Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation and Significant Accounting Policies
Business, Consolidation and Presentation
Priority Technology Holdings, Inc. is a holding company with no material operations of its own. Priority Technology Holdings, Inc. and its consolidated subsidiaries are referred to herein collectively as "Priority," the "Company," "we," "our" or "us," unless the context requires otherwise. Priority is the payments and banking fintech that streamlines collecting, storing, lending and sending money through its innovative commerce engine to unlock revenue and generate operational success for businesses.
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, 2023 was derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 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 September 30, 2024, there was no income 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, 2023.
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.
Foreign Currency
The Company's reporting currency is the U.S. dollar. The functional currency of the Indian subsidiary of the Company is the Indian Rupee (i.e. local currency of Republic of India). The functional currency of the Canadian subsidiaries of the Company is the Canadian Dollar. 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).
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires incremental reportable segment disclosures, primarily about significant segment expenses. The amendments also require entities with a single reportable segment to provide all disclosures required by these amendments, and all existing segment disclosures. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024. The Company will adopt this guidance for the year ended December 31, 2024. This guidance is expected to only impact the disclosures with no impact on the results of operations, financial position or cash flows.
Income Taxes ASU 2023-09
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures, to enhance the transparency and decision usefulness of income tax disclosures. The guidance includes improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the potential effects this guidance will have on its disclosures.
Profit Interest ASU 2024-01
In March 2024, the FASB issued ASU 2024-01, Profit Interest and Similar Awards ("ASU 2024-01"), to improve GAAP by adding an illustrative example to demonstrate how an entity should apply the scope in paragraph 718-10-15-3 to determine whether profit interest and similar awards should be accounted for in accordance with Topic 718, Compensation- Stock Compensation. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the potential effects this guidance will have.
2. Acquisition
Plastiq Acquisition
On May 23, 2023, Priority’s subsidiary, Plastiq, Powered by Priority, LLC (the "acquiring entity"), entered into a stalking horse equity and asset purchase agreement (the "Purchase Agreement") with Plastiq, Inc. and certain of its affiliates ("Plastiq") to acquire substantially all of the assets of Plastiq, including the equity interest in Plastiq Canada, Inc. Plastiq is a buyer funded B2B payments platform offering bill pay and instant access to working capital to its customers and complements the Company's existing supplier-funded B2B payments business. On May 24, 2023, Plastiq filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware.
The purchase was completed on July 31, 2023 for a total purchase consideration of approximately $37.0 million. The total purchase consideration included $28.5 million in cash and the remaining consideration is in the nature of deferred or contingent consideration and certain equity interest in the acquiring entity. The cash consideration for the purchase was funded by borrowings from the Company's revolving credit facility.
The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the acquired assets and assumed liabilities were recognized at their fair values as of July 31, 2023, with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill. The fair values of the acquired assets and assumed liabilities as of July 31, 2023 were estimated by management using the discounted cash flow method and other factors specific to certain assets and liabilities. The final purchase price allocation is set forth in the table below.
9
(in thousands)
Consideration:
Cash
$
28,500
Contingent consideration payments (1)
8,419
Common equity of acquiring entity
330
Less: cash and restricted cash acquired
(278)
Total purchase consideration, net of cash and restricted cash acquired
$
36,971
Recognized amounts of assets acquired and liabilities assumed:
Accounts receivable
$
831
Prepaid expenses
490
Settlement assets
8,277
Equipment, net
47
Goodwill(3)
7,240
Intangible assets(2)
30,460
Accounts payable and accrued expenses
(1,881)
Customer deposits
(214)
Settlement obligations
(8,279)
Total purchase consideration
$
36,971
(1)The fair value of the contingent consideration payments issued was determined utilizing a Monte Carlo simulation. The contingent consideration payments were calculated based on the path for the simulated metrics and the contractual terms of the contingent consideration payments and were discounted to present value at a rate reflecting the risk associated with the payoffs. The fair value was estimated to be the average present value of the contingent consideration payments over all iterations of the simulation.
(2)The intangible assets acquired consist of $13.0 million for customer relationships, $7.0 million for referral partner relationships, $6.5 million for technology and $3.9 million for trade name.
(3)During the first and second quarters of 2024, the Company recorded immaterial measurement period adjustments due to a pre-acquisition tax accrual and security deposit which resulted in an adjustment to goodwill, accounts payable and accrued expenses, and prepaid expenses.
10
3. Revenues
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Revenue Type:
Merchant card fees
$
171,814
$
146,974
$
499,007
$
441,142
Money transmission services
33,868
25,831
94,352
70,955
Outsourced services and other services(2)
18,063
13,181
49,984
34,768
Equipment
3,304
3,029
9,292
9,468
Total revenues(1)
$
227,049
$
189,015
$
652,635
$
556,333
(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 $13.8 million and $38.8 million of interest income on customer funds for the three and nine months ended September 30, 2024, respectively, and $9.7 million and $21.9 million for the three and nine months ended September 30, 2023, respectively, is included in outsourced services and other services revenue in the table above. Approximately $0.6 million and $1.8 million of interest income on corporate funds for the three and nine months ended September 30, 2024, respectively, and $0.5 million and $1.1 million three and nine months ended September 30, 2023, respectively, is included in other income, net on the Company's Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) and not reflected in the table above.
The following table presents a disaggregation of our consolidated revenues by segment:
Three Months Ended September 30, 2024
(in thousands)
Merchant Card Fees
Money Transmission Services
Outsourced and Other Services
Equipment
Total
Segment
SMB Payments
$
153,061
$
—
$
2,405
$
3,304
$
158,770
B2B Payments
18,924
—
3,219
—
22,143
Enterprise Payments
521
33,868
12,710
—
47,099
Eliminations
(692)
—
(271)
—
(963)
Total revenues
$
171,814
$
33,868
$
18,063
$
3,304
$
227,049
11
Nine Months Ended September 30, 2024
(in thousands)
Merchant Card Fees
Money Transmission Services
Outsourced and Other Services
Equipment
Total
Segment
SMB Payments
$
443,557
$
—
$
5,026
$
9,292
$
457,875
B2B Payments
55,895
—
9,473
—
65,368
Enterprise Payments
1,325
94,352
36,081
—
131,758
Eliminations
(1,770)
—
(596)
—
(2,366)
Total revenues
$
499,007
$
94,352
$
49,984
$
9,292
$
652,635
Three Months Ended September 30, 2023
(in thousands)
Merchant Card Fees
Money Transmission Services
Outsourced and Other Services
Equipment
Total
Segment
SMB Payments
$
136,292
$
—
$
920
$
3,029
$
140,241
B2B Payments
10,838
—
3,147
—
13,985
Enterprise Payments
124
25,831
9,219
—
35,174
Eliminations
(280)
—
(105)
—
(385)
Total revenues
$
146,974
$
25,831
$
13,181
$
3,029
$
189,015
Nine Months Ended September 30, 2023
(in thousands)
Merchant Card Fees
Money Transmission Services
Outsourced and Other Services
Equipment
Total
Segment
SMB Payments
$
428,524
$
—
$
5,130
$
9,468
$
443,122
B2B Payments
12,718
—
7,026
—
19,744
Enterprise Payments
179
70,955
22,785
—
93,919
Eliminations
(279)
—
(173)
—
(452)
Total revenues
$
441,142
$
70,955
$
34,768
$
9,468
$
556,333
Deferred revenues were not material for the three and nine months ended September 30, 2024 and 2023.
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 $0.5 million and $0.6 million as of September 30, 2024 and December 31, 2023, respectively. Substantially all of these balances are recognized as revenue within 12 months.
Net contract assets were not material for any period presented.
12
Impairment losses recognized on contract assets arising from the Company's contracts with customers were not material for the three and nine months ended September 30, 2024 and 2023.
