Priority Technology Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Audited Consolidated Financial Statements and related Notes and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Certain amounts in this section may not add mathematically due to rounding. Cautionary Note Regarding Forward-looking Statements Some of the statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward-looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: • negative economic and political conditions that adversely affect the general economy, consumer confidence and consumer and commercial spending habits, which may, among other things, negatively impact our business, financial condition and results of operations; • competition in the payment processing industry; • the use of distribution partners; • any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses or otherwise; • any breakdowns in our processing systems; • government regulation, including regulation of consumer information; • the use of third-party vendors; • any changes in card association and debit network fees or products; • any failure to comply with the rules established by payment networks or standards established by third-party processors; • any proposed acquisitions or dispositions or any risks associated with completed acquisitions or dispositions; and • other risks and uncertainties set forth in the " Item 1A - Risk Factors " section of this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions, including the risk factors set forth in the " Item 1A - Risk Factors " section of this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K, that may cause our actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. 24 Table of Contents You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Terms Used in this Quarterly Report on Form 10-Q As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "Priority," "we," "us" and "our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries. Results of Operations This section includes certain components of our results of operations for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. We have derived this data, except the key indicators, from our Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and our Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. Revenue For the three months ended March 31, 2024, our consolidated revenue of $205.7 million increased by $20.7 million, or 11.2%, from $185.0 million for the three months ended March 31, 2023. The overall increase was driven by an increase in new enrollments and higher interest income in our Enterprise Payments segment and revenue from the Plastiq business in our B2B Payments segment that was acquired in the quarter ended September 30, 2023. These increases were partially offset by a decrease in revenues in our SMB Payments segment due to decreased volumes. The following table presents our revenues by type: (in thousands) Three Months Ended March 31, 2024 2023 $ Change Revenue Type: Merchant card fees $ 157,947 $ 149,644 $ 8,303 Money transmission services 29,144 21,406 7,738 Outsourced services and other services 15,665 11,005 4,660 Equipment 2,963 2,973 (10) Total revenues $ 205,719 $ 185,028 $ 20,691 Merchant card fees Merchant card fees revenue for the three months ended March 31, 2024 was $157.9 million an increase of $8.3 million or 5.5%, from $149.6 million for the three months ended March 31, 2023. The increase was primarily driven by the Plastiq business and rate increases. These increases were partially offset by a decrease in volume due to the diversification of our merchant portfolio by one of our referral partners. Money transmission services Money transmission services for the three months ended March 31, 2024 was $29.1 million an increase of $7.7 million, or 36.1%, from $21.4 million for the three months ended March 31, 2023. This increase was primarily driven by an increase in customer enrollments. 25 Table of Contents Outsourced services and other services revenue Outsourced services and other services revenue of $15.7 million for the three months ended March 31, 2024 increased by $4.7 million, or 42.3%, from $11.0 million for the three months ended March 31, 2023, primarily due to growth in interest income due to higher interest rates and deposit balances. Equipment Equipment revenue of $3.0 million for the three months ended March 31, 2024 remained consistent with $3.0 million for the three months ended March 31, 2023. Operating expenses were as follows: (in thousands) Three Months Ended March 31, 2024 2023 $ Change Operating expenses Cost of services (excludes depreciation and amortization) $ 129,298 $ 121,966 $ 7,332 Salary and employee benefits 22,150 19,048 3,102 Depreciation and amortization 15,253 18,048 (2,795) Selling, general and administrative 10,994 9,118 1,876 Total operating expenses $ 177,695 $ 168,180 $ 9,515 Cost of services (excludes depreciation and amortization) Cost of services (excludes depreciation and amortization) of $129.3 million for the three months ended March 31, 2024, increased by $7.3 million, or 6.0%, from $122.0 million for the three months ended March 31, 2023, primarily due to the corresponding increase in revenues. Salary and employee benefits Salary and employee benefits expense of $22.2 million for the three months ended March 31, 2024 increased by $3.1 million, or 16.3%, from $19.0 million for the three months ended March 31, 2023, primarily due to merit increases, certain performance based non-recurring bonuses and increased headcount from the acquisition of the Plastiq business and to support the overall growth of the Company. Depreciation and amortization expense Depreciation and amortization expense of $15.3 million for the three months ended March 31, 2024 decreased by $2.8 million, or 15.5%, from $18.0 million for the three months ended March 31, 2023, primarily due to full amortization of certain intangible assets during 2023. Selling, general and administrative Selling, general and administrative expenses of $11.0 million for the three months ended March 31, 2024 increased by $1.9 million, or 20.6%, from $9.1 million for the three months ended March 31, 2023, primarily due to certain software and maintenance expenses and other expenses to support overall growth of the Company. 