What changed in this filing

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Item 1. Financial Statements

2023-05-11 compared with 2022-11-10 · 295 added, 440 removed, 303 unchanged (71% of the section changed)

Financial Statements

Priority Technology Holdings, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except share data)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

4 unchanged sentences

Prepaid expenses and other current assets 10,443 11,832

Current portion of notes receivable 986 272

Settlement assets and customer account balances 516,687 479,471

Current portion of notes receivable, net of allowance of $ 0 and $ 0 , respectively

Settlement assets and customer/subscriber account balances 612,146 532,018

Total current assets 729,106 652,470

12 unchanged sentences

Current portion of long-term debt 6,200 6,200

Settlement and customer account obligations 517,008 500,291

Settlement and customer/subscriber account obligations 612,953 533,340

Total current liabilities 720,180 630,001

4 unchanged sentences

Commitments and contingencies ( Note 13 )

Redeemable senior preferred stock, net of discounts and issuance costs:

Redeemable senior preferred stock, $ 0.001 par value;

250,000 shares authorized;

225,000 issued and outstanding at September 30, 2022 and December 31, 2021

225,000 issued and outstanding at March 31, 2023 and December 31, 2022

235,439 235,579

2 unchanged sentences

100,000,000 shares authorized;

none issued or outstanding at September 30, 2022 and December 31, 2021

none issued or outstanding at March 31, 2023 and December 31, 2022

Common Stock, $ 0.001 par value;

1,000,000,000 shares authorized;

77,789,291 and 77,460,312 shares issued at September 30, 2022 and December 31, 2021, respectively;

and 75,981,186 and 76,739,896 shares outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 17,719 39,835

Treasury stock at cost, 1,808,105 and 720,416 shares at September 30, 2022 and December 31, 2021, respectively

78,902,459 and 78,385,685 shares issued at March 31, 2023 and December 31, 2022, respectively;

and 76,404,628 and 76,044,629 shares outstanding at March 31, 2023 and December 31, 2022, respectively

Treasury stock at cost, 2,497,831 and 2,341,056 shares at March 31, 2023 and December 31, 2022, respectively

( 12,336 ) ( 11,559 )

Additional paid-in capital 328 9,650

Accumulated other comprehensive income 24 —

Accumulated deficit ( 102,714 ) ( 102,208 )

Total stockholders' deficit attributable to stockholders of PRTH ( 114,622 ) ( 104,041 )

Non-controlling interests in consolidated subsidiaries 852 1,255

Total stockholders' deficit ( 113,770 ) ( 102,786 )

2 unchanged sentences

Priority Technology Holdings, Inc .

Unaudited Consolidated Statements of Operations

Unaudited Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended

Revenues $ 185,028 $ 153,239

8 unchanged sentences

Interest expense ( 17,699 ) ( 11,535 )

Debt extinguishment and modification costs — — — ( 8,322 )

Other income, net 212 51

Total other expense, net ( 17,487 ) ( 11,484 )

Income (loss) before income taxes 899 241 995 ( 12,656 )

Income tax expense 1,691 790 1,833 49

Loss before income taxes ( 639 ) ( 658 )

Income tax benefit ( 133 ) ( 325 )

Net loss ( 506 ) ( 333 )

Dividends and accretion attributable to redeemable senior preferred stockholders ( 11,295 ) ( 8,400 )

NCI preferred unit redemptions — — — ( 10,777 )

Net loss attributable to common stockholders ( 11,801 ) ( 8,733 )

Other comprehensive income (loss)

Foreign currency translation adjustments 24 —

Comprehensive loss $ ( 11,777 ) $ ( 8,733 )

Loss per common share:

4 unchanged sentences

Priority Technology Holdings, Inc .

Unaudited Consolidated Statements of Changes in Stockholders' Deficit

Unaudited Consolidated Statements of Changes in Stockholders' Deficit and Non-Controlling Interest

(in thousands)

Stock Treasury

Stock Additional Paid-In Capital Accumulated Deficit Deficit Attributable to Stockholders

Stock APIC AOCI Accumulated Deficit Deficit Attributable to Stockholders NCIs Total

Shares $ Shares $

1 unchanged sentence

Equity-classified stock-based compensation — — — — 1,936 — — 1,936 — 1,936

Vesting of stock-based compensation 129 — — — — — —

Share repurchases and shares withheld for taxes ( 27 ) 1 27 ( 157 ) ( 1 ) — ( 157 )

Dividends on redeemable senior preferred stock — — — — ( 7,595 ) — ( 7,595 )

Accretion of redeemable senior preferred stock — — — — ( 805 ) — ( 805 )

Net loss — — — — — ( 333 ) ( 333 )

March 31, 2022 76,842 $ 78 747 $ ( 4,248 ) $ 32,992 $ ( 100,391 ) $ ( 71,569 )

Equity-classified stock-based compensation — — — — 1,542 — 1,542

ESPP compensation and vesting of stock-based compensation 517 — — — 37 — — 37 — 37

Share repurchases and shares withheld for taxes ( 431 ) — 431 ( 1,922 ) — — ( 1,922 )

Dividends on redeemable senior preferred stock — — — — ( 7,732 ) — ( 7,732 )

Accretion of redeemable senior preferred stock — — — — ( 817 ) — ( 817 )

Net income — — — — — 287 287

June 30, 2022 76,568 $ 78 1,178 $ ( 6,170 ) $ 26,042 $ ( 100,104 ) $ ( 80,154 )

Equity-classified stock-based compensation — — — — 1,104 — 1,104

ESPP compensation and vesting of stock-based compensation 43 — — — 39 — 39

Share repurchases and shares withheld for taxes ( 630 ) — 630 ( 2,595 ) — — ( 2,595 )

Shares withheld for taxes ( 157 ) — 157 ( 777 ) — — — ( 777 ) — ( 777 )

Dividends on redeemable senior preferred stock — — — — ( 10,477 ) — — ( 10,477 ) — ( 10,477 )

Accretion of redeemable senior preferred stock — — — — ( 818 ) — — ( 818 ) — ( 818 )

Adjustment to NCI — — — — — — — — ( 403 ) ( 403 )

Foreign currency translation adjustment — — — — — 24 — 24 — 24

Net loss — — — — — — ( 506 ) ( 506 ) — ( 506 )

September 30, 2022 75,981 $ 78 1,808 $ ( 8,765 ) $ 17,719 $ ( 100,896 ) $ ( 91,864 )

March 31, 2023 76,404 $ 76 2,498 $ ( 12,336 ) $ 328 $ 24 $ ( 102,714 ) $ ( 114,622 ) $ 852 $ ( 113,770 )

Stock Treasury

Stock Additional Paid-In Capital Accumulated Deficit Deficit Attributable to Stockholders

Stock APIC AOCI Accumulated Deficit Deficit Attributable to Stockholders NCIs Total

Shares $ Shares $

2 unchanged sentences

Vesting of stock-based compensation 129 — — — — — — — — —

Liability-classified stock-based compensation converted to equity-classified — — — — 313 — 313

Exercise of stock options 90 — — — 617 — 617

Net loss — — — — — ( 2,679 ) ( 2,679 )

March 31, 2021 67,640 $ 68 451 $ ( 2,388 ) $ 7,257 $ ( 104,692 ) $ ( 99,755 )

Equity-classified stock-based compensation — — — — 821 — 821

Vesting of stock-based compensation 12 — — — — — —

Exercise of stock options 30 — — — 204 — 204

Dividends on redeemable senior preferred stock — — — — ( 3,413 ) — ( 3,413 )