Impairment losses recognized on receivables arising from the Company's contracts with customers were $1.1 million and $1.5 million for the three and nine months ended September 30, 2024, respectively, and were immaterial for the three and nine months ended September 30, 2023.
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 $10.8 million and $98.0 million at September 30, 2024 and December 31, 2023, respectively.
Exception items that become the liability of the Company are recorded as merchant losses, a component of cost of revenue in the Company's Unaudited Consolidated Statements of Operations and Comprehensive Income (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 and nine months ended September 30, 2024 were $2.5 million and $8.9 million, respectively. Expenses for merchant losses for the three and nine months ended September 30, 2023 were $1.6 million and $3.7 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 in the Company's Unaudited Consolidated Balance Sheets. 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 $109.8 million and $69.0 million at September 30, 2024 and December 31, 2023, respectively. Company-owned bank accounts held $1.4 million and $1.2 million at September 30, 2024 and December 31, 2023, respectively, which are included in restricted cash and settlement and customer/subscriber account obligations in the Company's Unaudited Consolidated Balance Sheets.
Exception items that the Company is still attempting to collect from the customers through the funds settlement process are recognized as settlement assets and customer/subscriber account balances in the Company's Unaudited Consolidated Balance Sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover. Expenses for these merchant losses for the three and nine months ended September 30, 2024 were $0.0 million and $0.3 million, respectively. Expenses for merchant losses for the three and nine months ended September 30, 2023 were not material.
The Company also accepts card payments from its B2B Payments segment customers and processes disbursements to their vendors within the Plastiq business. The time lag between authorization and settlement of card transactions creates certain receivables (from card networks) and payables (to the vendors of customers). These receivables and payables arise from the settlement activities that the Company performs on the behalf of its customers and therefore, are presented as settlement assets and related obligations.
13
Enterprise Payments Segment
In the Company's Enterprise Payments segment revenue is derived primarily from enrollment fees, monthly subscription fees and transaction-based fees from licensed money transmission services. As part of its licensed money transmission services, the Company accepts deposits from consumers and subscribers which are held in bank accounts maintained by the Company on behalf of consumers and subscribers. After accepting deposits, the Company is allowed to invest available balances in these accounts in certain permitted investments, and the return on such investments contributes to the Company's net cash inflows. These balances are payable on demand. As such, the Company recorded these balances and related obligations as current assets and current liabilities. The nature of these balances are cash and cash equivalents, but they are not available for day-to-day operations of the Company. Therefore, the Company has classified these balances as settlement assets and customer/subscriber account balances and the related obligations as settlement and customer/subscriber account obligations in the Company's Unaudited Consolidated Balance Sheets.
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 Income (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 and nine months ended September 30, 2024 were $0.0 million and $0.4 million, respectively. Expenses for merchant losses for the three and nine months ended September 30, 2023 were not material.
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 $36.8 million and $19.6 million at September 30, 2024 and December 31, 2023, respectively.
The Company's consolidated settlement assets and customer/subscriber account balances and settlement and customer/subscriber account obligations were as follows:
(in thousands)
September 30, 2024
December 31, 2023
Settlement Assets, net of estimated losses(1):
Card settlements due from merchants
$
4,694
$
2,705
Card settlements due from networks
10,150
8,185
Other settlement assets
930
889
Customer/subscriber account balances
Cash and cash equivalents
863,587
744,696
Total settlement assets and customer/subscriber account balances
$
879,361
$
756,475
Settlement and Customer/Subscriber Account Obligations:
Customer account obligations
$
847,168
$
710,775
Subscriber account obligations
16,419
33,921
Total customer/subscriber account obligations
863,587
744,696
Due to customers' payees(2)
12,228
11,058
Total settlement and customer/subscriber account obligations
$
875,815
$
755,754
(1)Allowance for estimated losses was $8.2 million and $6.6 million as of September 30, 2024 and December 31, 2023, respectively.
(2)Includes $10.2 million and $8.2 million as of September 30, 2024 and December 31, 2023, respectively, of card settlements due from networks and the remainder is included in restricted cash on our Unaudited Consolidated Balance Sheets.
14
5. Notes Receivable
The Company had notes receivable of $6.3 million and $5.2 million as of September 30, 2024 and December 31, 2023, respectively, which are reported as current portion of notes receivable and notes receivable less current portion on the Company's Unaudited Consolidated Balance Sheets. The notes receivable carried weighted-average interest rates of 18.6% as of September 30, 2024 and December 31, 2023. The notes receivable are comprised of notes receivable from ISOs, and under the terms of the agreements the Company preserves the right to hold back residual payments due to the ISOs and to apply such residuals against future payments due to the Company. As of September 30, 2024 and December 31, 2023, the Company had no allowance for doubtful notes receivable.
As of September 30, 2024, the principal payments for the Company's notes receivable are due as follows:
(in thousands)
Twelve months ending September 30,
2025
$
2,567
2026
1,270
2027
1,304
2028
1,153
After 2028
—
Total
$
6,294
6. Property, Equipment and Software
A summary of property, equipment and software, net was as follows:
(in thousands)
September 30, 2024
December 31, 2023
Computer software
$
100,399
$
78,492
Equipment
11,474
10,377
Leasehold improvements
2,742
1,535
Furniture and fixtures
1,367
1,442
Property, equipment and software
115,982
91,846
Less: Accumulated depreciation
(66,500)
(56,442)
Capital work in-progress
2,121
9,276
Property, equipment and software, net
$
51,603
$
44,680
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Depreciation expense
$
3,523
$
2,763
$
10,122
$
8,335
Computer software represents purchased software and internally developed software that is used to provide the Company's services to its customers.
Fully depreciated assets are retained in property, equipment and software, net, until removed from service. During the nine months ended September 30, 2024 , certain fully depreciated assets were removed from service.
15
7. Goodwill and Other Intangible Assets
Goodwill
The Company's goodwill relates to the following reporting units:
(in thousands)
September 30, 2024
December 31, 2023
SMB Payments
$
124,139
$
124,139
Enterprise Payments
244,712
244,712
Plastiq (B2B Payments)
7,240
7,252
Total
$
376,091
$
376,103
The following table summarizes the changes in the carrying value of goodwill:
(in thousands)
Amount
Balance at December 31, 2023
$
376,103
Plastiq adjustment
(12)
Balance at September 30, 2024
$
376,091
As of September 30, 2024, the Company is not aware of any triggering events for impairment that have occurred since the last annual impairment test.
Other Intangible Assets
Other intangible assets consisted of the following:
September 30, 2024
Weighted-average Useful Life
(in thousands, except weighted-average data)
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Other intangible assets:
ISO and referral partner relationships
$
182,339
$
(46,280)
$
136,059
14.6
Residual buyouts
143,564
(101,536)
42,028
6.2
Customer relationships
109,017
(94,724)
14,293
8.4
Merchant portfolios
83,350
(64,410)
18,940
6.5
Technology
57,639
(26,312)
31,327
8.7
Trade names
7,104
(3,032)
4,072
10.6
Non-compete agreements
3,390
(3,390)
—
0.0
Money transmission licenses(1)
2,100
—
2,100
Total
$
588,503
$
(339,684)
$
248,819
9.5
(1)These assets have an indefinite useful life.
16
December 31, 2023
Weighted-average Useful Life
(in thousands, except weighted-average data)
Gross Carrying Value
Accumulated Amortization
Net Carrying Value
Other intangible assets:
ISO and referral partner relationships
$
182,339
$
(36,506)
$
145,833
14.7
Residual buyouts
135,164
(92,699)
42,465
6.3
Customer relationships
109,017
(92,781)
16,236
8.4
Merchant portfolios
83,350
(56,139)
27,211
6.5
Technology
57,639
(22,712)
34,927
9.0
Trade names
7,104
(2,526)
4,578
11.7
Non-compete agreements
3,390
(3,390)
—
0.0
Money transmission licenses(1)
2,100
—
2,100
Total
$
580,103
$
(306,753)
$
273,350
9.7
(1)These assets have an indefinite useful life.
