credit facility - $40.0 million line, matures April 27, 2026, interest rate of 5.75% at March 31, 2022 and December 31, 2021 | 10,000 | | | 15,000 | |
Total debt obligations | 625,350 | | | 631,900 | |
Less: current portion of long-term debt | (6,200) | | | (6,200) | |
Less: unamortized debt discounts and deferred financing costs | (20,747) | | | (21,595) | |
Long-term debt, net | $ | 598,403 | | | $ | 604,105 | |
CreditInterest Expense and Guaranty AgreementAmortization of Deferred Loan Costs and Discounts
On September 17, 2021, Priority Holdings LLC ("Holdings"), which is a direct wholly-owned subsidiaryDeferred financing costs and debt discounts are amortized using the effective interest method over the remaining term of the Company,respective debt and certain directare recorded as a component of interest expense. Unamortized deferred financing costs and indirect subsidiaries of Holdings (together with Holdings, collectively, the "Loan Parties"), entered into an agreement with Truist Bank ("Truist") and the lenders party thereto, to amend the Credit and Guaranty Agreement dated as of April 27, 2021 (the "Credit Agreement") to increase the amount of the delayed draw term loan facility under the Credit Agreement by $30.0 million. The additional delayed draw term loansdebt discounts are part of the same class of term loans made pursuant to the original commitments under the Credit Agreement. See Note 2, Acquisitions for additional information related to the Finxera acquisition.On April 27, 2021, the Loan Parties, entered into the Credit Agreement with Truist and the lenders party thereto, pursuant to which Holdings has access to senior credit facilitiesincluded in an aggregate principal amount of $630.0 million which are secured by substantially all of the assets of the Loan Parties and by the equity interests of Holdings.
The credit facilities under the Credit Agreement are comprised of (i) a senior secured first lien term loan facility in an aggregate principal amount of $300.0 million (the "Initial Term Loan"), the proceeds of which were used to fund the refinancing described below, (ii) a senior secured revolving credit facility in an aggregate amount not to exceed $40.0 million outstanding at any time (the "Revolving Credit Facility") and (iii) a senior secured first lien delayed draw term loan facility in an aggregate principal amount of $290.0 million (the "Delayed Draw Term Loan"), the proceeds of which may be used to fundlong-term debt on the Company's acquisition of Finxera.
Unaudited Consolidated Balance Sheets.
Outstanding borrowings under the Credit Agreement accrue interest using either a base rate (as defined therein) or a LIBOR rate plus an applicable margin per year, as provided in the Credit Agreement, which includessubject to a LIBOR 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 of the $40.0 million credit line in an amount equal to 0.5%0.50% per year of the unused portion. Under the terms of the Credit Agreement, theThe future applicable interest rate margins may vary based on the Loan PartiesCompany's Total Net Leverage Ratio in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowing.borrowings.
Interest expense for outstanding debt, including fees for undrawn amounts and amortization of deferred financing costs and debt discounts, was $11.5 million, and $9.2 million for the three months ended March 31, 2022 and 2021. Interest expense included amortization of deferred financing costs and debt discounts of $0.8 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively.
UseFair Value
Outstanding debt obligations are reflected in the Company's Unaudited Consolidated Balance Sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of Proceedseach reporting period.
Holdings and certain other Loan Parties have previously entered into (i) the Senior Credit Agreement and (ii) the Term Loan Agreement, both of which are described below. The proceeds from the salefair value of the Securities (referof the term facility was estimated to be $614.6 million and $613.8 million. at March 31, 2022 and December 31, 2021, respectively, and was estimated using binding and non-binding quoted prices in an active secondary market, which considersNote 10, Redeemable Senior Preferred Stockthe credit risk and Warrants)market related conditions, and fromis within Level 3 of the Initial Term Loan were usedfair value hierarchy.The carrying values of the other long-term debt obligations approximate fair value due to refinancemechanisms in the Senior Credit Agreementcredit agreements that adjust the applicable interest rates and the Term Loan Agreement and all outstanding obligations thereunder were repaid in full (or in the caselack of outstanding undrawn letters of credit, deemed issued under the Credit Agreement), and all commitments and guaranties in connection therewith have been terminated or released (the "Refinancing").a market for these debt obligations.
Prepayments
Under the Credit Agreement, prepayments of outstanding principal may be made in permitted increments with a 1.00% penalty for certain prepayments made in connection with repricing transactions. Such premium will be based on the principal amount that is prepaid, subject to the terms of the credit agreements.
Acceleration
The outstanding amount of any loans and any other amounts owed under the Credit Agreement may, after the occurrence of an Event of Default (as defined in the Credit Agreement), at the option of Truist, be declared immediately due and payable. Events of Default include, without limitation, the failure of the Loan Parties to pay principal, premium or interest when due under the Credit Agreement, or the failure by the Loan Parties to perform or comply with any term or covenant in the Credit Agreement, in each case, subject to any applicable cure periods provided therein.
Debt Covenants
The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Loan Partiesloan 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 outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving facility thereunder, the Loan Partiesloan parties are required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the Credit Agreement as the ratio of consolidated total debt of the Loan Parties to the Loan Parties Consolidated Adjusted EBITDA (as defined in the Credit Agreement).Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is (i)is: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022, (ii)2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 20232023; and (iii)3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 and each fiscal quarter thereafter.
Senior Credit Agreement
Outstanding borrowings under the Credit and Guaranty Agreement, dated as As of January 3, 2017 and subsequently amended, with Truist (the "Senior Credit Agreement"), accrued interest using either a base rate (as defined) or a LIBOR rate plus an applicable margin, or percentage per year, as provided in the amended credit agreement. For the term loan facility of our Senior Credit Agreement, the Sixth Amendment, which was executed on March 18, 2020, provided for a LIBOR "floor" of 1.00% per year. Accrued interest was payable monthly. The revolving credit facility incurred a commitment fee on any undrawn amount of the $25.0 million credit line, which equated to 0.50% per year for the unused portion. The outstanding obligations under the Senior Credit Agreement at the time of the Refinancing were $274.6 million.
Term Loan Agreement
Outstanding borrowings under the Credit and Guaranty Agreement, dated as of January 3, 2017 and subsequently amended, with Goldman Sachs Specialty Lending Group, L.P. (the "Term Loan Agreement") accrued interest at 5.0%, plus an applicable margin, or percentage per year, as indicated in the amended credit agreement. Accrued interest was payable quarterly at 5.0%
per year, and the accrued interest attributable to the applicable margin was capitalized as payment-in-kind ("PIK") interest each quarter. The outstanding obligations under the Term Loan Agreement at the time of the Refinancing were $105.1 million, which consisted of the principal amount borrowed under the Term Loan Agreement of $80.0 million plus accumulated PIK interest of $25.1 million.
Contractual Maturities
Based on terms and conditions existing at September 30, 2021, future minimum principal payments for long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Principal Due |
(in thousands) | | Credit Agreement |
Twelve-month period ending September 30, | | Term Loan | | Revolver | | | | Total |
2022 | | $ | 6,200 | | | $ | — | | | | | $ | 6,200 | |
2023 | | 6,200 | | | — | | | | | 6,200 | |
2024 | | 6,200 | | | — | | | | | 6,200 | |
2025 | | 6,200 | | | — | | | | | 6,200 | |
2026 | | 6,200 | | | 30,000 | | | | | 36,200 | |
Beyond five years | | 587,450 | | | — | | | | | 587,450 | |
Total | | $ | 618,450 | | | $ | 30,000 | | | | | $ | 648,450 | |
Additionally,31, 2022, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as definedwas in the Credit Agreement.
Interest Expense and Amortization of Deferred Loan Costs and Discounts
Interest expense, including fees for undrawn amounts under the revolving credit facility and the delayed draw term loan facility, as well as amortization of deferred financing costs and debt discounts, was $8.2 million and $24.6 million for the three and nine months ended September 30, 2021, respectively, and $13.5 million and $35.5 million for the three and nine months ended September 30, 2020, respectively. Interest expense included amortization of deferred financing costs and debt discounts of $2.1 million and $3.3 million for the three and nine months ended September 30, 2021, respectively, and $0.7 million and $1.8 million for the three and nine months ended September 30, 2020, respectively.
Deferred Loan Costs and Discounts, and Debt Extinguishment and Modification Expenses
Refinancing: The Initial Term Loan under the Credit Agreement was issued in April 2021 at a discount of $6.4 million, while the Delayed Draw Term Loan was issued in September 2021 at a discount of $6.3 million. Additionally, the Company incurred approximately $6.4 million of costs for the Refinancing, in April 2021 and $9.9 million of costs for the Delayed Draw Term Loan, including $3.5 million of ticking fees (debt commitment fees) prior to the drawdown of the funds in September 2021. Approximately $6.1 million of the remaining fees incurred for the Delayed Draw Term Loan were paid during the initial Refinancing and were deferred and included in other non-current assets on the Company's Unaudited Condensed Consolidated Balance Sheet at June 30, 2021. The costs for the Delayed Draw Term Loan were amortized over the delayed commitment access period until September 2021, at which time the unamortized balance of the deferred costs was removed from other non-current assets and recorded as a reduction of the carrying amount of the debt obligation and is being amortized over the remaining term of the debt.
The Company determined that the issuance of the Initial Term Loan under the Refinancing in April 2021 was partially an extinguishment and a modification, and therefore, recognized debt extinguishment and modification costs of $8.3 million in April 2021, which included a portion of the Refinancing fees and the write-off of previously deferred fees under the prior credit agreements. These costs are reported within other expenses, net on the Company's Unaudited Condensed Consolidated Statements of Operations.
Senior Credit Agreement: For the Sixth Amendment, executed in the first quarter of 2020, $2.7 million of lender fees were deferred and added to then-existing unamortized loan costs and discount. Approximately $0.4 million of such costs were expensed in connectioncompliance with the Sixth Amendment during the first quarter of 2020.our financial covenants.
10.
9. Redeemable Senior Preferred Stock and Warrants
Redeemable Senior Preferred Stock
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 shares, the Company was provided the option to issue an additional 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.
The redeemable senior preferred stock ranks senior to the Company's common stock, equal with any other class of the Company's stock designated as being ranked on a parity basis with the redeemable senior preferred stock and junior to any other class of the Company's stock, including preferred stock, that is designated as being ranked senior to the redeemable senior preferred stock, with respect to the payment and distribution of dividends, the purchase or redemption of the Company's stock and the liquidation, winding up of and distribution of assets of the Company.
The redeemable senior preferred stock does not meet the definition of a liability pursuant to ASC 480, Distinguishing Liabilities from Equity, as it is redeemable upon the occurrence of events that are not solely within the Company's control. Therefore, the Company classified the redeemable senior preferred stock as temporary equity and is accreting the carrying amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method.
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 non-current 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 non-current assets for the committed financing put right was reclassified to the redeemable senior preferred stock.
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 | — | | | 4,090 | |
Accretion of discounts and issuance cost | — | | | 805 | |
March 31, 2022 | 225 | | | $ | 215,053 | |
| | | | | | | | | | | |
(in thousands) | Shares | | Amount |
January 1, 2021 | — | | | $ | — | |
Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs | 150 | | | 131,426 | |
Unpaid dividend on redeemable senior preferred stock | — | | | 1,838 | |
Accretion of discounts and issuance cost | — | | | 498 | |
June 30, 2021 | 150 | | | $ | 133,762 | |
Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs | 75 | | | 68,183 | |
Unpaid dividend on redeemable senior preferred stock | — | | | 2,846 | |
Accretion of discounts and issuance cost | — | | | 527 | |
September 30, 2021 | 225 | | | $ | 205,318 | |
The dividend rate for the redeemable senior preferred stock is equal to the three-month LIBOR rate (minimum of 1%) plus an applicable margin of 12% (capped at 22.50%)per year, with a required quarterly payment of 5% plus the three-month LIBOR rate per year. In the event of non-compliance with the cash payment requirement, the dividend rate shall increase by 2% per year. In the event of the occurrence an event of default, including the failure to make any required payment related to the redeemable senior preferred stock (e.g., payment of dividends or payments with respect to redemption or prepayments) within five business days of being due, or certain other conditions of default or breach as outlined in the agreement that are not remedied within thirty days of becoming aware of such default, the dividend rate shall increase by 3% per year for the period of continuance of the default. The dividend rate shall increase by 5% per year if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors within 120 days of approval of the sale transaction by the Sale Demand Special Committee and will continue to increase by an additional 5% for each subsequent 30 calendar day period until such sale is approved by all required stockholders. The following table provides a summary of the dividends for the periodsperiod presented:
| | | | | | | | | | | |
(in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2021 |
Dividends paid in cash | $ | 2,440 | | | $ | 4,015 | |
Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock | 2,846 | | | 4,684 | |
Dividends declared at the rate of 13% per year | $ | 5,286 | | | $ | 8,699 | |
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(in thousands) | Redemption PriceThree Months Ended March 31, 2022 |
Prior to April 27, 2023Dividends paid in cash | 100%$ | 3,505 | |
Accumulated dividends accrued as part of liquidation preference (i.e., $1,000 per share) plus any accrued and unpaid dividends and the Make-Whole amount (i.e., presentcarrying value of additional 2% of the liquidation preference plus any accrued and unpaid dividends thereon through the redemption date plus 102% of the amount of dividends that will accrue from the redemption date through April 27, 2023)redeemable senior preferred stock | 4,090 | |
April 27, 2023 - April 26, 2024Dividends declared at the rate of 13.0% per year | 102% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date |
April 27, 2024 and thereafter$ | 100% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date7,595 | |
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 (i) October 27, 2028, (ii) 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 (iii) 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. In connection with the
issuance of the warrants, the Company entered into an agreement pursuant to which it agreed to provide certain registration rights with respect to the common shares issuable upon exercise of the warrants. Under this agreement the holders of the related shares of common stock were granted (i) piggyback rights to be included in certain underwritten offerings of common stock and (ii) the right to demand a shelf registration of the shares of common stock issued upon exercise of the warrants. As of September 30, 2021,March 31, 2022, none of the warrants have been exercised. The warrants are considered to be equity contracts indexed in the Company's own shares and therefore were recorded at their inception date relative fair value and are included in additional paid-in capital on the Company's Unaudited Condensed Consolidated Balance Sheet.Sheets.
