Item 1. Financial Statements
Item 1. Financial Statements
March 31, 2023 December 31, 2022
Assets
Current assets:
Cash and cash equivalents $ 15,882 $ 18,454
Restricted cash 11,012 10,582
Accounts receivable, net of allowances of $ 1,154 and $ 1,143 , respectively
78,042 78,113
Prepaid expenses and other current assets 10,443 11,832
Current portion of notes receivable, net of allowance of $ 0 and $ 0 , respectively
1,581 1,471
Settlement assets and customer/subscriber account balances 612,146 532,018
Total current assets 729,106 652,470
Notes receivable, less current portion 3,066 3,191
Property, equipment and software, net 36,976 34,687
Goodwill 368,740 369,337
Intangible assets, net 277,478 288,794
Deferred income taxes, net 22,163 16,447
Other noncurrent assets 8,456 8,437
Total assets $ 1,445,985 $ 1,373,363
Liabilities, Redeemable Senior Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 57,110 $ 51,864
Accrued residual commissions 41,049 35,979
Customer deposits and advance payments 2,868 2,618
Current portion of long-term debt 6,200 6,200
Settlement and customer/subscriber account obligations 612,953 533,340
Total current liabilities 720,180 630,001
Long-term debt, net of current portion, discounts and debt issuance costs 592,279 598,926
Other noncurrent liabilities 11,857 11,643
Total noncurrent liabilities 604,136 610,569
Total liabilities 1,324,316 1,240,570
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 March 31, 2023 and December 31, 2022
235,439 235,579
Stockholders' deficit:
Preferred stock, $ 0.001 ; 100,000,000 shares authorized; none issued or outstanding at March 31, 2023 and December 31, 2022
— —
Common Stock, $ 0.001 par value; 1,000,000,000 shares authorized; 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
76 76
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 )
Total liabilities, redeemable senior preferred stock and stockholders' deficit $ 1,445,985 $ 1,373,363
See Notes to Unaudited Consolidated Financial Statements
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Priority Technology Holdings, Inc .
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
Three Months Ended
March 31,
2023 2022
Revenues $ 185,028 $ 153,239
Operating expenses
Cost of revenue (excludes depreciation and amortization) 121,966 101,480
Salary and employee benefits 19,048 16,077
Depreciation and amortization 18,048 17,353
Selling, general and administrative 9,118 7,503
Total operating expenses 168,180 142,413
Operating income 16,848 10,826
Other (expense) income
Interest expense ( 17,699 ) ( 11,535 )
Other income, net 212 51
Total other expense, net ( 17,487 ) ( 11,484 )
Loss before income taxes ( 639 ) ( 658 )
Income tax benefit ( 133 ) ( 325 )
Net loss ( 506 ) ( 333 )
Less: Dividends and accretion attributable to redeemable senior preferred stockholders ( 11,295 ) ( 8,400 )
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:
Basic and diluted $ ( 0.15 ) $ ( 0.11 )
Weighted-average common shares outstanding:
Basic and diluted 78,133 78,597
See Notes to Unaudited Consolidated Financial Statements
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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, 2022 76,044 $ 76 2,341 $ ( 11,559 ) $ 9,650 $ — $ ( 102,208 ) $ ( 104,041 ) $ 1,255 $ ( 102,786 )
Equity-classified stock-based compensation — — — — 1,936 — — 1,936 — 1,936
ESPP compensation and vesting of stock-based compensation 517 — — — 37 — — 37 — 37
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 )
March 31, 2023 76,404 $ 76 2,498 $ ( 12,336 ) $ 328 $ 24 $ ( 102,714 ) $ ( 114,622 ) $ 852 $ ( 113,770 )
Common
Stock Treasury
Stock APIC AOCI Accumulated Deficit Deficit Attributable to Stockholders NCIs Total
Shares $ Shares $
December 31, 2021 76,740 $ 77 720 $ ( 4,091 ) $ 39,835 $ — $ ( 100,058 ) $ ( 64,237 ) $ — $ ( 64,237 )
Equity-classified stock-based compensation — — — — 1,558 — — 1,558 — 1,558
Vesting of stock-based compensation 129 — — — — — — — — —
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 )
Accretion of redeemable senior preferred stock — — — — ( 805 ) — — ( 805 ) — ( 805 )
Net loss — — — — — — ( 333 ) ( 333 ) — ( 333 )
March 31, 2022 76,842 $ 78 747 $ ( 4,248 ) $ 32,992 $ — $ ( 100,391 ) $ ( 71,569 ) $ — $ ( 71,569 )
See Notes to Unaudited Consolidated Financial Statements
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Priority Technology Holdings, Inc .
