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, 2024. 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 24 be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Terms Used in this Quarterly Report on Form 10-Q As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "Priority," "we," "us" and "our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries. Results of Operations This section includes certain components of our results of operations for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. 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, 2024. Revenues For the three months ended March 31, 2025, our consolidated revenue of $224.6 million increased by $18.9 million, or 9.2%, from $205.7 million for the three months ended March 31, 2024. This overall increase was mainly driven by increase in merchant bankcard dollar value and total card dollar value processed in our SMB Payments segment, an increase in new enrollments and higher interest income in our Enterprise Payments segment and, an increase in issuing volume in our B2B Payments Segment. The following table presents our revenues by type: (in thousands) Three Months Ended March 31, 2025 2024 $ Change Revenue Type: Merchant card fees $ 167,079 $ 157,947 $ 9,132 Money transmission services 37,449 29,144 8,305 Outsourced services and other services 17,002 15,665 1,337 Equipment 3,100 2,963 137 Total revenues $ 224,630 $ 205,719 $ 18,911 25 Merchant card fees Merchant card fees revenue for the three months ended March 31, 2025 was $167.1 million an increase of $9.1 million or 5.8%, from $157.9 million for the three months ended March 31, 2024. The increase was primarily driven by an increase in merchant bankcard value, total card value, and the transaction count processed by the Company. Money transmission services Money transmission services for the three months ended March 31, 2025 was $37.4 million, an increase of $8.3 million, or 28.5%, from $29.1 million for the three months ended March 31, 2024. This increase was primarily driven by an increase in new customer enrollments and average billed clients. Outsourced services and other services revenue Outsourced services and other services revenue of $17.0 million for the three months ended March 31, 2025 increased by $1.3 million, or 8.5%, from $15.7 million for the three months ended March 31, 2024, primarily due to growth in interest income due to higher balances of permissible investments offset by reduction in interest rates. Equipment Equipment revenue of $3.1 million for the three months ended March 31, 2025 increased by $0.1 million, or 4.6% from $3.0 million for the three months ended March 31, 2024. The increase was primarily due to increased sales of point-of-sale equipment. Operating expenses were as follows: (in thousands) Three Months Ended March 31, 2025 2024 $ Change Operating expenses Cost of revenue (excludes depreciation and amortization) $ 137,353 $ 129,298 $ 8,055 Salary and employee benefits 25,775 22,150 3,625 Depreciation and amortization 13,777 15,253 (1,476) Selling, general and administrative 15,100 10,995 4,105 Total operating expenses $ 192,005 $ 177,696 $ 14,309 Cost of revenue (excludes depreciation and amortization) Cost of revenue (excludes depreciation and amortization) of $137.4 million for the three months ended March 31, 2025 increased by $8.1 million, or 6.2%, from $129.3 million for the three months ended March 31, 2024, primarily due to the corresponding increase in revenues offset by recovery of certain bad debts. Salary and employee benefits Salary and employee benefits expense of $25.8 million for the three months ended March 31, 2025 increased by $3.6 million, or 16.4%, from $22.2 million for the three months ended March 31, 2024, primarily due to merit increases and increased headcount to support the overall growth of the Company. Depreciation and amortization expense Depreciation and amortization expense of $13.8 million for the three months ended March 31, 2025 decreased by $1.5 million, or 9.7%, from $15.3 million for the three months ended March 31, 2024, primarily due to full amortization of certain intangible assets. 26 Selling, general and administrative Selling, general and administrative expenses of $15.1 million for the three months ended March 31, 2025 increased by $4.1 million, or 37.3%, from $11.0 million for the three months ended March 31, 2024, primarily due to increase in professional charges related to SOX compliance, increased marketing and software expenses to support overall growth, and legal expenses related to the Company's secondary offering of common shares. Other Expense, net Other expense, net were as follows: (in thousands) Three Months Ended March 31, 2025 2024 $ Change Other (expense) income Interest expense $ (23,176) $ (20,880) $ (2,296) Debt extinguishment and modification costs (38) — (38) Other income, net 1,107 632 475 Total other expense, net $ (22,107) $ (20,248) $ (1,859) Interest expense Interest expense of $23.2 million for the three months ended March 31, 2025 increased by $2.3 million, or 11.0%, from $20.9 million for the three months ended March 31, 2024, due to increased outstanding balance of the term loan facility used for the redemption of redeemable senior preferred stock, offset by decrease in