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Amortization expense(1)
$
10,210
$
14,512
$
34,108
$
44,968
(1)Included in amortization expense is $0.4 million and $1.2 million for the three and nine months ended September 30, 2024, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively, related to the amortization of certain contract acquisition costs.
As of September 30, 2024, there were no impairment indicators present.
8. Debt Obligations
Outstanding debt obligations consisted of the following:
September 30, 2024
December 31, 2023
2024 Credit Agreement
Term facility - matures May 16, 2031, interest rate of 9.81% at September 30, 2024
$
832,913
$
—
Revolving credit facility - $70.0 million line matures May 16, 2029, interest rate of 9.31% at September 30, 2024
—
—
2021 Credit Agreement - refinanced on May 16, 2024
Term facility - original maturity April 27, 2027, interest rate of 11.21% at December 31, 2023
—
654,373
Revolving credit facility - $65.0 million line, original Maturity April 27, 2026, interest rate of 10.20% at December 31, 2023
—
—
Total debt obligations
832,913
654,373
Less: current portion of long-term debt
(8,350)
(6,712)
Less: unamortized debt discounts and deferred financing costs
(16,482)
(15,696)
Long-term debt, net
$
808,081
$
631,965
17
2024 Credit Agreement
On May 16, 2024, the Company entered into a Credit Agreement ("2024 Credit Agreement") which provides 1) a $835.0 million senior secured first lien term loan facility ; and 2) a $70.0 million senior secured revolving facility ("Credit facilities"). Proceeds from these Credit facilities were used to repay the outstanding balances under the 2021 Credit Agreement and redeem a portion of the Company's redeemable senior preferred stock (see Note 9. Redeemable Securities). In accordance with ASC 470, the Company determined on a creditor-by-creditor basis that the 2024 Credit Agreement was both a debt modification and extinguishment of the 2021 Credit Agreement. The Company expensed $3.9 million of previously unamortized fees and $4.8 million of debt issuance costs related to the refinancing which is reported in debt extinguishment and modification in the Company's Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss).
Outstanding borrowings under the Credit agreement accrue interest using a base rate or a SOFR rate plus an applicable margin per year, subject to a SOFR rate floor of 0.50% 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 may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for SOFR and the rate used for base-rate borrowings.
The 2024 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 2024 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) 6.90:1.00 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 September 30, 2024, the Company was in compliance with the covenants in the 2024 Credit Agreement.
2021 Credit Agreement
On April 27, 2021, the Company entered into the 2021 Credit Agreement with Truist which provides for: 1) a $300.0 million Initial Term Loan; 2) a $290.0 million Delayed Draw Term Loan (together, the "Term Facility"); and 3) a $40.0 million senior secured revolving credit facility. The First Amendment to the Credit Agreement on May 20, 2021, clarified and provided further detail on the Credit Agreement's terms. The Second Amendment to the Credit Agreement on September 17, 2021, increased the amount of the Delayed Draw Term Loan facility by $30.0 million to $320.0 million. The additional Delayed Draw Term Loan is part of the same class of term loans made pursuant to the original commitments under the Credit Agreement. The third amendment amended the reference rate from LIBOR to SOFR and increased the revolving facility from $40.0 million to $65.0 million effecting June 30, 2023. The fourth amendment increased the principal balance by $50.0 million and increased the quarterly principal amortization payment from $1.6 million to $1.7 million. Outstanding borrowings from the 2021 Credit Agreement were repaid on May 16, 2024 as part of the refinancing and the Company was released from any related commitments, guarantees and security interests.
Outstanding borrowings under the Credit Agreement accrued interest using either a base rate or a SOFR rate plus an applicable margin per year, subject to a SOFR rate floor of 1.00% per year. Accrued interest is payable on each interest payment date (as defined in the Credit Agreement). The revolving credit facility incurs an unused commitment fee on any undrawn amount in an amount equal to 0.50% per year of the unused portion. The future applicable interest rate margins may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for SOFR and the rate used for base-rate borrowings.
Proceeds from the Initial Term Loan were used to partially fund the refinancing of the Company's existing credit facilities as of April 27, 2021. Proceeds from the Delayed Draw Term Loan were used to fund the Company's acquisition of Finxera. Proceeds from the Fourth Amendment were used to repay the balance of the revolving credit facility (used to acquire the Plastiq business) and added additional cash for general corporate purposes.
18
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.
Interest expense for outstanding debt, including fees for undrawn amounts and amortization of deferred financing costs and debt discounts was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Interest expense(1),(2)
$
23,246
$
19,997
$
65,836
$
55,461
(1)Included in interest expense is $1.1 million and $3.3 million related to the accretion of contingent consideration from acquisitions for the three and nine months ended September 30, 2024, respectively, $0.6 million and $0.8 million for the three and nine months ended September 30, 2023, respectively.
(2)Interest expense included amortization of deferred financing costs and debt discounts of $0.4 million and $2.3 million for the three and nine months ended September 30, 2024, respectively, and $1.0 million and $2.8 million for the three and nine months ended September 30, 2023, respectively.
9. Redeemable Senior Preferred Stock and Warrants
The redeemable senior preferred stock ranks senior to the Company's Common Stock, equal with any other class of the Company's stock designated as being ranked on a parity basis with the redeemable senior preferred stock and junior to any other class of the Company's stock, including preferred stock, that is designated as being ranked senior to the redeemable senior preferred stock, with respect to the payment and distribution of dividends, the purchase or redemption of the Company's stock and the liquidation, winding up of and distribution of assets of the Company.
The following table provides the redemption value of the redeemable senior preferred stock for the periods presented:
(in thousands)
September 30, 2024
December 31, 2023
Redeemable senior preferred stock
$
88,064
$
225,000
Accumulated unpaid dividend
22,639
43,498
Dividend payable
—
7,027
Redemption value
110,703
275,525
Less: unamortized discounts and issuance costs
(5,605)
(16,920)
Redeemable senior preferred stock, net of discounts and issuance costs:
$
105,098
$
258,605
19
The following table provides a reconciliation of the beginning and ending carrying amounts of the redeemable senior preferred stock for the periods presented:
(in thousands)
Shares
Amount
December 31, 2023
225
$
258,605
Unpaid dividend on redeemable senior preferred stock
—
4,699
Accretion of discounts and issuance costs
—
841
Cash portion of dividend outstanding at March 31, 2024
—
7,122
Payment of cash portion of dividend outstanding at December 31, 2023
—
(7,027)
March 31, 2024
225
264,240
Redemption of senior preferred stock(1)
(137)
(166,268)
Unpaid dividend on redeemable senior preferred stock
—
1,871
Accretion of discounts and issuance costs
—
10,139
Cash portion of dividend outstanding at June 30, 2024
—
2,824
Payment of cash portion of dividend outstanding at March 31, 2024
—
(7,122)
June 30, 2024
88
$
105,684
Unpaid dividend on redeemable senior preferred stock
—
1,903
Accretion of discounts and issuance cost
—
335
Payment of cash portion of dividend outstanding at June 30, 2024
—
(2,824)
September 30, 2024
88
$
105,098
(1)On May 16, 2024, the Company used proceeds totaling $170.0 million from the refinancing (see Note 8. Debt Obligations) to redeem a portion of the redeemable senior preferred stock. The redemption consisted of $136.9 million of redeemable senior preferred stock, $29.4 million for accumulated unpaid dividend, and $2.2 million of cash dividend and $1.5 million of accumulated unpaid dividend for the quarter ending June 30, 2024.
The dividend rate as of September 30, 2024 and December 31, 2023, was 17.6% and 17.7% respectively.