26 Table of Contents Other Expense, net Other expenses, net were as follows: (in thousands) Three Months Ended March 31, 2024 2023 $ Change Other (expense) income Interest expense $ (20,880) $ (17,699) $ (3,181) Other income, net 632 212 420 Total other expense, net $ (20,248) $ (17,487) $ (2,761) Interest expense Interest expense of $20.9 million for the three months ended March 31, 2024 increased by $3.2 million, or 18.0%, from $17.7 million for the three months ended March 31, 2023, due to increased interest rates and increased outstanding balance for the term loan facility used for the acquisition of the Plastiq business, offset by a decrease in the revolving credit facility. Income tax (benefit) expense Income tax expense was as follows: (in thousands) Three Months Ended March 31, 2024 2023 $ Change Income (loss) before income taxes $ 7,775 $ (639) $ 8,414 Income tax expense (benefit) $ 2,582 $ (133) $ 2,715 Effective tax rate 33.2 % 20.8 % We compute our interim period income tax expense or benefit by using a forecasted EAETR and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income. The EAETR for 2024 is 29.9% and includes the income tax provision on pre-tax income and a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2024 interest expense. The effective tax rate for 2024 changed primarily due to an increase in certain forecasted nondeductible expenses. Our consolidated effective income tax rates differ from the statutory rate due to timing and permanent differences between amounts calculated under accounting principles GAAP and the U.S. tax code. The consolidated effective income tax rate for 2024 may not be indicative of our effective tax rate for future periods. 27 Table of Contents Segment Results SMB Payments (in thousands) Three Months Ended March 31, 2024 2023 $ Change Revenue $ 143,751 $ 154,933 $ (11,182) Operating expenses 131,368 142,922 (11,554) Operating income $ 12,383 $ 12,011 $ 372 Operating margin 8.6 % 7.8 % Depreciation and amortization $ 8,802 $ 10,846 $ (2,044) Key Indicators: Merchant bankcard processing dollar value $ 14,788,095 $ 15,220,715 $ (432,620) Merchant bankcard transaction count 175,228 163,406 11,822 Revenue Revenue from our SMB Payments segment was $143.8 million for the three months ended March 31, 2024, compared to $154.9 million for the three months ended March 31, 2023. The decrease of $11.2 million, or 7.2%, was primarily driven by a decrease in certain incentives and, decreased transaction count and processed merchant bankcard volume due to diversification of merchant portfolios by one of the Company's referral partners. The Company's merchant card fee revenue from the SMB Payments segment ($139.5 million for 2024 and $148.7 million for 2023) as a percentage of merchant bankcard processing dollar value during 2024 decrease to 0.9% from 1.0% during 2023. The decrease was primarily driven by changes in merchant and card mix. Operating Income Operating income from our SMB Payments segment was $12.4 million for the three months ended March 31, 2024, compared to $12.0 million for the three months ended March 31, 2023. The increase of $0.4 million or 3.1% was the result of a decrease in operating income of $4.0 million in merchant card fee revenue driven by the diversification of merchant portfolios by one of the Company's referral partners, the mix related margin compression and a decrease in certain incentive revenue. This decrease was offset by decreases in the allocation of salary and employee benefits expense of $1.7 million, a decrease in selling, general and administrative expenses of $0.7 million due to efficiencies and realignment at the corporate level and a decrease in depreciation and amortization expense of $2.0 million due to full amortization of certain intangible assets in 2023. Depreciation and Amortization Depreciation and amortization expense of our SMB Payments segment was $8.8 million for the three months ended March 31, 2024, compared to $10.8 million for the three months ended March 31, 2023. The decrease of $2.0 million is due to full amortization of certain intangible assets in 2023. 28 Table of Contents B2B Payments (in thousands) Three Months Ended March 31, 2024 2023 $ Change Revenue $ 21,115 $ 2,786 $ 18,329 Operating expenses 21,908 3,635 18,273 Operating loss $ (793) $ (849) $ 56 Operating margin (3.8) % (30.5) % Depreciation and amortization $ 1,640 $ 125 $ 1,515 Key Indicators: B2B issuing dollar volume $ 227,811 $ 198,546 $ 29,265 B2B issuing transaction count 240 280 $ (40) Revenue Revenue from our B2B Payments segment was $21.1 million for the three months ended March 31, 2024, compared to $2.8 million for the three months ended March 31, 2023. The increase of $18.3 million was primarily driven by revenue from the Plastiq business. Operating Loss Operating loss from our B2B Payments segment of $0.8 million for the three months ended March 31, 2024 remained consistent compared to the three months ended March 31, 2023. The increase in operating income due to increased revenue was offset by certain performance based non-recurring bonuses related to the Plastiq business and processing losses related to the CPX business. Depreciation and Amortization Depreciation and amortization from our B2B Payments segment was $1.6 million for the three months ended March 31, 2024, compared to $125.0 thousand depreciation and amortization expense for the three months ended March 31, 2023. The increase is primarily attributable to the Plastiq business. Enterprise Payments (in thousands) Three Months Ended March 31, 2024 2023 $ Change Revenue $ 40,853 $ 27,309 $ 13,544 Operating expenses 15,306 14,646 660 Operating income $ 25,547 $ 12,663 $ 12,884 Operating margin 62.5 % 46.4 % Depreciation and amortization $ 4,356 $ 6,690 $ (2,334) Key Indicators: Average billed clients 703,887 465,219 238,668 Average new enrollments 53,551 45,948 7,603 Revenue Revenue from our Enterprise Payments segment was $40.9 million for the three months ended March 31, 2024, compared to $27.3 million for the three months ended March 31, 2023. The increase of $13.5 million or 49.6%, was primarily driven by an increase in billed clients and customer enrollments, and growth in interest income due to higher interest rates and deposit balances. 