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
2023 2022
Cash flows from operating activities:
Net loss $ ( 506 ) $ ( 333 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of assets 18,048 17,353
Stock-based compensation 1,936 1,558
Amortization of debt issuance costs and discounts 903 848
Deferred income tax ( 5,716 ) ( 3,227 )
Change in contingent consideration 229 —
Other non-cash items, net 14 —
Change in operating assets and liabilities:
Accounts receivable 81 ( 14,440 )
Prepaid expenses and other current assets 481 164
Income taxes (receivable) payable 8,666 2,913
Notes receivable ( 163 ) 98
Accounts payable and other accrued liabilities 3,916 5,316
Customer deposits and advance payments 250 ( 13 )
Other assets and liabilities, net ( 462 ) ( 624 )
Net cash provided by operating activities 27,677 9,613
Cash flows from investing activities:
Additions to property, equipment and software ( 5,046 ) ( 2,370 )
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:
Repayments of long-term debt ( 1,550 ) ( 1,550 )
Repayments of borrowings under revolving credit facility ( 6,000 ) ( 5,000 )
Shares withheld for taxes on vested stock-based compensation ( 777 ) ( 156 )
Dividends paid to redeemable senior preferred stockholders ( 11,435 ) ( 3,505 )
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:
Net increase in cash and cash equivalents, and restricted cash 77,631 6,440
Cash and cash equivalents, and restricted cash at beginning of period 560,610 518,093
Cash and cash equivalents, and restricted cash equivalents at end of period $ 638,241 $ 524,533
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Priority Technology Holdings, Inc .
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
2023 2022
Reconciliation of cash and cash equivalents, and restricted cash:
Cash and cash equivalents $ 15,882 $ 13,557
Restricted cash 11,012 13,588
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
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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. 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.
The accompanying Unaudited Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. These Unaudited Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information pursuant to the rules and regulations of the SEC. 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. 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, 2022.
Use of Estimates
The preparation of Unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.
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. dollar. 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. Translation adjustments are reported as a component of accumulated other comprehensive income (loss).
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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 SOFR. 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), 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.
2. Acquisitions
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.
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(in thousands)
Consideration:
Cash (1)
$ 5,026
Total purchase consideration 5,026
Fair value of class B shares issued in Ovvi (3)
659
Total enterprise value of business acquired (3)
$ 5,685
Recognized amounts of assets acquired and liabilities assumed:
Accounts receivable $ 110
Inventory 142
Property, equipment and software, net 20
Goodwill (3)
3,393
Intangible assets (2)
2,021
Other non-current asset 152
Other non-current liability ( 153 )
Total enterprise value of business acquired (3)
$ 5,685
and
(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.
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3. Revenues
Disaggregation of Revenues
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
Revenue Type:
Merchant card fees $ 149,644 $ 127,952
Money transmission services 21,406 16,283
Outsourced services and other services 11,005 7,097
Equipment 2,973 1,907
Total revenues (1),(2)
$ 185,028 $ 153,239
(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 $ 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
Segment
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
Segment
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.
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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 $ 0.2 million as of March 31, 2023 and December 31, 2022, respectively. Substantially all of these balances are recognized as revenue within 12 months.
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.
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 $ 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 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 $ 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
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
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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/Subscriber Account Balances:
Cash and cash equivalents 611,347 531,574
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
Subscriber account obligations 10,831 15,488
Due to customers' payees (1)
1,606 1,766
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.
5. 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,
2023 $ 1,581
2024 1,051
2025 917
2026 888
2027 210
After 2027 —
Total $ 4,647
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6. 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
Less: 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.
7. Goodwill and Other Intangible Assets
Goodwill
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
Enterprise Payments 244,712 244,712
Total $ 368,740 $ 369,337
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
Purchase price adjustment for Ovvi ( 597 )
Balance at March 31, 2023
$ 368,740
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.
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Other Intangible Assets
Other intangible assets consisted of the following:
(in thousands, except weighted-average data) March 31, 2023 Weighted-average
Useful Life
Gross Carrying Value Accumulated Amortization Net Carrying Value
Other intangible assets:
ISO and referral partner relationships $ 175,300 $ ( 27,096 ) $ 148,204 14.8
Residual buyouts 136,064 ( 81,335 ) 54,729 6.3
Customer relationships 96,000 ( 86,319 ) 9,681 8.2
Merchant portfolios 76,350 ( 46,202 ) 30,148 6.7
Technology 51,156 ( 19,524 ) 31,632 8.9
Trade names 3,183 ( 2,199 ) 984 11.4
Non-compete agreements 3,390 ( 3,390 ) — 0.0
Money transmission licenses (1)
2,100 — 2,100
Total $ 543,543 $ ( 266,065 ) $ 277,478 9.7
(1) These assets have an indefinite useful life.
(in thousands, except weighted-average data) December 31, 2022 Weighted-average
Useful Life
Gross Carrying Value Accumulated Amortization Net Carrying Value
Other intangible assets:
ISO and referral partner relationships $ 175,300 $ ( 24,021 ) $ 151,279 14.8
Residual buyouts 132,325 ( 76,316 ) 56,009 6.6
Customer relationships 96,000 ( 83,298 ) 12,702 8.2
Merchant portfolios 76,423 ( 43,170 ) 33,253 6.7
Technology 50,963 ( 18,566 ) 32,397 8.4
Trade names 3,183 ( 2,129 ) 1,054 11.6
Non-compete agreements 3,390 ( 3,390 ) — 0.0
Money transmission licenses (1)
2,100 — 2,100
Total $ 539,684 $ ( 250,890 ) $ 288,794 9.7
(1) These assets have an indefinite useful life.