Accretion of redeemable senior preferred stock — — — — ( 498 ) — ( 498 )

Fair value of warrants issued — — — — 11,357 — 11,357

Fair value of PHOT preferred units redemption — — — — ( 10,777 ) — ( 10,777 )

Fair value of common shares issued for PHOT redemption 1,428 2 — — 9,962 — 9,964

Net loss — — — — — ( 9,477 ) ( 9,477 )

June 30, 2021 69,110 $ 70 451 $ ( 2,388 ) $ 14,913 $ ( 114,169 ) $ ( 101,574 )

Equity-classified stock-based compensation — — — — 790 — 790

Vesting of stock-based compensation 20 — — — — — —

Issuance of acquisition Common Stock 7,551 7 — — 34,381 — 34,388

Exercise of stock options 53 — — — 369 — 369

Share repurchases ( 163 ) — 163 ( 1,023 ) — — ( 1,023 )

Share repurchases and shares withheld for taxes ( 27 ) 1 27 ( 157 ) ( 1 ) — — ( 157 ) — ( 157 )

Dividends on redeemable senior preferred stock — — — — ( 7,595 ) — — ( 7,595 ) — ( 7,595 )

1 unchanged sentence

Net loss — — — — — — ( 333 ) ( 333 ) — ( 333 )

September 30, 2021 76,571 $ 77 614 $ ( 3,411 ) $ 44,640 $ ( 114,718 ) $ ( 73,412 )

March 31, 2022 76,842 $ 78 747 $ ( 4,248 ) $ 32,992 $ — $ ( 100,391 ) $ ( 71,569 ) $ — $ ( 71,569 )

See Notes to Unaudited Consolidated Financial Statements

2 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net loss $ ( 506 ) $ ( 333 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization of assets 18,048 17,353

1 unchanged sentence

Amortization of debt issuance costs and discounts 903 848

Write-off of deferred loan costs and discount — 2,580

Deferred income tax benefit ( 3,567 ) ( 160 )

PIK interest paid — ( 23,715 )

Deferred income tax ( 5,716 ) ( 3,227 )

Change in contingent consideration 229 —

Other non-cash items, net 14 —

7 unchanged sentences

Other assets and liabilities, net ( 462 ) ( 624 )

Net cash provided by (used in) operating activities 50,558 ( 2,567 )

Net cash provided by operating activities 27,677 9,613

Cash flows from investing activities:

Acquisitions of businesses, net of cash acquired — ( 407,129 )

Additions to property, equipment and software ( 5,046 ) ( 2,370 )

Notes receivable loan funding ( 3,250 ) —

Acquisitions of intangible assets ( 6,715 ) ( 48,219 )

Other investing activities 250 —

Notes receivable, net 178 ( 2,400 )

Acquisitions of assets and other investing activities ( 2,715 ) ( 941 )

Net cash used in investing activities ( 7,583 ) ( 5,711 )

Cash flows from financing activities:

Proceeds from issuance of long-term debt, net of issue discount — 607,318

Debt issuance and modification costs paid — ( 9,073 )

Repayments of long-term debt ( 1,550 ) ( 1,550 )

Borrowings under revolving credit facility 23,000 30,000

Repayments of borrowings under revolving credit facility ( 6,000 ) ( 5,000 )

Proceeds from the issuance of redeemable senior preferred stock, net of discount — 219,062

Redeemable senior preferred stock issuance fees and costs — ( 8,098 )

Repurchases of Common Stock and shares withheld for taxes ( 4,674 ) ( 1,023 )

Shares withheld for taxes on vested stock-based compensation ( 777 ) ( 156 )

Dividends paid to redeemable senior preferred stockholders ( 11,435 ) ( 3,505 )

Proceeds from exercise of stock options — 1,190

Settlement and customer accounts obligations, net 25,695 396,338

Contingent consideration for business combinations and asset acquisitions ( 3,992 ) —

Other financing activities — ( 814 )

Nine Months Ended September 30,

Net cash (used in) provided by financing activities ( 8,099 ) 871,010

Settlement and customer/subscriber accounts obligations, net 79,258 12,749

Payment of contingent consideration related to business combination ( 1,959 ) —

Net cash provided by financing activities 57,537 2,538

Net change in cash and cash equivalents, and restricted cash:

2 unchanged sentences

Cash and cash equivalents, and restricted cash equivalents at end of period $ 638,241 $ 524,533

Supplemental cash flow information:

Cash paid for interest $ 33,023 $ 17,043

Non-cash investing and financing activities:

Treasury stock purchases settled after the balance sheet date $ 651 $ —

Accruals for future contingent payments $ 4,825 $ 6,833

Notes receivable from sellers used as partial consideration for acquisitions $ — $ 3,499

Non-cash additions to other noncurrent assets for right-of-use operating leases $ 166 $ —

Table of Cont ents

Priority Technology Holdings, Inc .

Unaudited Consolidated Statements of Cash Flows

(in thousands)

Three Months Ended March 31,

Reconciliation of cash and cash equivalents, and restricted cash:

1 unchanged sentence

Restricted cash 11,012 13,588

Cash and cash equivalents included in settlement assets and customer account balances (see Note 4 )

Cash and cash equivalents included in settlement assets and customer/subscriber account balances (see Note 4 )

611,347 497,388

Total cash and cash equivalents, and restricted cash $ 638,241 $ 524,533

Supplemental cash flow information:

Cash paid for interest $ 16,330 $ 10,613

Non-cash investing and financing activities:

Adjustment to value of profit interest units $ 596 $ —

Acquisition of intangible asset $ 193 $ —

See Notes to Unaudited Consolidated Financial Statements

Tab le of Contents

Priority Technology Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

Nature of Business and Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

Business, Consolidation and Presentation

1 unchanged sentence

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, licensed money transmission services and commercial payments solutions.

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.

4 unchanged sentences

The Consolidated Balance Sheet as of December 31, 2022 was derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 but does not include all disclosures required by GAAP for annual financial statements.

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, 2023, there was no income or loss attributable to NCI in accordance with the applicable operating agreements.

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.

4 unchanged sentences

Actual results could materially differ from those estimates.

In particular, the continued magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and the ultimate effect could result in future charges related to the recoverability of assets, including financial assets, long-lived assets, goodwill and other losses.

Accounts Receivable, net

Accounts receivables include dues from the Company's sponsor banks (for revenues earned, net of related interchange and processing fees, and do not bear interest), agents, merchants and other customers, stated net of allowance for current expected credit losses for any uncollectible amounts.

Foreign Currency

The Company's reporting currency is the U.S.

Assets and liabilities denominated in a foreign currency are translated into U.S.

The functional currency of the Indian subsidiary of the Company is Indian Rupee (i.e.

local currency of Republic of India).

Accordingly, assets and liabilities denominated in a foreign currency are translated into U.S.

dollars at the current exchange rate on the last day of the reporting period.

Revenues and expenses are translated using the average exchange rate in effect during the reporting period.

Foreign exchange translation and transaction gains and losses were not material for the periods presented and are included in the Unaudited Consolidated Statements of Operations.

Emerging Growth Company Status

Prior to December 31, 2021, the Company was an EGC, as defined in JOBS Act, and elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies until the Company is no longer an EGC, including using the extended transition period for complying with new or revised accounting standards.

On December 31, 2021, we ceased to qualify as an EGC and have adopted any new standards that we are now required to adopt.

