SEC Form 10-Q filed by Priority Technology Holdings Inc.
$PRTH
Business Services
Consumer Discretionary
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2024
OR
For the transition period from to
Commission file number: 001-37872
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant's telephone number, including area code: ( | ||||||||
| Not applicable | ||||||||
| (Former name, former address and former fiscal year, if changed since last report) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of May 3, 2024, the number of the registrant's Common Stock outstanding was 80,065,145 .
Table of Contents
| Page | |||||
i
| Term | Definition | |||||||
| 2018 Plan | 2018 Equity Incentive Plan | |||||||
| 2021 Stock Purchase Plan | Priority Technology Holdings, Inc. 2021 Employee Stock Purchase Plan | |||||||
| 2021 Share Repurchase Program | Priority Technology Holdings, Inc. 2021 Share Repurchase Program | |||||||
| AOCI | Accumulated other comprehensive income/loss | |||||||
| AP | Accounts payable | |||||||
| ASC | Accounting Standards Codification | |||||||
| APIC | Additional paid-in capital | |||||||
| Amended Certificate of Designation | Amended and Restated Certificate of Designation of Senior Preferred Stock effective as of June 30, 2023 | |||||||
| ASU | Accounting Standards Update | |||||||
| B2B | Business-to-business | |||||||
| B2C | Business-to-consumer | |||||||
| CEO | Chief Executive Officer | |||||||
| CFO | Chief Financial Officer | |||||||
| Common Stock | The Company's Common Stock, par value $0.001 | |||||||
| Credit Agreement | Credit and Guaranty Agreement with Truist Bank dated as of April 27, 2021 (as amended) | |||||||
| EAETR | Estimated annual effective tax rate | |||||||
| ESPP | Employee Stock Purchase Plan | |||||||
| Exchange Act | Securities Exchange Act of 1934 | |||||||
| FASB | Financial Accounting Standards Board | |||||||
| FDIC | Federal Deposit Insurance Corporation | |||||||
| FBO | For the benefit of | |||||||
| FI | Financial institution | |||||||
| Finxera | Finxera Holdings, Inc. | |||||||
| GAAP | U.S. Generally Accepted Accounting Principles | |||||||
| ISO | Independent sales organization | |||||||
| ISV | Independent software vendor | |||||||
| LIBOR | London Interbank Offered Rate | |||||||
| NCI | Non-controlling interests in consolidated subsidiaries | |||||||
| PHOT | Priority Hospitality Technology, LLC | |||||||
| Plastiq | Acquisition of Plastiq, Inc. and certain of its affiliates | |||||||
| PRTH | Priority Technology Holdings, Inc. | |||||||
| Revolving credit facility | $65.0 million line issued under the Credit Agreement | |||||||
| SEC | Securities and Exchange Commission | |||||||
| SOFR | Secured Overnight Financing Rate | |||||||
| SMB | Small to medium-sized businesses | |||||||
| Term facility | $620.0 million senior secured term loan facility issued under the Credit Agreement (including $320.0 million delayed draw facility) | |||||||
ii
Priority Technology Holdings, Inc.
Unaudited Consolidated Balance Sheets
(in thousands, except share data)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| March 31, 2024 | December 31, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
Current portion of notes receivable, net of allowance of $ | |||||||||||
| Settlement assets and customer/subscriber account balances | |||||||||||
| Total current assets | |||||||||||
| Notes receivable, less current portion | |||||||||||
| Property, equipment and software, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities, Redeemable Senior Preferred Stock, Redeemable NCI, and Stockholders' Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Accrued residual commissions | |||||||||||
| Customer deposits and advance payments | |||||||||||
| Current portion of long-term debt | |||||||||||
| Settlement and customer/subscriber account obligations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion, discounts and debt issuance costs | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Redeemable senior preferred stock, net of discounts and issuance costs: | |||||||||||
Redeemable senior preferred stock, $ | |||||||||||
| Redeemable non-controlling interests in consolidated subsidiary | |||||||||||
| Stockholders' deficit: | |||||||||||
Preferred stock, $ | |||||||||||
Common Stock, $ | |||||||||||
Treasury stock at cost, | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' deficit attributable to stockholders of PRTH | ( | ( | |||||||||
| Non-controlling interests in consolidated subsidiaries | |||||||||||
| Total stockholders' deficit | ( | ( | |||||||||
| Total liabilities, redeemable senior preferred stock, redeemable NCI and stockholders' deficit | $ | $ | |||||||||
1
Priority Technology Holdings, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues | $ | $ | |||||||||
| Operating expenses | |||||||||||
| Cost of revenue (excludes depreciation and amortization) | |||||||||||
| Salary and employee benefits | |||||||||||
| Depreciation and amortization | |||||||||||
| Selling, general and administrative | |||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Other (expense) income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Other income, net | |||||||||||
| Total other expense, net | ( | ( | |||||||||
| Income (loss) before income taxes | ( | ||||||||||
| Income tax expense (benefit) | ( | ||||||||||
| Net income (loss) | ( | ||||||||||
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | ( | ( | |||||||||
| Less: Return on redeemable NCI in consolidated subsidiary | ( | ||||||||||
| Net loss attributable to common stockholders | ( | ( | |||||||||
| Other comprehensive loss | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
| Loss per common share: | |||||||||||
| Basic and diluted | $ | ( | $ | ( | |||||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic and diluted | |||||||||||
2
Priority Technology Holdings, Inc.
Unaudited Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interest
(in thousands)
| Common Stock | Treasury Stock | APIC | AOCI | Accumulated Deficit | Deficit Attributable to Stockholders | NCIs | Total | |||||||||||||||||||||||||
| Shares | $ | Shares | $ | |||||||||||||||||||||||||||||
| December 31, 2023 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Equity-classified stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| ESPP compensation and vesting of stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes | ( | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||
| Exchange for PHOT redeemable NCI | ( | ( | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||
| Dividends on redeemable senior preferred stock | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||
| Accretion of redeemable senior preferred stock | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||
| Issuance of profit interests/common equity in subsidiaries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||
| Reclassification of negative additional paid in capital | — | — | — | — | — | ( | — | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| March 31, 2024 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Common Stock | Treasury Stock | APIC | AOCI | Accumulated Deficit | Deficit Attributable to Stockholders | NCIs | Total | |||||||||||||||||||||||||
| Shares | $ | Shares | $ | |||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | ( | $ | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Equity-classified stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| ESPP compensation and vesting of stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes | ( | — | ( | — | — | — | ( | — | ( | |||||||||||||||||||||||
| Dividends on redeemable senior preferred stock | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||
| Accretion of redeemable senior preferred stock | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||
| Adjustment to NCI | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||
| March 31, 2023 | $ | $ | ( | $ | $ | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||
3
Priority Technology Holdings, Inc.