Three Months Ended March 31,
(in thousands) 2023 2022
Amortization expense $ 15,291 $ 15,126
As of March 31, 2023, there were no impairment indicators present.
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8. Debt Obligations
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 9.59 % and 8.82 % at March 31, 2023 and December 31, 2022, respectively
6,500 12,500
Total debt obligations 615,650 623,200
Less: current portion of long-term debt ( 6,200 ) ( 6,200 )
Less: unamortized debt discounts and deferred financing costs ( 17,171 ) ( 18,074 )
Long-term debt, net $ 592,279 $ 598,926
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.
Outstanding borrowings under the Credit Agreement accrue interest using either a base rate or a LIBOR rate plus an applicable margin per year, subject to a LIBOR rate floor of 1.00 % per year. 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 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 March 31,
(in thousands) 2023 2022
Interest expense (1)
$ 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 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,
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2023; and 3) 5.50 :1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. 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.
9. 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 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
Accretion of discounts and issuance cost — 818
March 31, 2023 225 $ 235,439
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 March 31,
(in thousands) 2023 2022
Dividends paid in cash $ 6,094 $ 3,505
Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock 4,383 4,090
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 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.
10. Income Taxes
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
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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
The Company considers all available positive and negative evidence to determine whether sufficient taxable income will be generated in the future to permit realization of the existing deferred tax assets. In accordance with the provisions of ASC 740, Income Taxes , the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.
Based on management's assessment, as of 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.
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, 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)
— 1,309,374
Average price paid per share $ — $ 4.42
Total Investment (1)
$ — $ 5,791
(1) These amounts may differ from the repurchases of Common Stock amounts in the Unaudited Statements of Cash Flows due to shares withheld for taxes and unsettled share repurchases at the end of the quarter.
12. 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.
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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 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.
13. 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 that are based on the volume and dollar amounts of processed payment transactions. Some of these agreements have minimum annual requirements for processing volumes. Based on existing contracts in place, 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
See Note 4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations , for information about merchant reserves.
Contingency
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
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process. 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
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
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.
Concentration of Risks
The Company's revenue is substantially derived from processing Visa and Mastercard bankcard transactions. Because the Company is not a member bank, in order to process these bankcard transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card associations.
A majority of the Company's cash and restricted cash is held in certain 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.
14. 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:
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(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.
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.
15. Segment Information
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 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.
Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.
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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,
2023 2022
Revenues:
SMB Payments $ 154,933 $ 129,959
B2B Payments 2,786 5,925
Enterprise Payments 27,309 17,355
Consolidated revenues $ 185,028 $ 153,239
Depreciation and amortization:
SMB Payments $ 10,846 $ 10,824
B2B Payments 125 73
Enterprise Payments 6,690 6,197
Corporate 387 259
Consolidated depreciation and amortization $ 18,048 $ 17,353
Operating (loss) income:
SMB Payments $ 12,011 $ 12,486
B2B Payments ( 849 ) 409
Enterprise Payments 12,663 4,494
Corporate ( 6,977 ) ( 6,563 )
Consolidated operating income $ 16,848 $ 10,826
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,
2023 2022
Total operating income of reportable segments $ 23,825 $ 17,389
Corporate ( 6,977 ) ( 6,563 )
Interest expense ( 17,699 ) ( 11,535 )
Other income, net 212 51
Income tax benefit 133 325
Net loss $ ( 506 ) $ ( 333 )
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16. Loss per Common Share
The following tables set forth the computation of the Company's basic and diluted loss per common share:
(in thousands except per share amounts) Three Months Ended March 31,
2023 2022
Numerator:
Net loss $ ( 506 ) $ ( 333 )
Less: Dividends and accretion attributable to redeemable senior preferred stockholders ( 11,295 ) ( 8,400 )
Net loss attributable to common stockholders $ ( 11,801 ) $ ( 8,733 )
Denominator:
Basic and diluted:
Weighted-average common shares outstanding (1)
78,133 78,597
Loss per common share $ ( 0.15 ) $ ( 0.11 )
(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:
Three Months Ended March 31,
(in thousands) 2023 2022
Outstanding warrants on Common Stock (1)
3,557 3,557
Outstanding options and warrants issued to adviser (2)
600 600
Restricted stock awards (3)
2,245 2,284
Outstanding stock option awards (3)
952 1,203
Total 7,354 7,644
(1) The warrants are exercisable at $ 11.50 per share and expire on August 24, 2023.
(2) The warrants and options are exercisable at $ 12.00 per share and expire on August 24, 2023.
(3) Granted under the 2018 Plan.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.