The following table provides a summary of the dividends for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Dividends paid in cash(1)
$
2,883
$
6,810
$
15,073
$
19,377
Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock
1,903
4,538
9,960
13,382
Dividends declared
$
4,786
$
11,348
$
25,033
$
32,759
(1)Dividend payable for the three months ended September 30, 2023 was paid on October 2, 2023.
The dividend rate (capped at 22.50%) is equal to the three-month term SOFR (minimum of 1.00%), plus the three-month term SOFR spread adjustment of 0.26% plus the applicable margin of 12.00%. The dividend rate is subject to future increases if the Company doesn't comply with the minimum cash payment requirements outlined in the agreement, which includes required payments of dividends, required payments related to redemption or required prepayments. The dividend rate may also increase if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors or if an event of default as outlined in the agreement occurs.
20
In 2021, the Company issued warrants to purchase up to 1,803,841 shares of the Common Stock, at an exercise price of $0.001. As of September 30, 2024, 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 and nine months ended September 30, 2024, was 31.6% and 37.3%, respectively, compared to a consolidated effective income tax rate of 102.1% and 122.5% for the three and nine months ended September 30, 2023, respectively. The effective rates differed from the statutory rate of 21.0% primarily due to an increase in the valuation allowance against certain business interest carryover deferred tax assets, and certain forecasted nondeductible expenses.
Valuation Allowance for Deferred Income Tax Assets
The Company considers all available positive and negative evidence to determine whether sufficient taxable income will be generated in the future to permit realization of the existing deferred tax assets. In accordance with the provisions of ASC 740, Income Taxes, the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.
Based on management's assessment, as of September 30, 2024, the Company continues to record a full valuation allowance against non-deductible interest expense. The Company will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may change in future periods.
11. Stockholders' Deficit
The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2024 and December 31, 2023, the Company has not issued any shares of preferred stock.
Share Repurchase Program
In 2022, Priority's Board of Directors authorized a general share repurchase program under which the Company may purchase up to 2,000,000 shares of its outstanding Common Stock for a total of up to $10.0 million. Under the terms of this plan, the Company may purchase shares through open market purchases, unsolicited or solicited privately negotiated transactions, or in another manner so long as it complies with applicable rules and regulations. There have been no shares repurchased under this plan since December 2022. As of September 30, 2024, the Company has purchased 1,309,374 shares for $5.7 million under this plan.
21
12. Stock-based Compensation
Stock-based compensation expense was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Stock-based compensation expense
$
1,345
$
1,491
$
4,603
$
5,147
Incentive units compensation expense
58
—
236
—
ESPP compensation expense
13
10
39
36
Total
$
1,416
$
1,501
$
4,878
$
5,183
Income tax benefit for stock-based compensation was immaterial for the three and nine months ended September 30, 2024 and 2023. No stock-based compensation has been capitalized.
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.
As of September 30, 2024, the Company had 3,121,189 shares available for issuance under the 2018 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 at 95% of the lesser of the fair value on the first and last trading day of each offering period.
As of September 30, 2024, the Company had 57,254 shares available for issuance under the 2021 Stock Purchase Plan.
Non-voting Incentive Units
The Company issued non-voting incentive units to certain employees and partners in six subsidiaries. These non-voting incentive units were determined to be equity and are accounted for under ASC 718 Stock Compensation. The non-voting incentive units are either fully vested when granted, or vest according to the service period and/or performance measure noted in the grant agreement. As the non-voting incentive units are vested, they are recognized as NCI to the Company, who is the majority owner of the subsidiaries.
22
13. Related Party Transactions
In February 2019, PHOT, a subsidiary of the Company, received a contribution of substantially all of the operating assets of eTab and Cumulus under asset contribution agreements. PHOT is a part of the Company's SMB reportable segment. These contributed assets were primarily composed of technology-related assets. Prior to these transactions, eTab was 80.0% owned by the Company's Chairman and Chief Executive Officer ("CEO"). No cash consideration was paid to the contributors of the eTab or Cumulus assets on the date of the transactions. As consideration for these contributed assets, the contributors were issued redeemable non-controlling preferred equity interests ("redeemable NCIs") in PHOT. Under these redeemable NCIs, the contributors were eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per year) on any undistributed preferred equity interest ("Total Preferred Equity Interest"). Once the total preferred equity interest is distributed to the holders, the redeemable NCIs cease to exist. The Company's CEO initially owned 83.3% of the redeemable NCIs, which ownership interest was subsequently reduced to 35.3% through the CEO's disposition of interests to others.
In November 2020, the Company agreed with the contributors to an exchange of shares of common stock of the Company, or cash, for the remaining undistributed Total Preferred Equity Interests of $4.8 million. An exchange valuation for the Company's common stock was established as of November 12, 2020 at the prior 20-day volume weighted average price of $2.78 per share. The exchange was contingent upon receiving approval of the Company's lenders; therefore, the binding exchange agreements were not entered into until after lender approval was received in April 2021 in connection with the debt refinancing.
In May 2021, the Company entered into exchange agreements and completed the exchange of 1,428,358 shares of common stock and $0.8 million of cash for the Total Preferred Equity Interests. The CEO received 605,623 shares of common stock of the Company in exchange for his 35.3% interest, and the Company's Chief Operating Officer (“COO”) received 413,081 shares of common stock of the Company in exchange for her 24.1% interest.
On October 31, 2023, a lawsuit was filed alleging that the Board breached its fiduciary duties by approving the above mentioned exchange transaction. The Company denied any wrongdoing. The lawsuit was settled on January 30, 2024, wherein the Company agreed to unwind the exchange transaction and received previously issued shares of common stock of the Company and promissory notes for the amount of cash paid from the CEO, COO and others in exchange of the reissuance of PHOT redeemable preferred units. The returned shares of common stock of the Company are recorded as treasury stock at their closing market price as of the settlement date of January 30, 2024. The reissued PHOT redeemable preferred units are recorded as redeemable NCI at their estimated fair value as of the settlement date on the Company’s Unaudited Consolidated Balance Sheets.
As of May 30, 2024, the Company approved redemption of PHOT redeemable preferred units for cash, common stock of the Company or a combination of both, at the sole discretion of the Company. The redeemable preferred units were accreted to their redemption value of $5.9 million as of May 30, 2024, through net loss available to common stockholders in the Company’s Unaudited Statements of Operations and Comprehensive Income (Loss). The exchange value of the Company's common stock was established based on the 30-day volume weighted average close price adjusted for market illiquidity. During the quarter ended June 30, 2024, the PHOT redeemable preferred units held by the CEO were redeemed in cash for $2.1 million and the promissory notes were satisfied. During the quarter ending September 30, 2024, the PHOT redeemable preferred units held by the COO were redeemed for 408,013 shares of the Company's common stock and PHOT redeemable preferred units held by other holders were redeemed for 404,628 shares of the Company's common stock.
14. Commitments and Contingencies
Minimum Annual Commitments with Third-party Processors
The Company has multi-year agreements with third parties to provide certain payment processing services to the Company. The Company pays processing fees under these agreements. Based on existing contracts in place, the Company is committed to pay minimum processing fees under these agreements of approximately $21.6 million in 2024 and $25.6 million in 2025.
23
Annual Commitment with Vendor
Effective January 1, 2022, the Company entered into a three year business cooperation agreement with a vendor to resell its services. Under the agreement, the Company purchased vendor services worth $1.5 million for the year ended December 31, 2023, and is committed to purchase vendor services worth $2.3 million in 2024.
Capital Commitments
The Company committed to capital contributions to fund the operations of certain subsidiaries totaling $26.0 million as of September 30, 2024 and December 31, 2023. The Company is obligated to make the contributions within 10 business days of receiving notice for such contribution from the subsidiary. As of September 30, 2024 and December 31, 2023, the Company has contributed $16.3 million and $11.8 million, respectively.