interest rates. Income tax (benefit) expense Income tax expense was as follows: (in thousands) Three Months Ended March 31, 2025 2024 $ Change Income before income taxes $ 10,518 $ 7,775 $ 2,743 Income tax expense $ 2,250 $ 2,582 $ (332) Effective tax rate 21.4 % 33.2 % 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 2025 is 28.0% and includes the income tax provision on pre-tax income and a tax provision related to the establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2025 interest expense. The effective tax rate for 2025 changed primarily due to an increase in the valuation allowance against certain business interest carryover deferred tax assets. Our consolidated effective income tax rates differ from the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the U.S. tax code. The consolidated effective income tax rate for 2025 may not be indicative of our effective tax rate for future periods. Segment Results The CODM's review of segment performance and allocation of resources are based on the Adjusted EBITDA (a non-GAAP financial measure). Adjusted EBITDA at each segment level includes revenues of the segment, less costs of revenue (excluding 27 depreciation and amortization) and operating expenses that are directly related those revenues. Operating overhead and shared costs are managed centrally and included in corporate segment. This non-GAAP financial measure helps to illustrate the underlying financial and business trends relating to results of operations of the Company and therefore used as a measure of segment profit or loss for the purposes of evaluation of segment performance and allocation of resources. SMB Payments (in thousands) Three Months Ended March 31, 2025 2024 Change Revenues $ 151,690 $ 144,005 $ 7,685 Adjusted EBITDA $ 25,705 $ 25,023 $ 682 Key Indicators: Merchant bankcard processing dollar value $ 15,294,133 $ 14,788,095 $ 506,038 Merchant bankcard transaction count 185,539 175,228 10,311 Total card processing dollar value $ 17,685,491 $ 17,098,758 586,733 Revenues Revenue from our SMB Payments segment was $151.7 million for the three months ended March 31, 2025, compared to $144.0 million for the three months ended March 31, 2024. The increase of $7.7 million, or 5.3%, was primarily driven by an increase in merchant card fee rate, increased card processing dollar value, and transaction count increases. The Company's merchant card fee revenue from the SMB Payments segment ($147.5 million for the three months ended March 31 2025 and $139.8 million for the three months ended March 31, 2024) as a percentage of merchant bankcard processing dollar value during the three months ended March 31, 2025 increased to 0.96% from 0.94% as compared to the three months ended March 31, 2024. Adjusted EBITDA Adjusted EBITDA from our SMB Payments segment was $25.7 million for the three months ended March 31, 2025, compared to $25.0 million for the three months ended March 31, 2024. The increase of $0.7 million, or 2.7% was primarily driven by an increase in revenue, and recovery of certain chargeback losses, offset by mix related margin compression and other operating expenses. B2B Payments (in thousands) Three Months Ended March 31, 2025 2024 Change Revenues $ 23,918 $ 21,344 $ 2,574 Adjusted EBITDA $ 3,516 $ 1,747 $ 1,769 Key Indicators: B2B issuing dollar volume $ 237,290 $ 227,811 $ 9,479 B2B issuing transaction count 211 240 $ (29) Revenues Revenue from our B2B Payments segment was $23.9 million for the three months ended March 31, 2025, compared to $21.3 million for the three months ended March 31, 2024. The increase of $2.6 million, or 12.1% was primarily driven by increase in issuing dollar volume in the CPX business and total card volume processed by Plastiq business. 28 Adjusted EBITDA Adjusted EBITDA from our B2B Payments segment of $3.5 million for the three months ended March 31, 2025, compared to $1.7 million for the three months ended March 31, 2024.The increase in Adjusted EBITDA of $1.8 million or 101.3% was contributed by $0.5 million in the CPX business and $1.3 million in the Plastiq business. Enterprise Payments (in thousands) Three Months Ended March 31, 2025 2024 Change Revenues $ 50,088 $ 40,990 $ 9,098 Adjusted EBITDA $ 42,442 $ 34,727 $ 7,715 Key Indicators: Average CFTPay billed clients 940,463 703,887 236,576 Average CFTPay new enrollments 55,946 53,551 2,395 Revenues Revenue from our Enterprise Payments segment was $50.1 million for the three months ended March 31, 2025, compared to $41.0 million for the three months ended March 31, 2024. The increase of $9.1 million, or 22.2%, was primarily driven by an increase in billed clients and new customer enrollments, the addition of new integrated partners and growth in interest income due to higher balances of permissible investments offset by reduction in interest rates. Adjusted EBITDA Adjusted EBITDA from our Enterprise Payments segment was $42.4 million for the three months ended March 31, 2025, compared to $34.7 million for the three months ended March 31, 2024. The increase of $7.7 million, or 22.2%, was primarily driven by increases in revenues. 29 Three Months Ended March 31, 2025 SMB Payments B2B Payments Enterprise Payments Corporate Total Consolidated Reconciliation of Adjusted EBITDA to GAAP Measure: Adjusted EBITDA $ 25,705 $ 3,516 $ 42,442 $ (20,369) $ 51,294 Interest expense — (1,006) — (22,170) (23,176) Depreciation and amortization (6,625) (1,261) (4,642) (1,249) (13,777) Debt modification and extinguishment expenses — — — (38) (38) Selling, general and administrative (non-recurring) — — — (2,199) (2,199) Non-cash stock based compensation (4) (84) (32) (1,466) (1,586) Income before taxes $ 19,076 $ 1,165 $ 37,768 $ (47,491) $ 10,518 Income tax expense (2,250) Net income $ 8,268 Three Months Ended March 31, 2024 SMB Payments B2B Payments Enterprise Payments Corporate Total Consolidated Reconciliation of Adjusted EBITDA to GAAP Measure: Adjusted EBITDA $ 25,023 $ 1,747 $ 34,727 $ (15,157) $ 46,340 Interest expense (1) (973) — (19,906) (20,880) Depreciation and amortization (8,586) (1,470) (4,039) (1,158) (15,253) Selling, general and administrative (non-recurring) — — — (798) (798) Non-cash stock based compensation (4) (118) (32) (1,480) (1,634) Income before taxes $ 16,432 $ (814) $ 30,656 $ (38,499) $ 7,775 Income tax expense (2,582) Net income $ 5,193 30 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, 2024. There have been no material changes to these critical accounting policies and estimates as of March 31, 2025. 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 $61.9 million at March 31, 2025 and $32.4 million at March 31, 2024. As of March 31, 2025, we had cash totaling $47.6 million compared to $34.3 million at March 31, 2024. These cash balances do not include restricted cash of $11.5 million and $12.7 million at March 31, 2025 and March 31, 2024, 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 $1.9 million and $6.7 million at March 31, 2025 and March 31, 2024, respectively. At March 31, 2025, we had availability of approximately $70.0 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) 2025 2024 Net cash provided by (used in): Operating activities $ 9,956 $ 13,307 Investing activities (9,715) (7,669) Financing activities 47,260 (10,279) Net increase (decrease) in cash and cash equivalents and restricted cash $ 47,501 $ (4,641) Cash Provided by Operating Activities Net cash provided by operating activities was $10.0 million for the three months ended March 31, 2025 compared to $13.3 million for the three months ended March 31, 2024. The $3.3 million decrease was primarily driven by changes in the operating assets and liabilities. Cash Used in Investing Activities Net cash used in investing activities was $9.7 million and $7.7 million for the three months ended March 31, 2025 and 2024, respectively. For the three months ended March 31, 2025, investing activities included additions to property, equipment and software of $5.1 million, $0.1 million related to net funding of new loans to ISOs and $4.5 million related to the acquisition of a business. For the three months ended March 31, 2024, net cash used in investing activities included additions to property, equipment and software of $6.6 million and $1.1 million related funding of new loans to ISOs. 31 Cash Provided by (Used in) Financing Activities Net cash provided by financing activities was $47.3 million for the three months ended March 31, 2025, compared to $10.3 million of cash used in financing activities for the three months ended March 31, 2024. The net cash used in financing activities for the three months ended March 31, 2025 included changes in the net obligations for funds held on the behalf of customers of $59.1 million and proceeds from the exercise of stock options of $0.1 million offset by $10.0 million of cashed used for the unscheduled repayment of the term loan principal, $1.5 million of cash used for shares withheld for taxes and $0.4 million of payments of contingent consideration. 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. Long-term Debt As of March 31, 2025, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $935.5 million, compared to $945.5 million at December 31, 2024, resulting in a decrease of $10.0 million . The decrease is to an unscheduled principal payment. The debt balance at March 31, 2025 consisted of $935.5 million outstanding under the term facility offset by $14.7 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 on May 16, 2031 and the revolving credit facility matures on May 16, 2029. 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, which is defined in the Credit Agreement as the ratio of consolidated total debt less unrestricted cash to consolidated adjusted EBITDA (as defined in the Credit Agreement). If the aggregate principal amount of outstanding revolving loans and letters of credit under the 2024 Credit Agreement exceeds 35% of the total revolving credit facility thereunder, the Company is required to comply with certain restrictions on its Total Net Leverage Ratio. If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.90:1.00 at each fiscal quarter ended September 30, 2024 through December 31, 2025; 2) 6.40:1.00 at each fiscal quarter ended March 31, 2026 and each fiscal quarter thereafter. As of March 31, 2025, the Company was in compliance with the covenants in the 2024 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. 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, 2024. Our exposures to market risk have not changed materially since December 31, 2024. 32