Translation adjustments are reported as a component of accumulated other comprehensive income (loss).

Recently Adopted Accounting Standards

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

This new guidance changes how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments.

ASU 2016-13 replaces the current "incurred loss" model with an "expected loss" model.

Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred").

Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur.

The Company adopted ASU 2016-13 effective January 1, 2023 using the modified-retrospective approach.

The implementation of ASU 2016-13 did not have a material impact on the Company's unaudited consolidated financial condition and results of operations.

Additionally, the Company modified its accounting policy to conform with the requirements of the adoption of this standard.

Recently Issued Accounting Standards Pending Adoption

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financial Rate.

If certain criteria are met, entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform.

An entity that makes this election would not have to remeasure the contract at the modification date or reassess a previous accounting determination.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) , which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

These updates can be adopted at any time before December 31, 2022.

The Company's term facility and revolving credit facility bear interest at rates based on LIBOR, and the dividend rate on the Company's redeemable senior preferred stock is also based on LIBOR.

The Company is evaluating the potential impact these updates may have on its Unaudited Consolidated Financial Statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments .

This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments.

ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model.

The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur.

The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective.

The Company is currently evaluating the potential impact that this update may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable and notes receivable.

Since the Company is a smaller reporting company, the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods.

Recently Adopted Accounting Standards

Business Combinations

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires entities to recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, as if the acquirer had originated the contracts.

Generally this will result in the acquirer recognizing and measuring the acquired contract assets and liabilities consistent with the manner by which they were recognized and measured by the acquiree.

This update is effective for public companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted, including in an interim period.

If this update is adopted early in an interim period, it must be applied retrospectively to all business combinations that occurred since the beginning of the fiscal year.

The Company elected to early adopt ASU 2021-08 in the second quarter of 2022.

The Company has not acquired any businesses during 2022, therefore there was no impact on the Company's Unaudited Consolidated Financial Statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope ASU 2021-01, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

ASU 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848, amended ASU 2020-04, deferring the sunset date of Topic 848 to December 31, 2024.

The Company will adopt Topic 848 when relevant contracts are modified upon transition to alternative reference rates.

The Company does not expect the adoption of Topic 848 to have a material impact on the Company's Consolidated Financial Statements.

Ovvi Acquisition

On November 18, 2022, the Company completed its acquisition of certain assets and assumption of a certain liability of Ovvi, LLC, under an asset purchase agreement through its wholly-owned subsidiary, Priority Ovvi, LLC ("Ovvi").

The acquisition was accounted for as a business combination using the acquisition method of accounting.

Prior to this acquisition, the business operated as a SaaS proprietary platform for the restaurant, hospitality and retail industries by providing complete all-in-one point of sale software and hardware systems, comprehensive ancillary services including fraud detection and mitigation, and processing services for various types of cards including credit cards, debit cards, private label cards and prepaid cards.

This business is reported within the Company's SMB Payments reportable segment.

Transaction costs were not material and were expensed.

The non-voting incentive shares issued to the seller will be evaluated at each reporting period to determine whether or not profit or loss should be allocated based on the subsidiary's operating agreement.

The preliminary purchase price allocation is set forth in the table below and is expected to be finalized as soon as practicable, but no later than one year from the acquisition date.

(in thousands)

Consideration:

Total purchase consideration 5,026

Fair value of class B shares issued in Ovvi (3)

Total enterprise value of business acquired (3)

Recognized amounts of assets acquired and liabilities assumed:

Accounts receivable $ 110

Inventory 142

Property, equipment and software, net 20

Intangible assets (2)

Other non-current asset 152

Other non-current liability ( 153 )

Total enterprise value of business acquired (3)

(1) Includes $ 50,000 withheld for inventory acquired which was subsequently released in March 2023.

(2) The intangible assets consist of $ 1.3 million for technology, $ 0.4 million for customer relationships and $ 0.3 million for trade names.

(3) During the three months ended March 31, 2023, the Company recorded measurement period adjustments due to additional information received related to the valuation of the Class B shares.

This measurement period adjustment resulted in a decrease of $ 0.6 million in goodwill and NCI.

Other Acquisition

The Company also completed another acquisition during 2022 for approximately $ 1.2 million, which was not material.

The acquisition did not meet the definition of a business, therefore it was accounted for as an asset acquisition under which the cost of acquisition was allocated to the technology asset acquired.

Disaggregation of Revenues

The following table presents a disaggregation of our consolidated revenues by type for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

The following table presents a disaggregation of our consolidated revenues by type for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands) 2023 2022

1 unchanged sentence

Merchant card fees $ 149,644 $ 127,952

Money transmission services revenue 18,291 2,873 51,757 2,873

Money transmission services 21,406 16,283

Outsourced services and other services 11,005 7,097

4 unchanged sentences

The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.

(2) Approximately $ 2.0 million and $ 3.4 million of interest income for the three and nine months ended September 30, 2022, respectively, and $ 0.1 million and $ 0.1 million three and nine months ended September 30, 2021, respectively, is included in outsourced services and other services revenue in the table above.

Approximately $ 0.2 million and $ 0.4 million of interest income for the three and nine months ended September 30, 2022, respectively, and $ 0.1 million and $ 0.6 million of interest income three and nine months ended September 30, 2021, respectively, is included in other income, net on the Company's Unaudited Consolidated Statements of Operations and not reflected in the table above.

Deferred revenues were not material for the three and nine months ended September 30, 2022 and 2021.

(2) Approximately $ 5.0 million and $ 0.6 million of interest income for the three months ended March 31, 2023 and 2022, respectively, is included in outsourced services and other services revenue in the table above.

Approximately $ 0.2 million and $ 0.1 million of interest income for the three months ended March 31, 2023, and 2022, 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, 2023

(in thousands) Merchant Card Fees Money Transmission Services Outsourced and Other Services Equipment Total

SMB Payments $ 148,688 $ — $ 3,272 $ 2,973 $ 154,933

B2B Payments 927 — 1,859 — 2,786

Enterprise Payments 29 21,406 5,874 — 27,309

Total revenues $ 149,644 $ 21,406 $ 11,005 $ 2,973 $ 185,028

Three Months Ended March 31, 2022

(in thousands) Merchant Card Fees Money Transmission Services Outsourced and Other Services Equipment Total

SMB Payments $ 127,387 $ — $ 665 $ 1,907 $ 129,959

B2B Payments 565 — 5,360 — 5,925

Enterprise Payments — 16,283 1,072 — 17,355

Total revenues $ 127,952 $ 16,283 $ 7,097 $ 1,907 $ 153,239

Deferred revenues were not material for the three months ended March 31, 2023 and 2022.

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.

Supplemental balance sheet information related to contracts from customers as of September 30, 2022 and December 31, 2021 was as follows:

(in thousands) Consolidated Balance Sheet Line Item September 30, 2022 December 31, 2021

Contract liabilities, net (current) Customer deposits and advance payments $ — $ 1,280

Contract liabilities were $ 0.6 million and $ 0.2 million as of March 31, 2023 and December 31, 2022, respectively.

Substantially all of these balances are recognized as revenue within 12 months.

As of September 30, 2022, all of the contract liabilities, have been recognized as revenue.

Net contract assets were not material for any period presented.

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three and nine months ended September 30, 2022 and September 30, 2021.

Finxera Acquisition

On September 17, 2021, the Company completed its acquisition of 100 % of the equity interests of Finxera.