Contingent Consideration
The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration liabilities related to completed acquisitions:
(in thousands)
Contingent Consideration Liabilities
December 31, 2023
$
13,438
Accretion of contingent consideration
972
Payment of contingent consideration
(3,071)
March 31, 2024
11,339
Accretion of discount on contingent consideration
1,240
Payment of contingent consideration
(1,085)
June 30, 2024
11,494
Accretion of discount on contingent consideration
1,066
Payment of contingent consideration
(840)
September 30, 2024
$
11,720
Legal Proceedings
The Company is involved in certain legal proceedings and claims which arise in the ordinary course of business. In the opinion of the Company and based on consultations with internal and external counsel, the results of any of these matters, individually and in the aggregate, are not expected to have a material effect on the Company's results of operations, financial condition or cash flows. As more information becomes available, and the Company determines that an unfavorable outcome is probable on a claim and that the amount of probable loss that the Company will incur on that claim is reasonably estimable, the Company will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact the Company's results of operations, financial condition and cash flows.
The Company is involved in a case that was filed on October 11, 2023 and is currently pending in the United States District Court for the Northern District of California (the “Complaint”).The Complaint is a putative class action against The Credit Wholesale Company, Inc. (“Wholesale”), Priority Technology Holdings, Inc., Priority Payment Systems (“PPS”), LLC and Wells Fargo Bank, N.A. (“Wells Fargo”).The Complaint alleges that Wholesale is an agent of Priority, PPS and Wells Fargo and that it made non-consensual recordation of telephonic communications with California businesses in violation of California Invasion of Privacy Act (the “Act”). The Complaint seeks to certify a class of affected businesses and an award of $5,000 per violation of the Act.
24
Concentration of Risks
While providing SMB Acquiring, B2B Payables, and Enterprise Payments processing services, Priority manages funds that are held on behalf of its customers. Because Priority is not a member bank, these customer funds are held in bank accounts maintained with member banks pursuant to sponsorship agreements which require, among other things, that the Company abide by the by-laws and regulations of the card associations and MTL regulators.
As of September 30, 2024, the Company's customer account balances of $847.2 million are maintained in accounts with certain FIs which are eligible to pass-through insurance subject to FDIC rules and regulations (refer to Note 4. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations) A majority of the Company's cash, restricted cash and off-balance sheet settlement funds are held in certain FIs, substantially all of which is in excess of FDIC limits. The Company does not believe it is exposed to any significant credit risk from these transactions.
15. Fair Value
Fair Value Measurements
The Company's contingent consideration liabilities derived from business combinations and are classified within Level 3 of the fair value hierarchy due to the uncertainty of the fair value measurement created by the absence of quoted market prices, the inherent lack of liquidity and unobservable inputs used to measure fair value which require judgement. The Company uses valuation techniques including discounted cash flow analysis based on cash flow projections and Monte Carlo simulations to estimate fair value based on projection period and assumed growth rates. A change in inputs in the valuation techniques used might result in a significantly higher or lower fair value measurement than what is reported. The current portion of contingent consideration is included in accounts payable and accrued expenses on the Company's Unaudited Consolidated Balance Sheets and the noncurrent portion of contingent consideration is included in other noncurrent liabilities on the Company's Unaudited Consolidated Balance Sheets.
Liabilities measured at fair value on a recurring basis consisted of the following:
(in thousands)
Fair Value Hierarchy
September 30, 2024
December 31, 2023
Contingent consideration, current portion
Level 3
$
5,521
$
5,951
Contingent consideration, noncurrent portion
Level 3
6,199
7,487
Total contingent consideration
$
11,720
$
13,438
During the three and nine months ended September 30, 2024, there were no transfers into, out of, or between levels of the fair value hierarchy.
Fair Value Disclosures
Notes Receivable
Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company provides for allowances when it believes that certain notes receivable may not be collectible. The carrying value of the Company's notes receivable, net approximates fair value and was approximately $6.3 million and $5.2 million at September 30, 2024 and December 31, 2023, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.
Debt Obligations
Outstanding debt obligations (see Note 8. Debt Obligations) are reflected in the Company's Unaudited Consolidated Balance Sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.
25
The fair value of the term facility was estimated to be $832.9 million and $651.9 million at September 30, 2024 and December 31, 2023, respectively, and was estimated using binding and non-binding quoted prices in an active secondary market, which considersthe credit risk and market related conditions, and is within Level 2 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.
16. Segment Information
The Company has three reportable segments:
•SMB Payments – Provides full-service acquiring and payment-enabled solutions for B2C transactions, leveraging Priority's proprietary software platform, distributed through ISO, direct sales and vertically focused ISV channels.
•B2B Payments – provides market-leading AP automation solutions to corporations, software partners and industry leading FIs (including Citibank and Mastercard) in addition to improving cash flow by providing instant access to working capital.
•Enterprise Payments – Provides embedded finance and treasury solutions to enterprise customers to modernize legacy platforms and accelerate software partners' strategies to monetize payments.
The Company does not have dedicated assets assigned to any particular reportable segment and such information is not available and continues to be aggregated. Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.
Due to the recent acquisitions, growth, implementation of a shared services model and management of a single unified commerce engine across our payments infrastructure, the costs of operating overhead and shared services becomes less identifiable at the segment level. Therefore, the process of review of the CODM was updated during the quarter ended June 30, 2024. The CODM's review of segment performance and allocation of resources are based on adjusted earnings before interest, income tax and depreciation and amortization expenses ("EBITDA"). Adjusted EBITDA at each segment level includes revenues of the segment, less costs of revenue (excluding depreciation and amortization) and operating expenses that are directly related to those revenues. Operating overhead and shared costs are managed centrally and included in the corporate segment. All comparative periods have been adjusted to reflect this update.
Information on reportable segments and reconciliations to income (loss) before income taxes are as follows:
Three Months Ended September 30, 2024
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Eliminations
Total Consolidated
Revenues
$
158,770
$
22,143
$
47,099
$
—
$
(963)
$
227,049
Adjusted EBITDA
$
28,644
$
1,933
$
40,940
$
(16,876)
$
—
$
54,641
Three Months Ended September 30, 2023
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Eliminations
Total Consolidated
Revenues
$
140,241
$
13,985
$
35,174
$
—
$
(385)
$
189,015
Adjusted EBITDA
$
27,613
$
1,359
$
29,757
$
(13,767)
$
—
$
44,962
26
Nine Months Ended September 30, 2024
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Eliminations
Total Consolidated
Revenues
$
457,875
$
65,368
$
131,758
$
—
$
(2,366)
$
652,635
Adjusted EBITDA
$
82,265
$
5,209
$
112,911
$
(47,853)
$
—
$
152,532
Nine Months Ended September 30, 2023
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Eliminations
Total Consolidated
Revenues
$
443,122
$
19,744
$
93,919
$
—
$
(452)
$
556,333
Adjusted EBITDA
$
84,449
$
1,877
$
77,853
$
(40,484)
$
—
$
123,695
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Reconciliation of Segment measure of profit or loss to income (loss) before income taxes
Total consolidated Adjusted EBITDA
$
54,641
$
44,962
$
152,532
$
123,695
Interest expense
(23,246)
(19,997)
(65,836)
(55,461)
Depreciation and amortization
(13,733)
(17,275)
(44,230)
(53,303)
Debt modification and extinguishment expenses
(43)
—
(8,666)
—
Selling, general and administrative (non-recurring)
(696)
(2,114)
(2,131)
(4,410)
Non-cash stock based compensation
(1,416)
(1,501)
(4,878)
(5,183)
Other non-recurring gain, net
—
166
—
7
Income before income taxes
$
15,507
$
4,241
$
26,791
$
5,345
27
17. Earnings (Loss) per Common Share
The following tables set forth the computation of the Company's basic and diluted earnings (loss) per common share:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands except per share amounts)
2024
2023
2024
2023
Numerator:
Net income (loss)
$
10,608
$
(87)
$
16,795
$
(1,205)
Less: Dividends and accretion attributable to redeemable senior preferred stockholders
(5,121)
(12,192)
(36,348)
(35,252)
Less: Return on redeemable NCI in consolidated subsidiary
For the three months ended September 30, 2024, the Company had 2.1 million dilutive securities that were included in the Company's diluted earnings per share. For the nine months ended September 30, 2024 and three and nine months ended September 30, 2023, all potentially dilutive securities were anti-dilutive, so diluted net loss per share was equivalent to basic net loss per share. Potentially anti-dilutive securities that were excluded from the Company's earnings (loss) per common share are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Outstanding warrants on Common Stock(1)
—
—
—
—
Outstanding options and warrants issued to adviser(2)
—
—
—
—
Restricted stock awards(3)
42
1,109
788
1,297
Outstanding stock option awards(3)
855
918
865
909
Total
897
2,027
1,653
2,206
(1)The warrants were issued in 2018 and were exercisable at $11.50 per share. These warrants expired on August 24, 2023.
(2)The warrants were issued in 2018 and were exercisable at $12.00 per share. These warrants expired on August 24, 2023.
(3)Granted under the 2018 Plan.
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
28
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.
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.
29
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 and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 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.
Revenues
For the three months ended September 30, 2024, our consolidated revenue of $227.0 million increased by $38.0 million, or 20.1%, from $189.0 million for the three months ended September 30, 2023. This overall increase was mainly driven by increase in merchant bankcard volume 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 and acquisition of the Plastiq business on July 31, 2023, in our B2B Payments Segment.
For the nine months ended September 30, 2024, our consolidated revenue of $652.6 million increased by $96.3 million, or 17.3%, from $556.3 million for the nine months ended September 30, 2023. This overall increase was mainly driven by increase in merchant bankcard volume 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 and acquisition of the Plastiq business on July 31, 2023 in our B2B Payments Segment.
The following table presents our revenues by type:
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
2024
2023
$ Change
Revenue Type:
Merchant card fees
$
171,814
$
146,974
$
24,840
$
499,007
$
441,142
$
57,865
Money transmission services
33,868
25,831
8,037
94,352
70,955
23,397
Outsourced services and other services
18,063
13,181
4,882
49,984
34,768
15,216
Equipment
3,304
3,029
275
9,292
9,468
(176)
Total revenues
$
227,049
$
189,015
$
38,034
$
652,635
$
556,333
$
96,302
30
Merchant card fees
Merchant card fees revenue for the three months ended September 30, 2024 was $171.8 million, an increase of $24.8 million, or 16.9%, from $147.0 million for the three months ended September 30, 2023. This increase was primarily driven by an increase in merchant bankcard volume and the transaction count processed by the Company, rate increases, and the acquisition of the Plastiq business on July 31, 2023.
Merchant card fees revenue for the nine months ended September 30, 2024 was $499.0 million an increase of $57.9 million or 13.1%, from $441.1 million for the nine months ended September 30, 2023. The increase was primarily driven by an increase in merchant bankcard volume and the transaction count processed by the Company, rate increases, and the acquisition of the Plastiq business on July 31, 2023.
Money transmission services
Money transmission services for the three months ended September 30, 2024 was $33.9 million, an increase of $8.0 million, or 31.1%, from $25.8 million for the three months ended September 30, 2023. This increase was primarily driven by an increase in new customer enrollments and average billed clients.
Money transmission services for the nine months ended September 30, 2024 was $94.4 million, an increase of $23.4 million, or 33.0%, from $71.0 million for the nine months ended September 30, 2023. 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 $18.1 million for the three months ended September 30, 2024 increased by $4.9 million, or 37.0%, from $13.2 million for the three months ended September 30, 2023, primarily due to growth in interest income due to higher balances of permissible investments.
Outsourced services and other services revenue of $50.0 million for the nine months ended September 30, 2024 increased by $15.2 million, or 43.8%, from $34.8 million for the nine months ended September 30, 2023, primarily due to growth in interest income due to higher balances of permissible investments.
Equipment
Equipment revenue of $3.3 million for the three months ended September 30, 2024 increased by $0.3 million, or 9.1%, from $3.0 million for the three months ended September 30, 2023. The increase was primarily due to increased sales of point-of-sale equipment.
Equipment revenue of $9.3 million for the nine months ended September 30, 2024 decreased by $0.2 million, or 1.9% from $9.5 million for the nine months ended September 30, 2023. The decrease was primarily due to decreased sales of point-of-sale equipment during the first half of the year.
31
Operating expenses were as follows:
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
2024
2023
$ Change
Operating expenses
Cost of revenue (excludes depreciation and amortization)
$
141,070
$
116,682
$
24,388
$
408,486
$
353,929
$
54,557
Salary and employee benefits
21,748
20,129
1,619
66,017
58,286
7,731
Depreciation and amortization
13,733
17,275
(3,542)
44,230
53,303
(9,073)
Selling, general and administrative
12,413
11,423
990
34,620
31,328
3,292
Total operating expenses
$
188,964
$
165,509
$
23,455
$
553,353
$
496,846
$
56,507
Cost of revenue (excludes depreciation and amortization)
Cost of revenue (excludes depreciation and amortization) of $141.1 million for the three months ended September 30, 2024 increased by $24.4 million, or 20.9%, from $116.7 million for the three months ended September 30, 2023, primarily due to corresponding increase in revenues.
Cost of revenue (excludes depreciation and amortization) of $408.5 million for the nine months ended September 30, 2024 increased by $54.6 million, or 15.4%, from $353.9 million for the nine months ended September 30, 2023, primarily due to the corresponding increase in revenues.
Salary and employee benefits
Salary and employee benefits expense of $21.7 million for the three months ended September 30, 2024 increased by $1.6 million, or 8.0%, from $20.1 million for the three months ended September 30, 2023, primarily due to merit increases and increased headcount from the acquisition of the Plastiq business on July 31, 2023.
Salary and employee benefits expense of $66.0 million for the nine months ended September 30, 2024 increased by $7.7 million, or 13.3%, from $58.3 million for the nine months ended September 30, 2023, primarily due to merit increases, certain performance based non-recurring bonuses and increased headcount from the acquisition of the Plastiq business on July 31, 2023.
Depreciation and amortization expense
Depreciation and amortization expense of $13.7 million for the three months ended September 30, 2024 decreased by $3.5 million, or 20.5%, from $17.3 million for the three months ended September 30, 2023, primarily due to full amortization of certain intangible assets.
Depreciation and amortization expense of $44.2 million for the nine months ended September 30, 2024 decreased by $9.1 million, or 17.0%, from $53.3 million for the nine months ended September 30, 2023, primarily due to full amortization of certain intangible assets.
Selling, general and administrative
Selling, general and administrative expenses of $12.4 million for the three months ended September 30, 2024 increased by $1.0 million, or 8.7%, from $11.4 million for the three months ended September 30, 2023, primarily due to increase in professional charges related to SOX compliance, increased marketing and software expenses to support overall growth of the Company, offset by decrease in certain non-recurring professional charges related to business combination.
Selling, general and administrative expenses of $34.6 million for the nine months ended September 30, 2024 increased by $3.3 million, or 10.5%, from $31.3 million for the nine months ended September 30, 2023, primarily due to increase in professional charges related to SOX compliance, increased marketing and software expenses to support overall growth of the Company, offset by decrease in certain non-recurring professional charges related to business combination and legal expenses.
32
Other Expense, net
Other expense, net were as follows:
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
2024
2023
$ Change
Other (expense) income
Interest expense
$
(23,246)
$
(19,997)
$
(3,249)
$
(65,836)
$
(55,461)
$
(10,375)
Debt extinguishment and modification costs
(43)
—
(43)
(8,666)
—
(8,666)
Other income, net
711
732
(21)
2,011
1,319
692
Total other expense, net
$
(22,578)
$
(19,265)
$
(3,313)
$
(72,491)
$
(54,142)
$
(18,349)
Interest expense
Interest expense of $23.2 million for the three months ended September 30, 2024 increased by $3.2 million, or 16.2%, from $20.0 million for the three months ended September 30, 2023, due to increased outstanding balance of the term loan facility used for the acquisition of the Plastiq business and redemption of redeemable senior preferred stock, offset by a decrease in the revolving credit facility.
Interest expense of $65.8 million for the nine months ended September 30, 2024 increased by $10.4 million, or 18.7%, from $55.5 million for the nine months ended September 30, 2023, due to increased interest rates and increased outstanding balance of the term loan facility used for the acquisition of the Plastiq business and redemption of redeemable senior preferred stock, offset by a decrease in the revolving credit facility.
Debt extinguishment and modification costs
Debt extinguishment and modification costs of $0.04 million for the three months ended September 30, 2024 and $8.7 million for the nine months ended September 30, 2024, relates to the refinancing of the Company's credit facilities on May 16, 2024.
Income tax (benefit) expense
Income tax expense was as follows:
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
2024
2023
$ Change
Income before income taxes
$
15,507
$
4,241
$
11,266
$
26,791
$
5,345
$
21,446
Income tax expense
$
4,899
$
4,328
$
571
$
9,996
$
6,550
$
3,446
Effective tax rate
31.6
%
102.1
%
37.3
%
122.5
%
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 36.0% 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 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 2024 may not be indicative of our effective tax rate for future periods.
33
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 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 September 30,
Nine Months Ended September 30,
2024
2023
Change
2024
2023
Change
Revenues
$
158,770
$
140,241
$
18,529
$
457,875
$
443,122
$
14,753
Adjusted EBITDA
$
28,644
$
27,613
$
1,031
$
82,265
$
84,449
$
(2,184)
Key Indicators:
Merchant bankcard processing dollar value
$
15,517,131
$
14,150,995
$
1,366,136
$
46,096,861
$
44,483,491
$
1,613,370
Merchant bankcard transaction count
195,786
178,721
17,065
564,855
522,470
42,385
Revenues
Revenue from our SMB Payments segment was $158.8 million for the three months ended September 30, 2024, compared to $140.2 million for the three months ended September 30, 2023. The increase of $18.5 million, or 13.2%, was primarily driven by increased transaction count and processed merchant bankcard dollar value. The Company's merchant card fee revenue from the SMB Payments segment ($153.1 million for 2024 and $136.3 million for 2023) as a percentage of merchant bankcard processing dollar value during 2024 increased to 0.99% from 0.96% during 2023.
Revenue from our SMB Payments segment was $457.9 million for the nine months ended September 30, 2024, compared to $443.1 million for the nine months ended September 30, 2023. The increase of $14.8 million, or 3.3%, was primarily driven by a decrease in certain incentives, decrease in rates as the Company's merchant card fee revenue from the SMB Payments segment ($443.6 million for 2024 and $428.5 million for 2023) as a percentage of merchant bankcard processing dollar value during 2024 remained consistent at 0.96% as compared to 2023.
Adjusted EBITDA
Adjusted EBITDA from our SMB Payments segment was $28.6 million for the three months ended September 30, 2024, compared to $27.6 million for the three months ended September 30, 2023. The increase of $1 million or 3.7% was primarily driven by the contribution margin from increased revenue offset by increased selling, general and administrative expenses and mix related margin compression.
Adjusted EBITDA from our SMB Payments segment was $82.3 million for the nine months ended September 30, 2024, compared to $84.4 million for the nine months ended September 30, 2023. The decrease of $2.2 million or 2.6% was primarily driven by a decrease in certain incentive revenues, mix related margin compression and higher level of chargeback losses and other operating expenses.
34
B2B Payments
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
Change
2024
2023
Change
Revenues
$
22,143
$
13,985
$
8,158
$
65,368
$
19,744
$
45,624
Adjusted EBITDA
$
1,933
$
1,359
$
574
$
5,209
$
1,877
$
3,332
Key Indicators:
B2B issuing dollar volume
$
255,323
$
221,456
$
33,867
$
732,589
$
636,361
$
96,228
B2B issuing transaction count
256
267
$
(11)
738
829
$
(91)
Revenues
Revenue from our B2B Payments segment was $22.1 million for the three months ended September 30, 2024, compared to $14.0 million for the three months ended September 30, 2023. The increase of $8.2 million was primarily driven by revenue from the Plastiq business and growth in CPX business.
Revenue from our B2B Payments segment was $65.4 million for the nine months ended September 30, 2024, compared to $19.7 million for the nine months ended September 30, 2023. The increase of $45.6 million was primarily driven by revenue from the Plastiq business and growth in CPX business.
Adjusted EBITDA
Adjusted EBITDA from our B2B Payments segment of $1.9 million for the three months ended September 30, 2024, compared to $1.4 million for the three months ended September 30, 2023. The increase in Adjusted EBITDA of $0.6 million was primarily driven by $1.3 million in the Plastiq business, offset by decrease of $0.7 million in the CPX business due to certain bad debt write-offs. The Plastiq business was acquired on July 31, 2023.
Adjusted EBITDA from our B2B Payments segment of $5.2 million for the nine months ended September 30, 2024, compared to $1.9 million for the nine months ended September 30, 2023.The increase in Adjusted EBITDA of $3.3 million was contributed by $0.9 million in the CPX business and $2.4 million in the Plastiq business. The Plastiq business was acquired on July 31, 2023.
Enterprise Payments
(in thousands)
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
Change
2024
2023
Change
Revenues
$
47,099
$
35,174
$
11,925
$
131,758
$
93,919
$
37,839
Adjusted EBITDA
$
40,940
$
29,757
$
11,183
$
112,911
$
77,853
$
35,058
Key Indicators:
Average billed clients
832,351
590,578
241,773
766,370
525,274
241,096
Average new enrollments
62,875
56,269
6,606
57,281
51,864
5,417
Revenues
Revenue from our Enterprise Payments segment was $47.1 million for the three months ended September 30, 2024, compared to $35.2 million for the three months ended September 30, 2023. The increase of $11.9 million or 33.9%, was primarily driven by an increase in billed clients and new customer enrollments, and growth in interest income due to higher balances of permissible investments.
35
Revenue from our Enterprise Payments segment was $131.8 million for the nine months ended September 30, 2024, compared to $93.9 million for the nine months ended September 30, 2023. The increase of $37.8 million or 40.3%, was primarily driven by an increase in billed clients and new customer enrollments, and growth in interest income due to higher balances of permissible investments.
Adjusted EBITDA
Adjusted EBITDA from our Enterprise Payments segment was $40.9 million for the three months ended September 30, 2024, compared to $29.8 million for the three months ended September 30, 2023. The increase of $11.2 million or 37.6%, was primarily driven by increases in revenues.
Adjusted EBITDA from our Enterprise Payments segment was $112.9 million for the nine months ended September 30, 2024, compared to $77.9 million for the nine months ended September 30, 2023. The increase of $35.1 million or 45.0%, was primarily driven by increases in revenues.
Three Months Ended September 30, 2024
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Total Consolidated
Reconciliation of Adjusted EBITDA to GAAP Measure
Adjusted EBITDA
$
28,644
$
1,933
$
40,940
$
(16,876)
$
54,641
Interest expense
—
(1,066)
—
(22,180)
(23,246)
Depreciation and amortization
(6,939)
(1,261)
(4,304)
(1,229)
(13,733)
Debt modification and extinguishment expenses
—
—
—
(43)
(43)
Selling, general and administrative (non-recurring)
—
—
—
(696)
(696)
Non-cash stock based compensation
(4)
(73)
(33)
(1,306)
(1,416)
Income (loss) before taxes
$
21,701
$
(467)
$
36,603
$
(42,330)
$
15,507
Three Months Ended September 30, 2023
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Total Consolidated
Reconciliation of Adjusted EBITDA to GAAP Measure
Adjusted EBITDA
$
27,613
$
1,359
$
29,757
$
(13,767)
$
44,962
Interest expense
—
(498)
(62)
(19,437)
(19,997)
Depreciation and amortization
(9,136)
(719)
(5,947)
(1,473)
(17,275)
Selling, general and administrative (non-recurring)
—
—
—
(2,114)
(2,114)
Non-cash stock based compensation
(114)
(36)
(66)
(1,285)
(1,501)
Other non-recurring gain, net
—
—
—
166
166
Income (loss) before taxes
$
18,363
$
106
$
23,682
$
(37,910)
$
4,241
36
Nine Months Ended September 30, 2024
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Total Consolidated
Reconciliation of Adjusted EBITDA to GAAP Measure
Adjusted EBITDA
$
82,265
$
5,209
$
112,911
$
(47,853)
$
152,532
Interest expense
(1)
(3,280)
—
(62,555)
(65,836)
Depreciation and amortization
(24,065)
(3,992)
(12,431)
(3,742)
(44,230)
Debt modification and extinguishment expenses
—
—
—
(8,666)
(8,666)
Selling, general and administrative (non-recurring)
—
—
—
(2,131)
(2,131)
Non-cash stock based compensation
(12)
(299)
(98)
(4,469)
(4,878)
Income (loss) before taxes
$
58,187
$
(2,362)
$
100,382
$
(129,416)
$
26,791
Nine Months Ended September 30, 2023
(in thousands)
SMB Payments
B2B Payments
Enterprise Payments
Corporate
Total Consolidated
Reconciliation of Adjusted EBITDA to GAAP Measure
Adjusted EBITDA
$
84,449
$
1,877
$
77,853
$
(40,484)
$
123,695
Interest expense
—
(498)
(293)
(54,670)
(55,461)
Depreciation and amortization
(27,553)
(756)
(18,571)
(6,423)
(53,303)
Selling, general and administrative (non-recurring)
—
—
—
(4,410)
(4,410)
Non-cash stock based compensation
(408)
(237)
(195)
(4,343)
(5,183)
Other non-recurring gain, net
—
—
—
7
7
Income (loss) before taxes
$
56,488
$
386
$
58,794
$
(110,323)
$
5,345
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 September 30, 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.
37
Our working capital, defined as current assets less current liabilities, was $37.7 million at September 30, 2024 and $16.6 million at September 30, 2023. As of September 30, 2024, we had cash totaling $41.1 million compared to $24.6 million at September 30, 2023. These cash balances do not include restricted cash of $13.4 million and $13.9 million at September 30, 2024 and September 30, 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 $8.4 million and $6.2 million at September 30, 2024 and September 30, 2023, respectively.At September 30, 2024, 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 nine month periods.
Nine Months Ended September 30,
(in thousands)
2024
2023
Net cash provided by (used in):
Operating activities
$
61,852
$
72,680
Investing activities
(24,734)
(51,224)
Financing activities
84,716
157,029
Net (decrease) increase in cash and cash equivalents and restricted cash
$
121,834
$
178,485
Cash Provided by Operating Activities
Net cash provided by operating activities was $61.9 million for the nine months ended September 30, 2024 compared to $72.7 million for the nine months ended September 30, 2023. The $10.8 million decrease in 2024 was primarily driven by changes in the operating assets and liabilities.
Cash Used in Investing Activities
Net cash used in investing activities was $24.7 million and $51.2 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, investing activities included additions to property, equipment and software of $17.0 million, $0.2 million related to net payments received on loans to ISOs and $7.5 million related to the acquisition of intangible assets and an investment in an unconsolidated entity. For the nine months ended September 30, 2023, net cash used in investing activities included the acquisition of business of $28.2 million, $7.9 million of cash used to fund acquisitions of intangible assets, $15.3 million of cash used to acquire property, equipment and software and 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 $84.7 million for the nine months ended September 30, 2024, compared to $157.0 million of cash provided by financing activities for the nine months ended September 30, 2023. The net cash used in financing activities for the nine months ended September 30, 2024 included changes in the net obligations for funds held on the behalf of customers of $116.1 million and borrowings under the 2024 Credit Agreement net of issue discounts of $830.2 million, offset by $661.9 million of cash used for the repayment of the principal of the 2021 Credit Agreement and debt issuance and modification costs related to the refinancing, $167.8 million related to the redemption of senior preferred stock and accumulated unpaid dividend, $2.1 million for the redemption of redeemable NCI in subsidiary, $22.1 million of cash dividends paid to redeemable senior preferred stockholders, $1.2 million of cash used for shares withheld for taxes and $5.0 million of payments of contingent consideration. The net cash provided by financing activities for the nine months ended September 30, 2023 included $28.2 million of cash used for the repayment of debt, $17.9 million of cash dividends paid to redeemable senior preferred stockholders, $1.0 million of cash used for shares withheld for taxes and share repurchases, $4.7 million of payments of contingent consideration for business combinations and $0.9 million of debt modification costs, which was offset by changes in the net obligations for funds held on the behalf of customers of $165.6 million and $44.0 million in borrowings under the revolving credit facility.
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Long-term Debt
As of September 30, 2024, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $816.4 million, compared to $638.7 million at December 31, 2023, resulting in an increase of $177.8 million. The increase is due to the refinancing of the 2021 Credit Agreement on May 16, 2024. The debt balance at September 30, 2024 consisted of $832.9 million outstanding under the term facility offset by $16.5 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 2024 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) 6.90:1.00 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 September 30, 2024, 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, 2023. Our exposures to market risk have not changed materially since December 31, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized or reported within the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to our management, including our principal executive officer (CEO), our principal financial officer (CFO) and, as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2024. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2024.
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Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the three and nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
As of June 30, 2024, the public float of the Company exceeded $75.0 million resulting in a change in the filing status of the Company to an accelerated filer.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain legal proceedings and claims, which arise in the ordinary course of business. In the opinion of the Company, based on consultations with internal and external counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available and we determine that an unfavorable outcome is probable on a claim and that the amount of probable loss that we will incur on that claim is reasonably estimable, we will record an accrued expense for the claim in question. If and when we record such an accrual, it could be material and could adversely impact our results of operations, financial condition and cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report under Part I, Item 1A "Risk Factors" because these risk factors may affect our operations and financial results. The risks described in the Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The Company's purchases of its Common Stock during the three months ended September 30, 2024 were as follows:
Period
Total Number of Shares Purchased(1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2024
13,624
$
5.47
—
690,296
August 1-31, 2024
57,048
$
5.45
—
690,296
September 1-30, 2024
36,439
$
6.01
—
690,296
Total
107,111
$
5.65
—
(1)Represents shares (in whole units) withheld to satisfy employees' tax withholding obligations related to the vesting of restricted stock awards, which was determined based on the fair market value on the vesting date.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Mine Safety Disclosures
N/A
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Item 5. Other Information
Rule 10b5-1 Director and Officer Trading Arrangements
On June 16, 2023, Sean Kiewiet, an officer of the Company as defined in Section 16 of the Exchange Act, adopted a Rule 10b5-1 trading arrangement as defined in Item 408(a) of the SEC's Regulation S-K.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
† Indicates exhibits that constitute management contracts or compensation plans or arrangements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