Unaudited Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interest
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of assets | |||||||||||
| Stock-based, ESPP and incentive units compensation | |||||||||||
| Amortization of debt issuance costs and discounts | |||||||||||
| Deferred income tax | ( | ( | |||||||||
| Change in contingent consideration | |||||||||||
| Other non-cash items, net | ( | ||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Income taxes (receivable) payable | |||||||||||
| Notes receivable | ( | ( | |||||||||
| Accounts payable and other accrued liabilities | |||||||||||
| Customer deposits and advance payments | |||||||||||
| Other assets and liabilities, net | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, equipment and software | ( | ( | |||||||||
| Notes receivable, net | ( | ||||||||||
| Acquisitions of assets and other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Repayments of borrowings under revolving credit facility | ( | ||||||||||
| Repurchases of Common Stock and shares withheld for taxes | ( | ( | |||||||||
Dividends paid to redeemable senior preferred stockholders1 | ( | ( | |||||||||
| Settlement and customer/subscriber accounts obligations, net | |||||||||||
| Payment of contingent consideration related to business combination | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net change in cash and cash equivalents and restricted cash: | |||||||||||
| Net (decrease) increase in cash and cash equivalents, and restricted cash | ( | ||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
4
Priority Technology Holdings, Inc.
Unaudited Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interest
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Reconciliation of cash and cash equivalents, and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Cash and cash equivalents included in settlement assets and customer/subscriber account balances (see Note 4) | |||||||||||
| Total cash and cash equivalents, and restricted cash | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Forfeiture of liability-classified award | $ | $ | |||||||||
| Acquisition of intangible asset | $ | $ | |||||||||
| Issuance of NCI | $ | $ | |||||||||
(1)The dividend payable for the quarter ended March 31, 2024, was paid on April 1, 2024.
5
Priority Technology Holdings, Inc.
Unaudited Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interest
(in thousands)
Priority Technology Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation and Significant Accounting Policies
Business, Consolidation and Presentation
Priority Technology Holdings, Inc. is a holding company with no material operations of its own. Priority Technology Holdings, Inc. and its consolidated subsidiaries are referred to herein collectively as "Priority," "PRTH," the "Company," "we," "our" or "us," unless the context requires otherwise. Priority is a provider of merchant acquiring, integrated payment software, money transmission services and commercial payments solutions.
The Company operates on a calendar year ending each December 31 and on four calendar quarters ending on March 31, June 30, September 30 and December 31 of each year. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
NCI represents the equity interest in certain consolidated entities in which the Company owns less than 100% of the profit interests. Changes in the Company's ownership interest while the Company retains its controlling interest are accounted for as equity transactions. As of March 31, 2024, there was no income or loss attributable to NCI in accordance with the applicable operating agreements.
Redeemable NCI represents non-controlling ownership of certain redeemable preferred units in one of the Company's consolidated subsidiaries. These preferred units carry a compounded coupon rate of 6 % per annum. The return on the redeemable NCI for the three months ended March 31, 2024, since the reissuance of these redeemable preferred units, is $0.6 million. Refer to Note 13. Related Party Transactions.
In the opinion of the Company's management, all known adjustments necessary for a fair presentation of the Unaudited Consolidated Financial Statements for interim periods have been made. These adjustments consist of normal recurring accruals and estimates that affect the carrying amounts of assets and liabilities. These Unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
The results for the quarter ended March 31, 2024 include the results of the Plastiq business acquired through Chapter 11 bankruptcy process on July 31, 2023.
Use of Estimates
Foreign Currency
The Company's reporting currency is the U.S. dollar. The functional currency of the Indian subsidiary of the Company is Indian Rupee (i.e. local currency of Republic of India). The functional currency of the Canadian subsidiary of the Company is the Canadian Dollar. Accordingly, assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the
6
current exchange rate on the last day of the reporting period. Revenues and expenses are translated using the average exchange rate in effect during the reporting period. Translation adjustments are reported as a component of accumulated other comprehensive income (loss).
Reclassification
Recently Issued Accounting Standards Pending Adoption
Segment Reporting ASU 2023-07
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires incremental reportable segment disclosures, primarily about significant segment expenses. The amendments also require entities with a single reportable segment to provide all disclosures required by these amendments, and all existing segment disclosures. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024. The Company will adopt this guidance for the year ended December 31, 2024. This guidance is expected to only impact the disclosures with no impact on the results of operations, financial position or cash flows.
Income Taxes ASU 2023-09
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, to enhance the transparency and decision usefulness of income tax disclosures. The guidance includes improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the potential effects this guidance will have on its disclosures.
Profit Interest ASU 2024-01
In March 2024, the FASB issued ASU 2024-01, Profit Interest and Similar Awards ("ASU 2024-01"), to improve GAAP by adding an illustrative example to demonstrate how an entity should apply the scope in paragraph 718-10-15-3 to determine whether profit interest and similar awards should be accounted for in accordance with Topic 718, Compensation- Stock Compensation. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the potential effects this guidance will have on its disclosures.
2. Acquisition
Plastiq Acquisition
On May 23, 2023, PRTH’s subsidiary, Plastiq, Powered by Priority, LLC (the "acquiring entity"), entered into a stalking horse equity and asset purchase agreement (the "Purchase Agreement") with Plastiq, Inc. and certain of its affiliates ("Plastiq") to acquire substantially all of the assets of Plastiq, including the equity interest in Plastiq Canada, Inc. Plastiq is a buyer funded B2B payments platform offering bill pay and instant access to working capital to its customers and will complement the Company's existing supplier-funded B2B payments business. On May 24, 2023, Plastiq filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware.
The purchase was completed on July 31, 2023 for a total purchase consideration of approximately $37.0 million. The total purchase consideration included $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in the acquiring entity. The cash consideration for the purchase was funded by borrowings from the Company's revolving credit facility.
7
The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the acquired assets and assumed liabilities were recognized at their fair values as of July 31, 2023, with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill. The fair values of the acquired assets and assumed liabilities as of July 31, 2023 were estimated by management using the discounted cash flow method and other factors specific to certain assets and liabilities. The preliminary purchase price allocation is set forth in the table below and expected to be finalized as soon as practicable but no later than one year from the closing date.
| (in thousands) | |||||
| Consideration: | |||||
| Cash | $ | ||||
Contingent consideration payments (1) | |||||
| Common equity of acquiring entity | |||||
| Less: cash and restricted cash acquired | ( | ||||
| Total purchase consideration, net of cash and restricted cash acquired | $ | ||||
| Recognized amounts of assets acquired and liabilities assumed: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses | |||||
| Settlement assets | |||||
| Equipment, net | |||||
Goodwill(3) | |||||
Intangible assets(2) | |||||
| Accounts payable and accrued expenses | ( | ||||
| Customer deposits | ( | ||||
| Settlement obligations | ( | ||||
| Total purchase consideration | $ | ||||
(1)The fair value of the contingent consideration payments issued was determined utilizing a Monte Carlo simulation. The contingent consideration payments were calculated based on the path for the simulated metrics and the contractual terms of the contingent consideration payments and were discounted to present value at a rate reflecting the risk associated with the payoffs. The fair value was estimated to be the average present value of the contingent consideration payments over all iterations of the simulation.