Finxera is a provider of deposit account management and licensed money transmission services in the U.S.

The acquisition will allow the Company to offer clients turn-key merchant services, payment facilitation, card issuing, automated payables, virtual banking, e-wallet tools, risk management, underwriting and compliance on a single platform.

The transaction was funded with the Company's cash on hand, proceeds from the issuance of the redeemable senior preferred stock and debt, and the issuance of common equity shares to the sellers.

The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the assets acquired and liabilities assumed were recognized at their fair values as of September 17, 2021, with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill.

The fair values of the assets acquired and liabilities assumed as of September 17, 2021 were estimated by management based on the valuation of the Finxera business using the discounted cash flow method and other factors specific to certain assets and liabilities.

The final purchase price allocation is set forth in the table below.

(in thousands)

Consideration:

Cash $ 379,220

Equity instruments (1)

cash and restricted cash acquired ( 6,598 )

Total purchase consideration, net of cash and restricted cash acquired $ 407,010

Recognized amounts of assets acquired and liabilities assumed:

Accounts receivable $ 385

Prepaid expenses and other current assets (2)

Current portion of notes receivable 784

Settlement assets and customer account balances 498,811

Property, equipment and software, net 712

Intangible assets, net (3)

Other noncurrent assets 955

Accounts payable and accrued expenses ( 7,837 )

Settlement and customer account obligations ( 498,811 )

Deferred income taxes, net (2)

Other noncurrent liabilities ( 5,380 )

Total purchase consideration $ 407,010

(1) The fair value of the 7,551,354 shares of Common stock that were issued was determined based on their market price at the time of closing adjusted for an appropriate liquidity discount due to trading restrictions under Securities Act Rule 144.

(2) During the nine months ended September 30, 2022, the Company recorded measurement period adjustments due to additional information received related to income taxes and deferred income taxes, net.

These measurement period adjustments resulted in an increase of $ 0.1 million in prepaid expenses and an increase of $ 0.3 million in other current assets and deferred income taxes, offset by a decrease in goodwill of $ 0.4 million.

(3) The intangible assets acquired consist of $ 154.9 million for referral partner relationships, $ 34.3 million for technology, $ 20.1 million for customer relationships and $ 2.1 million for money transmission licenses.

Goodwill of $ 244.7 million arising from the acquisition of Finxera primarily consists of the expected synergies and other benefits from combining operations.

Goodwill attributable to the acquisition of $ 8.7 million was deductible for income tax purposes.

The goodwill was allocated 100 % to the Company's Enterprise Payments reportable segment.

In 2020, Finxera acquired two businesses for which the purchase price included contingent consideration valued at $ 6.1 million.

The contingent consideration payable is comprised of earnout opportunities equal to 25 % to 50 % of certain revenues earned from the customers assumed in these acquisitions.

The associated earnout opportunities are to be measured and paid every six months and expire at various dates through December 31, 2023.

As of September 30, 2022, an adjustment of $ 1.1 million was recorded due to changes in the fair value of the contingent consideration (as selling, general and administrative expenses in the Company's Consolidated Statements of Operations) resulting in total contingent consideration of $ 7.2 million.

The accretion of contingent consideration was $ 0.1 million and $ 0.4 million for the three and nine months ended September 30, 2022, respectively, which is included in interest expense on the Company's Unaudited Consolidated Statements of Operations, increasing the total liability to $ 7.6 million of which $ 1.8 million has been paid.

The remaining $ 5.8 million was accrued, of which $ 3.9 million and $ 1.9 million were included in accounts payable and accrued expenses and other noncurrent liabilities, respectively, on the Company's Unaudited Consolidated Balance Sheet as of September 30, 2022.

Other Acquisitions

Wholesale Payments, Inc .

On April 28, 2021, a subsidiary of the Company completed its acquisition of certain residual portfolio rights for a purchase price of $ 42.4 million in addition to $ 24.8 million of post-closing payments and earnout payments based on meeting certain attrition thresholds over a three-year period from the date of acquisition.

The transaction did not meet the definition of a business, therefore it was accounted for as an asset acquisition under which the cost of the acquisition was allocated to the acquired assets based on relative fair values.

As this is an asset acquisition, additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset.

The seller's note payable to the Company of $ 3.0 million and an advance of $ 2.0 million outstanding at the time of the purchase was netted against the initial purchase price, resulting in cash of $ 41.2 million being paid by the Company to the seller, which was funded from cash proceeds from the issuance of the redeemable senior preferred stock and cash on hand.

As of the second quarter 2022, the sellers earned $ 9.4 million of the $ 24.8 million earnout, increasing the total purchase price recorded to $ 51.8 million, which was recorded to residual buyout intangible assets with a seven-year useful life amortized on a straight-line basis.

In September 2022, an adjustment of $ 0.5 million was recorded, decreasing the total amount earned as of September 30, 2022 to $ 8.9 million.

As of September 30, 2022, $ 5.1 million had been paid.

On June 25, 2021, a subsidiary of the Company acquired certain assets and assumed certain related liabilities of C&H under an asset purchase agreement.

C&H was an ISO partner of the Company where it developed expertise in software-integrated payment services, as well as marketing programs for specific verticals such as automotive and youth sports.

This business is reported within the Company's SMB Payments reportable segment.

The initial purchase price for the net assets was $ 35.0 million in cash and a total purchase price of not more than $ 60.0 million including post-closing payments and earnout payments based on certain gross profit and revenue achievements over a three-year period from the date of acquisition.

The acquisition date fair value of the contingent consideration was $ 4.7 million, which increased the total purchase price to $ 39.7 million.

The seller's note payable to the Company of $ 0.5 million at the time of purchase was netted against the initial purchase price, resulting in cash of $ 34.5 million being paid by the Company to the seller, which was funded from a $ 30.0 million draw down of the revolving credit facility under the Credit Agreement held by the Company and $ 4.5 million cash on hand.

Transaction costs were not material and were expensed.

The purchase price allocation is set forth in the table below.

(in thousands)

Accounts receivable $ 214

Prepaid expenses and other current assets 209

Property, equipment and software, net and other current assets 287

Goodwill 13,804

Intangible assets, net (1)

Other noncurrent liabilities ( 214 )

Total purchase price $ 39,700

(1) The intangible assets acquired consist of $ 20.2 million for merchant portfolio intangible assets with a ten-year useful life and $ 5.2 million for ISO partner relationships with a twelve-year useful life.

As of September 30, 2022, the fair value of the C&H contingent consideration was $ 5.0 million, of which $ 3.0 million and $ 2.0 million were included in accounts payable and accrued expenses and other noncurrent liabilities, respectively, on the Company's Unaudited Consolidated Balance Sheet as of September 30, 2022.

The accretion of contingent consideration was $ 0.3 million for the three and nine months ended September 30, 2022, which is included in interest expense on the Company's Unaudited Consolidated Statements of Operations.

The goodwill for the C&H business combination is deductible by the Company for income tax purposes.

Settlement Assets and Customer Account Balances and Related Obligations

Net contract assets and net contract liabilities were not material for any period presented.

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months ended March 31, 2023 and March 31, 2022.

Settlement Assets and Customer/Subscriber Account Balances and Related Obligations

SMB Payments Segment

1 unchanged sentence

The standards of the card networks require possession of funds during the settlement process by a member bank which controls the clearing transactions.

Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company.

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 $ 113.3 million and $ 102.1 million at September 30, 2022 and December 31, 2021, 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.

Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets and customer account balances in the Company's Unaudited Consolidated Balance Sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover.

Expenses for merchant losses for the three and nine months ended September 30, 2022 were $ 0.7 million and $ 2.8 million, respectively.

Expenses for merchant losses for the three and nine months ended September 30, 2021 were $ 0.6 million and $ 1.6 million, respectively.

Member banks held merchant funds of $ 107.0 million and $ 110.3 million at March 31, 2023 and December 31, 2022, 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, 2023 and 2022 were $ 1.0 million and $ 1.1 million, respectively.

B2B Payments Segment

In the Company's B2B Payments segment, the Company earns revenues from certain of its services by processing transactions for FIs and other business customers.

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 related to these funds are not liabilities of the Company.

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 $ 71.8 million and $ 45.5 million at September 30, 2022 and December 31, 2021, respectively.

Company-owned bank accounts held $ 4.4 million and $ 21.4 million at September 30, 2022 and December 31, 2021, respectively, which are included in restricted cash and settlement and customer account obligations in the Company's Unaudited Consolidated Balance Sheets.

Bank-owned FBO accounts held funds of $ 66.6 million and $ 42.7 million at March 31, 2023 and December 31, 2022, respectively.

Company-owned bank accounts held $ 1.6 million and $ 1.8 million at March 31, 2023 and December 31, 2022, respectively, which are included in restricted cash and settlement and customer/subscriber account obligations in the Company's Unaudited Consolidated Balance Sheets.

Enterprise Payments Segment

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The nature of these balances are cash and cash equivalents, but they are not available for day-to-day operations of the Company.

Therefore, the Company has classified these balances as settlement assets and customer account balances and the related obligations as settlement and customer account obligations in the Company's Unaudited Consolidated Balance Sheets.

The Company's settlement assets and customer account balances and settlement and customer account obligations were as follows:

(in thousands) September 30, 2022 December 31, 2021

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 $ 7.1 million and $ 6.1 million at March 31, 2023 and December 31, 2022, respectively.

The Company's consolidated settlement assets and customer/subscriber account balances and settlement and customer/subscriber account obligations were as follows:

(in thousands) March 31, 2023 December 31, 2022

Settlement Assets:

Card settlements due from merchants, net of estimated losses $ 799 $ 444

Customer Account Balances:

Customer/Subscriber Account Balances:

Cash and cash equivalents 611,347 531,574

Time deposits — 10,000

Total settlement assets and customer account balances $ 516,687 $ 479,471

Settlement and Customer Account Obligations:

Total settlement assets and customer/subscriber account balances $ 612,146 $ 532,018

Settlement and Customer/Subscriber Account Obligations:

Customer account obligations $ 600,516 $ 516,086

Due to customer payees (1)

Total settlement and customer account obligations $ 517,008 $ 500,291

Subscriber account obligations 10,831 15,488

Due to customers' payees (1)

Total settlement and customer/subscriber account obligations $ 612,953 $ 533,340

(1) The related assets are included in restricted cash on our Unaudited Consolidated Balance Sheets.

Notes Receivable

The Company had notes receivable of $ 4.6 million and $ 4.7 million as of March 31, 2023 and December 31, 2022, 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 15.4 % as of March 31, 2023 and December 31, 2022.

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, 2023 and December 31, 2022, the Company had no allowance for doubtful notes receivable.

As of March 31, 2023, the principal payments for the Company's notes receivable are due as follows:

(in thousands)

Twelve months ending March 31,

Total $ 4,647

Property, Equipment and Software

A summary of property, equipment and software, net was as follows:

(in thousands) March 31, 2023 December 31, 2022

Computer software $ 67,371 $ 64,197

Equipment 13,611 13,302

Leasehold improvements 7,191 6,990

Furniture and fixtures 2,891 2,909

Property, equipment and software 91,064 87,398

Accumulated depreciation ( 61,171 ) ( 58,409 )

Capital work in-progress 7,083 5,698

Property, equipment and software, net $ 36,976 $ 34,687

Three Months Ended March 31,

(in thousands) 2023 2022

Depreciation expense $ 2,757 $ 2,227

Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist in the reporting of merchant processing transactions and other related information.

Goodwill and Other Intangible Assets

The Company's goodwill relates to the following reporting units as of September 30, 2022 and December 31, 2021:

(in thousands) September 30, 2022 December 31, 2021

The Company's goodwill relates to the following reporting units was as follows:

(in thousands) March 31, 2023 December 31, 2022

SMB Payments $ 124,028 $ 124,625

1 unchanged sentence

Total $ 368,740 $ 369,337

The following table summarizes the changes in the carrying value of goodwill for the periods ended September 30, 2022 and December 31, 2021

The following table summarizes the changes in the carrying value of goodwill for the periods ended March 31, 2023 and December 31, 2022:

(in thousands) Amount

Balance at December 31, 2022 $ 369,337

Changes in the value of goodwill —

Purchase price adjustment for Ovvi ( 597 )

Balance at March 31, 2023

Changes in the value of goodwill —

Balance at June 30, 2022 365,740

Final purchase price adjustment for Finxera ( 393 )

Balance at September 30, 2022

As of September 30, 2022, the Company is not aware of any triggering events for impairment that have occurred since the last annual impairment test.

As of March 31, 2023, the Company is not aware of any triggering events for impairment that have occurred since the last annual impairment test.

Other Intangible Assets

At September 30, 2022 and December 31, 2021, other intangible assets consisted of the following:

(in thousands, except weighted-average data) September 30, 2022 Weighted-average

Other intangible assets consisted of the following:

(in thousands, except weighted-average data) March 31, 2023 Weighted-average

Gross Carrying Value Accumulated Amortization Net Carrying Value

5 unchanged sentences

Technology 51,156 ( 19,524 ) 31,632 8.9

Non-compete agreements 3,390 ( 3,390 ) — 0.0

Trade names 3,183 ( 2,199 ) 984 11.4

Non-compete agreements 3,390 ( 3,390 ) — 0.0

Money transmission licenses (1)

1 unchanged sentence

Total $ 543,543 $ ( 266,065 ) $ 277,478 9.7

(1) Money transmission licenses have an indefinite useful life.

(1) These assets have an indefinite useful life.

(in thousands, except weighted-average data) December 31, 2022 Weighted-average

3 unchanged sentences

Residual buyouts 132,325 ( 76,316 ) 56,009 6.6

126,225 ( 56,186 ) 70,039 6.4

Customer relationships 96,000 ( 83,298 ) 12,702 8.2

1 unchanged sentence

Technology 50,963 ( 18,566 ) 32,397 8.4

48,690 ( 15,039 ) 33,651 9.9

Non-compete agreements (2)

3,390 ( 3,390 ) — 0.0

Trade names 3,183 ( 2,129 ) 1,054 11.6

Non-compete agreements 3,390 ( 3,390 ) — 0.0

Money transmission licenses (1)

1 unchanged sentence

Total $ 539,684 $ ( 250,890 ) $ 288,794 9.7

(1) Additions to residual buyouts were offset by certain assets that became fully amortized in 2021 but are still in service.

(2) Certain assets in the group became fully amortized in 2021 but are still in service.

(1) These assets have an indefinite useful life.

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

Amortization expense $ 15,291 $ 15,126

As of September 30, 2022, there were no impairment indicators present.