29 Table of Contents Operating Income Operating income from our Enterprise Payments segment was $25.5 million for the three months ended March 31, 2024, compared to $12.7 million for the three months ended March 31, 2023. The increase of $12.9 million or 101.7%, was primarily driven by increases in revenues. Depreciation and Amortization Depreciation and amortization from our Enterprise Payments segment was $4.4 million for the three months ended March 31, 2024, compared to $6.7 million depreciation and amortization expense for the three months ended March 31, 2023. The decrease of $2.3 million or 34.9%, was primarily driven by full amortization of certain intangible assets in 2023. Critical Accounting Policies and Estimates Our Unaudited Consolidated Financial Statements have been prepared in accordance with GAAP for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods. Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to these critical accounting policies and estimates as of March 31, 2024. Liquidity and Capital Resources Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, for technology solutions and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital and other anticipated needs, including our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next 12 months. Our principal uses of cash are to fund business operations and administrative costs, and to service our debt. Our working capital, defined as current assets less current liabilities, was $32.4 million at March 31, 2024 and $8.9 million at March 31, 2023. As of March 31, 2024, we had cash totaling $34.3 million compared to $15.9 million at March 31, 2023. These cash balances do not include restricted cash of $12.7 million and $11.0 million at March 31, 2024 and March 31, 2023, respectively, which reflects cash accounts holding customer settlement funds and cash reserves for potential losses. The current portion of long-term debt included in current liabilities was $6.7 million and $6.2 million at March 31, 2024 and March 31, 2023, respectively. At March 31, 2024, we had availability of approximately $65.0 million under our revolving credit facility. The following table and discussion reflect our changes in cash flows for the comparative three month periods. Three Months Ended March 31, (in thousands) 2024 2023 Net cash provided by (used in): Operating activities $ 13,307 $ 27,677 Investing activities (7,669) (7,583) Financing activities (10,279) 57,537 Net (decrease) increase in cash and cash equivalents and restricted cash $ (4,641) $ 77,631 Cash Provided by Operating Activities Net cash provided by operating activities was $13.3 million for the three months ended March 31, 2024 compared to $27.7 million for the three months ended March 31, 2023. The $14.4 million decrease in 2024 was primarily driven by changes in the operating assets and liabilities. 30 Table of Contents Cash Used in Investing Activities Net cash used in investing activities was $7.7 million and $7.6 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, investing activities included additions to property, equipment and software of $6.6 million and $1.1 million related funding of new loans to ISOs. For the three months ended March 31, 2023, net cash used in investing activities included $2.7 million of cash used to fund acquisitions of intangible assets and $5.0 million of cash used to acquire property, equipment and software offset by $0.2 million related to net payments received on loans to ISOs. Cash Provided by Financing Activities Net cash used in financing activities was $10.3 million for the three months ended March 31, 2024, compared to $57.5 million of cash provided by financing activities for the three months ended March 31, 2023. The net cash used in financing activities for the three months ended March 31, 2024 included changes in the net obligations for funds held on the behalf of customers of $1.9 million, offset by $1.7 million of cash used for the repayment of debt, $7.0 million of cash dividends paid to redeemable senior preferred stockholders, $0.4 million of cash used for shares withheld for taxes and $3.1 million of payments of contingent consideration. The net cash provided by financing activities for the three months ended March 31, 2023 included $7.6 million of cash used for the repayment of debt, $11.4 million of cash dividends paid to redeemable senior preferred stockholders, $0.8 million of cash used for shares withheld for taxes and share repurchases, and $2.0 million of payments of contingent consideration for business combinations, which was offset by changes in the net obligations for funds held on the behalf of customers of $79.3 million. Long-term Debt As of March 31, 2024, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $638.1 million, compared to $638.7 million at December 31, 2023, resulting in a decrease of $0.6 million. The debt balance at March 31, 2024 consisted of $652.7 million outstanding under the term facility offset by $14.6 million of unamortized debt discounts and issuance costs. Minimum amortization of the term facility are equal quarterly installments in aggregate annual amounts equal to 1.0% of the original principal, with the balance paid upon maturity. The term facility matures in April 2027 and the revolving credit facility expires in April 2026. The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the loan parties to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates) and to enter into certain leases. If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving credit facility thereunder, the loan parties are required to comply with certain restrictions on its Total Net Leverage Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022; 2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter. As of March 31, 2024, the Company was in compliance with the covenants in the Credit Agreement. Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that may affect our current and/or future financial statements. See Note 1, Basis of Presentation and Significant Accounting Policies , to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a discussion of recently issued accounting pronouncements not yet adopted. 31 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2023. Our exposures to market risk have not changed materially since December 31, 2023.