(2)The intangible assets acquired consist of $13.0 million for customer relationships, $7.0 million for referral partner relationships, $6.5 million for technology and $3.9 million for trade name.
(3)During the first quarter of 2024, the Company recorded an immaterial measurement period adjustment due to a pre-acquisition tax accrual which resulted in an adjustment to goodwill and accounts payable and accrued expenses.
8
3. Revenues
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Revenue Type: | |||||||||||
| Merchant card fees | $ | $ | |||||||||
| Money transmission services | |||||||||||
| Outsourced services and other services | |||||||||||
| Equipment | |||||||||||
Total revenues(1),(2) | $ | $ | |||||||||
(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 $11.9 million and $5.0 million of interest income for the three months ended March 31, 2024 and 2023, respectively, is included in outsourced services and other services revenue in the table above. Approximately $0.6 million and $0.2 million of interest income for the three months ended March 31, 2024, and 2023, respectively, is included in other income, net on the Company's Unaudited Consolidated Statements of Operations and Comprehensive Loss and not reflected in the table above.
The following table presents a disaggregation of our consolidated revenues by segment:
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||
| (in thousands) | Merchant Card Fees | Money Transmission Services | Outsourced and Other Services | Equipment | Total | ||||||||||||||||||||||||
| Segment | |||||||||||||||||||||||||||||
| SMB Payments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| B2B Payments | |||||||||||||||||||||||||||||
| Enterprise Payments | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||
| (in thousands) | Merchant Card Fees | Money Transmission Services | Outsourced and Other Services | Equipment | Total | ||||||||||||||||||||||||
| Segment | |||||||||||||||||||||||||||||
| SMB Payments | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| B2B Payments | |||||||||||||||||||||||||||||
| Enterprise Payments | |||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Deferred revenues were not material for the three months ended March 31, 2024 and 2023.
9
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.
Contract liabilities were $0.6 million and $0.6 million as of March 31, 2024 and December 31, 2023, respectively. Substantially all of these balances are recognized as revenue within 12 months.
Net contract assets were not material for any period presented.
4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations
SMB Payments Segment
In the Company's SMB Payments reportable segment, funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. The standards of the card networks require possession of funds during the settlement process by a member bank which controls the clearing transactions. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations are not liabilities of the Company. Therefore, neither is recognized in the Company's Unaudited Consolidated Balance Sheets. Member banks held merchant funds of $109.2 million and $98.0 million at March 31, 2024 and December 31, 2023, respectively.
Exception items that become the liability of the Company are recorded as merchant losses, a component of cost of revenue in the Company's Unaudited Consolidated Statements of Operations and Comprehensive Loss. Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets and customer/subscriber account balances in the Company's 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 months ended March 31, 2024 and 2023 were $4.7 million and $1.0 million, respectively.
B2B Payments Segment
In the Company's B2B Payments segment, the Company earns revenues by processing transactions for FIs and other business customers. Customers transfer funds to the Company, which are held in either company-owned bank accounts controlled by the Company or bank-owned FBO accounts controlled by the banks, until such time that 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 are not liabilities of the Company. Therefore, neither is recognized in the Company's Unaudited Consolidated Balance Sheets. Bank-owned FBO accounts held funds of $79.1 million and $69.0 million at March 31, 2024 and December 31, 2023, respectively. Company-owned bank accounts held $1.6 million and $1.2 million at March 31, 2024 and December 31, 2023, respectively, which are included in restricted cash and settlement and customer/subscriber account obligations in the Company's Unaudited Consolidated Balance Sheets.
Exception items that the Company is still attempting to collect from the customers through the funds settlement process are recognized as settlement assets and customer/subscriber 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 these merchant losses for the three months ended March 31, 2024 were $0.2 million. There were no expenses for these merchant losses in 2023.
For the Plastiq business, the Company accepts card payments from its customers and processes disbursements to their vendors. The time lag between authorization and settlement of card transactions creates certain receivables (from card networks) and
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payables (to the vendors of customers). These receivables and payables arise from the settlement activities that the Company performs on the behalf of its customers and therefore, are presented as Settlement assets and related obligations.
Enterprise Payments Segment
In the Company's Enterprise Payments segment revenue is derived primarily from enrollment fees, monthly subscription fees and transaction-based fees from licensed money transmission services. As part of its licensed money transmission 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. 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/subscriber account balances and the related obligations as settlement and customer/subscriber account obligations in the Company's Unaudited Consolidated Balance Sheets.
In certain states, the Company accepts deposits under agency arrangement with member banks wherein accepted deposits remain under the control of the member banks. Therefore, the Company does not record assets for the deposits accepted and liabilities for the associated obligation. Agency owned accounts held $46.2 million and $19.6 million at March 31, 2024 and December 31, 2023, respectively.
The Company's consolidated settlement assets and customer/subscriber account balances and settlement and customer/subscriber account obligations were as follows:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
Settlement Assets, net of estimated losses(1): | |||||||||||
| Card settlements due from merchants | $ | $ | |||||||||
| Card settlements due from networks | |||||||||||
| Other settlement assets | |||||||||||
| Customer/subscriber account balances | |||||||||||
| Cash and cash equivalents | |||||||||||
| Total settlement assets and customer/subscriber account balances | $ | $ | |||||||||
| Settlement and Customer/Subscriber Account Obligations: | |||||||||||
| Customer account obligations | $ | $ | |||||||||
| Subscriber account obligations | |||||||||||
| Total customer/subscriber account obligations | |||||||||||
Due to customers' payees(2) | |||||||||||
| Total settlement and customer/subscriber account obligations | $ | $ | |||||||||
(1)Allowance for estimated losses was $9.2 million and $6.6 million as of March 31, 2024 and December 31, 2023, respectively
(2)Card settlements due from networks includes $6.3 million and $8.2 million as of March 31, 2024 and December 31, 2023, respectively, related assets and remainder are included in restricted cash on our Unaudited Consolidated Balance Sheets.