Property, Equipment and Software

A summary of property, equipment and software, net as of September 30, 2022 and December 31, 2021 was as follows:

(in thousands) September 30, 2022 December 31, 2021

Computer software $ 63,087 $ 52,715

Equipment 12,916 12,255

Leasehold improvements 6,720 6,467

Furniture and fixtures 2,869 2,819

Property, equipment and software 85,592 74,256

accumulated depreciation ( 55,819 ) ( 49,023 )

Property, equipment and software, net $ 29,773 $ 25,233

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2022 2021 2022 2021

Depreciation expense $ 2,365 $ 2,139 $ 6,902 $ 6,265

Notes Receivable

The Company had notes receivable of $ 3.1 million and $ 0.4 million as of September 30, 2022 and December 31, 2021, 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 14.8 % and 13.8 % as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the Company had no allowance for doubtful notes receivable.

As of September 30, 2022, the principal payments for the Company's notes receivable are due as follows:

(in thousands)

Twelve months ending September 30,

Total $ 3,058

As of March 31, 2023, there were no impairment indicators present.

Debt Obligations

Outstanding debt obligations as of September 30, 2022 and December 31, 2021 consisted of the following:

(in thousands) September 30, 2022 December 31, 2021

Term facility - matures April 27, 2027, interest rates of 8.27 % and 6.75 % at September 30, 2022 and December 31, 2021, respectively

Outstanding debt obligations consisted of the following:

(in thousands) March 31, 2023 December 31, 2022

Term facility - matures April 27, 2027, interest rates of 10.70 % and 9.82 % at March 31, 2023 and December 31, 2022, respectively

$ 609,150 $ 610,700

Revolving credit facility - $ 40.0 million line, matures April 27, 2026, interest rates of 7.24 % and 5.75 % at September 30, 2022 and December 31, 2021, respectively

Revolving credit facility - $ 40.0 million line, matures April 27, 2026, interest rates of 9.59 % and 8.82 % at March 31, 2023 and December 31, 2022, respectively

Total debt obligations 615,650 623,200

7 unchanged sentences

The revolving credit facility incurs an unused commitment fee on any undrawn amount in an amount equal to 0.50 % per year of the unused portion.

The future applicable interest rate margins may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings.

The future applicable interest rate margins on the revolving credit facility may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings.

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 September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

Interest expense (1)

Interest expense included amortization of deferred financing costs and debt discounts of $ 0.9 million and $ 2.6 million for the three and nine months ended September 30, 2022, respectively, and $ 2.1 million and $ 3.3 million three and nine months ended September 30, 2021, respectively.

Deferred Loan Costs and Discounts, and Debt Extinguishment and Modification Expenses

In connection with the April 2021 refinancing, the Company recorded $ 8.3 million of debt extinguishment and modification costs for the nine months ended September 30, 2021 on the Company's Unaudited Consolidated Statements of Operations.

$ 17,699 $ 11,536

(1) Included in interest expense is $ 0.1 million and $ 0.0 million related to the accretion of contingent considerations from acquisitions for the three months ended March 31, 2023 and 2022, respectively.

Interest expense included amortization of deferred financing costs and debt discounts of $ 0.9 million and $ 0.8 million for the three months ended March 31, 2023, and 2022, 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 facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio.

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:

2 unchanged sentences

and 3) 5.50 :1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.

As of September 30, 2022, the Total Net Leverage Ratio was not applicable and the Company was in compliance with our financial covenants.

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 September 30, 2022 December 31, 2021

Contingent consideration, current portion Level 3 $ 6,883 $ 4,006

Contingent consideration, noncurrent portion Level 3 3,870 6,680

Total contingent consideration $ 10,753 $ 10,686

During the three and nine months ended September 30, 2022, there were no transfers into, out of, or between levels of the fair value hierarchy.

The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration liability for the three and nine months ended September 30, 2022:

(in thousands) Contingent Consideration Liability

December 31, 2021 $ 10,686

Payment of contingent consideration ( 415 )

March 31, 2022 10,271

Accretion of discount on contingent consideration 602

Fair value adjustments due to resolution of contingencies related to future payments ( 48 )

June 30, 2022 10,825

Addition of contingent consideration due to acquisition —

Accretion of discount on contingent consideration 108

Fair value adjustments due to resolution of contingencies related to future payments 1,070

Payment of contingent consideration ( 1,250 )

September 30, 2022 $ 10,753

The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration liability for the three and nine months ended September 30, 2021:

(in thousands) Contingent Consideration Liability

December 31, 2020 $ —

Payment of contingent consideration —

March 31, 2021 —

Addition of contingent consideration due to acquisition 4,700

Payment of contingent consideration —

June 30, 2021 4,700

Addition of contingent consideration due to acquisition 5,986

Accretion of discount on contingent consideration —

Fair value adjustments due to resolution of contingencies related to future payments —

Payment of contingent consideration —

September 30, 2021 $ 10,686

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 $ 3.1 million and $ 0.4 million at September 30, 2022 and December 31, 2021, 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 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.

The fair value of the of the term facility was estimated to be $ 590.8 million and $ 613.8 million at September 30, 2022 and December 31, 2021, respectively, and was estimated using binding and non-binding quoted prices in an active secondary market, which considers the credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.

The carrying values of the other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of a market for these debt obligations.

As of March 31, 2023, the Total Net Leverage Ratio was not applicable and the Company was in compliance with the covenants in the Credit Agreement.

Redeemable Senior Preferred Stock and Warrants

The following table provides a reconciliation of the beginning and ending carrying amounts of the redeemable senior preferred stock for the three and nine months ended September 30, 2022:

The following table provides a reconciliation of the beginning and ending carrying amounts of the redeemable senior preferred stock for the three months ended March 31, 2023:

(in thousands) Shares Amount

December 31, 2022 225 $ 235,579

Payment of cash portion of dividend and ticking fee outstanding at December 31, 2022 — ( 5,341 )

Unpaid dividend on redeemable senior preferred stock — 4,383

1 unchanged sentence

March 31, 2023 225 $ 235,439

Unpaid dividend on redeemable senior preferred stock — 4,161

Accretion of discounts and issuance cost — 817

June 30, 2022 225 $ 220,031

Unpaid dividend on redeemable senior preferred stock — 4,234

Accretion of discounts and issuance cost — 830

September 30, 2022 225 $ 225,095

The following table provides a reconciliation of the beginning and ending carrying amounts of the redeemable senior preferred stock for the three and nine months ended September 30, 2021

(in thousands) Shares Amount

December 31, 2020 — $ —

Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs 150 $ 131,426

Unpaid dividend on redeemable senior preferred stock — 1,838

Accretion of discounts and issuance cost — 498

June 30, 2021 150 133,762

Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs 75 68,183

Unpaid dividend on redeemable senior preferred stock — 2,846

Accretion of discounts and issuance cost — 527

September 30, 2021 225 $ 205,318

The dividend rate for the redeemable senior preferred stock is equal to the three-month LIBOR rate (minimum of 1.00 %) plus an applicable margin of 12.00 % (capped at 22.50 %) per year, with a minimum quarterly cash dividend payment of 5.00 % plus the three-month LIBOR rate per year.

The dividend rate is subject to future increases if the Company doesn't comply with the minimum cash payment requirements outlined in the agreement, which includes required payments of dividends, required payments related to redemption or required prepayments.

The dividend rate may also increase if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors or if an event of default as outlined in the agreement occurs.

The dividend rate as of March 31, 2023 and December 31, 2022, was 16.7 % and 15.7 % respectively.