11.10. Income Taxes
The Company's consolidated effective income tax rate (benefit) for the three and nine months ended September 30, 2021 was 327.8% and (0.4)%, respectively. Our effective income tax rate49.4% for the three months ended September 30, 2021 differed from the U.S. statutory rate primarily asMarch 31, 2022, compared to a result of changes to our valuation allowance for interest limited under section 163(j) of the Internal Revenue Code.
The Company'sconsolidated effective income tax rate (benefit) for the three and nine months ended September 30, 2020 was 13.8% and 15.2%, respectively. Our effective income tax rateof 45.4% for the three months ended September 30, 2020March 31, 2021. The effective rate for March 31, 2022 differed from the U.S. statutory rate of 21.0% primarily as a result of changesdue to ouran increase in the valuation allowance against certain business interest carryover deferred tax assets. The effective rate for March 31, 2021 differed from the statutory federal rate of 21.0% primarily due to an increase in the valuation allowance against certain business interest limited under section 163(j) of the Internal Revenue Code and related favorable interest limitation provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").carryover deferred tax assets.
Valuation Allowance for Deferred Income Tax Assets
The Company considers all available positive and negative evidence to determine whether sufficient taxable income will be generated in the future to permit realization of the existing deferred tax assets. In accordance with the provisions of ASC 740, Income Taxes, the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.
Based on management's assessment, as of the third quarter of 2021,March 31, 2022, the Company continues to record a full valuation allowance against non-deductible interest expense. The Company will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may change in future periods.
12.
11. Commitments and Contingencies
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 payment transactions. Some of these agreements have minimum annual requirements for processing volumes. Based on existing contracts in place at September 30, 2021,March 31, 2022, the Company is committed to pay minimum processing fees under these agreements of approximately $14.8$15.7 million in 20212022 and $7.8$16.6 million in both 2022 and 2023.
Commitment to Lend
Contingent Consideration for Acquisitions
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 initially recorded by the acquirer on the date of acquisition. Rather, the acquirer generally recognizes contingent consideration when it becomes probable and estimable.
On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. This asset acquisition became part of the Company's ConsumerSMB Payments reportable segment. The initial purchase price is subject to an increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers. As of September 30, 2021, $4.3 million ofMarch 31, 2022, the $6.4 million total contingent consideration has been paidsellers had not achieved the criteria to the seller, whileearn the remaining $2.1 million will be payable in the first quarter of 2022 if certain criteria are achieved.million.
See Note 2,3, Acquisitions, for information about contingent consideration related to acquisitions consummated in 2021.other acquisitions. 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 insideinternal and outsideexternal 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.
Concentration of Risks
The Company's revenue is substantially derived from processing Visa and MasterCard bankcard transactions. Because the Company is not a member bank, in order to process these bankcard transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card associations.
A majority of the Company's cash and restricted cash is held in certain financial institutions,FIs, substantially all of which is in excess of federal deposit insurance corporation limits. The Company does not believe it is exposed to any significant credit risk from these transactions.
13. Related Party Transactions
Commitment to Lend and Warrant to Acquire
During 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity. The Company has loaned the entity a total of $3.5 million at September 30, 2021 and December 31, 2020, with a commitment to loan up to a total of $10.0 million based on certain growth metrics of the entity and continued compliance by 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 under any of the Company's debt or other applicable agreements. Amounts loaned to this entity by the Company are secured by substantially all of the assets of the entity and by a personal guarantee. The note receivable has an interest rate of 12.0% per year and is repayable in full in May 2024. The Company also received a warrant 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. The Company monitors any circumstances that may alter this assessment.
Equity-Method Investment
During the first quarter of 2020, the Company wrote off its $0.2 million carrying value in an equity-method investment. This loss is reported as a component of other expenses, net on the Company's Unaudited Condensed Consolidated Statement of Operations.
PHOT Preferred Unit Redemption - Distribution to Non-Controlling Interests
In February 2019, Priority Hospitality Technology, LLC ("PHOT"), a subsidiary of the Company, received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements. PHOT is a part of the Company's Integrated Partners reportable segment. No material liabilities were assumed by PHOT. These contributed assets were composed substantially of technology-related assets. Prior to these transactions, eTab was 80.0% owned by the Company's Chairman and Chief Executive Officer ("CEO"). 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 non-controlling preferred equity interests ("redeemable NCIs") in PHOT. Under these redeemable NCIs, the contributors were eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per year) on any undistributed preferred equity interest ("Total Preferred Equity Interest"). Once the Total Preferred Equity Interest is distributed to the holders, the redeemable NCIs cease to exist. The Company's CEO initially owned 83.3% of the redeemable NCIs, which ownership interest was subsequently reduced to 35.3% through the CEO's disposition of interests to others.
At the time of contribution, the Company determined that the contributor's carrying values of the eTab and Cumulus net assets (as a common control transaction under GAAP) were not material. Under the guidance for a common control transaction, the contribution of the eTab and Cumulus 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 were not adjusted to reflect the historical results attributable to the eTab net assets. For the period from February 1, 2019 through October 31, 2020, a total of $0.3 million of PHOT's earnings were attributable to the redeemable NCIs of PHOT, and this same amount was distributed in cash to the redeemable NCIs during the same period.
In November 2020, the Company agreed with the contributors to an exchange of shares of common stock of the Company, or cash, for the remaining undistributed Total Preferred Equity Interests of $4.8 million. An exchange valuation for the Company's common stock was established as of November 12, 2020 at the prior 20-day volume weighted average price of $2.78 per share. The exchange was contingent upon receiving approval of the Company's lenders; therefore, the binding exchange agreements were not entered into until after lender approval was received in April 2021 in connection with the Refinancing.
In May 2021, the Company entered into exchange agreements and completed the exchange of 1,428,358 shares of common stock and $0.8 million of cash for the Total Preferred Equity Interests. The CEO received 605,623 shares of common stock of the Company in exchange for his 35.3% interest, and the Company's Executive Vice President of M&A and Corporate Development received 413,081 shares of common stock of the Company in exchange for her 24.1% interest. Subsequent to establishing the common stock valuation in November 2020 and the date of exchange in May 2021, the Company's common stock price appreciated to $7.75 per share. The Company's financial statements for the nine months ended September 30, 2021 reflect this exchange as a distribution to NCIs at an appreciated common stock value of $6.975 per share, which incorporates a 10% liquidity discount of $0.775 per share due to trading restrictions under Securities Rule 144. Therefore, the total distribution amounted to $10.8 million, comprised of $10.0 million of common stock and $0.8 million of cash.
14. Reconciliation of Stockholders' Deficit and Non-controlling Interests12. Stock-based Compensation
The following tables provide a reconciliation of the beginning and ending carrying amounts of stockholders' deficit and equity attributable to NCIs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Additional Paid-In Capital | | Accumulated (Deficit) | | Total |
| | | | | | Common Stock | Treasury Stock(1) |
(in thousands) | | | | | | | | | | Shares | | Amount | Shares | | Amount |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
January 1, 2021 | | | | | | | | | | 67,391 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 5,769 | | | $ | (102,013) | | | $ | (98,564) | |
Equity-classified stock-based compensation | | | | | | | | | | — | | | — | | | — | | | — | | | 558 | | | — | | | 558 | |
Vesting of stock-based compensation | | | | | | | | | | 159 | | | — | | | — | | | — | | | — | | | — | | | — | |
Liability-classified stock-based compensation converted to equity-classified | | | | | | | | | | — | | | — | | | — | | | — | | | 313 | | | — | | | 313 | |
| | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | | | | | | | | 90 | | | — | | | — | | | — | | | 617 | | | — | | | 617 | |
Net loss | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | (2,679) | | | (2,679) | |
| | | | | | | | | | | | | | | | | | | | | | |
March 31, 2021 | | | | | | | | | | 67,640 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 7,257 | | | $ | (104,692) | | | $ | (99,755) | |
Equity-classified stock-based compensation | | | | | | | | | | — | | | — | | | — | | | — | | | 821 | | | — | | | 821 | |
Vesting of stock-based compensation | | | | | | | | | | 12 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | | | | | | | | 30 | | | — | | | — | | | — | | | 204 | | | — | | | 204 | |
Dividends on redeemable senior preferred stock | | | | | | | | | | — | | | — | | | — | | | — | | | (3,413) | | | — | | | (3,413) | |
| | | | | | | | | | | | | | | | | | | | | | |
Fair value of warrants issued | | | | | | | | | | — | | | — | | | — | | | — | | | 11,357 | | | — | | | 11,357 | |
Accretion of redeemable senior preferred stock discount | | | | | | | | | | — | | | | | — | | | — | | | (498) | | | — | | | (498) | |
Fair value of PHOT preferred units redemption | | | | | | | | | | — | | | — | | | — | | | — | | | (10,777) | | | — | | | (10,777) | |
Fair value of common shares issued for PHOT redemption | | | | | | | | | | 1,428 | | | 2 | | | | | | | 9,962 | | | — | | | 9,964 | |
Net loss | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | (9,477) | | | (9,477) | |
June 30, 2021 | | | | | | | | | | 69,110 | | | $ | 70 | | | 451 | | | $ | (2,388) | | | $ | 14,913 | | | $ | (114,169) | | | $ | (101,574) | |
Equity-classified stock-based compensation | | | | | | | | | | — | | | — | | | — | | | — | | | 790 | | | — | | | 790 | |
Vesting of stock-based compensation | | | | | | | | | | 20 | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of acquisition common stock | | | | | | | | | | 7,551 | | | 7 | | | — | | | — | | | 34,381 | | | — | | | 34,388 | |
Exercise of stock options | | | | | | | | | | 53 | | | — | | | — | | | — | | | 369 | | | — | | | 369 | |
Share repurchases | | | | | | | | | | (163) | | | — | | | 163 | | | (1,023) | | | — | | | — | | | (1,023) | |
Dividends on redeemable senior preferred stock | | | | | | | | | | — | | | — | | | — | | | — | | | (5,286) | | | — | | | (5,286) | |
| | | | | | | | | | | | | | | | | | | | | | |
Accretion of redeemable senior preferred stock discount | | | | | | | | | | — | | | — | | | — | | | — | | | (527) | | | — | | | (527) | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | (549) | | | (549) | |
September 30, 2021 | | | | | | | | | | 76,571 | | | $ | 77 | | | 614 | | | $ | (3,411) | | | $ | 44,640 | | | $ | (114,718) | | | $ | (73,412) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional Paid-In Capital | | Accumulated (Deficit) | | Total Priority Technology Holdings, Inc. Stockholders' (Deficit) | | NCI(2) |
| | | | | | | | | | | | | | Common Stock | Treasury Stock(1) |
| | | | | | | | | | | | | | | | | | | | | Shares | | Amount | Shares | | Amount |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January 1, 2020 | | | | | | | | | | | | | | | | | | | | | 67,061 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 3,651 | | | $ | (127,674) | | | $ | (126,343) | | | $ | 5,654 | |
Equity-classified stock-based compensation | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | 338 | | | — | | | 338 | | | — | |
Net loss | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | (5,869) | | | (5,869) | | | — | |
March 31, 2020 | | | | | | | | | | | | | | | | | | | | | 67,061 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 3,989 | | | $ | (133,543) | | | $ | (131,874) | | | $ | 5,654 | |
Equity-classified stock compensation | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | 580 | | | — | | | 580 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | (7,858) | | | (7,858) | | | — | |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | 67,061 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 4,569 | | | $ | (141,401) | | | $ | (139,152) | | | $ | 5,654 | |
Equity-based stock compensation | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | 499 | | | — | | | 499 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 45,348 | |
Redemption of non-controlling interest | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,654) | |
Distributions to non-controlling interests | | | | | | | | | | | | | | | | | | | | | — | | | — | | | — | | | — | | | — | | | 40,392 | | | 40,392 | | | (45,348) | |
September 30, 2020 | | | | | | | | | | | | | | | | | | | | | 67,061 | | | $ | 68 | | | 451 | | | $ | (2,388) | | | $ | 5,068 | | | $ | (101,009) | | | $ | (98,261) | | | $ | — | |
(1)At cost
(2)Prior to the third quarter of 2020, this balance was related to the acquisition of certain assets from YapStone, Inc. by the Company's PRET subsidiary during 2019. As part of the consideration for the assets acquired from YapStone, Inc. by PRET, YapStone, Inc. was issued a NCI in PRET with an initial estimated fair value and carrying value of $5.7 million. For all reporting periods since PRET's inception through June 30, 2020, no earnings or losses were attributable to the NCIs of PRET. During the three months ended September 30, 2020, a gain on a sale of assets from PRET resulted in the attribution of a total of $45.1 million to the NCIs of PRET. This amount was also distributed in a final redemption of the NCIs' interests in PRET during the three months ended September 30, 2020.