5. Notes Receivable
The Company had notes receivable of $6.5 million and $5.2 million as of March 31, 2024 and December 31, 2023, respectively, which are reported as current portion of notes receivable and notes receivable less current portion on the Company's Unaudited Consolidated Balance Sheets. The notes receivable carried weighted-average interest rates of 18.5 % and 18.6 % as of March 31,
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2024 and December 31, 2023. 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, 2024 and December 31, 2023, the Company had no
As of March 31, 2024, the principal payments for the Company's notes receivable are due as follows:
| (in thousands) | |||||
| Twelve months ending March 31, | |||||
| 2025 | $ | ||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| After 2028 | |||||
| Total | $ | ||||
6. Property, Equipment and Software
A summary of property, equipment and software, net was as follows:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Computer software | $ | $ | |||||||||
| Equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Property, equipment and software | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Capital work in-progress | |||||||||||
| Property, equipment and software, net | $ | $ | |||||||||
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Depreciation expense | $ | $ | |||||||||
Computer software represents purchased software and internally developed software that is used to provide the Company's services to its customers.
Fully depreciated assets are retained in property, equipment and software, net, until removed from service. During the quarter ended March 31, 2024, certain fully depreciated assets were removed from service.
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7. Goodwill and Other Intangible Assets
Goodwill
The Company's goodwill relates to the following reporting units:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| SMB Payments | $ | $ | |||||||||
| Enterprise Payments | |||||||||||
| Plastiq (B2B Payments) | |||||||||||
| Total | $ | $ | |||||||||
The following table summarizes the changes in the carrying value of goodwill:
| (in thousands) | Amount | ||||
| Balance at December 31, 2023 | $ | ||||
| Plastiq adjustment | |||||
Balance at March 31, 2024 | $ | ||||
As of March 31, 2024, the Company is not aware of any triggering events for impairment that have occurred since the last annual impairment test.
Other Intangible Assets
Other intangible assets consisted of the following:
| March 31, 2024 | Weighted-average Useful Life | ||||||||||||||||||||||
| (in thousands, except weighted-average data) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||
| Other intangible assets: | |||||||||||||||||||||||
| ISO and referral partner relationships | $ | $ | ( | $ | |||||||||||||||||||
| Residual buyouts | ( | ||||||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Merchant portfolios | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| Trade names | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
Money transmission licenses(1) | — | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
(1)These assets have an indefinite useful life.
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| December 31, 2023 | Weighted-average Useful Life | ||||||||||||||||||||||
| (in thousands, except weighted-average data) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||
| Other intangible assets: | |||||||||||||||||||||||
| ISO and referral partner relationships | $ | $ | ( | $ | |||||||||||||||||||
| Residual buyouts | ( | ||||||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Merchant portfolios | ( | ||||||||||||||||||||||
| Technology | ( | ||||||||||||||||||||||
| Trade names | ( | ||||||||||||||||||||||
| Non-compete agreements | ( | ||||||||||||||||||||||
Money transmission licenses(1) | — | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
(1)These assets have an indefinite useful life.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Amortization expense(1) | $ | $ | |||||||||
8. Debt Obligations
Outstanding debt obligations consisted of the following:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
Term facility - matures April 27, 2027, interest rates of | $ | $ | |||||||||
Revolving credit facility - $ | |||||||||||
| Total debt obligations | |||||||||||
| Less: current portion of long-term debt | ( | ( | |||||||||
| Less: unamortized debt discounts and deferred financing costs | ( | ( | |||||||||
| Long-term debt, net | $ | $ | |||||||||
Interest Expense and Amortization of Deferred Loan Costs and Discounts
Deferred financing costs and debt discounts are amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense. Unamortized deferred financing costs and debt discounts are included in long-term debt on the Company's Unaudited Consolidated Balance Sheets.
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Interest expense for outstanding debt, including fees for undrawn amounts and amortization of deferred financing costs and debt discounts was as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Interest expense(1),(2) | $ | $ | |||||||||
(1)Included in interest expense is $1.0 million and $0.1 million related to the accretion of contingent consideration from acquisitions for the three months ended March 31, 2024, and 2023, respectively.
Debt Covenants
The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the loan parties to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates) and to enter into certain leases.
If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35 % of the total revolving credit facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50 :1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022; 2) 6.00 :1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50 :1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. As of March 31, 2024, the Company was in compliance with the covenants in the Credit Agreement.
9. Redeemable Senior Preferred Stock and Warrants
The redeemable senior preferred stock ranks senior to the Company's Common Stock, equal with any other class of the Company's stock designated as being ranked on a parity basis with the redeemable senior preferred stock and junior to any other class of the Company's stock, including preferred stock, that is designated as being ranked senior to the redeemable senior preferred stock, with respect to the payment and distribution of dividends, the purchase or redemption of the Company's stock and the liquidation, winding up of and distribution of assets of the Company.
The following table provides the redemption value of the redeemable senior preferred stock for the periods presented:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Redeemable senior preferred stock | $ | $ | |||||||||
| Accumulated unpaid dividend | |||||||||||
| Dividend payable | |||||||||||
| Redemption value | |||||||||||
| Less: unamortized discounts and issuance costs | ( | ( | |||||||||
| Redeemable senior preferred stock, net of discounts and issuance costs: | $ | $ | |||||||||
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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 | |||||||||
| December 31, 2023 | $ | ||||||||||
| Unpaid dividend on redeemable senior preferred stock | — | ||||||||||
| Accretion of discounts and issuance costs | — | ||||||||||
| Cash portion of dividend outstanding at March 31, 2024 | — | ||||||||||
| Payment of cash portion of dividend outstanding at December 31, 2023 | ( | ||||||||||
| March 31, 2024 | $ | ||||||||||
The dividend rate as of March 31, 2024 and December 31, 2023, was 17.6 % and 17.7 % respectively.
The following table provides a summary of the dividends for the period presented:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Dividends paid in cash(1) | $ | $ | |||||||||
| Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock | |||||||||||
| Dividends declared | $ | $ | |||||||||
(1)Dividend payable for the three months ended March 31, 2024 was paid on April 1, 2024.
Under the Amended Certificate of Designation, the dividend rate (capped at 22.50 %) is equal to the three-month term SOFR (minimum of 1.00 %), plus the three-month term SOFR spread adjustment of 0.26 % plus the applicable margin of 12.00 %. The dividend rate is subject to future increases if the Company doesn't comply with the minimum cash payment requirements outlined in the agreement, which includes required payments of dividends, required payments related to redemption or required prepayments. The dividend rate may also increase if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors or if an event of default as outlined in the agreement occurs.
10. Income Taxes
The Company's consolidated effective income tax rate for the three months ended March 31, 2024, was 33.2 % compared to a consolidated effective income tax rate of 20.8 % for the three months ended March 31, 2023. The effective rates differed from the statutory rate of 21.0% primarily due to an increase in the valuation allowance against certain business interest carryover deferred tax assets, and certain forecasted nondeductible expenses.
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.
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Based on management's assessment, as of March 31, 2024, 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.
11. Stockholders' Deficit
The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of March 31, 2024 and December 31, 2023, the Company has not
Share Repurchase Program
In 2022, PRTH's Board of Directors authorized a general share repurchase program under which the Company may purchase up to 2.0 million shares of its outstanding Common Stock for a total of up to $10.0 million. Under the terms of this plan, the Company may purchase shares through open market purchases, unsolicited or solicited privately negotiated transactions, or in another manner so long as it complies with applicable rules and regulations. There have been no shares repurchased under this plan since December 2022.
12. Stock-based Compensation
Stock-based compensation expense was as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Stock options compensation expense | $ | $ | |||||||||
| Incentive units compensation expense | |||||||||||
| ESPP compensation expense | |||||||||||
| Total | $ | $ | |||||||||
Income tax benefit for stock-based compensation was immaterial for the three months ended March 31, 2024 and 2023. No
2018 Plan
The Company's 2018 Plan initially 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, which was subsequently approved by our shareholders, to increase the number of shares authorized for issuance under the plan by 2,500,000 shares, resulting in 9,185,696 shares of the Company's Common Stock authorized for issuance under the plan.
2021 Stock Purchase Plan
The 2021 Stock Purchase Plan provides for up to 200,000 shares to be purchased under the 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 the first offering period began on January 10, 2022. The 2021 Stock Purchase Plan provides eligible employees the
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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 offering period.
Non-voting Incentive Units
13. Related Party Transactions
In February 2019, PHOT, a subsidiary of the Company, received a contribution of substantially all of the operating assets of eTab and Cumulus under asset contribution agreements. PHOT is a part of the Company's SMB reportable segment. These contributed assets were primarily composed 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.
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.
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 Chief Operating Officer (“COO”) received 413,081 shares of common stock of the Company in exchange for her 24.1 % interest.
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14. Commitments and Contingencies
Minimum Annual Commitments with Third-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. Based on existing contracts in place, the Company is committed to pay minimum processing fees under these agreements of approximately $21.6 million in 2024 and $25.0 million in 2025.
Annual Commitment with Vendor
Effective January 1, 2022, the Company entered into a three year business cooperation agreement with a vendor to resell its services. Under the agreement, the Company purchased vendor services worth $1.5 million for the year ended December 31, 2023, and is committed to purchase vendor services worth $2.3 million in 2024.
Capital Commitments
The Company committed to capital contributions to fund the operations of certain subsidiaries totaling $26.0 million as March 31, 2024 and December 31, 2023. The Company is obligated to make the contributions within 10 business days of receiving notice for such contribution from the subsidiary. As of March 31, 2024 and December 31, 2023, the Company has contributed $13.4 million and $11.8 million, respectively.
Merchant Reserves
See Note 4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations, for information about merchant reserves.
Contingent Consideration
The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration liabilities related to completed acquisitions:
| (in thousands) | Contingent Consideration Liabilities | ||||
| December 31, 2023 | $ | ||||
| Payment of contingent consideration | ( | ||||
| March 31, 2024 | $ | ||||
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 internal and external counsel, the results of any of these matters, individually and in the aggregate, are not expected to have a material effect on the Company's results of operations, financial condition or cash flows. As more information becomes available, and the Company determines that an unfavorable outcome is probable on a claim and that the amount of probable loss that the Company will incur on that claim is reasonably estimable, the Company will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact the Company's results of operations, financial condition and cash flows.
The Company is involved in a case that was filed on October 11, 2023 and is currently pending in the United States District Court for the Northern District of California (the “Complaint”). The Complaint is a putative class action against The Credit Wholesale Company, Inc. (“Wholesale”), Priority Technology Holdings, Inc., Priority Payment Systems (“PPS”), LLC and Wells Fargo Bank, N.A. (“Wells Fargo”). The Complaint alleges that Wholesale is an agent of Priority, PPS and Wells Fargo
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and that it made non-consensual recordation of telephonic communications with California businesses in violation of California Invasion of Privacy Act (the “Act”). The Complaint seeks to certify a class of affected businesses and an award of $5,000 per violation of the Act. As of May 9, 2024, the financial impact, if any, of the outcome of this legal proceeding is neither probable nor estimable.
Concentration of Risks
The Company's revenue is substantially derived from processing Visa and Mastercard bankcard transactions. Because the Company is not a member bank, 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.
As of March 31, 2024 , the Company's customer account balances of $703 million are maintained in FDIC insured eligible accounts with certain FIs (refer to Note 4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations) A majority of the Company's cash and restricted cash is held in certain FIs, substantially all of which is in excess of FDIC limits. The Company does not believe it is exposed to any significant credit risk from these transactions.
15. Fair Value
Fair Value Measurements
Contingent consideration related to the Company's business combinations is estimated based on the present value of a weighted payout probability at the measurement date, which falls within Level 3 on the fair value hierarchy. The current portion of contingent consideration is included in accounts payable and accrued expenses on the Company's Unaudited Consolidated Balance Sheets and the noncurrent portion of contingent consideration is included in other noncurrent liabilities on the Company's Unaudited Consolidated Balance Sheets.
Liabilities measured at fair value on a recurring basis consisted of the following:
| (in thousands) | Fair Value Hierarchy | March 31, 2024 | December 31, 2023 | ||||||||||||||
| Contingent consideration, current portion | Level 3 | $ | $ | ||||||||||||||
| Contingent consideration, noncurrent portion | Level 3 | $ | |||||||||||||||
| Total contingent consideration | $ | $ | |||||||||||||||
During the three months ended March 31, 2024, there were no transfers into, out of, or between levels of the fair value hierarchy.
Fair Value Disclosures
Notes Receivable
Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company provides for allowances when it believes that certain notes receivable may not be collectible. The carrying value of the Company's notes receivable, net approximates fair value and was approximately $6.5 million and $5.2 million at March 31, 2024 and December 31, 2023, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.
Debt Obligations
Outstanding debt obligations (see Note 8. 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 each reporting period.
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The fair value of the term facility was estimated to be $651.9
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.
16. Segment Information
The Company has three reportable segments:
•SMB Payments – Provides full-service acquiring and payment-enabled solutions for B2C transactions, leveraging Priority's proprietary software platform, distributed through ISO, direct sales and vertically focused ISV channels.
•B2B Payments – provides market-leading AP automation solutions to corporations, software partners and industry leading FIs (including Citibank and Mastercard) in addition to working improving cash flow by providing instant access to working capital.
•Enterprise Payments – Provides embedded finance and treasury solutions to enterprise customers to modernize legacy platforms and accelerate software partners' strategies to monetize payments.
Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.
In January 2024, the Company changed the grouping of certain business activity to conform to the way we internally manage and monitor the business. As a result, certain immaterial activity was reassigned from the SMB Payments segment to the Enterprise Payments segment effective January 1, 2024. Impact on prior year segment results were determined to be immaterial and have not been reclassified to reflect this change.
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Information on reportable segments and reconciliations to consolidated revenues, consolidated depreciation and amortization, and consolidated operating income are as follows:
| (in thousands) | Three Months Ended March 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
| SMB Payments | $ | $ | |||||||||
| B2B Payments | |||||||||||
| Enterprise Payments | |||||||||||
| Consolidated revenues | $ | $ | |||||||||
| Depreciation and amortization: | |||||||||||
| SMB Payments | $ | $ | |||||||||
| B2B Payments | |||||||||||
| Enterprise Payments | |||||||||||
| Corporate | |||||||||||
| Consolidated depreciation and amortization | $ | $ | |||||||||
| Operating income (loss): | |||||||||||
| SMB Payments | $ | $ | |||||||||
| B2B Payments | ( | ( | |||||||||
| Enterprise Payments | |||||||||||
| Corporate | ( | ( | |||||||||
| Consolidated operating income | $ | $ | |||||||||
A reconciliation of total operating income of reportable segments to the Company's net (loss) income is provided in the following table:
| (in thousands) | Three Months Ended March 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Total operating income of reportable segments | $ | $ | |||||||||
| Corporate | ( | ( | |||||||||
| Interest expense | ( | ( | |||||||||
| Other income, net | |||||||||||
| Income tax (expense) benefit | ( | ||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
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17. Loss per Common Share
The following tables set forth the computation of the Company's basic and diluted loss per common share:
| Three Months Ended March 31, | |||||||||||
| (in thousands except per share amounts) | 2024 | 2023 | |||||||||
| Numerator: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | ( | ( | |||||||||
| Less: Return on redeemable NCI in consolidated subsidiary | ( | ||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Basic and diluted: | |||||||||||
Weighted-average common shares outstanding(1) | |||||||||||
| Loss per common share | $ | ( | $ | ( | |||||||
For the three months ended March 31, 2024 and 2023, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. Potentially anti-dilutive securities that were excluded from the Company's loss per common share are as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Outstanding warrants on Common Stock(1) | |||||||||||
Outstanding options and warrants issued to adviser(2) | |||||||||||
Restricted stock awards(3) | |||||||||||
Outstanding stock option awards(3) | |||||||||||
| Total | |||||||||||
(1)The warrants were issued in 2018 and were exercisable at $11.50 per share. These warrants expired on August 24, 2023.
(2)The warrants were issued in 2018 and were exercisable at $12.00 per share. These warrants expired on August 24, 2023.
(3)Granted under the 2018 Plan.
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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 Audited Consolidated Financial Statements and related Notes 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 for the year ended December 31, 2023. Certain amounts in this section may not add mathematically due to rounding.
Cautionary Note Regarding Forward-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 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:
•negative economic and political conditions that adversely affect the general economy, consumer confidence and consumer and commercial spending habits, which may, among other things, negatively impact our business, financial condition and results of operations;
•competition in the payment processing industry;
•the use of distribution partners;
•any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses or otherwise;
•any breakdowns in our processing systems;
•government regulation, including regulation of consumer information;
•the use of third-party vendors;
•any changes in card association and debit network fees or products;
•any failure to comply with the rules established by payment networks or standards established by third-party processors;
•any proposed acquisitions or dispositions or any risks associated with completed acquisitions or dispositions; and
•other risks and uncertainties set forth in the "Item 1A - Risk Factors" section of this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this 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.
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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 certain components of our results of operations for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. We have derived this data, except the key indicators, from our Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and our Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Revenue
For the three months ended March 31, 2024, our consolidated revenue of $205.7 million increased by $20.7 million, or 11.2%, from $185.0 million for the three months ended March 31, 2023. The overall increase was driven by an increase in new enrollments and higher interest income in our Enterprise Payments segment and revenue from the Plastiq business in our B2B Payments segment that was acquired in the quarter ended September 30, 2023. These increases were partially offset by a decrease in revenues in our SMB Payments segment due to decreased volumes.
The following table presents our revenues by type:
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Revenue Type: | |||||||||||||||||
| Merchant card fees | $ | 157,947 | $ | 149,644 | $ | 8,303 | |||||||||||
| Money transmission services | 29,144 | 21,406 | 7,738 | ||||||||||||||
| Outsourced services and other services | 15,665 | 11,005 | 4,660 | ||||||||||||||
| Equipment | 2,963 | 2,973 | (10) | ||||||||||||||
| Total revenues | $ | 205,719 | $ | 185,028 | $ | 20,691 | |||||||||||
Merchant card fees
Merchant card fees revenue for the three months ended March 31, 2024 was $157.9 million an increase of $8.3 million or 5.5%, from $149.6 million for the three months ended March 31, 2023. The increase was primarily driven by the Plastiq business and rate increases. These increases were partially offset by a decrease in volume due to the diversification of our merchant portfolio by one of our referral partners.
Money transmission services
Money transmission services for the three months ended March 31, 2024 was $29.1 million an increase of $7.7 million, or 36.1%, from $21.4 million for the three months ended March 31, 2023. This increase was primarily driven by an increase in customer enrollments.
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Outsourced services and other services revenue
Outsourced services and other services revenue of $15.7 million for the three months ended March 31, 2024 increased by $4.7 million, or 42.3%, from $11.0 million for the three months ended March 31, 2023, primarily due to growth in interest income due to higher interest rates and deposit balances.
Equipment
Equipment revenue of $3.0 million for the three months ended March 31, 2024 remained consistent with $3.0 million for the three months ended March 31, 2023.
Operating expenses were as follows:
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Operating expenses | |||||||||||||||||
| Cost of services (excludes depreciation and amortization) | $ | 129,298 | $ | 121,966 | $ | 7,332 | |||||||||||
| Salary and employee benefits | 22,150 | 19,048 | 3,102 | ||||||||||||||
| Depreciation and amortization | 15,253 | 18,048 | (2,795) | ||||||||||||||
| Selling, general and administrative | 10,994 | 9,118 | 1,876 | ||||||||||||||
| Total operating expenses | $ | 177,695 | $ | 168,180 | $ | 9,515 | |||||||||||
Cost of services (excludes depreciation and amortization)
Cost of services (excludes depreciation and amortization) of $129.3 million for the three months ended March 31, 2024, increased by $7.3 million, or 6.0%, from $122.0 million for the three months ended March 31, 2023, primarily due to the corresponding increase in revenues.
Salary and employee benefits
Salary and employee benefits expense of $22.2 million for the three months ended March 31, 2024 increased by $3.1 million, or 16.3%, from $19.0 million for the three months ended March 31, 2023, primarily due to merit increases, certain performance based non-recurring bonuses and increased headcount from the acquisition of the Plastiq business and to support the overall growth of the Company.
Depreciation and amortization expense
Depreciation and amortization expense of $15.3 million for the three months ended March 31, 2024 decreased by $2.8 million, or 15.5%, from $18.0 million for the three months ended March 31, 2023, primarily due to full amortization of certain intangible assets during 2023.
Selling, general and administrative
Selling, general and administrative expenses of $11.0 million for the three months ended March 31, 2024 increased by $1.9 million, or 20.6%, from $9.1 million for the three months ended March 31, 2023, primarily due to certain software and maintenance expenses and other expenses to support overall growth of the Company.
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Other Expense, net
Other expenses, net were as follows:
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Other (expense) income | |||||||||||||||||
| Interest expense | $ | (20,880) | $ | (17,699) | $ | (3,181) | |||||||||||
| Other income, net | 632 | 212 | 420 | ||||||||||||||
| Total other expense, net | $ | (20,248) | $ | (17,487) | $ | (2,761) | |||||||||||
Interest expense
Interest expense of $20.9 million for the three months ended March 31, 2024 increased by $3.2 million, or 18.0%, from $17.7 million for the three months ended March 31, 2023, due to increased interest rates and increased outstanding balance for the term loan facility used for the acquisition of the Plastiq business, offset by a decrease in the revolving credit facility.
Income tax (benefit) expense
Income tax expense was as follows:
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Income (loss) before income taxes | $ | 7,775 | $ | (639) | $ | 8,414 | |||||||||||
| Income tax expense (benefit) | $ | 2,582 | $ | (133) | $ | 2,715 | |||||||||||
| Effective tax rate | 33.2 | % | 20.8 | % | |||||||||||||
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 2024 is 29.9% and includes the income tax provision on pre-tax income and a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2024 interest expense. The effective tax rate for 2024 changed primarily due to an increase in certain forecasted nondeductible expenses.
Our consolidated effective income tax rates differ from the 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 2024 may not be indicative of our effective tax rate for future periods.
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Segment Results
SMB Payments
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Revenue | $ | 143,751 | $ | 154,933 | $ | (11,182) | |||||||||||
| Operating expenses | 131,368 | 142,922 | (11,554) | ||||||||||||||
| Operating income | $ | 12,383 | $ | 12,011 | $ | 372 | |||||||||||
| Operating margin | 8.6 | % | 7.8 | % | |||||||||||||
| Depreciation and amortization | $ | 8,802 | $ | 10,846 | $ | (2,044) | |||||||||||
| Key Indicators: | |||||||||||||||||
| Merchant bankcard processing dollar value | $ | 14,788,095 | $ | 15,220,715 | $ | (432,620) | |||||||||||
| Merchant bankcard transaction count | 175,228 | 163,406 | 11,822 | ||||||||||||||
Revenue from our SMB Payments segment was $143.8 million for the three months ended March 31, 2024, compared to $154.9 million for the three months ended March 31, 2023. The decrease of $11.2 million, or 7.2%, was primarily driven by a decrease in certain incentives and, decreased transaction count and processed merchant bankcard volume due to diversification of merchant portfolios by one of the Company's referral partners. The Company's merchant card fee revenue from the SMB Payments segment ($139.5 million for 2024 and $148.7 million for 2023) as a percentage of merchant bankcard processing dollar value during 2024 decrease to 0.9% from 1.0% during 2023. The decrease was primarily driven by changes in merchant and card mix.
Operating Income
Operating income from our SMB Payments segment was $12.4 million for the three months ended March 31, 2024, compared to $12.0 million for the three months ended March 31, 2023. The increase of $0.4 million or 3.1% was the result of a decrease in operating income of $4.0 million in merchant card fee revenue driven by the diversification of merchant portfolios by one of the Company's referral partners, the mix related margin compression and a decrease in certain incentive revenue. This decrease was offset by decreases in the allocation of salary and employee benefits expense of $1.7 million, a decrease in selling, general and administrative expenses of $0.7 million due to efficiencies and realignment at the corporate level and a decrease in depreciation and amortization expense of $2.0 million due to full amortization of certain intangible assets in 2023.
Depreciation and Amortization
Depreciation and amortization expense of our SMB Payments segment was $8.8 million for the three months ended March 31, 2024, compared to $10.8 million for the three months ended March 31, 2023. The decrease of $2.0 million is due to full amortization of certain intangible assets in 2023.
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B2B Payments
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Revenue | $ | 21,115 | $ | 2,786 | $ | 18,329 | |||||||||||
| Operating expenses | 21,908 | 3,635 | 18,273 | ||||||||||||||
| Operating loss | $ | (793) | $ | (849) | $ | 56 | |||||||||||
| Operating margin | (3.8) | % | (30.5) | % | |||||||||||||
| Depreciation and amortization | $ | 1,640 | $ | 125 | $ | 1,515 | |||||||||||
| Key Indicators: | |||||||||||||||||
| B2B issuing dollar volume | $ | 227,811 | $ | 198,546 | $ | 29,265 | |||||||||||
| B2B issuing transaction count | 240 | 280 | $ | (40) | |||||||||||||
Revenue
Revenue from our B2B Payments segment was $21.1 million for the three months ended March 31, 2024, compared to $2.8 million for the three months ended March 31, 2023. The increase of $18.3 million was primarily driven by revenue from the Plastiq business.
Operating Loss
Operating loss from our B2B Payments segment of $0.8 million for the three months ended March 31, 2024 remained consistent compared to the three months ended March 31, 2023. The increase in operating income due to increased revenue was offset by certain performance based non-recurring bonuses related to the Plastiq business and processing losses related to the CPX business.
Depreciation and Amortization
Depreciation and amortization from our B2B Payments segment was $1.6 million for the three months ended March 31, 2024, compared to $125.0 thousand depreciation and amortization expense for the three months ended March 31, 2023. The increase is primarily attributable to the Plastiq business.
Enterprise Payments
| (in thousands) | Three Months Ended March 31, | ||||||||||||||||
| 2024 | 2023 | $ Change | |||||||||||||||
| Revenue | $ | 40,853 | $ | 27,309 | $ | 13,544 | |||||||||||
| Operating expenses | 15,306 | 14,646 | 660 | ||||||||||||||
| Operating income | $ | 25,547 | $ | 12,663 | $ | 12,884 | |||||||||||
| Operating margin | 62.5 | % | 46.4 | % | |||||||||||||
| Depreciation and amortization | $ | 4,356 | $ | 6,690 | $ | (2,334) | |||||||||||
| Key Indicators: | |||||||||||||||||
| Average billed clients | 703,887 | 465,219 | 238,668 | ||||||||||||||
| Average new enrollments | 53,551 | 45,948 | 7,603 | ||||||||||||||
Revenue
Revenue from our Enterprise Payments segment was $40.9 million for the three months ended March 31, 2024, compared to $27.3 million for the three months ended March 31, 2023. The increase of $13.5 million or 49.6%, was primarily driven by an increase in billed clients and customer enrollments, and growth in interest income due to higher interest rates and deposit balances.
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Operating Income
Operating income from our Enterprise Payments segment was $25.5 million for the three months ended March 31, 2024, compared to $12.7 million for the three months ended March 31, 2023. The increase of $12.9 million or 101.7%, was primarily driven by increases in revenues.
Depreciation and Amortization
Depreciation and amortization from our Enterprise Payments segment was $4.4 million for the three months ended March 31, 2024, compared to $6.7 million depreciation and amortization expense for the three months ended March 31, 2023. The decrease of $2.3 million or 34.9%, was primarily driven by full amortization of certain intangible assets in 2023.
Critical Accounting Policies and Estimates
Our Unaudited Consolidated Financial Statements have been prepared in accordance with GAAP 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 Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to these critical accounting policies and estimates as of March 31, 2024.
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 and other anticipated needs, including our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next 12 months.
Our principal uses of cash are to fund business operations and administrative costs, and to service our debt.
Our working capital, defined as current assets less current liabilities, was $32.4 million at March 31, 2024 and $8.9 million at March 31, 2023. As of March 31, 2024, we had cash totaling $34.3 million compared to $15.9 million at March 31, 2023. These cash balances do not include restricted cash of $12.7 million and $11.0 million at March 31, 2024 and March 31, 2023, respectively, which reflects cash accounts holding customer settlement funds and cash reserves for potential losses. The current portion of long-term debt included in current liabilities was $6.7 million and $6.2 million at March 31, 2024 and March 31, 2023, respectively. At March 31, 2024, we had availability of approximately $65.0 million under our revolving credit facility.
The following table and discussion reflect our changes in cash flows for the comparative three month periods.
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 13,307 | $ | 27,677 | |||||||
| Investing activities | (7,669) | (7,583) | |||||||||
| Financing activities | (10,279) | 57,537 | |||||||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (4,641) | $ | 77,631 | |||||||
Cash Provided by Operating Activities
Net cash provided by operating activities was $13.3 million for the three months ended March 31, 2024 compared to $27.7 million for the three months ended March 31, 2023. The $14.4 million decrease in 2024 was primarily driven by changes in the operating assets and liabilities.
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Cash Used in Investing Activities
Net cash used in investing activities was $7.7 million and $7.6 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, investing activities included additions to property, equipment and software of $6.6 million and $1.1 million related funding of new loans to ISOs. For the three months ended March 31, 2023, net cash used in investing activities included $2.7 million of cash used to fund acquisitions of intangible assets and $5.0 million of cash used to acquire property, equipment and software offset by $0.2 million related to net payments received on loans to ISOs.
Cash Provided by Financing Activities
Net cash used in financing activities was $10.3 million for the three months ended March 31, 2024, compared to $57.5 million of cash provided by financing activities for the three months ended March 31, 2023. The net cash used in financing activities for the three months ended March 31, 2024 included changes in the net obligations for funds held on the behalf of customers of $1.9 million, offset by $1.7 million of cash used for the repayment of debt, $7.0 million of cash dividends paid to redeemable senior preferred stockholders, $0.4 million of cash used for shares withheld for taxes and $3.1 million of payments of contingent consideration. The net cash provided by financing activities for the three months ended March 31, 2023 included $7.6 million of cash used for the repayment of debt, $11.4 million of cash dividends paid to redeemable senior preferred stockholders, $0.8 million of cash used for shares withheld for taxes and share repurchases, and $2.0 million of payments of contingent consideration for business combinations, which was offset by changes in the net obligations for funds held on the behalf of customers of $79.3 million.
Long-term Debt
As of March 31, 2024, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $638.1 million, compared to $638.7 million at December 31, 2023, resulting in a decrease of $0.6 million. The debt balance at March 31, 2024 consisted of $652.7 million outstanding under the term facility offset by $14.6 million of unamortized debt discounts and issuance costs. Minimum amortization of the term facility are equal quarterly installments in aggregate annual amounts equal to 1.0% of the original principal, with the balance paid upon maturity. The term 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 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 credit facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. As of March 31, 2024, the Company was in compliance with the covenants in the Credit Agreement.
Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that may affect our current and/or future financial statements. See Note 1, Basis of Presentation and Significant Accounting Policies, to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a discussion of recently issued accounting pronouncements not yet adopted.
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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, 2023. Our exposures to market risk have not changed materially since December 31, 2023.
Item 4. Controls and Procedures
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 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), 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 March 31, 2024. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the three months ended March 31, 2024 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 arise in the ordinary course of business. In 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 expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available and we determine that an unfavorable outcome is probable on a claim and that the amount of probable loss that we will incur on that claim is reasonably estimable, we will record an accrued expense for the claim in question. If and when we record such an accrual, it could be material and could adversely impact our results of operations, financial condition and cash flows.
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 may also 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 Company's purchases of its Common Stock during the three months ended March 31, 2024 were as follows:
| Period | Total Number of Shares Purchased(1),(2) | 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, 2024 | 1,529,378 | $ | 3.66 | — | ||||||||||||||||||||||
| February 1-29, 2024 | 22,148 | $ | 3.36 | — | ||||||||||||||||||||||
| March 1-31, 2024 | — | — | ||||||||||||||||||||||||
| Total | 1,551,526 | $ | 3.66 | — | ||||||||||||||||||||||
(1)Represents shares (in whole units) withheld to satisfy employees' tax withholding obligations related to the vesting of restricted stock awards, which was determined based on the fair market value on the vesting date.
(2)Includes 1,428,358 treasury shares as a result of the PHOT settlement. See Note 13. Related Party Transactions for more information.
Item 3. Defaults Upon Senior Securities
N/A
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Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
On June 16, 2023, Sean Kiewiet, an officer of the Company as defined in Section 16 of the Exchange Act, adopted a Rule 10b5-1 trading arrangement as defined in Item 408(a) of the SEC's Regulation S-K.
| Officer or Director Name and Title | Action | Plan Type | Date | Number of Shares to be sold | Expiration | |||||||||||||||||||||||||||
Sean Kiewiet, Chief Strategy Officer | Adopted | Rule 10b5-1 | June 16, 2023 | 620,000 | December 31, 2024 | |||||||||||||||||||||||||||
Item 6. Exhibits
| Exhibit | Description | |||||||
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31.1 * | ||||||||
31.2 * | ||||||||
32 ** | ||||||||
| 101.INS * | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH * | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL * | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB * | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE * | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF * | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
* Filed herewith.
** Furnished herewith.
† Indicates exhibits that constitute management contracts or compensation plans or arrangements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRIORITY TECHNOLOGY HOLDINGS, INC.
| May 9, 2024 | /s/ Thomas C. Priore Thomas C. Priore President, Chief Executive Officer and Chairman (Principal Executive Officer) | ||||
| May 9, 2024 | /s/ Timothy M. O'Leary Tim O'Leary Chief Financial Officer (Principal Financial Officer) | ||||
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