The following table provides a summary of the dividends for the period presented:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

1 unchanged sentence

Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock 4,383 4,090

Dividends declared at the rate of 13.0 % per year

$ 8,636 $ 5,286 $ 23,963 $ 8,699

Dividends declared $ 10,477 $ 7,595

On April 27, 2021, the Company issued warrants to purchase up to 1,803,841 shares of the Common Stock, at an exercise price of $ 0.001 .

As of September 30, 2022, none of the warrants have been exercised.

As of March 31, 2023, none of the warrants have been exercised.

The warrants are considered to be equity contracts indexed in the Company's own shares and therefore were recorded at their inception date relative fair value and are included in additional paid-in capital on the Company's Unaudited Consolidated Balance Sheets.

The Company's consolidated effective income tax rate for the three and nine months ended September 30, 2022, was 188.1 % and 184.2 %, respectively.

The effective rate for the three and nine months ended September 30, 2022 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.

The Company's consolidated effective income tax (benefit) rate for the three and nine months ended September 30, 2021, was 327.8 % and ( 0.4 )%, respectively.

The effective rate for the three and nine months ended September 30, 2021 differed from the statutory federal rate of 21.0% primarily due to an increase in the valuation allowance against certain business interest carryover deferred tax assets.

The Company's consolidated effective income tax rate for the three months ended March 31, 2023, was 20.8 %, compared to a consolidated effective income tax rate of 49.4 % for the three months ended March 31, 2022.

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.

Valuation Allowance for Deferred Income Tax Assets

1 unchanged sentence

In accordance with the provisions of ASC 740, Income Taxes , the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.

Based on management's assessment, as of September 30, 2022, the Company continues to record a full valuation allowance against non-deductible interest expense.

Based on management's assessment, as of March 31, 2023, 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.

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act into law.

The IRA, among other provisions, implements a 15% corporate alternative minimum tax based on global adjusted financial statement income and a 1% excise tax on share repurchases, which shall take effect in tax years beginning after December 31, 2022.

We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material effect on our reported results, cash flows, or financial position when it becomes effective.

If applicable, we expect to reflect the excise tax within equity as part of the repurchase price of common stock.

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, 2023 and December 31, 2022 , the Company has not issued any shares of preferred stock.

Share Repurchase Program

During the second quarter of 2022, PRTH's Board of Directors authorized a general share repurchase program under which the Company may purchase up to 2.0 million shares of its outstanding Common Stock for a total of up to $ 10.0 million.

Under the terms of this plan, the Company may purchase shares through open market purchases, unsolicited or solicited privately negotiated transactions, or in another manner so long as it complies with applicable rules and regulations.

The Company did not repurchase any shares under the share repurchase program during the first quarter of 2023.

March 31, 2023 December 31, 2022

in thousands, except share data, which is in whole units

Number of shares purchased (1)

Average price paid per share $ — $ 4.42

Total Investment (1)

(1) These amounts may differ from the repurchases of Common Stock amounts in the Unaudited Statements of Cash Flows due to shares withheld for taxes and unsettled share repurchases at the end of the quarter.

Stock-based Compensation

For the three months ended March 31, 2023 and 2022, stock-based compensation expense was as follows:

Three Months Ended March 31,

(in thousands) 2023 2022

Stock-based compensation expense $ 1,936 $ 1,558

Income tax benefit for stock-based compensation was immaterial for the three months ended March 31, 2023 and 2022.

No stock-based compensation has been capitalized.

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 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.

The compensation expense for the three months ended March 31, 2023, was immaterial and is included in stock-based compensation in the table above.

Commitments and Contingencies

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Some of these agreements have minimum annual requirements for processing volumes.

Based on existing contracts in place at September 30, 2022, the Company is committed to pay minimum processing fees under these agreements of approximately $ 15.7 million in 2022 and $ 17.0 million in 2023.

Based on existing contracts in place, the Company is committed to pay minimum processing fees under these agreements of approximately $ 13.0 million in 2023 and $ 7.0 million in 2024.

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 $ 0.7 million for the year ended December 31, 2022, and is committed to purchase vendor services worth $ 1.5 million in 2023 and $ 2.3 million in 2024.

Capital Commitments

The Company committed to capital contributions to fund the operations of certain subsidiaries totaling $ 26.0 million and $ 22.0 million as March 31, 2023 and December 31, 2022 , respectively.

The Company is obligated to make the contributions within 10 business days of receiving notice for such contribution from the subsidiary.

As of March 31, 2023 and December 31, 2022, the Company has contributed $ 7.1 million and $ 6.9 million, respectively.

Merchant Reserves

Settlement Assets and Customer/Subscriber Account Balances and Related Obligations , for information about merchant reserves.

The Company received an invoice of $ 2.7 million in March 2023 from one of the partner banks related to certain services rendered during Q1 2022.

Of the invoiced amount, $ 2.3 million was disputed with the partner bank and further review is in

Pending completion of the review, the Company is unable to estimate the amount of liability and therefore an accrual related to this item has not been recorded as of March 31, 2023.

Contingent Consideration

For asset acquisitions that do not meet the definition of a business, the portion of the unpaid purchase price that is contingent on future activities is not initially recorded by the acquirer on the date of acquisition.

Rather, the acquirer generally recognizes contingent consideration when it becomes probable and estimable.

On April 14, 2022, the Company amended the purchase agreement related to its acquisition of certain residual portfolio rights in 2019 to provide for an additional earnout opportunity to be earned during the 12 months ending March 31, 2023.

purchase price was subject to an increase of up to $ 6.4 million in accordance with the terms of the agreement between the Company and the sellers.

In connection with this amendment, the Company paid $ 2.1 million to the sellers during the second quarter of 2022.

As of September 30, 2022 and December 31, 2021, the Company had accrued $ 0.1 million and $ 2.4 million, respectively, of estimated remaining cash consideration and additional accumulated costs related to its October 2019 acquisition of certain merchant portfolio rights.

The Company had recorded aggregate costs, including both actual costs and estimated remaining consideration, totaling $ 11.5 million and $ 11.1 million as of September 30, 2022 and December 31, 2021, respectively.

Amortization expense was adjusted to reflect the new carrying value at the original purchase date.

As of September 30, 2022 and December 31, 2021, accumulated amortization was $ 6.7 million and $ 5.0 million, respectively.

The merchant portfolio has an estimated remaining life of two years at September 30, 2022.

See Note 3, Acquisitions , for information about contingent consideration related to other acquisitions.

The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration liabilities related to acquisitions completed during prior years:

(in thousands) Contingent Consideration Liabilities

December 31, 2022 $ 8,079

Addition of contingent consideration (related to asset acquisition) 2,100

Accretion of contingent consideration 113

Fair value adjustments due to changes in estimates of future payments 116

Payment of contingent consideration ( 4,059 )

March 31, 2023 $ 6,349

Legal Proceedings

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Because the Company is not a member bank, in order to process these bankcard transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card associations.

A majority of the Company's cash and restricted cash is held in certain FIs, substantially all of which is in excess of federal deposit insurance corporation limits.

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.

Related Party Transactions

Employee Loan

In February 2021, the Company loaned $ 0.9 million to an employee who is considered to be an affiliate of the Company.

Under the terms the loan agreement, the loan accrues interest at the rate of 4.0 % per year and is secured by shares of the Company's Common Stock that are owned by the employee.

The loan was originally repayable in August 2021, but the agreement was amended in August 2021 to automatically renew for one year terms until the Company requires repayment.

The loan may be prepaid at any time.