Share Repurchase Program
In August 2021, Priority's Board of Directors authorized a $10.0 million share repurchase program (the "2021 Share Repurchase Program"). Under this program the Company was authorized to purchase up to one million shares of its common stock through open market transactions, unsolicited or solicited privately negotiated transactions, or otherwise in accordance with all applicable securities laws and regulations. The 2021 Share Repurchase Program expires on August 17,March 31, 2022 and may be discontinued at any time. The Company terminated the 2021, Share Repurchase Program effective as of the close of business on September 23, 2021.
15. Stock-based Compensation
Stock-basedstock-based compensation expense is included in salary and employee benefits in the accompanying Unaudited Condensed Consolidated Statements of Operations. The Company recognizes the effects of forfeitures on compensation expense as the forfeitures occur.
Expense recognized under the 2018 Equity Incentive Plan during the periods presented was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Equity-classified stock compensation expense | | $ | 790 | | | $ | 499 | | | $ | 2,169 | | | $ | 1,417 | |
Liability-classified stock compensation expense(1) | | 145 | | | 102 | | | 180 | | | 210 | |
Total stock compensation expense | | $ | 935 | | | $ | 601 | | | $ | 2,349 | | | $ | 1,627 | |
(1)Liability-classified stock compensation under the 2018 Equity Incentive Plan where the service inception date preceded the future grant-date. | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
Restricted stock units compensation expense | $ | 1,558 | | | $ | 558 | | | | | |
| | | | | | | |
| | | | | | | |
In March 2021, the Company converted a $313 thousand$0.3 million liability-classified stockstock-based compensation accrualaward for restricted stock units under the 2018 Equity Incentive Plan, whereby the service inception date preceded the future grant-date, to an equity-classified award when the restricted stock units were granted.
Income tax benefit for the stock-based compensation was not materialimmaterial for the three and nine months ended September 30, 2021March 31, 2022 and September 30, 2020.2021. No stock-based compensation has been capitalized.
Employee2018 Plan
The Company's 2018 Plan provided for the issuance of up to 6,685,696 shares of the Company's common stock. On March 17, 2022, the Company's Board of Directors unanimously approved an amendment to the 2018 Plan, subject to approval 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.
2021 Stock Purchase Plan
On April 16,The 2021 the Priority Technology Holdings, Inc. 2021 Employee Stock Purchase Plan ("2021 Stock Purchase Plan") was authorized by the Company's Board of Directors. The maximum number ofprovides for up to 200,000 shares available for purchaseto be purchased under the plan is 200,000 shares.plan. Shares issued under the 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 we anticipate the first offering period will begin during the first quarter ofbegan on January 10, 2022. The plan2021 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.offering period.
16. Fair Value13. Segment Information
Fair Value Measurements
Prior to the fourth quarter of 2021, the Company's 3 reportable segments included the Consumer Payments segment, the Commercial Payments segment and the Integrated Partners segment. As of September 30, 2021 and December 31, 2020, the Company no longer has any fair value estimates that are required to be remeasured at the end of each reporting period on a recurring basis.
Fair Value Disclosures
Notes Receivable
Notes receivable are carried at amortized cost. Substantially allresult of the Company's notes receivable are secured,organic growth and the Company provides for allowances when it believes that certain notes receivable may not be collectible. The carrying value ofrecent acquisitions, a new internal reporting structure was implemented which resulted in changes to the Company's notes receivable, net approximates fair valuereportable segments. The 3 new reportable operating segments are SMB Payments, B2B Payments and was approximately $4.1 million and $7.7 million, at September 30, 2021 and December 31, 2020, respectively. OnEnterprise Payments. All comparative periods have been adjusted to reflect the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.new reportable segments.
Debt Obligations
Outstanding debt obligations (see Note 9, Debt Obligations) are reflected in the Company's Unaudited Condensed Consolidated Balance Sheets at carrying value since the Company did not elect to remeasure debt obligations at fair value at the end of each reporting period.The fair value of the of the term loan facility under the Credit Agreement at September 30, 2021 was estimated to be approximately $618.5 million. The fair value of the term loan facility under the Senior Credit Agreement at December 31, 2020 was estimated to be approximately $278.0 million. The fair value of these notes at September 30, 2021 and December 31, 2020, with a notional value and carrying value (gross of deferred costs and discounts) of $618.5 million and $279.4 million, respectively, was estimated using binding and non-binding quoted prices in an active secondary market, which considersthe credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.
The carrying values of the other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of a market for these debt obligations.
17. Segment Information
The Company hasMore information about our 3 reportable segments. The Consumer Payments operating segment and the Integrated Partners operating segments are each reported as separate reportable segments. The Commercial Payments and Institutional Services (sometimes referred to as Managed Services) operating segments are aggregated into 1 reportable segment, Commercial Payments.segments:
•ConsumerSMB Payments – represents consumer-related services and offerings including merchantprovides full-service acquiring and transaction processing services includingpayment-enabled solutions for B2C transactions, leveraging the Company's proprietary MX enterprise suite. Eithersoftware platform, distributed through acquisition of merchant portfolios or through resellers, the Company becomes a party or enters into contracts with a merchantISOs, direct sales and a sponsor bank. Pursuant 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 due 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.vertically focused ISV channels.
•CommercialB2B Payments – represents services providedprovides AP automation solutions to certain enterprise customers,corporations, software partners and FIs, including providing an outsourced sales force to those customersCiti, Mastercard and accounts payable automation services to commercial customers.American Express.
•Integrated PartnersEnterprise Payments – representsprovides embedded payment adjacent servicesand banking solutions to enterprise customers that are provided primarilymodernize legacy platforms and accelerate modern software partners looking to the health care, real estate and hospitality industries. In September 2020, the Company sold a substantial portion of the assets of this segment. On September 17, 2021, the Company completed the acquisition of Finxera which will operate as part of this segment. Finxera provides licensed money transmitter services in the United States.monetize payments.
Corporate includes costs of corporate functions and shared services not allocated to theour reportable segments.
Information on reportable segments and reconciliations to consolidated revenues, and consolidated depreciation and amortization, and consolidated operating income are as follows for the periods presented:follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenues: | | | | | | | |
Consumer Payments | $ | 124,027 | | | $ | 99,301 | | | $ | 352,045 | | | $ | 267,039 | |
Commercial Payments | 4,181 | | | 4,995 | | | 11,722 | | | 17,017 | |
Integrated Partners | 4,334 | | | 4,666 | | | 7,086 | | | 14,195 | |
Consolidated revenues | $ | 132,542 | | | $ | 108,962 | | | $ | 370,853 | | | $ | 298,251 | |
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Consumer Payments | $ | 10,971 | | | $ | 8,481 | | | $ | 29,847 | | | $ | 25,721 | |
Commercial Payments | 73 | | | 77 | | | 220 | | | 231 | |
Integrated Partners | 1,017 | | | 1,403 | | | 1,222 | | | 4,048 | |
Corporate | 269 | | | 290 | | | 834 | | | 886 | |
Consolidated depreciation and amortization | $ | 12,330 | | | $ | 10,251 | | | $ | 32,123 | | | $ | 30,886 | |
| | | | | | | |
Operating income (loss) | | | | | | | |
Consumer Payments | $ | 14,656 | | | $ | 11,098 | | | $ | 42,467 | | | $ | 25,520 | |
Commercial Payments | (29) | | | 169 | | | (417) | | | 1,408 | |
Integrated Partners | 1,220 | | | 253 | | | 1,477 | | | 1,466 | |
| | | | | | | |
Total operating income of reportable segments | $ | 15,847 | | | $ | 11,520 | | | $ | 43,527 | | | $ | 28,394 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | |
(in thousands) | | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Revenues: | | | | | | | |
SMB Payments | | | | | $ | 129,959 | | | $ | 109,101 | |
B2B Payments | | | | | 5,925 | | | 3,500 | |
Enterprise Payments | | | | | 17,355 | | | 696 | |
Consolidated revenues | | | | | $ | 153,239 | | | $ | 113,297 | |
| | | | | | | |
Depreciation and amortization: | | | | | | | |
SMB Payments | | | | | $ | 10,824 | | | $ | 8,708 | |
B2B Payments | | | | | 73 | | | 74 | |
Enterprise Payments | | | | | 6,197 | | | — | |
Corporate | | | | | 259 | | | 288 | |
Consolidated depreciation and amortization | | | | | $ | 17,353 | | | $ | 9,070 | |
| | | | | | | |
Operating income (loss): | | | | | | | |
SMB Payments | | | | | $ | 12,486 | | | $ | 13,289 | |
B2B Payments | | | | | 409 | | | (409) | |
Enterprise Payments | | | | | 4,494 | | | 164 | |
Corporate | | | | | (6,563) | | | (8,517) | |
Consolidated operating income | | | | | $ | 10,826 | | | $ | 4,527 | |
A reconciliation of total operating income of reportable segments to the Company's net (loss) incomeloss is provided in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Total operating income of reportable segments | | $ | 15,847 | | | $ | 11,520 | | | $ | 43,527 | | | $ | 28,394 | |
Corporate | | (7,597) | | | (4,478) | | | (23,345) | | | (13,762) | |
Interest expense | | (8,155) | | | (13,471) | | | (24,608) | | | (35,454) | |
Debt modification and extinguishment costs | | — | | | (1,523) | | | (8,322) | | | (1,899) | |
Gain on sale of business | | — | | | 107,239 | | | — | | | 107,239 | |
Other income (expenses), net | | 146 | | | 190 | | | 92 | | | 414 | |
Income tax expense | | (790) | | | (13,737) | | | (49) | | | (12,919) | |
Net (loss) income | | (549) | | | 85,740 | | | (12,705) | | | 72,013 | |
Substantially all revenue is generated in the United States.
For the three and nine months ended September 30, 2021 and September 30, 2020, 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 referral partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can potentially move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. For the three months ended September 30, 2021 and September 30, 2020, merchants referred by one ISO organization with potential merchant portability rights generated revenue within the | | | | | | | | | | | | | | | |
(in thousands) | | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Total operating income of reportable segments | | | | | $ | 17,389 | | | $ | 13,044 | |
Corporate | | | | | (6,563) | | | (8,517) | |
Interest expense | | | | | (11,535) | | | (9,168) | |
| | | | | | | |
| | | | | | | |
Other income (expense), net | | | | | 51 | | | (269) | |
Income tax benefit | | | | | 325 | | | 2,231 | |
Net loss | | | | | $ | (333) | | | $ | (2,679) | |
| | | | | | | |
| | | | | | | |
Company's Consumer Payments reportable segment that represented approximately 23.4% and 21.4%, respectively, of the Company's consolidated revenues.
18. (Loss) Earnings14. Loss per Common Share
The following tables set forth the computation of the Company's basic and diluted loss per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Basic and diluted loss per common share: | | | | | | | |
Numerator: | | | | | | | |
Net (loss) income | $ | (549) | | | $ | 85,740 | | | $ | (12,705) | | | $ | 72,013 | |
Less: Dividends and accretion attributable to redeemable senior preferred stockholders | (5,813) | | | — | | | (9,724) | | | — | |
Less: Non-controlling interest preferred unit redemptions | — | | | — | | | (10,777) | | | — | |
Less: Earnings attributable to non-controlling interests | — | | | (45,348) | | | — | | | (45,348) | |
Net (loss) income attributable to common stockholders | $ | (6,362) | | | $ | 40,392 | | | $ | (33,206) | | | $ | 26,665 | |
| | | | | | | |
Basic: | | | | | | | |
Weighted-average common shares outstanding(1) | 71,979 | | | 67,167 | | | 69,689 | | | 67,114 | |
Basic (loss) earnings per common share | $ | (0.09) | | | $ | 0.60 | | | $ | (0.48) | | | $ | 0.40 | |
| | | | | | | |
Diluted: | | | | | | | |
Weighted-average common shares outstanding(1) | 71,979 | | | 67,167 | | | 69,689 | | | 67,114 | |
Effect of potentially dilutive common stock equivalents | — | | | 119 | | | — | | | 17 | |
Diluted weighted average common shares outstanding | 71,979 | | | 67,286 | | | 69,689 | | | 67,131 | |
Diluted (loss) earnings per common share | $ | (0.09) | | | $ | 0.60 | | | $ | (0.48) | | | $ | 0.40 | |
| | | | | | | | | | | | | | | |
(in thousands except per share amounts) | | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net loss | | | | | $ | (333) | | | $ | (2,679) | |
Less: Dividends and accretion attributable to redeemable senior preferred stockholders | | | | | (8,400) | | | — | |
| | | | | | | |
| | | | | | | |
Net loss attributable to common stockholders | | | | | $ | (8,733) | | | $ | (2,679) | |
Denominator: | | | | | | | |
Basic and diluted: | | | | | | | |
Weighted-average common shares outstanding(1) | | | | | 78,597 | | | 67,543 | |
Loss per common share | | | | | $ | (0.11) | | | $ | (0.04) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Potentially anti-dilutive securities that were excluded from the Company's loss per common share for the three and nine months ended September 30, 2021 and September 30, 2020 that could potentially be dilutive in future periods wereare as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Common Stock Equivalents at |
| | September 30, 2021 | | September 30, 2020 |
Outstanding warrants on common stock(1) | | 3,557 | | | 3,557 | |
Outstanding options and warrants issued to adviser(1) | | 600 | | | 600 | |
Restricted stock awards(2) | | 1,202 | | | 127 | |
Liability-classified restricted stock units | | 135 | | | 238 | |
Outstanding stock option awards(2) | | 1,232 | | | 1,593 | |
Total | | 6,726 | | | 6,115 | |
| | | | |
| | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Outstanding warrants on common stock(1) | 3,557 | | | 3,557 | |
Outstanding options and warrants issued to adviser(2) | 600 | | | 600 | |
Restricted stock awards(3) | 2,284 | | | 842 | |
| | | |
Outstanding stock option awards(3) | 1,203 | | | 1,394 | |
Total | 7,644 | | | 6,393 | |
(1)Issued by M.I. Acquisitions, Inc. prior to July 25, 2018.The warrants are exercisable at $11.50 per share and expire on August 24, 2023.
(2)The warrants and options are exercisable at $12.00 per share and expire on August 24, 2023.
(3)Granted under the 2018 Equity Incentive Plan.
- 30 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our auditedAudited Consolidated Financial Statements and related notes for the years ended December 31, 2020, 2019 and 2018Notes and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K filed withfor the U.S. Securities and Exchange Commission on Marchyear ended December 31, 2021 (the "Annual Report").2021.
Cautionary Note Regarding Forward-LookingForward-looking Statements
Some of the statements made in this Quarterly Report on Form 10-Q 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," "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 Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•the impact of the COVID-19 pandemic;
•competition in the payment processing industry;
•the use of distribution partners;
•any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses or otherwise;
•any breakdowns in our processing systems;
•government regulation, including regulation of consumer information;
•the use of third-party vendors;
•any changes in card association and debit network fees or products;
•any failure to comply with the rules established by payment networks or standards established by third-party processors;
•any proposed acquisitions or dispositions or any risks associated with completed acquisitions;acquisitions or dispositions; and
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
The forward-looking statements contained in this Quarterly Report on Form 10-Q 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 in the "Item 1A - Risk Factors" section of this Quarterly Report on Form 10-Q or our 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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 this Quarterly Report on Form 10-Q
As used in this Quarterly Report on Form 10-Q, 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.
Results of Operations
This section includes a discussion and analysiscertain components of our results of operations for the three months ended September 30, 2021 (or third quarter 2021)March 31, 2022, compared to the three months ended September 30, 2020 (or third quarter 2020), and the nine months ended September 30, 2021 (or 2021 period) compared to the nine months ended September 30, 2020 (or 2020 period).March 31, 2021. We have derived this data, except key indicators for merchant bankcard processing dollar values and transaction volumes, from our Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements included in our latest Annual Report on Form 10-K.10-K for the year ended December 31, 2021.
Revenue
Three Months Ended September 30, 2021 Compared toFor the Three Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended September 30, | | | | |
| 2021 | | 2020 | | Change | | % Change |
Revenue | $ | 132,542 | | | $ | 108,962 | | | $ | 23,580 | | | 21.6 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating expenses | | | | | | | |
Costs of services | 92,833 | | | 74,971 | | | 17,862 | | | 23.8 | % |
| | | | | | | |
Salary and employee benefits | 11,909 | | | 10,010 | | | 1,899 | | | 19.0 | % |
Depreciation and amortization | 12,330 | | | 10,251 | | | 2,079 | | | 20.3 | % |
Selling, general and administrative | 7,220 | | | 6,688 | | | 532 | | | 8.0 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total operating expenses | 124,292 | | | 101,920 | | | 22,372 | | | 22.0 | % |
Operating income | 8,250 | | | 7,042 | | | 1,208 | | | 17.2 | % |
Other (expenses) income | | | | | | | |
| | | | | | | |
Interest expense | (8,155) | | | (13,471) | | | 5,316 | | | (39.5) | % |
| | | | | | | |
Debt extinguishment and modification costs | — | | | (1,523) | | | 1,523 | | | (100.0) | % |
Gain on sale of business | — | | | 107,239 | | | (107,239) | | | (100.0) | % |
| | | | | | | |
Other income, net | 146 | | | 190 | | | (44) | | | (23.2) | % |
Total other (expenses) income, net | (8,009) | | | 92,435 | | | (100,444) | | | (108.7) | % |
Income before income taxes | 241 | | | 99,477 | | | (99,236) | | | (99.8) | % |
Income tax expense | 790 | | | 13,737 | | | (12,947) | | | (94.2) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net (loss) income | $ | (549) | | | $ | 85,740 | | | $ | (86,289) | | | (100.6) | % |
| | | | | | | |
| | | | | | | |
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Nine Months Ended September 30, | | | | |
| 2021 | | 2020 | | Change | | % Change |
Revenue | $ | 370,853 | | | $ | 298,251 | | | $ | 72,602 | | | 24.3 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating expenses | | | | | | | |
Costs of services | 264,527 | | | 203,733 | | | 60,794 | | | 29.8 | % |
| | | | | | | |
Salary and employee benefits | 31,808 | | | 29,695 | | | 2,113 | | | 7.1 | % |
Depreciation and amortization | 32,123 | | | 30,886 | | | 1,237 | | | 4.0 | % |
Selling, general and administrative | 22,213 | | | 19,305 | | | 2,908 | | | 15.1 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total operating expenses | 350,671 | | | 283,619 | | | 67,052 | | | 23.6 | % |
Operating income | 20,182 | | | 14,632 | | | 5,550 | | | 37.9 | % |
Other (expenses) income | | | | | | | |
| | | | | | | |
Interest expense | (24,608) | | | (35,454) | | | 10,846 | | | (30.6) | % |
| | | | | | | |
Debt extinguishment and modification costs | (8,322) | | | (1,899) | | | (6,423) | | | 338.2 | % |
Gain on sale of business | — | | | 107,239 | | | (107,239) | | | (100.0) | % |
| | | | | | | |
Other income, net | 92 | | | 414 | | | (322) | | | (77.8) | % |
Total other (expenses) income, net | (32,838) | | | 70,300 | | | (103,138) | | | (146.7) | % |
(Loss) income before income taxes | (12,656) | | | 84,932 | | | (97,588) | | | (114.9) | % |
Income tax expense | 49 | | | 12,919 | | | (12,870) | | | (99.6) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net (loss) income | $ | (12,705) | | | $ | 72,013 | | | $ | (84,718) | | | (117.6) | % |
| | | | | | | |
| | | | | | | |
The following table shows our reportable segments' financial performance data and selected performance measures$153.2 million increased by $39.9 million, or 35.2%, from $113.3 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended September 30, | | | | |
| 2021 | | 2020 | | Change | | % Change |
Consumer Payments: | | | | | | | |
Revenues | $ | 124,027 | | $ | 99,301 | | $ | 24,726 | | 24.9 | % |
Operating expenses | 109,371 | | 88,203 | | 21,168 | | 24.0 | % |
Operating income | $ | 14,656 | | $ | 11,098 | | $ | 3,558 | | 32.1 | % |
Operating margin | 11.8% | | 11.2% | | | | |
Depreciation and amortization | $ | 10,971 | | $ | 8,481 | | $ | 2,490 | | 29.4 | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 13,817,001 | | $ | 11,235,068 | | $ | 2,581,933 | | 23.0 | % |
Merchant bankcard transaction volume | 151,524 | | 122,623 | | 28,901 | | 23.6 | % |
Commercial Payments: | | | | | | | |
Revenues | $ | 4,181 | | $ | 4,995 | | $ | (814) | | (16.3) | % |
Operating expenses | 4,210 | | 4,826 | | (616) | | (12.8) | % |
Operating (loss) income | $ | (29) | | $ | 169 | | $ | (198) | | (117.2) | % |
Operating margin | (0.7)% | | 3.4% | | | | |
Depreciation and amortization | $ | 73 | | $ | 77 | | $ | (4) | | (5.2) | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 86,855 | | $ | 58,304 | | $ | 28,551 | | 49.0 | % |
Merchant bankcard transaction volume | 54 | | $ | 24 | | $ | 30 | | 125.0 | % |
Integrated Partners: | | | | | | | |
Revenues | $ | 4,334 | | $ | 4,666 | | $ | (332) | | (7.1) | % |
Operating expenses | 3,114 | | 4,413 | | (1,299) | | (29.4) | % |
Operating income | $ | 1,220 | | $ | 253 | | $ | 967 | | 382.2 | % |
Operating margin | 28.1% | | 5.4% | | | | |
Depreciation and amortization | $ | 1,017 | | $ | 1,403 | | $ | (386) | | (27.5) | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 13,832 | | $ | 105,537 | | $ | (91,705) | | (86.9) | % |
Merchant bankcard transaction volume | 160 | | 371 | | (211) | | (56.9) | % |
Operating income of reportable segments | $ | 15,847 | | $ | 11,520 | | $ | 4,327 | | 37.6 | % |
Less: Corporate expense | (7,597) | | | (4,478) | | (3,119) | | (69.7) | % |
Consolidated operating income | $ | 8,250 | | $ | 7,042 | | $ | 1,208 | | 17.2 | % |
Corporate depreciation and amortization | $ | 269 | | $ | 290 | | $ | (21) | | (7.2) | % |
Key indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 13,917,688 | | $ | 11,398,909 | | $ | 2,518,779 | | 22.1 | % |
Merchant bankcard transaction volume | 151,738 | | 123,018 | | 28,720 | | 23.3 | % |
The following table shows our reportable segments' financial performance data and selected performance measures for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Nine Months Ended September 30, | | | | |
| 2021 | | 2020 | | Change | | % Change |
Consumer Payments: | | | | | | | |
Revenues | $ | 352,045 | | | $ | 267,039 | | | $ | 85,006 | | | 31.8 | % |
Operating expenses | 309,578 | | | 241,519 | | | 68,059 | | | 28.2 | % |
Operating income | $ | 42,467 | | | $ | 25,520 | | | $ | 16,947 | | | 66.4 | % |
Operating margin | 12.1 | % | | 9.6 | % | | | | |
Depreciation and amortization | $ | 29,847 | | | $ | 25,721 | | | $ | 4,126 | | | 16.0 | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 39,564,898 | | | $ | 30,632,724 | | | $ | 8,932,174 | | | 29.2 | % |
Merchant bankcard transaction volume | 429,610 | | | 334,896 | | | 94,714 | | | 28.3 | % |
Commercial Payments: | | | | | | | |
Revenues | $ | 11,722 | | | $ | 17,017 | | | $ | (5,295) | | | (31.1) | % |
Operating expenses | 12,139 | | | 15,609 | | | (3,470) | | | (22.2) | % |
Operating income (loss) | $ | (417) | | | $ | 1,408 | | | $ | (1,825) | | | (129.6) | % |
Operating margin | (3.6) | % | | 8.3 | % | | | | |
Depreciation and amortization | $ | 220 | | | $ | 231 | | | $ | (11) | | | (4.8) | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 225,373 | | | $ | 195,229 | | | $ | 30,144 | | | 15.4 | % |
Merchant bankcard transaction volume | 140 | | | 70 | | | 70 | | | 100.0 | % |
Integrated Partners: | | | | | | | |
Revenues | $ | 7,086 | | | $ | 14,195 | | | $ | (7,109) | | | (50.1) | % |
Operating expenses | 5,609 | | | 12,729 | | | (7,120) | | | (55.9) | % |
Operating income | $ | 1,477 | | | $ | 1,466 | | | $ | 11 | | | 0.8 | % |
Operating margin | 20.8 | % | | 10.3 | % | | | | |
Depreciation and amortization | $ | 1,222 | | | $ | 4,048 | | | $ | (2,826) | | | (69.8) | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 38,256 | | | $ | 352,144 | | | $ | (313,888) | | | (89.1) | % |
Merchant bankcard transaction volume | 390 | | | 1,207 | | | (817) | | | (67.7) | % |
Operating income of reportable segments | $ | 43,527 | | | $ | 28,394 | | | $ | 15,133 | | | 53.3 | % |
Less: Corporate expense | (23,345) | | | (13,762) | | | (9,583) | | | (69.6) | % |
Consolidated operating income | $ | 20,182 | | | $ | 14,632 | | | $ | 5,550 | | | 37.9 | % |
Corporate depreciation and amortization | $ | 834 | | | $ | 886 | | | $ | (52) | | | (5.9) | % |
Key indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 39,828,527 | | | $ | 31,180,097 | | | $ | 8,648,430 | | | 27.7 | % |
Merchant bankcard transaction volume | 430,140 | | | 336,173 | | | 93,967 | | | 28.0 | % |
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, adversely affected commercial activity and contributed to a significant decline in economic activity in 2020, particularly in the second quarter of 2020.
Starting in mid-March 2020 through April 2020, COVID-19 had a significant negative effect on our results.31, 2021. This impact was evident in a decline in merchant bankcard volume and our revenues particularly during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020. In May 2020, as shelter-in-place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return, and revenue growth was supplemented by the acceleration of certain specialized product offerings and e-commerce payment transactions. This recovery momentum continued through the second half of 2020 and first nine months of 2021.
While there continues to be uncertainty regarding the future economic impacts of COVID-19 variants, our operating results reflect a significant recovery from the pandemic's negative effects during the first half of 2020. The pandemic's impact on the overall economy and on our comparative historical results and future results are beyond our ability to quantify predict or control.
Revenues
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Consolidated revenues
Our consolidated revenues in the third quarter of 2021 of $132.5 million increased by $23.6 million, or 21.6%, from revenues in the third quarter of 2020 of $109.0 million. Revenue growth of $24.7 million in our Consumer Payments segment was partially offset by revenue declines of $0.8 million and $0.3 million in our Commercial Payments and Integrated Partners segments, respectively.
Revenues in Consumer Payments segment
Consumer payments revenues in the third quarter 2021 of $124.0 million increased $24.7 million, or 24.9%, compared to revenues in the third quarter of 2020 of $99.3 million. This increase was driven by $30.0 million, or 33.3%, in revenue growth from our base merchant business, and was partially offset by a $5.3 million, or 58.0%, revenue decline from specialized e-commerce merchants.
Merchant bankcard volume in the third quarter of 2021 of $13.8 billion increased by $2.6 billion, or 23.0%, as compared with $11.2 billion in the third quarter of 2020. Merchant bankcard transactions of 151.5 million in the third quarter of 2021 increased by 23.6%, as compared with 122.6 million in the third quarter of 2020. Average ticket (calculated by dividing bankcard processing dollar value by the associated number of transactions processed) of $91.19 in the third quarter of 2021 decreased by 0.5%, as compared with $91.62 in the third quarter of 2020. The pandemic's influence on consumer behavior impacted the comparative volume, vertical industry mix and overall consumer spending trends.
Revenues in Commercial Payments segment
Commercial Payments revenues in the third quarter of 2021 of $4.2 million decreased by $0.8 million, or 16.3%, compared to revenues in the third quarter of 2020 of $5.0 million. Revenues in this segment are derived primarily from the accounts payable automated solutions business and from our curated managed services business.
Revenues from the accounts payable automated solutions business in the third quarter of 2021 of $1.6 million increased $0.1 million, or 3.9%, from $1.5 million in the third quarter of 2020. This increase was moderate due to increased volume from customers with lower yield. Revenues from our curated managed services business in the third quarter of 2021 of $2.6 million decreased by $0.9 million, or 25.7%, from revenues in the third quarter of 2020 of $3.5 million. This decrease was driven by a decline and curtailment in 2020 of a customer's merchant financing program in response to the COVID-19 related economic
conditions and subsequent changes in the customer's business model. However, this customer initiated a new supplier enablement program during the first quarter of 2021 which contributed $1.0 million of additional revenue in the third quarter of 2021.
Revenues in Integrated Partners segment
Integrated Partners revenues in the third quarter of 2021 of $4.3 million decreased by $0.3 million, or 7.1%, compared to revenues in the third quarter of 2020 of $4.7 million. PRET comprised $0.8 million and $4.1 million of this segment's revenues in the third quarter of 2021 and 2020, respectively. Through September 22, 2020, PRET was comprised of our RentPayment and Landlord Station businesses. RentPayment, which was sold on September 22, 2020, generated revenue of $3.9 million in the third quarter of 2020. Simultaneous with the sale of RentPayment, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services, which offers us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer. Revenues in the third quarter 2021 of $0.8 million from PRET's ongoing business increased $0.6 million, or 274.2%, compared with revenues of $0.2 million in the third quarter of 2020. Finxera Holdings, Inc. ("Finxera"), which was acquired on September 17, 2021, contributed $3.0 million to this segment’s revenues in the third quarter of 2021. Priority PayRight Health Solutions and PHOT contributed $0.6 million of this segment's revenues in the third quarter of 2021.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Consolidated revenues
Our consolidated revenues in the first nine months of 2021 of $370.9 million increased by $72.6 million, or 24.3%, from revenues in the first nine months of 2020 of $298.3 million. Revenue growth of $85.0 million in our Consumer Payments segment was partially offset by revenue declines of $5.3 million and $7.1 million in our Commercial Payments and Integrated Partners segments, respectively.
Revenues in Consumer Payments segment
Consumer payments revenues in the first nine months of 2021 of $352.0 million increased $85.0 million, or 31.8%, compared to revenues in the first nine months of 2020 of $267.0 million. This increase was driven by $87.6 million, or 35.1%, revenue growth from our base merchant business, and a $2.6 million, or 14.9%, decrease in revenue from specialized e-commerce merchants.
Merchant bankcard volume in the first nine months of 2021 of $39.6 billion increased by $8.9 billion, or 29.2%, as compared with $30.6 billion in the first nine months of 2020. Merchant bankcard transactions of 429.6 million in the first nine months of 2021 increased by 28.3%, as compared with 334.9 million in the first nine months of 2020. Average ticket of $92.09 in the first nine months of 2021 increased 0.7%, as compared with $91.47 in first nine months of 2020.
Revenues in Commercial Payments segment
Commercial Payments revenues in the first nine months of 2021 of $11.7 million decreased by $5.3 million, or 31.1%, compared to revenues in the first nine months of 2020 of $17.0 million. Revenue in this segment is derived primarily from the accounts payable automated solutions business and from our curated managed services business.
Revenue from the accounts payable automated solutions business in the first nine months of 2021 of $4.9 million increased $0.4 million, or 8.9%, from $4.5 million in the first nine months of 2020. This increase was due to increased volume from customers with lower yield. Revenue from our curated managed services business in the first nine months of 2021 of $6.8 million decreased by $5.7 million, or 45.6%, from revenue in the first nine months 2020 of $12.5 million. This decrease was driven by a decline and curtailment in 2020 of a customer's merchant financing program in response to the COVID-19 related economic conditions and subsequent changes in the customer's business model. However, this customer initiated a new supplier enablement program during the first quarter 2021 which contributed $1.7 million of additional revenue in the first nine months of 2021.
Revenues in Integrated Partners segment
Integrated Partners revenues in the first nine months of 2021 of $7.1 million, decreased by $7.1 million, or 50.1%, compared to revenues in the first nine months of 2020 of $14.2 million. PRET comprised $2.3 million and $12.6 million of this segment's revenues in the first nine months of 2021 and 2020, respectively. Through September 22, 2020, PRET was comprised of our RentPayment and our Landlord Station businesses. RentPayment, which was sold on September 22, 2020, generated revenue of $12.1 million in the first nine months of 2020. Simultaneous with the sale of RentPayment, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services, which offers us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer. Revenue in the first nine months of 2021 of $2.3 million from PRET's ongoing business increased $1.9 million, or 475.0%, compared with revenue of $0.4 million in the in the first nine months of 2020. Finxera, which was acquired on September 17, 2021, contributed $3.0 million to this segment’s revenue in the first nine months of 2021. Priority PayRight Health Solutions and PHOT contributed $1.8 million of this segment's revenue in the first nine months of 2021.
Consolidated Operating expenses
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Our consolidated operating expenses in the third quarter of 2021 of $124.3 million increased $22.4 million, or 22.0%, from consolidated operating expenses in the third quarter of 2020 of $101.9 million. This increase wasmainly driven by an increase in costsbankcard volumes fueled by increased consumer spending and acquisitions completed by the Company in 2021.
The following table presents our revenues by type for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Revenue Type: | | | | | | | |
Merchant card fees | $ | 127,952 | | $ | 107,702 | | $ | 20,250 | | 18.8 | % |
Outsourced services and other services | 7,097 | | 4,378 | | 2,719 | | 62.1 | % |
Money transmission services revenue | 16,283 | | — | | 16,283 | | nm |
Equipment | 1,907 | | 1,217 | | 690 | | 56.7 | % |
Total revenues | $ | 153,239 | | $ | 113,297 | | $ | 39,942 | | 35.3 | % |
For the three months ended March 31, 2022, our merchant card fees revenue of services. Costs of services is the third quarter of 2021 of $92.8$128.0 million increased by $17.9$20.3 million, or 23.8%18.8%, from costs of services in$107.7 million for the third quarter of 2020 of $74.9 million due to higher revenues in the third quarter ofthree months ended March 31, 2021. Depreciation and amortization expense in the third quarter of 2021 of $12.3 million increased by $2.1 million, or 20.3%, from depreciation and amortization expense in the third quarter of 2020 of $10.3 million primarily due to amortization expense from intangible assets acquired during the period. Salary and employee benefits expense in the third quarter of 2021 of $11.9 million increased $1.9 million, or 19.0%, from salary and employee benefits expense in the third quarter of 2020 of $10.0 million, primarily attributable to an increase in the number of employees and contracted resources caused by the increased level of operations and acquisitions, as well as higher stock-based compensation expense. Selling, general and administrative ("SG&A") expense in the third quarter of 2021 of $7.2 million increased $0.5 million, or 8.0%, from SG&A expense in the third quarter of 2020 of $6.7 million, primarily attributable to acquisition and corporate financing activities, tax-related assessments, and slightly higher costs for travel, tradeshows and office-related expenses. During the third quarter of 2021, SG&A expense included $1.3 million of professional fees and expenses incurred in connection with the acquisition of Finxera, as well as certain litigation activities, and $0.6 million of tax-related assessments and acquisition-related transition services. During the third quarter of 2020, SG&A expense included $0.6 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, $1.0 million of acquisition-related transition services in the Integrated Partners segment, and a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment. These expenses were partially offset by a $0.8 million legal recovery settled in the third quarter of 2020.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Our consolidated operating expenses in the first nine months of 2021 of $350.7 million increased $67.1 million, or 23.6%, from consolidated operating expenses in the first nine months of 2020 of $283.6 million. This increase was driven by higher costs of services. Costs of services in the first nine months 2021 of $264.5 million increased $60.8 million, or 29.8%, from costs of services in the first nine months 2020 of $203.7 million due to higher revenues in the first nine months of 2021. Depreciation and amortization expense in the first nine months of 2021 of $32.1 million increased by $1.2 million, or 4.0%, from depreciation and amortization expense in the first nine months of 2020 of $30.9 million due to amortization expense from intangible assets acquired during the period. Salary and employee benefits expense in the first nine months of 2021 of $31.8 million increased $2.1 million, or 7.1%, from salary and employee benefits expenses in the first nine months of 2020 of $29.7 million, primarily attributable to an increase in the number of employees and contracted resources caused by the increased level of operations, as well as higher stock-based compensation expense. SG&A expense in the first nine months of 2021 of $22.2 million increased $2.9 million, or 15.1%, from SG&A expense in the first nine months of 2020 of $19.3 million. During the first nine months of 2021, SG&A expense included $6.8 million of professional fees and expenses incurred in connection with the acquisition of Finxera, the April 2021 debt refinancing and issuance of preferred stock and other acquisition activities, as well as litigation activities, and $0.6 million of tax-related assessments and acquisition-related
transition services. During the first nine months of 2020, Corporate SG&A expense included $1.5 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, partially offset by $0.7 million of legal settlement recoveries. The Integrated Partners segment SG&A expense included $2.7 million of acquisition-related transition services, while the Consumer Payments segment expense included a $1.0 million write-down of the carrying value of an intangible asset.
Operating income (loss)
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Consolidated operating income in the third quarter of 2021 of $8.3 million increased by $1.2 million, or 17.2%, from $7.0 million in the third quarter of 2020. This increase was the result of $5.7 million of higher revenues less costs of services partially offset by $1.9 million of higher salary and employee benefits expense, $0.5 million of higher SG&A expense and $2.1 million of higher depreciation and amortization expense.
Our Consumer Payments segment contributed $14.7 million in operating income for the third quarter of 2021, an increase of $3.6 million, or 32.1%, from $11.1 million in the third quarter of 2020. This increase was the result of $6.6 million higher revenues less costs of services and $0.8 million of lower SG&A expense being partially offset by $1.3 million of higher salary and employee benefits expense and $2.5 million of higher depreciation and amortization expense.
Our Commercial Payments segment had an operating income slightly below breakeven for the third quarter of 2021 compared to operating income of $0.2 million for the third quarter of 2020. This decline was primarily the result of $0.4 million of lower revenues less costs of services being partially offset by $0.2 million of lower other operating costs, primarily salaries and employee benefits.
Our Integrated Partners segment contributed operating income of $1.2 million for the third quarter of 2021, an increase of $1.0 million compared to $0.3 million of operating income for the third quarter of 2020. The increase was driven by the September 2021 acquisition of Finxera. Revenues less costs of services decreased by $0.5 million, which was more than offset by a decrease in SG&A of $1.1 million, and a decrease in depreciation and amortization expense of $0.4 million. SG&A in the third quarter of 2020 included $1.0 million of RentPayment acquisition-related transition services. The RentPayment business was sold in September, 2020.
Corporate expenses were $7.6 million for the third quarter of 2021, an increase of $3.1 million from expenses of $4.5 million for the third quarter of 2020. This increase was driven by an increase in professional fees, selling, general and administrative expenses, and salaries and employee benefits, as described above in the prior section for Consolidated Operating expenses.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Consolidated operating income in the first nine months of 2021 of $20.2 million increased by $5.6 million, or 37.9%, from $14.6 million in the first nine months of 2020. This increase was the result of $11.8 million of higher revenues less costs of services being partially offset by $2.1 million of higher salary and employee benefits expense, $2.9 million of higher SG&A expense and $1.2 million of higher depreciation and amortization expense.
Our Consumer Payments segment contributed $42.5 million in operating income in the first nine months of 2021, an increase of $16.9 million, or 66.4%, from $25.5 million in the first nine months of 2020. This increase was the result of $21.6 million higher revenues less costs of services and $1.4 million of lower SG&A expense being partially offset by $1.9 million of higher salary and employee benefits expense and $4.1 million of higher depreciation and amortization due to an increase in intangible assets from acquisitions.
Our Commercial Payments segment had an operating loss of $0.4 million in the first nine months of 2021 compared to operating income of $1.4 million in the first nine months of 2020. This $1.8 million decline was the result of $2.3 million of lower revenues less costs of services, partially offset by $0.5 million of lower salary and employee benefits.
Our Integrated Partners segment contributed operating income of $1.5 million in the first nine months of 2021, which is consistent with $1.5 million of operating income in the first nine months of 2020. The September 2021 acquisition of Finxera resulting in $1.0 million of operating profit, and PRET's ongoing operating profit increased $0.8 million for the first nine months of 2021, which was offset by the September 2020 sale of PRET's RentPayment business, which had operating profit of $1.8 million for the first nine months of 2020.
Corporate expenses were $23.3 million in the first nine months of 2021, an increase of $9.5 million from expenses of $13.8 million in the first nine months of 2020. This increase was driven by a $5.5 million increase in professional fees, a $2.1 million increase in selling, general and administrative expenses, and a $1.9 million increase in salaries and employee benefits, as described above in the prior section for Consolidated Operating expenses.
Interest expense
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Interest expense in the third quarter of 2021 of $8.2 million decreased by $5.3 million, or 39.5%, from $13.5 million in the third quarter of 2020. This decline was primarily driven by lower rate of interest on the new loans securedmerchant bankcard volume processed by the Company on the refinancing of its credit facilities in April 2021. The new term and revolver loans carry an interest rate of 6.75% and 5.75%, respectively, as comparedpurchased residuals related to the old term loansC&H acquisition, slightly offset by rate decreases.
Outsourced services and subordinated term loans, which carried an interest rateother services revenue of 7.5% and 12.5%, respectively. The outstanding debt during the third quarter 2020 was also higher as proceeds from the RentPayment sale in September 2020 were used to fund the senior debt principal repayment. Additionally, proceeds from the issuance of our redeemable senior preferred stock in April 2021 were used to repay the subordinated debt which carried a higher rate of interest.
Interest expense included cash interest, payment-in-kind interest and amortization of deferred financing costs and debt discounts. During the third quarter of 2021 and 2020, interest expense was comprised of:
| | | | | | | | | | | | | | |
(dollars in thousands) | | Three Months Ended September 30, |
| | 2021 | | 2020 |
Cash | | $ | 8,296 | | | $ | 9,589 | |
| | | | |
Payment-in-kind | | — | | | 3,228 | |
Amortization and other | | (141) | | | 654 | |
| | $ | 8,155 | | | $ | 13,471 | |
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Interest expense in the first nine months of 2021 of $24.6$7.1 million decreased by $10.9 million, or 30.6%, from $35.5 million in the first nine months of 2020. This decline was primarily driven by the factors described above for the three months ended September 30, 2021 compared toMarch 31, 2022 increased by $2.7 million, or 61.4%, from $4.4 million for the three months ended September 30, 2020.March 31, 2021, primarily due to growth in revenue from AP automation solutions and the acceleration of certain customer programs which were scaled back in 2021 due to the impact of the COVID-19 pandemic.
Interest expense included cash interest, payment-in-kind interest and amortizationMoney transmission services revenue of deferred financing costs and debt discounts. During the first nine months of 2021 and 2020, interest expense was comprised of:
| | | | | | | | | | | | | | |
(dollars in thousands) | | Nine Months Ended September 30, |
| | 2021 | | 2020 |
Cash | | $ | 17,250 | | | $ | 27,028 | |
| | | | |
Payment-in-kind | | 2,512 | | | 6,643 | |
Amortization and other | | 4,846 | | | 1,783 | |
| | $ | 24,608 | | | $ | 35,454 | |
Debt extinguishment and modification costs
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020
During April 2021, the Company expensed unamortized deferred costs and discounts of $3.0$16.3 million associated with the retirement of our subordinated debt facility and refinancing of our senior debt facility and expensed $5.3 million of third-party costs incurred in connection with the refinancing. During September 2020 the Company expensed unamortized deferred costs and discount of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Facility. In the first quarter of 2020, the Company expensed $0.4 million of third-party costs incurred in connection with the amendment of our debt facilities.
Income taxes
We assess all available positive and negative evidencethree months ended March 31, 2022 is related 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, 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 ATI. For taxable years through 2021, the calculation of Available Taxable Income ("ATI") closely aligns with EBITDA. Commencing in 2022, the ATI limitation more closely aligns with EBITDA, without adjusting for depreciation and amortization. Any business interest in excess of the annual limitation is carried forward indefinitely. In March 2020, the 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.
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. Based on management's assessment, as of the third quarter of 2021 the Company continues to record a full valuation allowance against non-deductible interest expense. The Company will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may change in future periods.
We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. We have used a discrete effective tax rate method to calculate taxes for the fiscal three month and nine month periods ended September 30, 2021. We determined that since small changes in estimated "ordinary" income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate of the year to date tax provision for the fiscal three month and nine month periods ended September 30, 2021.
Financial Condition
The following discussion describes key changes that have occurred to our consolidated balance sheet at September 30, 2021 compared to December 31, 2020.
Total current assets of $580.7 million at September 30, 2021 increased by $444.8 million from $135.9 million at December 31, 2020 due primarily to the following factors:
Cash and cash equivalents
Unrestricted cash of $17.0 million at September 30, 2021 increased by $7.8 million from $9.2 million at December 31, 2020. The increase is largely attributable to net cash used in operating activities of $2.6 million, offset by the net impact of cash provided by (used in) investing and financing activities.
Restricted cash
Restricted cash of $17.3 million decreased by $61.6 million in the first nine months 2021, largely attributable to the transfer of customer restricted cash from a Priority-owned account to a bank-owned FBO account resulting from a change in our business practice for certain types of customer deposits and cash advance payments.
Prepaid expenses and other current assets
Prepaid expenses and other current assets of $13.3 million increased by $9.8 million in the first nine months 2021, largely attributable to acquisition of Finxera.
Settlement assets and customer account balances
Settlement assets and customer account balances of $480.3 million increased by $479.5 million in the first nine months of 2021, largely attributable to the acquisition of Finxera for cash balances in client and subscriber accounts.
Accounts receivable, net of allowance for doubtful accounts
Accounts receivable, net of $52.7 million increased by $11.3 million in the first nine months of 2021, largely attributable to higher revenues.
Total assets of $1,335.2 million at September 30, 2021 increased by $917.4 million from $417.8 million at December 31, 2020 due primarily to the $444.8 million increase in current assets and the following increases in long-term assets:
Goodwill
Goodwill of $372.7 million increased by $265.9 million in the first nine months of 2021, resulting from the acquisition of C&H Financial Services, Inc.in June 2021 and the acquisition of Finxera in September 2021.
Intangible assets
Intangible assets, netEquipment revenue of accumulated amortization, of $346.7$1.9 million for the three months ended March 31, 2022 increased by $248.6$0.7 million, or 58.3%, from $1.2 million for the three months ended March 31, 2021. The increase was primarily due to increased sales of mobile card reader equipment and other equipment from our MX product line.
Operating Expenses
Operating expenses for three months ended March 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Operating expenses | | | | | | | |
Costs of services | $ | 101,480 | | $ | 81,863 | | $ | 19,617 | | 24.0 | % |
Salary and employee benefits | 16,077 | | 9,548 | | 6,529 | | 68.4 | % |
Depreciation and amortization | 17,353 | | 9,070 | | 8,283 | | 91.3 | % |
Selling, general and administrative | 7,503 | | 8,289 | | (786) | | (9.5) | % |
Total operating expenses | $ | 142,413 | | $ | 108,770 | | $ | 33,643 | | 30.9 | % |
Costs of Services
Costs of services of $101.5 million for the three months ended March 31, 2022 increased by $19.6 million, or 23.9%, from $81.9 million for the three months ended March 31, 2021, primarily due to the corresponding increase in revenues. For the first ninethree months ended March 31, 2022, costs of 2021, resulting from acquisitionsservices as a percentage of $274.5 million,total revenues decreased to 66.2% as compared to 72.3% for the three months ended March 31, 2021. This decrease was primarily due to the impact of the Finxera acquisition on gross profit margins, partially offset by bankcard volume growth from larger partners with higher commissions and contraction of the specialized merchant acquiring portfolio.
Salary and Employee Benefits
Salary and employee benefits expense of $16.1 million for the three months ended March 31, 2022 increased by $6.6 million, or 69.5%, from $9.5 million for the three months ended March 31, 2021, primarily due to increases in headcount related to our acquisition of Finxera in September 2021, an increase in stock-based compensation and overall growth of the Company.
Depreciation and Amortization Expense
Depreciation and amortization expense of $25.9 million.$17.4 million for the three months ended March 31, 2022 increased by $8.3 million, or 91.2%, from $9.1 million for the three months ended March 31, 2021, primarily due to the amortization of finite-lived intangible assets acquired from the business combinations completed during 2021.
Deferred taxesSelling, General and Administrative
The net deferred tax assetSelling, general and administrative expenses of $3.5$7.5 million for the three months ended March 31, 2022 decreased by $43.2$0.8 million, or 9.6%, from $8.3 million for the three months ended March 31, 2021, primarily due to an increase in expenses from acquired businesses offset by one-time transaction expenses in the first nineprior year period.
Other (Expenses) Income, net
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Other (expense) income | | | | | | | |
Interest expense | $ | (11,535) | | $ | (9,168) | | $ | (2,367) | | 25.8 | % |
| | | | | | | |
| | | | | | | |
Other income (expense), net | 51 | | (269) | | 320 | | (119.0) | % |
Total other expense, net | $ | (11,484) | | $ | (9,437) | | $ | (2,047) | | 21.7 | % |
Interest Expense
Interest expense of $11.5 million for the three months ofended March 31, 2022 increased by $2.3 million, or 25.0%, from $9.2 million for the three months ended March 31, 2021, primarily resulting from a deferred tax liability recorded as part ofdue to additional borrowings to fund the acquisition of Finxera in September 2021.
Total current liabilities
Income Tax Expense
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Loss before income taxes | $ | (658) | | | $ | (4,910) | | | $ | 4,252 | | | (86.6) | % |
Income tax benefit | $ | (325) | | | $ | (2,231) | | | $ | 1,906 | | | (85.4) | % |
Effective tax rate | 49.4 | % | | 45.4 | % | | | | |
We compute our interim period income tax expense or benefit by using a forecasted EAETR and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income. The EAETR for 2022 is 51.5% and includes the income tax provision on pre-tax income and a tax provision related to establishment of $569.2 million at September 30, 2021a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2022 interest expense. The effective tax rate for 2022 increased by $420.4 millionprimarily due to an increase in the valuation allowance against certain business interest carryover deferred tax assets.
Our consolidated effective income tax rates differ from $148.8 million atthe statutory rate due to timing and permanent differences between amounts calculated under accounting principles GAAP and the U.S. tax code. The consolidated effective income tax rate for 2022 may not be indicative of our effective tax rate for future periods.
Segment Results
The Company reorganized its business segments as of December 31, 2020 due primarily2021, resulting in three segments: SMB Payments, B2B Payments and Enterprise Payments. Segment results included in the discussion below were restated in accordance with the new segment structure for comparison purposes.
The impact of the restatement of the prior period results is as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, 2021 |
| SMB Payments(1) | | B2B Payments(2) | | Enterprise Payments(3) |
Revenue: | | | | | |
Restated | $ | 109,101 | | $ | 3,500 | | $ | 696 |
Historically reported | 108,393 | | 3,500 | | 1,404 |
Difference | $ | 708 | | $ | — | | $ | (708) |
Operating Income (Loss): | | | | | |
Restated | $ | 13,289 | | $ | (409) | | $ | 164 |
Historically reported | 13,363 | | (409) | | 92 |
Difference | $ | (74) | | $ | — | | $ | 72 |
Depreciation and Amortization: | | | | | |
Restated | $ | 8,708 | | $ | 74 | | $ | — |
Historically reported | 8,579 | | 74 | | 129 |
Difference | $ | 129 | | $ | — | | $ | (129) |
(1)Compared to the following factors:Company's legacy Consumer Payments segment.
Accounts payable(2)Compared to the Company's legacy Commercial Payments segment.
(3)Compared to the Company's legacy Integrated Partners segment.
SMB Payments
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Revenue | $ | 129,959 | | $ | 109,101 | | $ | 20,858 | | 19.1 | % |
Operating expenses | 117,473 | | 95,812 | | 21,661 | | 22.6 | % |
Operating income | $ | 12,486 | | $ | 13,289 | | $ | (803) | | (6.0) | % |
Operating margin | 9.6 | % | | 12.2 | % | | | | |
Depreciation and amortization | $ | 10,824 | | $ | 8,708 | | $ | 2,116 | | 24.3 | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 14,076,847 | | $ | 11,883,166 | | $ | 2,193,681 | | 18.5 | % |
Merchant bankcard transaction volume | 145,948 | | 127,583 | | 18,365 | | 14.4 | % |
Revenue
Revenue from our SMB Payments segment was $130.0 million for the three months ended March 31, 2022, compared to $109.1 million for the three months ended March 31, 2021. The increase of $20.9 million, or 19.2%, was primarily driven by increased merchant bankcard volume. The Company's revenue from the SMB Payments segment as a percentage of merchant bankcard processing dollar value during 2022 decreased to 0.88% from 0.90% during 2021. The decrease is primarily driven by a decrease in revenue from the specialized merchant acquiring portfolio offset by an increase in other fees revenues.
Operating Income
Operating income from our SMB Payments segment was $12.5 million for the three months ended March 31, 2022, compared to $13.3 million for the three months ended March 31, 2021. The decrease of $0.8 million, or 6.0%, was primarily driven by the increase in volumes from partners with higher commissions.
Depreciation and accrued expensesAmortization
Accounts payableDepreciation and accrued expensesamortization expense from our SMB Payments segment was $10.8 million for the three months ended March 31, 2022, compared to $8.7 million depreciation expense for the three months ended March 31, 2021. The increase of $42.1$2.1 million increasedwas primarily driven by $12.3the amortization of acquired intangibles resulting from the C&H and Wholesale Payments, Inc. acquisitions.
B2B Payments
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Revenue | $ | 5,925 | | $ | 3,500 | | $ | 2,425 | | 69.3 | % |
Operating expenses | 5,516 | | 3,909 | | 1,607 | | 41.1 | % |
Operating income (loss) | $ | 409 | | $ | (409) | | $ | 818 | | (200.0) | % |
Operating margin | 6.9 | % | | (11.7) | % | | | | |
Depreciation and amortization | $ | 73 | | $ | 74 | | $ | (1) | | (1.4) | % |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 108,407 | | $ | 63,650 | | $ | 44,757 | | 70.3 | % |
Merchant bankcard transaction volume | 88 | | 39 | | 49 | | 125.6 | % |
Revenue
Revenue from our B2B Payments segment was $5.9 million for the three months ended March 31, 2022, compared to $3.5 million for the three months ended March 31, 2021. The increase of $2.4 million, or 68.6%, was primarily driven by $1.5 million, or 42.9%, as a result of the acceleration of certain programs in the first nine months ofManaged Services business operations that were scaled back in 2021 as a result of the acquisitionCOVID-19 pandemic and volume growth in the CPX business. The remaining increase of Finxera and$0.9 million, or 25.7%, is from the recognition of certain revenues for which recovery became probable during the current quarter.
Operating Income (Loss)
Operating income from our B2B Payments segment was $0.4 million for the three months ended March 31, 2022, compared to an operating loss of $(0.4) million for the three months ended March 31, 2021. The increase in operations.
Settlement and customer account obligations
Settlement and customer account obligations of $489.3$0.8 million, at September 30, 2021 increased by $416.4 million from $72.9 million at December 31, 2020 largelyor 200.0%, was primarily attributable to obligations related to customer account balances of $479.5 million from the Finxera acquisition offset by a decreaseincreases in customer restricted cash from a Priority-owned account to a bank-owned FBO account resulting from a change in our business practice for certain types of customer cash advance activities. The increase in customer account obligations is directly correlated with the increase in customer account balances.revenue.
Enterprise Payments
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended March 31, | | |
| 2022 | | 2021 | | $ Change | | % Change |
Revenue | $ | 17,355 | | $ | 696 | | $ | 16,659 | | nm |
Operating expenses | 12,861 | | 532 | | 12,329 | | nm |
Operating income | $ | 4,494 | | $ | 164 | | $ | 4,330 | | nm |
Operating margin | 25.9 | % | | 23.6 | % | | | | |
Depreciation and amortization | $ | 6,197 | | $ | — | | $ | 6,197 | | nm |
Key Indicators: | | | | | | | |
Merchant bankcard processing dollar value | $ | 216,398 | | $ | — | | $ | 216,398 | | nm |
Merchant bankcard transaction volume | 372 | | — | | 372 | | nm |
Current portion of long-term debtRevenue
Current portion of long-term debt of $6.2Revenue from our Enterprise Payments segment was $17.4 million at September 30, 2021 decreased by $13.2 million from $19.4 million at December 31, 2020 due to the April 2021 debt refinancing, which resulted in an updated repayment schedule. The April 2021 debt refinancing is discussed below in the subsequent section for Liquidity and Capital Resources.
Total liabilities of $1,203.3 million at September 30, 2021 increased by $686.9 million from $516.4 million at December 31, 2020 due primarily to the $420.4 million increase in current liabilities and the following changes in long-term liabilities:
Long-term debt, net of current portion, discounts and debt issuance costs
Long-term debt of $620.0 million, including borrowings under the revolving credit facility of $30.0 million at September 30, 2021 increased by $262.1 million from $357.9 million at December 31, 2020 due largely to the April 2021 debt refinancing and additional borrowings for the funding of the Finxera and the C&H Financial Services, Inc. acquisitions.
Redeemable senior preferred stock
Redeemable senior preferred stock of $205.3 million at September 30, 2021 increased by $205.3 million duethree months ended March 31, 2022, compared to the issuance and sale Redeemable Senior Preferred Stock. The issuance of redeemable senior preferred stock is discussed below in the subsequent section for Liquidity and Capital Resources.
The Company issued 150.0 million of redeemable senior preferred stock along with detachable 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 $0.001 in April 2021. In September 2021, an additional $75.0 million of redeemable senior preferred stock was issued as part of the September 17, 2021 Finxera acquisition. The Company received a commitment from the investors to purchase up to an additional $25.0 million of redeemable senior preferred stock to provide financing for other permitted acquisitions. Proceeds from the issuance of the redeemable senior preferred stock of $211.0 million (net of discount of $5.9 million and issuance costs of $7.4 million) were allocated to the redeemable senior preferred stock $199.6 million and to the warrants $11.4 million.
Stockholders' deficit
Stockholders' deficit of $73.4 million at September 30, 2021 decreased by $25.2 million from a deficit of $98.6 million at December 31, 2020. Accumulated deficit of $114.7 million increased $12.7 million in the first nine months of 2021 due to the net loss of $12.7$0.7 million for ninethe three months ended September 30, 2021.
Additional paid-in capital of $44.6 million increased by $38.8 million in the first nine months ofMarch 31, 2021. The increase of $16.7 million was primarily driven by a $34.4revenues contributed by the Finxera business acquired in September 2021.
Operating Income
Operating income from our Enterprise Payments segment was $4.5 million for the three months ended March 31, 2022, compared to $0.2 million for the three months ended March 31, 2021. The increase of $4.3 million was primarily driven by operating income contributed by the Finxera business acquired in proceedsSeptember 2021.
Depreciation and Amortization
Depreciation and amortization expense from our Enterprise Payments segment was $6.2 million for the issuancethree months ended March 31, 2022, compared to no depreciation expense for the three months ended March 31, 2021. The increase of 7,551,354 common shares$6.2 million was primarily driven by the amortization of acquired intangibles resulting from the Finxera merger, $11.4 million from the issuance of detachable warrants, $10.0 million from the issuance of common stockacquisition in redemptions of non-controlling interest preferred units, $2.2 million from stock-based compensation and $1.2 million from stock option exercises. These increases were offset by a decrease of $10.8 million related to non-controlling interest preferred unit redemptions and a decrease of $9.7 million for dividends to redeemable senior preferred stockholders, including $1.0 million of discount accretion. The preferred unit redemption is discussed below in PHOT Preferred Unit Redemption – Distribution to Non-Controlling Interests.September 2021.
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 facilityagreement are sufficient to meet our working capital requirements for at least the next twelve months. This is based upon management's estimates and assumptions, including utilizing the most currently available information regarding the effects of the COVID-19 pandemic on our financial results.
Actual future results could differ materially, as the magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and ultimately could negatively impact our liquidity and capital resources.
Our principal uses of cash are to fund business operations and administrative costs, and debt service.to service our debt.
Our working capital, defined as current assets less current liabilities, was $11.5$18.9 million at September 30, 2021March 31, 2022 and $(13.0)$19.6 million at December 31, 2020, respectively. At September 30, 2021,2021. As of March 31, 2022, we had cash totaling $13.6 million compared to $20.3 million at December 31, 2021. These cash balances do not include restricted cash of $13.6 million and $28.9 million at March 31, 2022 and December 31, 2021, respectively, which reflects cash accounts holding customer settlement funds and cash reserves for potential losses. The current portion of long-term debt included in current liabilities was $6.2 million at March 31, 2022 and December 31, 2021.At March 31, 2022, we had availability of approximately $30.0 million outstanding under the $40.0 millionour revolving credit facility of our Senior Credit Agreement.arrangement.
The following tablestable and narrativediscussion reflect our changes in cash flows for the comparative ninethree month periods ended September 30, 2021 and 2020:periods.
| (dollars in thousands) | | Nine Months Ended September 30, | |
| | | 2021 | | 2020 | | Three Months Ended March 31, |
Net cash (used in) provided by: | | | | | |
(in thousands) | | (in thousands) | 2022 | | 2021 | |
Net cash provided by (used in): | | Net cash provided by (used in): | | | | |
Operating activities | Operating activities | | $ | (2,567) | | | $ | 10,431 | | Operating activities | $ | 9,613 | | | $ | 9,100 | | |
Investing activities | Investing activities | | (462,878) | | | 168,990 | | Investing activities | (5,711) | | | (5,691) | | |
Financing activities | Financing activities | | 871,010 | | | (171,056) | | Financing activities | 2,538 | | | (26,769) | | |
Net increase in cash and cash equivalents, and restricted cash | | $ | 405,565 | | | $ | 8,365 | | |
Net increase in cash and cash equivalents and restricted cash | | Net increase in cash and cash equivalents and restricted cash | $ | 6,440 | | | $ | (23,360) | | |
Cash (Used In) Provided Byby Operating Activities
Net cash used in operating activities was $2.6 million in the first nine months of 2021 compared to net cash provided by operating activities of $10.4was $9.6 million and $9.1 million for the three months March 31, 2022 and 2021, respectively. The $0.5 million, or 5.5%, increase in the first nine months of 2020. The decrease is2022 was primarily driven by cash generated from the paymentoperations of PIK interest andthe Company, offset by changes in operating assets and liabilities.liabilities
Cash (Used In) Provided byUsed in Investing Activities
Net cash used in investing activities was $462.9$5.7 million infor both the first ninethree months 2021 compared toended March 31, 2022 and 2021. For the three months ended March 31, 2022, net cash provided byused in investing activities included $2.4 million related to the funding of $169.0new loans to ISOs, additions to property, equipment and software of $2.4 million, and acquisitions of intangible assets of $0.9 million. For three months ended March 31, 2021, net cash used in the first nine monthsinvesting activities included $2.9 million of 2020. Cashcash used to acquire intangiblefund a portfolio assets amounted to $48.2acquisition and $2.8 million in the first nine months of 2021 compared to $4.4 million in the first nine months of 2020. Cash used to acquire businesses in the first nine months of 2021 amounted to $407.1 million. Cashcash used to acquire property, equipment and software amounted to $7.5 million in the first nine months of 2021 and $6.0 million in the first half of 2020. software.
Cash Provided Byby (Used In)in) Financing Activities
Net cash provided by financing activities was $871.0$2.5 million for the three months ended March 31, 2022, compared to $26.8 million of cash used in financing activities for the three months ended March 31, 2021. The net cash provided by financing activities for three months ended March 31, 2022 included $6.6 million of cash used for the repayment of debt, $3.5 million of cash dividends paid to redeemable senior preferred stockholders and $0.2 million of cash used for other financing activities, offset by changes in the first nine months compared tonet obligations for funds held on the behalf of customers of $12.7 million. The net cash used in financing activities for the three months ended March 31, 2021 included $22.5 million of $171.1 millioncash used related to changes in the first nine monthsnet obligations for funds held on behalf of 2020. In the first nine months of 2021, total debt principal repayments were $359.9 million; proceeds from the issuance of long-term debt, net of deferred discountscustomers and debt issuance costs, were $598.2 million; proceeds from borrowings under the revolving credit facility were $30.0 million; proceeds from issuance of senior preferred equity, net of discounts and issuance costs, were $211.0 million cash portion of dividend paid to redeemable senior preferred stockholder was $4.0 million; cash portion of preferred unit redemption to non-controlling interests was $0.8 million, proceeds from exercise of stock options was $1.2 million and the Company repurchased 162,715 shares of its common stock at a cost of $1.0 million under its share repurchase program. In the first nine months of 2020, senior debt principal repayments of $109.5 million, debt modification costs of $2.7 million , $0.5$4.9 million of net repayments undercash used for the revolving credit facility, redemptionrepayment of redeemable non-controlling interestsdebt, slightly offset by $0.6 million of $5.7 million and profit distributions to non-controlling interests of $45.3 million. In the first nine months of 2021, cash provided by other financing activities included balances in customer accounts of $396.3 million resulting from the acquisition of Finxera.
Long-Term Debt at September 30, 2021
On April 27, 2021, the Company refinanced its previous credit facilities by entering into a new Credit and Guaranty Agreement ("the Credit Agreement"). The Credit Agreement, is comprised of a senior secured first lien term loan facility in an aggregate principal amount of $300.0 million (the "Initial Term Loan", or "Term Loan"), a senior secured revolving credit facility in an aggregate amount not to exceed $40.0 million outstanding at any time and a senior secured first lien delayed draw term loan facility in an aggregate principal amount of $290.0 million ("Delayed Draw Term Loan", or "Term Loan"), the proceeds of which may be used to fund the Company's acquisition of Finxera. The Term Loan's interest rate is LIBOR (1.0% floor) plus 5.75%, which is a 75 basis point reduction from LIBOR (1.0% floor) plus 6.5% under the prior senior indebtedness.
As of September 30, 2021,March 31, 2022, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $626.2$604.6 million, compared to $377.3$610.3 million at December 31, 2020,2021, resulting in an increasea decrease of $248.9$5.7 million. The debt balance at September 30, 2021March 31, 2022 consisted of $596.2$615.3 million outstanding under the Term Loanterm facility and $30$10.0 million outstanding under the revolving credit facility.facility, offset by $20.7 million of unamortized debt discounts and issuance costs. Minimum amortization of the Initial Term Loanterm facility are equal quarterly installments in aggregate annual amounts equal to 1.0% of original principal, with the balance paid upon maturity. The Term Loanterm facility matures in April 2027 and the revolving credit facility expires in April 2026.
The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Loan Partiesloan 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 outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving facility thereunder, the Loan Partiesloan parties are required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the Credit Agreement as the ratio of consolidated total debt to the Consolidated Adjusted EBITDA (as defined in the Credit Agreement).Ratio. If applicable, the maximum permitted Total Net Leverage Ratio isis: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022,2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 20232023; and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.
As of September 30, 2021, we wereMarch 31, 2022, the Company was in compliance with our financial covenants. Total Net Leverage Ratio, Consolidated Total Debt and Consolidated Adjusted EBITDA are defined in the Credit and Guaranty Agreement and are summarized below:
•The Total Net Leverage Ratio means, at any date of determination, the ratio of Consolidated Total Debt for such date, to Consolidated Adjusted EBITDA.
•Consolidated Total Debt is the aggregate principal amount of indebtedness minus 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)(x) of the Consolidated Adjusted EBITDA definition, minus any applicable items determined in accordance with clauses (ii)(a) through (ii)(h) of the Consolidated Adjusted EBITDA.
Under the provisions of the agreement, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.
Consolidated Adjusted EBITDA is a non-GAAP liquidity measure. For determining the Total Net Leverage Ratio at September 30, 2021, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from the Credit and Guaranty Agreement executed on April 27, 2021:
| | | | | |
(in thousands) | Last Twelve Months Ended |
| September 30, 2021 |
Consolidated Net Income (GAAP) | $ | (13,709) | |
Applicable Adjustments: | |
| |
Interest expense (clause (i)(b)) | 33,992 | |
Depreciation and amortization (clause (i)(d)) | 42,012 | |
Income tax expense (clause (i)(c)) | (1,971) | |
Non-cash stock-based compensation (clause (i)(j)) | 3,153 | |
Acquisition transition services (clause (i)(k)) | (50) | |
Debt extinguishment and modification expenses (clause (i)(h)) | 8,322 | |
Impairment of intangible asset (clause (i)(f)) | 773 | |
Provision for allowance for note receivable (clause (i)(f)) | 467 | |
Change in fair value of contingent consideration for business combinations (clause (ii)(a)) | (360) | |
| |
Certain legal fees and expenses (clause (i)(m)) | 4,778 | |
Litigation settlement recoveries (clause (i)(k)) | 3 | |
Professional, accounting and consulting fees (clause (i)(k)) | 2,404 | |
Other professional and consulting fees (clause (i)(h)) | 1,693 | |
Other adjustments (clause (i)(k)) | 965 | |
Pro forma impact of disposal | 99 | |
Pro forma impact of acquisitions and transactions | 65,274 | |
Consolidated Adjusted EBITDA (non-GAAP) | $ | 147,845 | |
At September 30, 2021, the Total Net Leverage Ratio was 4.27:1.00, calculated as follows:
| | | | | |
(in thousands, except ratio) | September 30, 2021 |
Consolidated Total Debt: | |
Current portion of long-term debt | $ | 6,200 | |
Long-term debt, net of discounts and deferred financing costs | 619,957 | |
Unamortized debt discounts and deferred financing costs | 22,293 | |
| 648,450 | |
Less unrestricted cash | (16,974) | |
Consolidated Net Debt | $ | 631,476 | |
| |
| |
Total Net Leverage Ratio | 4.27x |
Redeemable Senior Preferred Stock.
On April 27, 2021, we entered into the Securities Purchase Agreement with credit funds managed by certain affiliates of Ares Management Corporation ("Investors"), pursuant to which we issued and sold 150,000 shares of Redeemable Senior Preferred Stock, par value $0.001 per share, at a purchase price of $150.0 million, or $1,000 per Redeemable Senior Preferred Share, less a $5.0 million discount and 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 $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.
In addition on September 17, 2021 the Company issued an additional 75,000 shares of Redeemable Senior Preferred Stock, upon the consummation of the Company's acquisition of Finxera for a purchase price of $75.0 million, or $100 per share, less a discount of $0.9 million. The Company may also issue and sell to the Investors up to an additional 25,000 shares of Redeemable Senior Preferred Stock, at a purchase price of $1,000 per share, less a discount of $0.3 million, within 18 months after September 17, 2021, upon the completion of a permitted acquisition and satisfaction of certain customary closing conditions.
Proceeds from the sale of the Redeemable Senior Preferred Stock were used to repay subordinated debt, pay certain fees and expenses relating to the debt refinancing and the Securities Purchase Agreement, fund an April 2021 asset acquisition and fund the Finxera acquisition in September 2021.
On April 27, 2021 the Company entered into a Registration Rights Agreement, by and among the Company and the Investors pursuant to which the Company agreed to provide certain registration rights with respect to the shares of Common Stock issuable upon exercise of the Warrants (the "Registrable Securities").
Under the Registration Rights Agreement, the holders of the Registrable Securities were granted piggyback rights to be included in certain underwritten offerings of Common Stock and the right to demand a shelf registration of Registrable Securities.
The Redeemable Senior Preferred Stock has a quarterly cumulative preferred dividend at LIBOR plus 12.0%, with a cash portion at the discretion of the Company at LIBOR (1.0% floor) plus 5.0% and accumulated portion at 7.0%. The dividend is subject to a 2.0% increase if the Company elects the cash portion to be added to accumulated. There are scheduled dividend rate increases after the fifth anniversary of issuance. In the first nine months of 2021, the Company's Board of Directors declared and authorized the second and third quarter 2021 dividends with a 6.0% cash portion of $1.6 million and $2.4 million, respectively, and a 7.0% accumulated portion of $1.8 million and $2.9 million respectively. The Company paid the dividend on June 30, 2021 and September 30, 2021. Additionally, the Company recorded $0.5 million of discount accretion.
Impact of COVID-19 Pandemic on Liquidity and Capital Resources
Our current assessment is that we anticipate cash on hand, funds generated from operations and available borrowings under our revolving credit facility to be sufficient to meet our working capital requirements, and that we will remain in compliance with our debt covenants. However, the ongoing magnitude, duration and effects of the COVID-19 pandemic on our future results of operation, cash flows and financial condition are difficult to predict at this time, and our current assessment is subject to material revision.
Related Party Transactions
PHOTPreferred Unit Redemption - Distribution to Non-Controlling Interests
In February 2019, PHOT, a subsidiary of the Company, received a contribution of substantially all of the operating assets eTab and Cumulus under asset contribution agreements. PHOT is a part of the Company's Integrated Partners reportable segment. No material liabilities were assumed by PHOT. These contributed assets were composed substantially of technology-related assets. Prior to these transactions, eTab was 80.0% owned by the Company's CEO. 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 NCIs in PHOT. Under these redeemable NCIs, the contributors were eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per year) on any undistributed preferred equity interest ("Total Preferred Equity Interest"). Once the Total Preferred Equity Interest is distributed to the holders, the redeemable NCIs cease to exist. The Company's CEO initially owned 83.3% of the redeemable NCIs, which ownership interest was subsequently reduced to 35.3% through the CEO's disposition of interests to others.
At the time of contribution, the Company determined that the contributor's carrying value of the eTab and Cumulus net assets (as a common control transaction under GAAP) were not material. Under the guidance for a common control transaction, the contribution of the eTab and Cumulus 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 were not adjusted to reflect the historical results attributable to the eTab net assets. For the period from February 1, 2019 through October 31, 2020, a total of $250,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this same amount was distributed in cash to the NCIs during the same period.
In November 2020, the Company agreed with the contributors to an exchange of shares of common stock of the Company, or cash, for the remaining undistributed Total Preferred Equity Interests of $4.8 million. An exchange valuation for the Company's common stock was established as of November 12, 2020 at the prior 20-day volume weighted average price of $2.78 per share. The exchange was contingent upon receiving approval of the Company's lenders; therefore, the binding exchange agreements were not entered into until after lender approval was received in April 2021 in connection with the debt refinancing. The April 2021 debt refinancing is discussed above in the prior section for Liquidity and Capital Resources.
In May 2021, the Company entered into exchange agreements and completed the exchange of 1,428,358 shares of common stock and $814,219 of cash for the Total Preferred Equity Interests. The CEO received 605,623 shares of common stock of the Company in exchange for his 35.3% interest, and the Company's Executive Vice President of M&A and Corporate Development received 413,081 shares of common stock of the Company in exchange for her 24.1% interest. Subsequent to establishing the common stock valuation in November 2020 and the date of exchange in May 2021, the Company's common stock price appreciated to $7.75 per share. The Company's financial statements for the three months ended June 30, 2021 reflect this exchange as a distribution to non-controlling interests at an appreciated common stock value of $6.975 per share, which incorporates a 10% liquidity discount of $0.775 per share due to Rule 144 trading restrictions. Therefore, the total distribution amounted to $10.8 million, comprised of $10.0 million of common stock and $0.8 million of cash.
Off-Balance Sheet Arrangements
We have not entered into any other 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.
Commitments and Contractual Obligations
Commitments
See Note 2. Acquisitionsand Note 12.Commitments and Contingencies, to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of September 30, 2021 or December 31, 2020.Contractual Obligations
Except as described in the following,there have been no significant changes to our contractual obligations compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2020. Changes in the minimum annual spend commitments with third-party processor partners and contingent consideration for acquisitions are further described in Note 12.Commitments and Contingencies. For an updated schedule of debt repayments under the Credit and Guaranty Agreement executed on April 27, 2021 and amended on September 17, 2021, see Note 9.Debt Obligations. Also, at December 31, 2020, the Company accrued approximately $6.2 million for the remaining cash consideration it estimates it will be required to pay under an assignment of merchant portfolio rights agreement and related reseller agreement it executed with a third-party in October 2019. Payments are required to be made on a quarterly basis through September 30, 2022. The Company continues to review its estimate of the remaining consideration to be paid and will adjust its obligation accordingly if deemed necessary. As of September 30, 2021, the only change in the amounts accrued was for the required payments made in 2021.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principlesGAAP for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods. Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K.10-K for the year ended December 31, 2021. There have been no material changes to these critical accounting policies and estimates as of September 30, 2021.March 31, 2022.
Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards BoardFASB or other standards setting bodies that may affect our current and/or future financial statements. See See Note 1,.Basis of Presentation and Significant Accounting Policies, to our Unaudited Condensed Consolidated Financial Statements included in Part 1,I, Item 1 of this Quarterly Report on Form 10-Q, for a discussion of recently issued accounting pronouncements not yet adopted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2020.2021. Our exposures to market risk have not changed materially since December 31, 2020.2021.
Item 4. 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 September 30, 2021.March 31, 2022. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021.March 31, 2022.
b) (b)Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the third quarter of 2021three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain legal proceedings and claims, which occurarise in the normalordinary course of our business. WeIn the opinion of the Company, based on consultations with internal and external counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not currently a partyexpected to any legal proceedings that we believe would have a material adverse effect on our financial position, 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.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report under Part I, Item 1A "Risk Factors" because these risk factors may affect our operations and financial results.
The risks described in the Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The following table presents information with respect toCompany's purchases made by the Company of its common stock during the three months ended September 30, 2021 (shares are in whole units):March 31, 2022 were as follows:
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Period | | Total Number of Shares Purchased | | 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(1) |
July 1-31, 2021 | | — | | $ | — | | | — | | — |
August 1-31, 2021 | | 44,911 | | 5.79 | | | 44,911 | | 955,089 |
September 1-30, 2021 | | 117,804 | | $ | 6.48 | | | 117,804 | | 0 |
Total | | 162,715 | | | | | 162,715 | | | |
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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 |
January 1-31, 2022 | | — | | $ | — | | | — | | — |
February 1-28, 2022 | | 26,671 | | $ | 5.86 | | | — | | — |
March 1-31, 2022 | | — | | $ | — | | | — | | — |
Total | | 26,671 | | | | | — | | | |
(1)In August 2021, Priority's BoardIncludes shares (in whole units) withheld to satisfy employees' tax withholding obligations related to the vesting of Directors authorized a $10.0 million share repurchase program (the "2021 Share Repurchase Program"). Under this programrestricted stock awards, which was determined based on the Company may purchase up to 1 million shares of its common stock through openfair market transactions, unsolicited or solicited privately negotiated transactions, or otherwise in accordance with all applicable securities laws and regulations. The 2021 Share Repurchase Program expiresvalue on August 17, 2022 and may be discontinued at any time. The Company terminated the 2021 Share Repurchase Program effective as of the close of business on September 23, 2021.vesting date.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
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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 | |
101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | * | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Filed herewithherewith.
** Furnished herewithherewith.
† Indicates exhibits that constitute management contracts or compensation plans or arrangements.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on theirits behalf by the undersigned thereunto duly authorized.
Priority Technology Holdings, Inc.
PRIORITY TECHNOLOGY HOLDINGS, INC.
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November 15, 2021May 11, 2022 | /s/ THOMASThomas C. PRIOREPriore Thomas C. Priore President, Chief Executive Officer and Chairman (Principal Executive Officer) |
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November 15, 2021May 11, 2022 | /s/ MICHAEL T. VOLLKOMMERMichael Vollkommer Michael T. Vollkommer Chief Financial Officer (Principal Financial Officer) |