As of September 30, 2022 and December 31, 2021, the amount due to the Company for this loan was $ 0.9 million.

PHOT Preferred Unit Redemption - Distribution to NCIs

In November 2020, the Company agreed to an exchange of shares of Common Stock of the Company, or cash, for the $ 4.8 million of remaining undistributed preferred equity interests related to the February 2019 contribution of the eTab and Cumulus assets to PHOT.

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 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 undistributed 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 received 413,081 shares of Common Stock of the Company in exchange for her 24.1 % interest.

Subsequent to establishing the Common Stock valuation in November 2020 and the date of exchange in May 2021, the Company's Common Stock price appreciated to $ 7.75 per share.

The Company's Unaudited Consolidated Financial Statements for the nine months ended September 30, 2021 reflect this exchange as a distribution to NCIs at an appreciated Common Stock value of $ 6.975 per share, which incorporates a 10 % liquidity discount of $ 0.775 per share due to trading restrictions under Securities Act Rule 144.

Therefore, the total distribution amounted to $ 10.8 million, comprised of $ 10.0 million of Common Stock and $ 0.8 million of cash.

In addition, the Company recorded a $ 2.8 million tax benefit related to an increase in the tax basis associated with the share exchange, for a net impact to equity of $ 8.0 million.

Stock-based Compensation

For the three and nine months ended September 30, 2022 and 2021, stock-based compensation expense was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2022 2021 2022 2021

Stock-based compensation expense $ 1,104 $ 935 4,204 $ 2,349

In March 2021, the Company converted a $ 0.3 million liability-classified stock-based compensation award for restricted stock units under the 2018 Plan, whereby the service inception date preceded the future grant-date, to an equity-classified award when the restricted stock units were granted.

Income tax benefit for stock-based compensation was immaterial for the three and nine months ended September 30, 2022 and 2021.

No stock-based compensation has been capitalized.

The Company's 2018 Plan initially provided for the issuance of up to 6,685,696 shares of the Company's Common Stock.

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.

The offering period shall be for a period of three months, and the first offering period began on January 10, 2022.

The compensation expense for the three and nine months ended September 30, 2022, was immaterial and is included in stock-based compensation in the table above.

Stockholders' Equity

As of September 30, 2022 and December 31, 2021 , the Company has not issued any shares of preferred stock.

2022 Share Repurchase Program

During the second quarter of 2022, PRTH's Board of Directors authorized the Company to implement 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.

In August 2021, Priority's Board of Directors authorized a $ 10.0 million share repurchase program.

Under this program the Company was authorized to purchase up to 1.0 million shares of its Common Stock through open market transactions, unsolicited or solicited privately negotiated transactions, or otherwise in accordance with all applicable securities laws and regulations.

The 2021 Share Repurchase Program was terminated effective on the close of business on September 23, 2021.

For the three and nine months ended September 30, 2022 and 2021, share repurchase activity was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

in thousands, except share data, which is in whole units 2022 2021 2022 2021

Number of shares purchased (1)

626,673 162,715 1,005,918 162,715

Average price paid per share $ 4.11 $ 6.29 $ 4.20 $ 6.29

Total Investment $ 2,578 $ 1,023 $ 4,227 $ 1,023

(1.) These amounts may differ from the repurchases of common stock amounts in the Consolidated Statements of Cash Flows due to unsettled share repurchases at the end of quarter.

Fair Value Measurements

Liabilities measured at fair value on a recurring basis consisted of the following:

(in thousands) Fair Value Hierarchy March 31, 2023 December 31, 2022

Contingent consideration, current portion Level 3 $ 4,349 $ 6,079

Contingent consideration, noncurrent portion Level 3 2,000 2,000

Total contingent consideration $ 6,349 $ 8,079

During the three months ended March 31, 2023, there were no transfers into, out of, or between levels of the fair value hierarchy.

Fair Value Disclosures

Notes Receivable

Notes receivable are carried at amortized cost.

Substantially all of the Company's notes receivable are secured, and the Company provides for allowances when it believes that certain notes receivable may not be collectible.

The carrying value of the Company's notes receivable, net approximates fair value and was approximately $ 4.6 million and $ 4.7 million at March 31, 2023 and December 31, 2022, respectively.

On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.

Debt Obligations

Outstanding debt obligations (see Note 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.

The fair value of the of the term facility was estimated to be $ 604.6 million and $ 606.1 million at March 31, 2023 and December 31, 2022, respectively, and was estimated using binding and non-binding quoted prices in an active secondary market, which considers the credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.

Segment Information

Prior to the fourth quarter of 2021, the Company's three reportable segments included the Consumer Payments segment, the Commercial Payments segment and the Integrated Partners segment.

As a result of the Company's organic growth and recent acquisitions, a new internal reporting structure was implemented which resulted in changes to the Company's reportable segments.

The three new reportable operating segments are SMB Payments, B2B Payments and Enterprise Payments.

All comparative periods have been adjusted to reflect the new reportable segments.

More information about our three reportable segments:

The Company has three reportable segments:

• SMB Payments – provides full-service acquiring and payment-enabled solutions for B2C transactions, leveraging the Company's proprietary software platform, distributed through ISOs, direct sales and vertically focused ISV channels.

• B2B Payments – provides AP automation solutions to corporations, software partners and FIs, including Citi, Mastercard and American Express.

• B2B Payments – provides AP automation solutions to corporations, software partners and FIs, including Citi and Mastercard.

• Enterprise Payments – provides embedded payment and banking solutions to enterprise customers that modernize legacy platforms and accelerate modern software partners looking to monetize payments.

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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 September 30, Nine Months Ended September 30,

2022 2021 2022 2021

(in thousands) Three Months Ended March 31,

SMB Payments $ 154,933 $ 129,959

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Consolidated operating income $ 16,848 $ 10,826

A reconciliation of total operating (loss) income of reportable segments to the Company's net (loss) is provided in the following table:

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

A reconciliation of total operating income of reportable segments to the Company's net loss is provided in the following table:

(in thousands) Three Months Ended March 31,

Total operating income of reportable segments $ 23,825 $ 17,389

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Interest expense ( 17,699 ) ( 11,535 )

Debt modification and extinguishment costs — — — ( 8,322 )

Other income, net 212 51

Income tax expense ( 1,691 ) ( 790 ) ( 1,833 ) ( 49 )

Income tax benefit 133 325

Net loss $ ( 506 ) $ ( 333 )

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The following tables set forth the computation of the Company's basic and diluted loss per common share:

(in thousands except per share amounts) Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

(in thousands except per share amounts) Three Months Ended March 31,

Net loss $ ( 506 ) $ ( 333 )

Dividends and accretion attributable to redeemable senior preferred stockholders ( 11,295 ) ( 8,400 )

Non-controlling interest preferred unit redemptions — — — ( 10,777 )

Net loss attributable to common stockholders $ ( 11,801 ) $ ( 8,733 )

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Loss per common share $ ( 0.15 ) $ ( 0.11 )

(1) The weighted-average common shares outstanding includes 1,803,841 warrants issued in the second quarter of 2021.

(1) The weighted-average common shares outstanding includes 1,803,841 warrants (refer to Note 9.

Redeemable Senior Preferred Stock and Warrants ) .

Potentially anti-dilutive securities that were excluded from the Company's loss per common share that could potentially be dilutive in future periods are as follows:

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

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Restricted stock awards (3)

Liability-classified restricted stock units — 135

Outstanding stock option awards (3)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements