Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies
The Business
Headquartered in Alpharetta, GA, the Company began operations in 2005 with a mission to build a merchant-inspired payments platform that would advance the goals of its customers and partners. Our approach leverages a single platform to collect, store and send money that operates at scale. Our technology supports high-value payments products complimented by our personalized support. We are a leading provider to businesses, enterprises and distribution partners such as retail ISOs, FIs, wholesale ISOs and ISVs.
The Company operates from a purpose-built business platform that includes tailored customer service offerings and bespoke technology development, allowing the Company to provide end-to-end solutions for payment and payment-adjacent needs.
The Company provides:
•SMB payments processing solutions for B2C transactions through ISOs, FIs, ISVs and other referral partners. Our proprietary MX platform for B2C payments provides merchants a fully customizable suite of business management solutions.
•B2B payments solutions such as automated vendor payments and professionally curated managed services to industry leading FIs and networks. Our proprietary B2B CPX platform was developed to be a best-in-class solution for buyer/supplier payment enablement.
•Institutional services (also known as Managed Services) solutions that provide audience-specific programs for institutional partners and other third parties looking to leverage the Company's professionally trained and managed call center teams for customer onboarding, assistance and support, including marketing and direct-sales resources.
•Enterprise payments solutions for ISVs and other third parties that allow them to leverage the Company's core payments engine via robust API resources and high-utility embeddable code and consulting and development solutions focused on the increasing demand for integrated payments solutions for transitioning to the digital economy.
The Company provides its services through three reportable segments: 1) SMB Payments; 2) B2B Payments; and 3) Enterprise Payments. For additional information about our reportable segments, see Note 20. Segment Information. To provide many of its services, the Company enters into agreements with payment processors which in turn have agreements with multiple card associations. These card associations comprise an alliance aligned with insured FIs ("member banks") that work in conjunction with various local, state, territory and federal government agencies to make the rules and guidelines regarding the use and acceptance of credit and the card associations. The Company has multiple sponsorship bank agreements and is itself a registered ISO with Visa. The Company is also a registered member service provider with Mastercard. The Company's sponsorship agreements allow the capture and processing of electronic data in a format to allow such data to flow through networks for clearing and fund settlement of merchant transactions. The Company offers money transmission services in 46 U.S. states and two U.S. territories.
Basis of Presentation and Consolidation
The accompanying 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. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in other noncurrent assets in the accompanying Consolidated Balance Sheets. The Company generally utilizes the equity method of accounting when it has an ownership interest of between 20% and 50% in an entity, provided the Company is able to exercise significant influence over the investee's operations.
NCI represents the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100% of the interests. Changes in the Company's ownership interest while the Company retains its controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. For 2022, there was no income or loss attributable to NCI in accordance with the applicable operating agreements.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.
Significant Accounting Policies
Revenue Recognition
The Company applies the five-step model to assess its contracts with customers. At contract inception, the Company assesses the services and goods promised in its contracts with customers and identifies the performance obligation for each promise to transfer a distinct good or service to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring a service or good to the customer in an amount to which the Company expects to be entitled (i.e., transaction price) allocated to the distinct services or goods. The Company has elected the permitted practical expedient that allows it to use the portfolio approach for many of its contracts since this approach's impact on the financial statements, when applied to a group of contracts (or performance obligations) with similar characteristics, is not materially different from the impact of applying the revenue standard on an individual contract basis. Under the portfolio practical expedient, collectability is still assessed at the individual contract level when determining if a contract exists. The Company has elected to exclude any contracts with an original duration of one year or less and any variable consideration that meets specified criteria from its disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance.
In delivering payment services to the customer, the Company may also provide a limited license agreement to the customer for the use of one or more of the Company's proprietary cloud-based software applications. The Company grants a right to use its software applications only when the customer has contracted with the Company to receive related payment services. When combined with the underlying payment services, the license and the payment services provided to the customer are a single stand-ready obligation and the Company's performance obligation is defined by each time increment, rather than by the underlying activities, (quantity and timing of which is not determinable), satisfied over time based on days elapsed.
In order to provide our payment services, we obtain authorization for the transaction and request funds settlement from the card issuing financial institution through the payment network. When third parties are involved in the transfer of services or goods to the customer, the Company considers the nature of each specific promised service or good and applies judgment to determine whether the Company controls the service or good before it is transferred to the customer or whether the Company is acting as an agent of the third party. To determine whether the Company controls the service or good, it assesses indicators including: 1) which party is primarily responsible for fulfillment; 2) which party has discretion in determining pricing for the service or good; and 3) other considerations deemed to be applicable to the specific situation. Based on our assessment of these indicators, we have concluded that the promise to our customers to provide payment services is distinct from the services provided by the card issuing FIs and payment networks in connection with payment transactions. We do not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card issuing FIs and payment networks before those services are transferred to our customer, and on that basis, we do not control those services prior to being transferred to our customer. As a result, we present our revenues net of the interchange fees retained by the card issuing FIs and the fees charged by the payment networks.
SMB Payments – The Company's SMB Payments segment enables the Company's customers to accept card, electronic and digital-based payments at the point of sale by providing a suite of services including authorization, settlement and funding, customer support and help-desk functions, chargeback resolution, payment security, consolidated billing and statements, and online reporting.
Typically, revenues generated from these transactions are based on a variable percentage of the dollar amount of each transaction, and in some instances, additional fees (e.g., statement fees, annual fees and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services) are charged for each transaction. The Company's sponsoring banks collect the gross merchant discount from the card holder's issuing bank, pay the interchange fees and assessments to the payment networks and credit card associations, retain their fees, and pay to the Company the net amount which represents the Company's revenue.
The Company also earns revenue and commissions from resale of electronic POS equipment.
B2B Payments – The Company's B2B Payments segment enables the Company's customers to automate their accounts payable and other commercial payments functions with the Company's payment services that utilize physical and virtual payment cards as well as ACH transactions. In addition, the Company provides cost-plus-fee turn-key business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of Electronic Payments.
Revenues are generally earned on a per-transaction basis and are recognized by the Company net of certain third-party costs for interchange fees, assessments to the payment networks, credit card associations fees, sponsor bank fees and rebates to customers. For outsourced services, revenue is recognized to the extent of billable rates multiplied times hours worked and other reimbursable costs incurred. For performance obligations associated with outsourced services that are satisfied over time, the Company applies the permitted practical expedient known as the "right to invoice practical expedient" that allows the Company to recognize revenue in the amount of consideration to which the Company has the right to invoice when that amount corresponds directly to the value transferred to the customer.
Enterprise Payments – The Company's Enterprise Payments segment uses payment-adjacent technologies to facilitate the acceptance of Electronic Payments from customers.
Revenue from the Enterprise Payments segment consists of the following:
•Enrollment fees: The revenue associated with enrollment fees is recognized upon the receipt of a fully executed enrollment application, completion of the customer account setup, data verification and the constructive receipt of the applicable non-refundable fee.
•Subscription fees: The Company recognizes monthly subscription fees as recurring maintenance fees each month during the term of the client's enrollment. Revenue from transaction-based fees is recognized upon constructive receipt of transaction fees for payments to creditors issued via ACH payments, paper checks or wire transfers. These fees are transferred to the Company from the customer account balances, which may be maintained by the Company in money transmission license trust accounts or by partner banks.
•Interest revenue: Interest revenue is derived from certain customer balances maintained in interest bearing accounts with select partner banks.
•CRM and consulting fees: CRM license fees are recognized on a monthly basis and consulting fees are recognized when services are performed.
A substantial portion of this segment's revenues are earned as an agent of a third party, and therefore this earned revenue is reported as a net amount within revenue.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. However, as allowed by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As described above, the Company's most significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service.
Such variable consideration meets the specified criteria for the disclosure exclusion. Therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
Cost of Services
Costs of merchant card fees primarily consist of residual payments to agents and ISOs and other third-party costs directly attributable to payment processing. The residual payments represent commissions paid to agents and ISOs based upon a percentage of the net revenues generated from merchant transactions. Costs of outsourced services and other revenue consist of salaries directly related to outsourced services revenue, the cost of equipment (point of sale terminals) sold, and third-party fees and commissions related to the Company's ACH processing activities.
Contracts with Customers and Contract Costs
The Company accrues and pays commission expense based on variable merchant payment volumes and for certain customer service and other services provided by its ISOs. Since commission expenses are accrued and paid to ISOs on a monthly basis after the merchant enters into a new or renewed contract, these are not deemed to be a cost to acquire a new contract but they are reported within costs of services on our Consolidated Statements of Operations. The ISO is typically an independent contractor or agent of the Company.
The Company may occasionally elect to buy out all or a portion of an ISO's rights to receive future commission payments related to certain merchants. Amounts paid to the ISO for these residual buyouts are capitalized by the Company under the accounting guidance for intangible assets and included in intangible assets, net on our Consolidated Balance Sheets.
A contract with a customer creates a legal right and obligation. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company's right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues recognized in excess of the amount billed to the customer is recognized as a contract asset. Contract liabilities represent consideration received from customers in excess of revenues recognized. Material contract assets and liabilities are presented net at the individual contract level in the Consolidated Balance Sheets and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents includes highly liquid instruments with an original maturity of three months or less, and cash owned by the Company that is held in financial institutions. Restricted cash is held by the Company in financial institutions for the purpose of in-process customer settlements or reserves held per contact terms.
Accounts Receivable
Accounts receivable is stated net of allowance for doubtful accounts and are amounts primarily due from the Company's sponsor banks for revenues earned, net of related interchange and processing fees, and do not bear interest. Other types of accounts receivable are from agents, merchants and other customers. Amounts due from sponsor banks are typically paid within 30 days following the end of each month.
Notes Receivable
Notes receivable are primarily comprised of notes receivable from ISOs and related parties, 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. See Note 6. Notes Receivable and Note 17. Related Parties
Allowance for Doubtful Accounts Receivable and Notes Receivable
The Company records an allowance for doubtful accounts and/or notes receivable when it is probable that the account receivable balance or the note receivable balance will not be collected, based upon loss trends and an analysis of individual accounts. Accounts receivable and notes receivable are written off when deemed uncollectible. Recoveries of accounts receivable and notes receivable previously written off, if any, are recognized when received. The allowance for doubtful accounts was $1.1 million and $0.6 million at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, there was no allowance for doubtful notes receivable. See Note 6. Notes Receivable. Customer Deposits and Advance Payments
The Company may receive cash payments from certain customers and vendors that require future performance obligations by the Company. Amounts associated with obligations expected to be satisfied within one year are reported in customer deposits and advance payments on the Company's Consolidated Balance Sheets and amounts associated with obligations expected to be satisfied after one year are reported as a component of other noncurrent liabilities on the Company's Consolidated Balance Sheets. These payments are subsequently recognized in the Company's Consolidated Statements of Operations when the Company satisfies the performance obligations required to retain and earn these deposits and advance payments.
A vendor may make an upfront payment to the Company to offset costs that the Company incurs to integrate the vendor into the Company's operations. These upfront payments are deferred by the Company and are subsequently amortized against expense in its Consolidated Statements of Operations as the related costs are incurred by the Company in accordance with the agreement with the vendor.
Property and Equipment
Property and equipment are stated at cost, except for property and equipment acquired in a business combination, which is recorded at fair value at the time of the transaction. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance which do not extend the useful life of the respective assets are charged to expense as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. At the time of retirements, sales or other dispositions of property and equipment, the original cost and related accumulated depreciation are removed from the respective accounts and the gains or losses are presented as a component of income or loss from operations.
| | | | | |
| Property, equipment and software | Estimated Useful Life |
| Furniture and fixtures | 5 - 10 years |
| Equipment | 3 - 8 years |
| Computer software | 2 - 5 years |
| Leasehold improvements | 3 - 10 years |
Costs Incurred to Develop Software for Internal Use
Costs incurred to develop or obtain internal-use software and implementation costs are accounted for in accordance with ASC 350-40, Internal-Use Software. The Company uses an agile development methodology in which feature-by-feature updates are made to its software. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized and amortized using the straight-line method over the estimated useful life of the software, which generally range from two to five years. Maintenance costs including those in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case such costs are capitalized and amortized using the straight-line method over the estimated useful life of the software.
Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product. For the years ended December 31, 2022, 2021 and 2020, there was no impairment associated with internal-use software.
For the years ended December 31, 2022, 2021 and 2020, the Company capitalized software development costs of $16.8 million, $7.8 million and $7.1 million, respectively. As of December 31, 2022 and 2021, capitalized software development costs, net of cumulated amortization, totaled $28.1 million and $18.3 million, respectively, and are included in property, equipment and software, net on the Consolidated Balance Sheets.
Amortization expense for capitalized software development costs for the years ended December 31, 2022, 2021 and 2020 was $6.9 million, $5.9 million and $5.3 million, respectively, and are included in depreciation and amortization on the Consolidated Statements of Operations.
Other Intangible Assets
Other intangible assets are initially recorded at cost or fair value when acquired in connection with a business combination. The carrying value of an intangible asset acquired in an asset acquisition may subsequently be increased for contingent consideration when due to the seller and such amounts can be estimated. The portion of any unpaid purchase price that is contingent on future activities is not initially recorded by the Company on the date of acquisition. Rather, the Company recognizes contingent consideration when it becomes probable and estimable. All of the Company's intangible assets, except goodwill and money transmission licenses, have finite lives and are subject to amortization. Intangible assets consist of acquired merchant portfolios, customer relationships, ISO and referral partner relationships, residual buyouts, trade names, technology, non-compete agreements and money transmission licenses.
| | | | | | | | |
| Intangible Asset | Nature | Estimated Useful Life |
| ISO and Referral Partner Relationships | Acquired relationships with ISOs and referral partners | 11 – 25 years |
| Residual Buyouts | Surrender of rights to receive commissions by ISOs | 3 – 9 years |
| Customer Relationships | Acquired customer relationships | 2 – 15 years |
| Merchant Portfolios | Acquired rights to a portfolio of merchants | 5 – 10 years |
| Technology | Acquired proprietary software and website domains | 7 – 10 years |
| Trade Names and Non-compete Agreements | Acquired trade names and non-compete agreements | 5 – 12 years |
| Money Transmission Licenses | Acquired licenses to collect, store and send money in 46 U.S. states and two U.S. territories. | indefinite |
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. For long-lived assets, except goodwill, an impairment loss is indicated when the undiscounted future cash flows estimated to be generated by the asset group are not sufficient to recover the carrying value of the asset group. If indicated, the loss is measured as the excess of carrying value over the asset groups' fair value, as determined based on discounted future cash flows. The Company concluded there were no indications of impairment for the years ended December 31, 2022 and 2021. For the year ended December 31, 2020, the Company recognized an impairment charge of $1.8 million for a residual buyout intangible asset. See Note 8. Goodwill and Other Intangible Assets. Goodwill
The Company tests goodwill for impairment on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value. See Note 8. Goodwill and Other Intangible Assets.
Leases
The Company adopted ASU 2016-02, Leases and its related interpretations, codified as ASC 842, as of January 1, 2021, applying the optional transition approach available whereby the new lease standard is applied at the adoption date recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if applicable, and prior periods are not restated. Upon adoption the Company recorded ROU Assets of approximately $7.4 million and related operating lease obligations of approximately $8.4 million. There was no impact to the opening balance of retained earnings.
Under ASC 842
The Company evaluates lease and service arrangements at lease inception to determine if the arrangement is a lease or contains a lease. Lease arrangements are evaluated at their commencement date to determine classification as operating or finance. Operating leases are reported as part of other noncurrent assets, accounts payable and accrued expenses and other noncurrent liabilities on the Company's Consolidated Balance Sheets. Finance leases, if applicable, are reported as part of property, equipment and software, net, and debt on the Company's Consolidated Balance Sheets. Leases with a term of twelve months or less are not included on the Company's Balance Sheets. The Company does not separate lease and non-lease components. Certain estimates and assumptions are made when determining the value of ROU Assets and the related liabilities, including when establishing the lease term and discount rates and variable lease payments (e.g., rent escalations tied to changes in the Producer Price Index). The lease term for all of the Company's leases includes the non-cancelable period of the lease adjusted for any renewal or termination options the Company is reasonably certain to exercise. The lease payment stream includes any rent escalation that is required under certain lease agreements. The Company's leases generally do not provide an implicit rate of interest, nor is it readily determinable by the Company, and as such the Company uses its incremental borrowing rate in determining the discounted value of the lease payments. Lease expense and depreciation expense, if applicable, are recognized on a straight-line basis over the term of the lease.
Prior to the Adoption of ASC 842
The Company has multiple operating leases related to office space. Operating leases do not involve transfer of risks and rewards of ownership of the leased asset to the lessee, therefore the Company expenses the costs of its operating leases. The Company may make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and equipment. Leasehold improvements are generally amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter. See Note 9. Leases. Settlement Assets and Customer/Subscriber Account Balances and Related Obligations
Debt Issuance and Modification Costs
Eligible debt issuance costs associated with the Company's credit facilities are deferred and amortized to interest expense over the term of the related debt using the effective interest method. Debt issuance costs associated with Company's term debt are presented on the Company's Consolidated Balance Sheets as a direct reduction in the carrying value of the associated debt liability. Debt modification costs represents amounts paid to third parties to modify existing debt agreements when those amounts are not eligible for capitalization.
Acquisitions
Business Combinations
The Company uses the acquisition method of accounting for business combinations which requires assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined
based upon the valuation of the acquired business and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Contingent Consideration
Contingent consideration related to the Company's business combinations are estimated based on the present value of a weighted payout probability at the measurement date using a Monte Carlo simulation model. This valuation falls within Level 3 on the fair value hierarchy. The current portion of contingent consideration is included in accounts payable and accrued expenses on the Company's Consolidated Balance Sheets and the noncurrent portion of contingent consideration is included in other noncurrent liabilities on the Company's Consolidated Balance Sheets.
For asset acquisitions that do not meet the definition of a business, the portion of the unpaid purchase price that is contingent on future activities is not recorded by the Company on the date of acquisition, but when it becomes probable and can be estimated.
Non-controlling Interests
The Company issued non-voting incentive units in three of its subsidiaries during 2022 to acquire the operating assets of certain businesses (see Note 2. Acquisitions). The Company is the majority owner of these subsidiaries and therefore the incentive units are deemed to be NCI. To estimate the initial fair value of the incentive units, the Company utilizes future cash flow scenarios with focus on those cash flow scenarios which could result in future distributions to the NCIs. In subsequent periods, income or loss will be attributed to an NCI based on the hypothetical liquidation at book value method utilizing the terms of the operating agreement between the Company and the NCI.
As the majority owner, the Company has call rights on the incentive units issued to the NCIs. These call rights can only be executed under certain circumstances and execution is always optional at the Company's discretion. The call rights do not meet the definition of a free-standing financial instrument or derivative, thus no separate accounting is required for these call rights.
Accrued Residual Commissions
Accrued residual commissions consist of amounts due to ISOs and independent sales agents based on a percentage of the net revenues generated from the Company's merchant customers. Percentages vary based on the program type and transaction volume of each merchant. Residual commission expenses were $383.5 million, $318.9 million and $240.2 million, respectively, for the years ended December 31, 2022, 2021 and 2020, and are included in costs of services in the accompanying Consolidated Statements of Operations.
ISO Deposit and Loss Reserve
ISOs may partner with the Company in an exclusive partner program in which ISOs are given negotiated pricing in exchange for bearing risk of loss. Through the arrangement, the Company accepts deposits on behalf of the ISO and a reserve account is established by the Company. All amounts maintained by the Company are included in the accompanying Consolidated Balance Sheets as other liabilities, which are directly offset by restricted cash accounts owned by the Company.
Stock-based Compensation
The Company recognizes the cost resulting from all stock-based payment transactions in the financial statements at grant date fair value. Stock-based compensation expense is recognized over the requisite service period and is reflected in salary and employee benefits expense on the Company's Consolidated Statements of Operations. Awards generally vest over three or four years and may not vest evenly over the vesting period. The effects of forfeitures are recognized as they occur. All shares issued
from option exercises or vesting of RSU awards are original issuance shares and any shares withheld for taxes are repurchased by the Company.
The Company measures a liability award under a stock-based compensation payment arrangement based on the award's fair value remeasured at each reporting date until the date of settlement. Compensation cost for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value of the instrument for each reporting period.
Stock options
Under the Company's 2018 Plan, the Company determines the fair value of stock options using the Black-Scholes option pricing model, which requires the use of the following subjective assumptions:
Expected volatility – Measure of the amount by which a stock price has fluctuated or is expected to fluctuate. Due to the relatively short amount of time that the Company's Common Stock (Nasdaq: PRTH) has traded on a public market, the Company uses volatility data for the Common Stock of a peer group of comparable public companies. An increase in the expected volatility will increase the fair value of the stock option and related compensation expense.
Risk-free interest rate – U.S. Treasury rate for a stripped-principal treasury note as of the grant date having a term equal to the expected term of the stock option. An increase in the risk-free interest rate will increase the fair value of the stock option and related compensation expense.
Expected term – Period of time over which the stock options granted are expected to remain outstanding. In 2018, when the Company's outstanding stock options were granted, the Company lacked sufficient exercise information for its stock option plan since it was a newly public company. Accordingly, the Company used a method permitted by the SEC whereby the expected term was estimated to be the mid-point between the vesting dates and the expiration dates of the stock option grants. An increase in the expected term will increase the fair value of the stock option and the related compensation expense.
Dividend yield – The Company uses an amount of zero as the Company has paid no cash or stock dividends and does not anticipate doing so in the foreseeable future. An increase in the dividend yield will decrease the fair value of the stock option and the related compensation expenses.
If a participant terminates employment with the Company, vested options may be exercised for a short period of time while unvested options are forfeited. However, in any event, a stock option will expire ten years from the date of grant.
Time-based restricted stock awards
The fair value of time-based restricted stock awards is determined based on the quoted closing price of the Company's Common Stock on the business day prior to the grant date and is recognized as compensation expense over the vesting term of the awards.
Performance-based restricted stock awards
The Company accounts for its performance-based restricted stock awards based on the quoted closing price of the Company's Common Stock on the business day prior to the grant date, adjusted for any market-based vesting criteria, and records stock-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved. The performance goals may be work-related goals for the individual recipient and/or based on certain corporate performance goals. The Company reassesses the probability of vesting at each reporting period and prospectively adjusts stock-based compensation expense based on its probability assessment. Additionally, if performance goals are set or reset on an annual basis, compensation cost is recognized in any reporting period only for performance-based restricted stock awards in which the performance goals have been established and communicated to the award recipient.
Employee Stock Purchase Program
The 2021 Employee Stock Purchase plan authorizes the issuance of shares of the Company’s Common Stock pursuant to purchase rights granted to employees. The fair value of purchase rights issued under the Employee Stock purchase Plan is estimated using the Black-Scholes option pricing model. The model requires management to make a number of assumptions, including the fair value of the Company’s Common Stock, expected volatility, expected term, risk-free interest rate, and expected dividends. The Company records the resulting compensation expense in the Consolidated Statements of Operations over each three-month offering period. See Note 15. Stock-based Compensation. Repurchased Stock
Pursuant to the provisions of ASC 505-30, Treasury Stock, the Company has elected to apply the cost method when accounting for treasury stock resulting from the repurchase of its Common Stock. Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account, treasury stock. The equity accounts that were originally credited for the original share issuance, Common Stock and additional paid-in capital, remain intact. See Note 14. Stockholders' Deficit. If the treasury shares are ever reissued in the future, proceeds in excess of repurchased cost will be credited to additional paid-in capital. Any deficiency will be charged to retained earnings (accumulated deficit), unless additional paid-in capital from previous treasury stock transactions exists, in which case the deficiency will be charged to that account, with any excess charged to retained earnings (accumulated deficit). If treasury stock is reissued in the future, a cost flow assumption (e.g., FIFO, LIFO or specific identification) will be adopted to compute excesses and deficiencies upon subsequent share reissuance.
Earnings (Loss) per Share
Basic EPS is computed by dividing net income (loss) available to Common Stockholders by the weighted-average number of shares of Common Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution, if any, that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock, using the more dilutive of the two-class method or if-converted method. Diluted EPS excludes potential shares of Common Stock if their effect is anti-dilutive. If there is a net loss in any period, basic and diluted EPS are computed in the same manner. See Note 14. Stockholders' Deficit. Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings.
The Financial Accounting Standards Board, or FASB, Staff has provided additional guidance to address the accounting for the effects of the provisions related to the taxation of Global Intangible Low-Tax Income noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse in future years or to include the tax expense in the year it is incurred. The Company has made a policy election to recognize such taxes as current period expenses when incurred.
The Company recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. The Company recognized interest and penalties associated with uncertain tax positions as a component of income tax expense. See Note 13. Income Taxes.
Fair Value Measurements
The Company measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company uses a three-level fair value hierarchy to prioritize the inputs used to measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 – Unobservable inputs that are not corroborated by market data.
The fair values of the Company's merchant portfolios, assets and liabilities acquired in mergers and business combinations, and contingent consideration are primarily based on Level 3 inputs and are generally estimated based upon valuation techniques that include discounted cash flow analysis based on cash flow projections and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analysis is corroborated by a market-based approach that utilizes comparable company public trading values and, where available, values observed in public market transactions.
The carrying values of accounts and notes receivable, accounts payable and accrued expenses, long-term debt and cash, including settlement assets and the associated deposit liabilities, approximate their fair values due to either the short-term nature of such instruments or the fact that the interest rate of the debt is based upon current market rates. The Company does not currently have any fair value estimates that are required to be remeasured at the end of each reporting period on a recurring basis. See Note 19. Fair Value. Foreign Currency
The Company's reporting currency is the U.S. dollar. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current exchange rate on the last day of the reporting period. Revenues and expenses are translated using the average exchange rate in effect during the reporting period. Foreign exchange translation and transaction gains and losses were not material for the periods presented and are included in the Consolidated Statements of Operations.
Concentration of Risk
A substantial portion of the Company's revenues and receivables are attributable to merchants. For the years ended December 31, 2022, 2021 and 2020, no individual merchant customer accounted for 10% or more of the Company's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other reseller partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. For the years ended December 31, 2022, 2021 and 2020, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's SMB Payments reportable segment that represented approximately 21%, 22% and 21%, respectively, of the Company's consolidated revenues.
The Company's settlement assets and customer /subscriber account balances of $532.0 million includes cash and cash equivalents of $516.1 million related to customer account balances which are maintained in FDIC insured accounts with certain FIs.
A majority of the Company's cash and restricted cash (including subscriber account balances) is held in certain FIs, substantially all of which is in excess of FDIC limits.
The Company does not believe it is exposed to any significant credit risk from these transactions.
Recently Adopted Accounting Standards
Business Combinations
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, as if the acquirer had originated the contracts. Generally this will result in the acquirer recognizing and measuring the acquired contract assets and liabilities consistent with the manner by which they were recognized and measured by the acquiree. This update is effective for public companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted, including in an interim period. If this update is adopted early in an interim period, it must be applied retrospectively to all business combinations that occurred since the beginning of the fiscal year. The Company elected to early adopt ASU 2021-08 in the second quarter of 2022. The adoption of this ASU did not have a material impact on the 2022 acquisitions.
Recently Issued Accounting Standards Pending Adoption
The following standards are pending adoption and will likely apply to the Company in future periods based on the Company's current business activities.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new guidance changes how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaces the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. The standard requires entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. Since the Company is an SRC, the Company will adopt ASU 2016-13 effective January 1, 2023 and does not expect to have a material impact on its Consolidated Financial Statements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates, such as the SOFR. If certain criteria are met, entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform. An entity that makes this election would not have to remeasure the contract at the modification date or reassess a previous accounting determination. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope ASU 2021-01, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, amended ASU 2020-04, deferring the sunset date of Topic 848 to December 31, 2024. The Company will adopt Topic 848 when relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption of Topic 848 to have a material impact on the Company's Consolidated Financial Statements.
2. Acquisitions
Ovvi Acquisition
On November 18, 2022, the Company completed its acquisition of certain assets and assumption of a certain liability of Ovvi, LLC, under an asset purchase agreement through its wholly-owned subsidiary, Priority Ovvi, LLC ("Ovvi"). The acquisition was accounted for as a business combination using the acquisition method of accounting. Prior to this acquisition, the business operated as a SaaS proprietary platform for the restaurant, hospitality and retail industries by providing complete all-in-one point of sale software and hardware systems, comprehensive ancillary services including fraud detection and mitigation, and processing services for various types of cards including credit cards, debit cards, private label cards and prepaid cards. This business is reported within the Company's SMB Payments reportable segment. The acquired business was valued for $6.3 million and the Company acquired a controlling interest for $5.0 million, the remaining $1.3 million was contributed by sellers for non-voting profit-sharing interest in Ovvi, creating NCI. Ovvi also issued non-voting incentive units to the seller. Transaction costs were not material and were expensed. The non-voting incentive shares issued to the seller will be evaluated at each reporting period to determine whether or not profit or loss should be allocated based on the subsidiary's operating agreement. The preliminary purchase price allocation is set forth in the table below and is expected to be finalized as soon as practicable, but no later than one year from the acquisition date.
| | | | | |
| (in thousands) | |
| Consideration: | |
| Cash | $ | 4,976 | |
Amount withheld for inventory(1) | 50 | |
| Total purchase consideration, inclusive of amount withheld for inventory | 5,026 | |
Fair value of class B shares issued in Ovvi(3) | 1,255 | |
Total enterprise value of business acquired(3) | $ | 6,281 | |
| |
| Recognized amounts of assets acquired and liabilities assumed: | |
| Accounts receivable | $ | 110 | |
| Inventory | 142 | |
| Property, equipment and software, net | 20 | |
Goodwill(3) | 3,989 | |
Intangible assets(2) | 2,021 | |
| Other non-current asset | 152 | |
| Other non-current liability | (153) | |
Total enterprise value of business acquired(3) | $ | 6,281 | |
(1)The inventory acquired is subject to a reduction for any portion up to the total amount withheld pending final determination of the inventory acquired.
(2)The intangible assets consist of $1.3 million for technology, $0.4 million for customer relationships and $0.3 million for trade name.
(3)The fair value determination for the Class B shares is subject to adjustment due to final determination as soon as practicable but no later than one year from the closing date. This will affect the enterprise value of the business acquired.
Other Acquisition
The Company also completed another acquisition during 2022 for approximately $1.0 million, which was not material. The acquisition did not meet the definition of a business, therefore it was accounted for as an asset acquisition under which the cost of acquisition was allocated to the technology asset acquired.
Finxera Acquisition
On September 17, 2021, the Company completed its acquisition of 100% of the equity interests of Finxera. Finxera is a provider of deposit account management and licensed money transmission services in the U.S. The acquisition allows the Company to offer clients turn-key merchant services, payment facilitation, card issuing, automated payables, virtual banking, e-wallet tools, risk management, underwriting and compliance on a single platform.
The transaction was funded with the Company's cash on hand, proceeds from the issuance of the redeemable senior preferred stock and debt, and the issuance of common equity shares to the sellers.
The acquisition was accounted for as a business combination using the acquisition method of accounting, under which the assets acquired and liabilities assumed were recognized at their fair values as of the September 17, 2021, with the excess of the fair value of consideration transferred over the fair value of the net assets acquired recognized as goodwill. The fair values of the assets acquired and liabilities assumed as of the September 17, 2021 were estimated by management based on the valuation of the Finxera business using the discounted cash flow method and other factors specific to certain assets and liabilities. The final purchase price allocation is set forth in the table below.
| | | | | |
| (in thousands) | |
| Consideration: | |
| Cash | $ | 379,220 | |
Equity instruments(1) | 34,388 | |
| Less: cash and restricted cash acquired | (6,598) | |
| Total purchase consideration, net of cash and restricted cash acquired | $ | 407,010 | |
| |
| Recognized amounts of assets acquired and liabilities assumed: | |
| Accounts receivable | $ | 385 | |
Prepaid expenses and other current assets(2) | 5,198 | |
| Current portion of notes receivable | 784 | |
| Settlement assets and customer/subscriber account balances | 498,811 | |
| Property, equipment and software, net | 712 | |
Goodwill(2) | 245,104 | |
Intangible assets, net(3) | 211,400 | |
| Other noncurrent assets | 955 | |
| Accounts payable and accrued expenses | (7,837) | |
| Settlement and customer/subscriber account obligations | (498,811) | |
Deferred income taxes, net(2) | (44,311) | |
| Other noncurrent liabilities | (5,380) | |
| Total purchase consideration | $ | 407,010 | |
(1)The fair value of the 7,551,354 shares of PRTH Common Stock that were issued was determined based on their market price at the time of closing adjusted for an appropriate liquidity discount due to trading restrictions under Securities Rule 144.
(2)During the year ended December 31, 2022, the Company recorded measurement period adjustments due to additional information received related to income taxes and deferred income taxes, net. These measurement period adjustments resulted in an increase of $0.1 million in prepaid expenses and an increase of $0.3 million in other current assets and deferred income taxes, offset by a decrease in goodwill of $0.4 million.
(3)The intangible assets acquired consist of $154.9 million for referral partner relationships, $34.3 million for technology, $20.1 million for customer relationships and $2.1 million for money transmission licenses.
Goodwill of $245.1 million arising from the acquisition primarily consists of the expected synergies and other benefits from combining operations. Goodwill attributable to the acquisition of $8.7 million was deductible for income tax purposes. The goodwill was allocated 100% to the Company's Enterprise Payments reportable segment.
In 2020, Finxera acquired two businesses for which the purchase price included contingent consideration valued at $6.1 million. The contingent consideration payable is comprised of earnout opportunities equal to 25% to 50% of certain revenues earned from the customers assumed in these acquisitions. The associated earnout opportunities are to be measured and paid every six months and expire at various dates through December 31, 2023. As of the year ended December 31, 2022, an adjustment of $1.2 million was recorded due to changes in the fair value of the contingent consideration (as selling, general and administrative expenses in the Company's Consolidated Statements of Operations) resulting in total contingent consideration of $7.3 million. The accretion of contingent consideration was $0.6 million for the year ended December 31, 2022, which is included in interest expense on the Company's Consolidated Statement of Operations, increasing total liability to $7.9 million of which $1.8 million has been paid. The remaining $6.1 million was accrued and was included in accounts payable on the Company's Consolidated Balance Sheet.
The Company's Consolidated Financial Statements for the year ended December 31, 2021 included the operating results of Finxera from the Closing Date through December 31, 2021, which were reported as part of the Enterprise Payments reportable segment. Revenues and operating income from Finxera during this period were $19.4 million and $4.3 million, respectively.
For the year ended December 31, 2021 we incurred $9.3 million, in acquisition related costs, which primarily consisted of consulting, legal, accounting and valuation expenses. These expenses were recorded in selling, general and administrative expenses in the Company's Consolidated Statements of Operations.
The following unaudited pro forma financial information presents results as if the acquisition occurred on January 1, 2020. The historical consolidated financial information of the Company and Finxera has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the transaction and are factually supportable. The unaudited pro forma results do not reflect events that have occurred or may occur after the transaction, including the impact of any synergies expected to result from the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction occurred on January 1, 2020, nor is it necessarily an indication of future operating results.
| | | | | | | | | | | | | | | |
| (in thousands, except per share amounts) | | | Years Ended December 31, |
| | | | | 2021 | | 2020 |
| Revenues | | | | | $ | 561,585 | | | $ | 463,823 | |
| Operating income | | | | | $ | 21,619 | | | $ | 32,548 | |
Wholesale Payments, Inc.
On April 28, 2021, a subsidiary of the Company completed its acquisition of certain residual portfolio rights for a purchase price of $42.4 million and $24.8 million of post-closing payments and earn-out payments based on meeting certain attrition thresholds over a three-year period from the date of acquisition. The transaction did not meet the definition of a business, therefore it was accounted for as an asset acquisition under which the cost of the acquisition was allocated to the acquired assets based on relative fair values. As an asset acquisition, additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset. The seller's note payable to the Company of $3.0 million and an advance of $2.0 million outstanding at the time of the purchase were netted against the initial purchase price, resulting in cash of $41.2 million being paid by the Company to the seller, which was funded from cash proceeds from the issuance of the redeemable senior preferred stock and cash on hand.
As of December 31, 2022, the sellers earned $8.9 million of the $24.8 million, increasing the total purchase price recorded at December 31, 2022 to $51.9 million, which was recorded to residual buyout intangible assets with a seven-year useful life
amortized on a straight-line basis. The $8.9 million includes a fair value adjustment of $0.5 million in the third quarter of 2022, which reduced the total amount earned from $9.4 million to $8.9 million.
C&H Financial Services, Inc.
On June 25, 2021, a subsidiary of the Company acquired certain assets and assumed certain related liabilities under an asset purchase agreement. The acquisition was accounted for as a business combination using the acquisition method of accounting. Prior to this acquisition, the business was an ISO partner of the Company where it developed expertise in software-integrated payment services, as well as marketing programs for specific verticals such as automotive and youth sports. This business is reported within the Company's SMB Payments reportable segment. The initial purchase price for the net assets was $35.0 million in cash and a total purchase price of not more than $60.0 million including post-closing payments and earn-out payments based on certain gross profit and revenue achievements over a three-year period from the date of acquisition. The acquisition date fair value of the contingent consideration was $4.7 million, which increased the total purchase price to $39.7 million. The seller's note payable to the Company of $0.5 million at the time of purchase was netted against the initial purchase price, resulting in cash of $34.5 million being paid by the Company to the seller, which was funded from a $30.0 million draw down of the revolving credit facility under the Credit Agreement and $4.5 million cash on hand. Transaction costs were not material and were expensed. The purchase price allocation is set forth in the table below.
| | | | | |
| (in thousands) | |
| Accounts receivable | $ | 214 | |
| Prepaid expenses and other current assets | 209 | |
| Property, equipment and software, net and other current assets | 287 | |
| Goodwill | 13,804 | |
Intangible assets, net(1) | 25,400 | |
| Other noncurrent liabilities | (214) | |
| Total purchase price | $ | 39,700 | |
(1)The intangible assets acquired consist of $20.2 million for merchant portfolio intangible assets with a ten-year useful life and $5.2 million for ISO partner relationships with a twelve-year useful life.
As of December 31, 2022, the fair value of the C&H contingent consideration was $2.0 million, of which was included in other noncurrent liabilities on the Consolidated Balance Sheets as of December 31, 2022. The accretion of contingent consideration was $0.3 million for the year ended December 31, 2022, which is included in interest expense on the Company's Consolidated Statement of Operations.
3. Disposal of Business
On September 1, 2020, PRET entered into an agreement to sell certain assets from PRET's real estate services business. The buyer also agreed to assume certain obligations associated with the assets. The assets covered by the agreement were PRET's RentPayment component. The transaction was completed on September 22, 2020 after receiving regulatory approval. Prior to execution of the agreement, the buyer was not a related party of PRET or the Company.
Proceeds received by PRET were $179.4 million, net of $0.6 million for a working capital adjustment. The gain amounted to $107.2 million as follows:
| | | | | |
| (in thousands) | |
| Gross cash consideration from buyer | $ | 180,000 | |
| Less working capital adjustment paid in cash | (584) | |
| Net proceeds from buyer | 179,416 | |
| Transaction costs incurred | (5,383) | |
| Assets sold: | |
| Intangible assets | (62,158) | |
| Other assets sold, net of obligations assumed | (716) | |
| Goodwill assigned to business sale | (2,683) | |
| Other intangible assets | (1,237) | |
| Pre-tax gain on sale of business | $ | 107,239 | |
PRET is a limited liability company and is a pass-through entity for income tax purposes. Income tax expenses associated with the gain attributable to the stockholders of the Company were estimated to be approximately $12.3 million.
Allocation of net proceeds, after transaction costs, to the PRET members included return of each member's invested capital in PRET and excess proceeds were distributed in accordance with the distribution provisions of the PRET LLC governing agreement. The Company's invested capital amounted to $71.8 million, which included the assets sold, goodwill and other intangible assets. The NCI's invested capital was $5.7 million. Approximately $51.4 million and $45.1 million of the excess proceeds were distributed to the Company and the NCI, respectively. The initial allocation of net proceeds remained subject to final adjustment by the PRET members at December 31, 2020. During the first quarter of 2021, it was determined that an additional $0.5 million of the excess proceeds was due to the NCI, which was included in other expenses, net on the Company's Consolidated Statement of Operations for the year ended December 31, 2021.
Continuing Operations
Based on historical financial results, the Company does not believe the sale of the RentPayment component represents a strategic shift. The sale of the business was not reported as discontinued operations in its Consolidated Financial Statements for any reporting period. The Company will continue to serve the rental property market through its ongoing PRET operations.
4. Revenues
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Revenue Type: | | | | | |
| Merchant card fees | $ | 553,037 | | | $ | 468,764 | | | $ | 377,346 | |
| Money transmission services | 71,536 | | | 19,415 | | | — | |
| Outsourced services and other services | 29,627 | | | 21,033 | | | 23,103 | |
| Equipment | 9,441 | | | 5,689 | | | 3,893 | |
Total revenues(1)(2) | $ | 663,641 | | | $ | 514,901 | | | $ | 404,342 | |
(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 $7.5 million and $0.7 million, of interest income for the years ended December 31, 2022 and 2021, respectively, is included in outsourced services and other services revenue in the table above.
The following table presents a disaggregation of our consolidated revenues by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 549,646 | | | $ | — | | | $ | 3,150 | | | $ | 9,441 | | | $ | 562,237 | |
| B2B | 3,391 | | | — | | | 15,499 | | | — | | | 18,890 | |
| Enterprise | — | | | 71,536 | | | 10,978 | | | — | | | 82,514 | |
| Total revenues | $ | 553,037 | | | $ | 71,536 | | | $ | 29,627 | | | $ | 9,441 | | | $ | 663,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 466,819 | | | $ | — | | | $ | 3,122 | | | $ | 5,689 | | | $ | 475,630 | |
| B2B | 1,945 | | | — | | | 15,193 | | | — | | | 17,138 | |
| Enterprise | — | | | 19,415 | | | 2,718 | | | — | | | 22,133 | |
| Total revenues | $ | 468,764 | | | $ | 19,415 | | | $ | 21,033 | | | $ | 5,689 | | | $ | 514,901 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| (in thousands) | Merchant Card Fees | | Money Transmission Services | | Outsourced and Other Services | | Equipment | | Total |
| Segment | | | | | | | | | |
| SMB | $ | 364,163 | | | $ | — | | | $ | 2,465 | | | $ | 3,893 | | | $ | 370,521 | |
| B2B | 1,795 | | | — | | | 19,127 | | | — | | | 20,922 | |
| Enterprise | 11,388 | | | — | | | 1,511 | | | — | | | 12,899 | |
| Total revenues | $ | 377,346 | | | $ | — | | | $ | 23,103 | | | $ | 3,893 | | | $ | 404,342 | |
Deferred revenues were not material for the years ended December 31, 2022, 2021 and 2020.
Contract Assets and Contract Liabilities
Material contract assets and liabilities are presented net at the individual contract level in the Consolidated Balance Sheets and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.
Supplemental balance sheet information related to contracts from customers was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Consolidated Balance Sheet Location | | December 31, 2022 | | December 31, 2021 |
| Liabilities: | | | | | | |
| Contract liabilities, net (current) | | Customer deposits and advance payments | | $ | — | | | $ | 1,280 | |
Substantially all of these balances are recognized as revenue within 12 months. Net contract liabilities were not material at December 31, 2022. Net contract assets were not material for any period presented.
Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the years ended December 31, 2022, 2021 or 2020.
5. 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 related to these funds are not liabilities of the Company. Therefore, neither is recognized in the Company's Consolidated Balance Sheets. Member banks held merchant funds of $110.3 million and $102.1 million at December 31, 2022 and 2021, respectively.
Exception items include items such as customer chargeback amounts received from merchants and other losses. Under agreements between the Company and its merchant customers, the merchants assume liability for such chargebacks and losses. If the Company is ultimately unable to collect amounts from the merchants for any charges or losses due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for these charges. In order to mitigate the risk of such liability, the Company may: 1) require certain merchants to establish and maintain reserves designed to protect the Company from such charges or losses under its risk-based underwriting policy; and 2) engage with certain ISOs in partner programs in which the ISOs assume liability for these charges or losses. A merchant reserve account is funded by the merchant and held by the member bank during the term of the merchant agreement. Unused merchant reserves are returned to the merchant after termination of the merchant agreement or in certain instances upon a reassessment of risks during the term of the merchant agreement.
Exception items that become the liability of the Company are recorded as merchant losses, a component of costs of services in the Consolidated Statements of Operations. Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets and customer/subscriber account balances in the Company's 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 years ended December 31, 2022, 2021 and 2020 were $4.4 million, $2.8 million and $4.1 million, respectively.
B2B Payments Segment
In the Company's B2B Payments segment, the Company earns revenues from certain of its services by processing transactions for FIs and other business customers. 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 as the transactions are settled with the customer payees. Amounts due to customer payees that are held by the Company in Company-owned bank accounts are included in restricted cash. Amounts due to customer payees that are held in bank-owned FBO accounts are not assets of the Company. As such, the associated obligations related to these funds are not liabilities of the Company; therefore, neither is recognized in the Company's Consolidated Balance Sheets. Bank-owned FBO accounts held funds of $42.7 million and $45.5 million at December 31, 2022 and 2021, respectively. Company-owned bank accounts held $4.1 million and $21.4 million at December 31, 2022 and 2021, respectively, which are included in restricted cash and settlement obligations in the Company's Consolidated Balance Sheets.
Enterprise Payments Segment
In the Company's Enterprise Payments segment, revenue is derived primarily from enrollment fees, monthly subscription fees, transaction-based fees and money transmission services fees. As part of its licensed money transmission services, the Company accepts deposits from customers and subscribers which are held in bank accounts maintained by the Company on behalf of customers 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 Consolidated Balance Sheets.
In certain states, the Company accepts deposits under agency arrangement with member banks wherein accepted deposits remain under the control of the member banks. Therefore, the Company does not record assets for the deposits accepted and liabilities for the associated obligation. Agency owned accounts held $6.1 million and $3.2 million and at December 31, 2022 and 2021, respectively.
The Company's consolidated settlement assets and customer/subscriber account balances and settlement and customer/subscriber account obligations were as follows:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | December 31, 2021 |
| Settlement Assets: | | | |
| Card settlements due from merchants, net of estimated losses | $ | 444 | | | $ | 537 | |
| Customer/Subscriber Account Balances: | | | |
| Cash and cash equivalents | 531,574 | | | 468,934 | |
| Time deposits | — | | | 10,000 | |
| Total settlement assets and customer/subscriber account balances | $ | 532,018 | | | $ | 479,471 | |
| | | |
| Settlement and Customer/Subscriber Account Obligations: | | | |
| Customer account obligations | $ | 516,086 | | | $ | 470,476 | |
Subscriber account obligations | 15,488 | | | 8,459 | |
Due to customer payees(1) | 1,766 | | | 21,356 | |
| Total settlement and customer/subscriber account obligations | $ | 533,340 | | | $ | 500,291 | |
(1)The related assets are included in restricted cash on our Consolidated Balance Sheets.
6. Notes Receivable
The Company has notes receivable of $4.7 million and $0.4 million as of December 31, 2022 and 2021, respectively, which are reported as current portion of notes receivable and notes receivable less current portion on the Company's Consolidated Balance Sheets. The notes bear a weighted-average interest rate of 15.4% and 13.8% as of December 31, 2022 and 2021, respectively. 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. Notes receivable from three other entities were fully repaid during 2021.
As of December 31, 2022, the principal payments for the Company's notes receivables are due as follows:
| | | | | |
| (in thousands) | |
| Year Ending December 31, | |
| 2023 | $ | 1,471 | |
| 2024 | 1,046 | |
| 2025 | 907 | |
| 2026 | 845 | |
| 2027 | 393 | |
| Thereafter | — | |
| Total | $ | 4,662 | |
As of December 31, 2022 and 2021, the Company had no allowance for doubtful notes receivable.
7. Property, Equipment and Software
A summary of property, equipment and software, net was as follows:
| | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | December 31, 2021 | | | | |
| Computer software | $ | 64,197 | | | $ | 50,799 | | | | | |
| Equipment | 13,302 | | | 12,255 | | | | | |
| Leasehold improvements | 6,990 | | | 6,467 | | | | | |
| Furniture and fixtures | 2,909 | | | 2,819 | | | | | |
| Property, equipment and software | 87,398 | | | 72,340 | | | | | |
| Less: Accumulated depreciation | (58,409) | | | (49,023) | | | | | |
| Capital work in-progress | 5,698 | | | 1,916 | | | | | |
| Property, equipment and software, net | $ | 34,687 | | | $ | 25,233 | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Depreciation expense | $ | 9,511 | | | $ | 8,460 | | | $ | 7,710 | |
Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist the reporting of merchant processing transactions and other related information.
8. Goodwill and Other Intangible Assets
Goodwill
The Company records goodwill upon acquisition of a business when the purchase price is greater than the fair value assigned to the underlying separately identifiable tangible and intangible assets acquired and the liabilities assumed. The Company's goodwill relates to the following reporting units:
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | December 31, 2021 | | |
| SMB Payments | $ | 124,625 | | | $ | 120,636 | | | |
| Enterprise Payments | 244,712 | | | 245,104 | | | |
| Total | $ | 369,337 | | | $ | 365,740 | | | |
The following table summarizes the changes in the carrying value of goodwill for the years ended December 31, 2022 and 2021:
| | | | | |
| (in thousands) | Amount |
| Balance at January 1, 2021 | 106,832 | |
| C&H Financial Services, Inc. acquisition | 13,804 | |
| Finxera acquisition | 245,104 | |
Balance at December 31, 2021 | 365,740 | |
| Final purchase price adjustment for Finxera | (392) | |
| Ovvi acquisition | 3,989 | |
Balance at December 31, 2022 | $ | 369,337 | |
In connection with the acquisition of Finxera, $8.7 million of goodwill recorded was deductible for income tax purposes. For all other business combinations consummated during the years ended December 31, 2022 and 2021, goodwill was fully deductible for income tax purposes.
There were no impairment losses for the years ended December 31, 2022, 2021 or 2020. The Company performed its most recent annual goodwill impairment test as of October 1, 2022, using the optional qualitative method. Under the qualitative method, we examined the factors most likely to affect our valuations. As a result, we have concluded that it remains more likely than not that the fair value of each of our reporting units exceeds their carrying amounts. As of December 31, 2022, the Company is not aware of any triggering events that have occurred since October 1, 2022.
Other Intangible Assets
At December 31, 2022 and 2021, other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | December 31, 2022 | | Weighted-average
Useful Life |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
| Other intangible assets: | | | | | | | |
| ISO and referral partner relationships | $ | 175,300 | | | $ | (24,021) | | | $ | 151,279 | | | 14.8 |
| Residual buyouts | 132,325 | | | (76,316) | | | 56,009 | | | 6.6 |
| Customer relationships | 96,000 | | | (83,298) | | | 12,702 | | | 8.2 |
| Merchant portfolios | 76,423 | | | (43,170) | | | 33,253 | | | 6.7 |
| Technology | 50,963 | | | (18,566) | | | 32,397 | | | 8.4 |
| Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 0.0 |
| Trade names | 3,183 | | | (2,129) | | | 1,054 | | | 11.6 |
Money transmission licenses(1) | 2,100 | | | — | | | 2,100 | | | |
| Total gross carrying value | $ | 539,684 | | | $ | (250,890) | | | $ | 288,794 | | | 9.7 |
(1)These assets have an indefinite useful life.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | December 31, 2021 | | Weighted-average
Useful Life |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
| Other intangible assets: | | | | | | | |
| ISO relationships | $ | 175,300 | | | $ | (11,679) | | | $ | 163,621 | | | 14.8 |
Residual buyouts(1) | 126,225 | | | (56,186) | | | 70,039 | | | 6.4 |
| Customer relationships | 95,566 | | | (70,883) | | | 24,683 | | | 8.1 |
| Merchant portfolios | 76,016 | | | (30,879) | | | 45,137 | | | 6.7 |
| Trade names | 2,870 | | | (1,890) | | | 980 | | | 11.6 |
| Non-compete agreements | 3,390 | | | (3,390) | | | — | | | 0.0 |
Technology(2) | 48,690 | | | (15,039) | | | 33,651 | | | 9.9 |
Money transmission licenses(3) | 2,100 | | | — | | | 2,100 | | | |
| Total gross carrying value | $ | 530,157 | | | $ | (189,946) | | | $ | 340,211 | | | 9.7 |
(1)Additions to residual buyouts were offset by certain assets that became fully amortized in 2021 but are still in service.
(2)Certain assets in the group became fully amortized in 2021 but are still in service.
(3)These assets have an indefinite useful life
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Amortization expense | $ | 61,170 | | | $ | 41,237 | | | $ | 33,065 | |
The estimated amortization expense of intangible assets as of December 31, 2022 for the next five years and thereafter is:
| | | | | | | | |
| (in thousands) | | Estimated Amortization Expense |
| Year Ending December 31, | |
| 2023 | | $ | 53,648 | |
| 2024 | | 35,872 | |
| 2025 | | 29,754 | |
| 2026 | | 28,939 | |
| 2027 | | 26,675 | |
| Thereafter | | 111,806 | |
Total(1) | | $ | 286,694 | |
(1)Total will not agree to the intangible asset net book value due to intangible asset with indefinite useful life.
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives and other relevant events or circumstances.
The Company tests intangible assets for impairment when events occur or circumstances indicate that the fair value of an intangible asset or group of intangible assets may be impaired. In the Company's SMB Payments segment, a residual buyout intangible asset with a net carrying value of $2.2 million was deemed to be impaired at December 31, 2020. The fair value of this intangible asset was estimated to be approximately $0.5 million, resulting in the recognition of an impairment charge of $1.8 million, which is included in selling, general and administrative expenses on the Company's Consolidated Statement of Operations for the year ended December 31, 2020. This impairment was the result of diminished cash flows generated by the merchant portfolio.
The Company also considered the market conditions and other factors and concluded that there were no additional impairment indicators present at December 31, 2022.
9. Leases
The Company's leases consist primarily of real estate leases for office space, which are classified as operating leases. Lease expense for the Company's operating leases is recognized on a straight-line basis over the term of the lease. The Company did not have any finance leases at December 31, 2022 and 2021.
As of December 31, 2022 and 2021, ROU Assets and lease liabilities consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except weighted-average data) | | Financial Statement Classification | | December 31, 2022 | | December 31, 2021 |
| Operating Lease ROU Assets: | | | | | | |
| Operating lease ROU Assets | | Other noncurrent assets | | $ | 4,593 | | | $ | 6,262 | |
| Operating Lease Obligations: | | | | | | |
| Operating lease obligations - current | | Accounts payable and accrued expenses | | $ | 1,336 | | | $ | 1,723 | |
| Operating lease obligations - noncurrent | | Other noncurrent liabilities | | 4,110 | | | 5,596 | |
| Total operating lease obligations | | | | $ | 5,446 | | | $ | 7,319 | |
| | | | | | |
| Weighted-average remaining lease term in years | | | | 4.4 | | 4.9 |
| Weighted-average discount rate | | | | 6.9 | % | | 6.9 | % |
The Components of lease expense for the years ended December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | Financial Statement Classification | | 2022 | | 2021 |
Operating lease expense (1) | | Selling, general and administrative | | $ | 1,984 | | | $ | 1,841 | |
(1)Excludes short-term lease expense and sublease income, which was immaterial for the years ended December 31, 2022 and 2021.
Total rent expense for the year ended December 31, 2020 was $2.5 million, which is included in selling, general and administrative expenses in the Company's Consolidated Statements of Operations..
Cash paid for amounts included in the measurement of lease liabilities was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | Financial Statement Classification | | 2022 | | 2021 |
| Operating cash flows from operating leases | | Operating activities | | $ | 2,131 | | | $ | 1,803 | |
Lease Commitments
Future minimum lease payments for the Company's real estate operating leases at December 31, 2022 were as follows:
| | | | | | | | |
| (in thousands) | | |
| Year Ending December 31, | | Amount Due |
| 2023 | | $ | 1,704 | |
| 2024 | | 1,308 | |
| 2025 | | 1,188 | |
| 2026 | | 1,302 | |
| 2027 | | 958 | |
| Thereafter | | — | |
| Total future minimum lease payments | | 6,460 | |
| Amount representing interest | | (1,014) | |
| Total future minimum lease payments, net of interest | | $ | 5,446 | |
As of December 31, 2022, the Company had one lease that has not yet commenced. The future obligation for this lease is not material.
10. Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses as of December 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | December 31, 2021 | | |
| Accrued expenses | $ | 17,742 | | | $ | 18,215 | | | |
| Accrued card network fees | 14,243 | | | 10,239 | | | |
| Accrued compensation | 7,287 | | | 5,861 | | | |
| Contingent consideration | 6,079 | | | 3,000 | | | |
| Accounts payable | 6,513 | | | 5,208 | | | |
| Total accounts payable and accrued expenses | $ | 51,864 | | | $ | 42,523 | | | |
11. Debt Obligations
Outstanding debt obligations as of December 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2022 | | December 31, 2021 |
| Credit Agreement: | | | |
Term facility - matures April 27, 2027, interest rate of 9.82% and 6.75% at December 31, 2022 and 2021, respectively | $ | 610,700 | | | $ | 616,900 | |
Revolving credit facility - $40.0 million line, matures April 27, 2026, interest rate of 8.82% and 5.75% at December 31, 2022 and 2021, respectively | 12,500 | | | 15,000 | |
| | | |
| | | |
| | | |
| | | |
| Total debt obligations | 623,200 | | | 631,900 | |
| Less: current portion of long-term debt | (6,200) | | | (6,200) | |
| Less: unamortized debt discounts and deferred financing costs | (18,074) | | | (21,595) | |
| Long-term debt, net | $ | 598,926 | | | $ | 604,105 | |
Contractual Maturities
Based on terms and conditions existing at December 31, 2022, future minimum principal payments for long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Revolving Credit Facility | | |
| December 31, | | Term Facility | | | Total Principal Due |
| 2023 | | $ | 6,200 | | | $ | — | | | $ | 6,200 | |
| 2024 | | 6,200 | | | — | | | 6,200 | |
| 2025 | | 6,200 | | | — | | | 6,200 | |
| 2026 | | 6,200 | | | 12,500 | | | 18,700 | |
| 2027 | | 585,900 | | | — | | | 585,900 | |
| | | | | | |
| Total | | $ | 610,700 | | | $ | 12,500 | | | $ | 623,200 | |
Additionally, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as defined in the Credit Agreement.
Credit Agreement
On April 27, 2021, the Company entered into a 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 Credit Agreement was amended on September 17, 2021 to increase 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.
Outstanding borrowings under the Credit Agreement accrue interest using either a base rate or a LIBOR rate plus an applicable margin per year, subject to a LIBOR rate floor of 1.00% per year. 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 LIBOR and the rate used for base-rate borrowings.
Prepayments of outstanding principal may be made in permitted increments subject to a 1.00% penalty for certain prepayments made in connection with repricing transactions.
The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default and affirmative and negative covenants, including covenants that restrict the ability to create liens, pay dividends or distribute assets from the Company's subsidiaries 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. The outstanding amount of any loans and any other amounts owed under the Credit Agreement may, after the occurrence of an event of default, at the option of Truist on behalf of lenders representing a majority of the commitments, be declared immediately due and payable. Events of default include the failure of the Company to make principal, premium or interest payment when due, or the failure by the Company to perform or comply with any term or covenant in the Credit Agreement, after any applicable cure period.
If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving facility thereunder, the Company is required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined as the ratio of consolidated total debt less unrestricted cash to consolidated adjusted EBITDA (as defined in the Credit Agreement). If applicable, the maximum permitted Total Net Leverage Ratio is: 1) 6.50:1.00 at each quarter ended September 30, 2021 through June 30, 2022; 2) 6.00:1.00 at each quarter ended September 30, 2022 through June 30, 2023; and 3) 5.50:1.00 at each quarter ended September 30, 2023 and thereafter. As of December 31, 2022, the Company is in compliance with the covenants in the Credit Agreement and the Total Net Leverage Ratio was not applicable.
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. See Note 2. Acquisitions for additional information related to the acquisition of Finxera. 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 discount are included in long-term debt on the Company's Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
| (in thousands) | | 2022 | | 2021 | 2020 |
Interest expense(1) | | $ | 53,554 | | | $ | 36,485 | | $ | 44,839 | |
| | | | | |
| | | | | |
(1)Included in this amount is $0.9 million of interest expense related to the accretion of contingent considerations from acquisitions.
Interest expense included amortization of deferred financing costs and debt discounts of $3.5 million, $4.0 million and $2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Deferred Loan Costs and Discounts, and Debt Extinguishment and Modification Expenses
In April 2021, the Initial Term Loan under the Credit Agreement was issued at a discount of $6.4 million. The Company incurred $6.4 million of costs including $3.5 million of ticking fees (debt commitment fees) prior to the drawdown of the funds in September 2021.
In September 2021, the Delayed Draw Term Loan was issued at a discount of $6.3 million. Additionally, the Company incurred $9.9 million of costs for the Delayed Draw Term Loan. Approximately $6.1 million of the remaining fees incurred for the Delayed Draw Term Loan were paid in connection with the Initial Term Loan and were deferred in other noncurrent assets on the Company's Consolidated Balance Sheet at June 30, 2021. The costs for the Delayed Draw Term Loan were amortized over the delayed commitment access period until September 2021, at which time the unamortized balance of the deferred costs was removed from other noncurrent assets and recorded as a reduction of the carrying amount of the debt obligation and are being amortized over the remaining term of the debt.
The Company determined that the issuance of the Initial Term Loan as part of the April 2021 refinancing of an existing facility was partially an extinguishment and a modification, and therefore, recognized debt extinguishment and modification costs of $8.3 million in April 2021, which included a portion of the refinancing fees and the write off of previously deferred fees under the prior credit agreements. These costs are reported within other expenses, net on the Company's Consolidated Statements of Operations.
12. Redeemable Senior Preferred Stock and Warrants
On April 27, 2021, the Company entered into an agreement pursuant to which it issued 150,000 shares of redeemable senior preferred stock, par value $0.001 per share, and a detachable warrant to purchase 1,803,841 shares of the Company's Common Stock, for gross proceeds of $150.0 million, less a $5.0 million discount and $5.5 million of issuance costs.
The agreement also provided the Company the option to issue an additional 50,000 shares of redeemable senior preferred stock upon the closing of the Finxera acquisition for $50.0 million, less a $0.6 million discount and within 18 months after the issuance of those additional shares, subject to the satisfaction of certain customary closing conditions.
Of the total net proceeds of $139.5 million, $131.4 million was allocated to the redeemable senior preferred stock, $11.4 million was allocated to additional paid-in capital for the warrants and $3.3 million was allocated to noncurrent assets for the committed financing put right.
On September 17, 2021 the Company issued an additional 75,000 shares of redeemable senior preferred stock for $75.0 million, less a $0.9 million discount, $0.7 million of ticking fees and $1.9 million of issuance costs. Upon issuance of these additional shares, the $3.3 million that was previously allocated to noncurrent assets for the committed financing put right was reclassified to the redeemable senior preferred stock.
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 redeemable senior preferred stock does not meet the definition of a liability pursuant to ASC 480, Distinguishing Liabilities from Equity, as it is redeemable upon the occurrence of events that are not solely within the Company's control. Therefore, the Company classified the redeemable senior preferred stock as temporary equity and is accreting the carrying amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method.
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 |
| January 1, 2021 | — | | | $ | — | |
| Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs | 225 | | | 199,609 | |
| Unpaid dividend on redeemable senior preferred stock | — | | | 8,704 | |
| Accretion of discounts and issuance cost | — | | | 1,845 | |
| December 31, 2021 | 225 | | | $ | 210,158 | |
| Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs | — | | | — | |
| Unpaid dividend on redeemable senior preferred stock | — | | | 16,794 | |
| Accretion of discounts and issuance cost | — | | | 3,286 | |
| Cash portion of dividend and ticking fee outstanding at the end of the year | — | | | 5,341 | |
| December 31, 2022 | 225 | | | $ | 235,579 | |
The dividend rate for the redeemable senior preferred stock is equal to the three-month LIBOR rate (minimum of 1.00%) plus an applicable margin of 12.00% (capped at 22.50%) per year, with a required quarterly cash dividend payment of 5.00% plus the three-month LIBOR rate per year. The dividend rate is subject to future increases if the Company doesn't comply with the cash payment requirements outlined in the agreement, which includes required payments of dividends, required payments related to redemption or required prepayments. The dividend rate may also increase if the Company fails to obtain the required stockholder approval for a forced sale transaction triggered by investors or if an event of default as outlined in the agreement occurs. The dividend rate as of December 31, 2022, and 2021 was 15.7% and 13.0% respectively.
The following table provides a summary of the dividends for the period presented:
| | | | | | | | | | | |
| (in thousands) | Year Ended
December 31, 2022 | | Year Ended December 31, 2021 |
Dividends paid in cash(1) | $ | 16,800 | | | $ | 7,460 | |
| Accumulated dividends accrued as part of the carrying value of redeemable senior preferred stock | 16,794 | | | 8,704 | |
| Dividends declared | $ | 33,594 | | | $ | 16,164 | |
(1)Included in this amount is $5.3 million of dividends outstanding as of December 31, 2022
The following table presents cumulative dividends in arrears in aggregate and per-share:
| | | | | | | | | | | |
| (in thousands, except per share amounts) | Year Ended
December 31, 2022 | | Year Ended December 31, 2021 |
| Cumulative preferred dividends in arrears | $ | 25,497 | | | $ | 8,704 | |
| Redeemable senior preferred stock, outstanding | 225 | | | 225 | |
| Cumulative preferred dividends in arrears, per share | $ | 113.3 | | | $ | 38.7 | |
The redeemable senior preferred shares have no stated maturity and will remain outstanding indefinitely until redeemed or otherwise repurchased by the Company. Outstanding shares of redeemable senior preferred stock can be redeemed at the option of the Company for cash in whole or in part at the following redemption price:
| | | | | |
Redemption Date | Redemption Price |
| Prior to April 27, 2023 | 100% of liquidation preference (i.e., $1,000 per share) plus any accrued and unpaid dividends and the make-whole amount (i.e., present value of additional 2% of the liquidation preference plus any accrued and unpaid dividends thereon through the redemption date plus 102% of the amount of dividends that will accrue from the redemption date through April 27, 2023) |
| April 27, 2023 - April 26, 2024 | 102% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date |
| April 27, 2024 and thereafter | 100% of the sum of the (a) outstanding liquidation preference plus (b) any accrued and unpaid dividends through and including the applicable redemption date |
Upon the occurrence of a change in control or a liquidation event, the Company will redeem all of the outstanding redeemable senior preferred shares for cash at the applicable redemption price described above.
The holders of the redeemable senior preferred stock may request the Company to pursue a sale transaction for the purpose of redeeming the redeemable senior preferred stock from and after the earliest of: 1) October 27, 2028; 2) 30 days after the redeemable senior preferred stockholders provide written notice to the Company of a failure by the Company to take steps within its control to prevent the Company's Common Stock from no longer being listed; and 3) the date that is 90 days following the Company's failure to consummate a mandatory redemption of the redeemable senior preferred stock upon the occurrence of a change in control or liquidation event.
The Company used the proceeds from the April 2021 sale of the redeemable senior preferred stock to partially fund the Refinancing (see Note 11. Debt Obligations), to partially fund the Wholesale Payments, Inc. and C&H Financial Services, Inc. acquisitions in the second quarter of 2021 (see Note 2. Acquisitions) and to pay certain fees and expenses relating to the Refinancing and the offering of the redeemable senior preferred stock and warrants. The Company used the proceeds from the September 2021 sale of additional shares of redeemable senior preferred stock to fund the Finxera acquisition (see Note 2. Acquisitions). Warrants
On April 27, 2021 the Company issued warrants to purchase up to 1,803,841 shares of the Company's Common Stock, par value $0.001 per share, at an exercise price of $0.001. The exercise price and the number of shares issuable upon exercise of the warrants are subject to certain adjustments from time to time on the terms outlined in the warrants. In connection with the issuance of the warrants, the Company entered into an agreement pursuant to which it agreed to provide certain registration rights with respect to the common shares issuable upon exercise of the warrants. Under this agreement the holders of the related shares of Common Stock were granted piggyback rights to be included in certain underwritten offerings of Common Stock and the right to demand a shelf registration of the shares of Common Stock issued upon exercise of the warrants. As of December 31, 2022, 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 Consolidated Balance Sheet.
13. Income Taxes
Components of consolidated income tax (benefit) expense for the years ended December 31, 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | For the Years Ended December 31, | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | | | | | | | | | | |
| U.S. current income tax expense (benefit) | | | | | | | | | | | | | | | | |
| Federal | $ | 10,411 | | | $ | (2,321) | | | $ | 4,766 | | | | | | | | | | | | |
| State and local | 2,546 | | | (379) | | | 3,173 | | | | | | | | | | | | |
| Foreign | 349 | | | 1 | | | — | | | | | | | | | | | | |
| Total current income tax (benefit) expense | $ | 13,306 | | | $ | (2,699) | | | $ | 7,939 | | | | | | | | | | | | |
| U.S. deferred income tax expense (benefit) | | | | | | | | | | | | | | | | |
| Federal | $ | (5,001) | | | $ | (1,343) | | | $ | 3,875 | | | | | | | | | | | | |
| State and local | (2,970) | | | (1,213) | | | (915) | | | | | | | | | | | | |
| Foreign | 15 | | | (3) | | | — | | | | | | | | | | | | |
| Total deferred income tax (benefit) expense | $ | (7,956) | | | $ | (2,559) | | | $ | 2,960 | | | | | | | | | | | | |
| Total income tax expense (benefit) | $ | 5,350 | | | $ | (5,258) | | | $ | 10,899 | | | | | | | | | | | | |
The Company's consolidated effective income tax rate was 167.2% for the year ended December 31, 2022, compared to a consolidated effective income tax rate of 135.9% for the year ended December 31, 2021. For the year ended December 31, 2020, the Company's consolidated effective income tax benefit rate was 13.3%. The effective rate for 2022 differed from the statutory rate of 21% primarily due to: 1) an increase in the valuation allowance against certain business interest carryover deferred tax assets; and 2) the finalization of prior estimates of certain intangible deferred tax liabilities resulting from the Finxera acquisition. The effective rate for December 31, 2021 differed from the statutory federal rate of 21% primarily due to: 1) an increase in the valuation allowance against certain business interest carryover deferred tax assets; 2) non-deductible transaction costs incurred in the acquisition of Finxera; 3) the finalization of prior estimates on the sale of the assets of PRET's real estate services business impacting amounts attributable to noncontrolling partners; and 4) an increase in the tax basis of certain intangible assets resulting from a change in a subsidiary's entity status. The effective rate for December 31, 2020 differed from the statutory federal rate of 21% primarily due to earnings attributable to noncontrolling interests and valuation allowance changes against certain business interest carryover deferred tax assets.
The following table provides a reconciliation of the consolidated income tax (benefit) expense at the statutory U.S. federal tax rate to actual consolidated income tax (benefit) expense for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | For the Years Ended December 31, | | | | |
| 2022 | | 2021 | | 2020 | | | | |
| U.S. federal statutory (benefit) expense | $ | 672 | | | $ | (813) | | | $ | 17,211 | | | | | |
| Non-controlling interests | — | | | (3,024) | | | (5,626) | | | | | |
| State and local income taxes, net | 421 | | | (372) | | | 1,140 | | | | | |
| Foreign rate differential | 142 | | | — | | | — | | | | | |
| Excess tax benefits pursuant to ASU 2016-09 | 4 | | | (339) | | | (37) | | | | | |
| Valuation allowance changes | 4,957 | | | 1,120 | | | (2,945) | | | | | |
| Nondeductible items | 576 | | | 703 | | | 233 | | | | | |
| Transaction Costs | — | | | 2,338 | | | — | | | | | |
| Intangible assets | (1,226) | | | (4,110) | | | 1,056 | | | | | |
| Tax credits | (100) | | | (223) | | | (283) | | | | | |
| Other, net | (96) | | | (538) | | | 150 | | | | | |
| Income tax expense (benefit) | $ | 5,350 | | | $ | (5,258) | | | $ | 10,899 | | | | | |
Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement carrying amount of the Company's assets and liabilities, tax credits and their respective tax bases, and loss carry forwards. The significant components of consolidated deferred income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| As of December 31, | | | | | | |
| (in thousands) | 2022 | | 2021 | | | | | | |
| Deferred Tax Assets: | | | | | | | | | |
| Accruals and reserves | $ | 1,510 | | | $ | 1,751 | | | | | | | |
| | | | | | | | | |
| Intangible assets | 15,600 | | | 9,673 | | | | | | | |
| Net operating loss carryforwards | 749 | | | 820 | | | | | | | |
| Interest limitation carryforwards | 15,142 | | | 10,786 | | | | | | | |
| Other | 4,107 | | | 3,332 | | | | | | | |
| Gross deferred tax assets | 37,108 | | | 26,362 | | | | | | | |
| Valuation allowance | (15,462) | | | (10,781) | | | | | | | |
| Total deferred tax assets | 21,646 | | | 15,581 | | | | | | | |
| Deferred Tax Liabilities: | | | | | | | | | |
| Prepaid assets | (1,101) | | | (1,191) | | | | | | | |
| Investments in partnership | (41) | | | — | | | | | | | |
| Property and equipment | (4,057) | | | (6,125) | | | | | | | |
| Total deferred tax liabilities | (5,199) | | | (7,316) | | | | | | | |
| Net deferred tax assets | $ | 16,447 | | | $ | 8,265 | | | | | | | |
In accordance with the provisions of ASC 740, Income Taxes, the Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. As of December 31, 2022 and 2021, the Company had a consolidated valuation allowance of approximately $15.5 million and $10.8 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and business combination costs that the Company believes are not more likely than not to be realized.
The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date. The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | |
| (in thousands) | |
| Balance as of January 1, 2022 | $ | 537 | |
| Additions based on tax positions related to the current year | — | |
| Additions based on positions of prior years | — | |
| Reductions for tax positions of prior years | (66) | |
| Reductions related to lapse of the applicable statutes of limitations | (169) | |
| Settlements | — | |
Balance as of December 31, 2022 | $ | 302 | |
As of December 31, 2022 and 2021, the balance of unrecognized tax benefits that, if recognized, affect our effective tax rate was $0.1 million and $0.1 million, respectively. The Company continually evaluates the uncertain tax benefit associated with its uncertain tax positions. It is reasonably possible that the liability for uncertain tax benefits could decrease during the next 12 months by up to $0.1 million due to the expiration of statutes of limitations.
The Company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. Tax periods for December 31, 2019 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for December 31, 2018 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.
At December 31, 2022 and December 31, 2021, the Company had state NOL carryforwards of approximately $13.4 million and $13.6 million, respectively, with expirations dates ranging from 2023 to 2041.
The Company has historically been impacted by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of ATI, as defined. In March 2020, the CARES Act was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020. As of December 31, 2022, the Company had interest deduction limitation carryforwards of $61.5 million.
14. Stockholders' Deficit
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of the Company's Common Stock possess all voting power for the election of members of the Company's Board of Directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of the Company's stockholders. Holders of the Company's Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of the Company's Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the Company's Board of Directors in its discretion. Historically, the Company has neither declared nor paid dividends. The holders of the Company's Common Stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the Common Stock.
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 December 31, 2022, the Company has not issued any shares of preferred stock.
Share Repurchase Program
During the second quarter of 2022, PRTH's Board of Directors authorized a general share repurchase program under which the Company may purchase up to 2.0 million shares of its outstanding Common Stock for a total of up to $10.0 million. Under the
terms of this plan, the Company may purchase shares through open market purchases, unsolicited or solicited privately negotiated transactions, or in another manner so long as it complies with applicable rules and regulations.
In August 2021, PRTH's Board of Directors authorized a $10.0 million 2021 share repurchase program. Under the 2021 Share Repurchase Program. the Company was authorized to purchase up to 1.0 million shares of its Common Stock through open market transactions, unsolicited or solicited privately negotiated transactions, or otherwise in accordance with all applicable securities laws and regulations. The Company terminated the 2021 Share Repurchase Program effective as of the close of business on September 23, 2021.
For the years ended December 31, 2022 and 2021, share re-purchase activity under these programs was as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| in thousands, except share data, which is in whole units | 2022 | | 2021 |
Number of shares purchased(1) | 1,309,374 | | | 162,715 | |
| Average price paid per share | $ | 4.42 | | | $ | 5.87 | |
Total Investment(1) | $ | 5,791 | | | $ | 1,023 | |
(1)These amounts may differ from the repurchases of Common Stock amounts in the Consolidated Statements of Cash Flows due to shares withheld for taxes and unsettled share repurchases at the end of the quarter.
Warrants and Purchase Options
As of December 31, 2022, 3,556,470 warrants from the original business combination in July 2018, remain outstanding. These warrants allow the holders to purchase shares of the Company's Common Stock at an exercise price of $11.50 per share. These warrants expire on August 24, 2023.
Prior to July 25, 2018, a purchase option was sold to an underwriter for consideration of $100. The purchase option, which survived the business combination, allow the holders to purchase up to a total of 300,000 units (each consisting of a share of Common Stock and a public warrant) exercisable at $12.00 per unit. The purchase option expires on August 24, 2023. The purchase option is classified as equity for accounting purposes and remain outstanding as of December 31, 2022.
15. Stock-based Compensation
2018 Equity Incentive Plan
The 2018 Plan was approved by the Company's Board of Directors and shareholders in July 2018. The 2018 Plan provided for the issuance of up to 6,685,696 of the Company's Common Stock, and these shares were registered on a Form S-8 during 2018. Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, SARs, restricted stock awards, RSUs, other stock-based awards (including cash bonus awards) or any combination of the foregoing. Any current or prospective employees, officers, consultants or advisors that the Company's compensation committee (or, in the case of non-employee directors, the Company's Board of Directors) selects, from time to time, are eligible to receive awards under the 2018 Plan. If any award granted under the 2018 Plan expires, terminates, or is canceled or forfeited without being settled or exercised, or if a SAR is settled in cash or otherwise without the issuance of shares, shares of the Company's Common Stock subject to such award will again be made available for future grants. In addition, if any shares are surrendered or tendered to pay the exercise price of an award or to satisfy withholding taxes owed, such shares will again be available for grants under the 2018 Plan. 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. These additional shares were registered on a Form S-8 in December 2022.
Stock-based compensation was as follows:
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | 2020 | | |
| 2018 Equity Incentive Plan | | | | | | | |
| Restricted stock units compensation expense | 6,182 | | | 2,561 | | | 1,364 | | | |
| Stock options compensation expense | $ | 7 | | | $ | 327 | | | $ | 753 | | | |
| Liability-classified compensation expense | — | | | 325 | | | 313 | | | |
| ESPP compensation expense | 39 | | | — | | | — | | | |
| Total | $ | 6,228 | | | $ | 3,213 | | | $ | 2,430 | | | |
For the years ended December 31, 2022, 2021 and 2020, the Company recognized an income tax benefit of approximately $0.7 million, $0.4 million and $0.4 million, respectively, for stock-based compensation expense. No stock-based compensation has been capitalized.
A summary of the activity in stock units for the 2018 Plan that occurred during the years ended December 31, 2022, 2021 and 2020 is as follows:
| | | | | | | | |
| | |
| | |
| | |
| | |
| Common Stock available for issuance at January 1, 2020 | | 4,796,176 | |
| Stock options granted | | (15,000) | |
| Stock options forfeited | | 220,045 | |
| RSUs granted | | (1,031,740) | |
| RSU granted with performance goals that have not been determined | | (128,624) | |
| RSUs forfeited | | 21,277 | |
Common Stock available for issuance at December 31, 2020 | | 3,862,134 | |
| | |
| Stock options forfeited | | 50,589 | |
| Stock options expired | | 53,870 | |
| RSUs granted | | (711,987) | |
| RSUs forfeited | | 1,957 | |
Shares withheld for taxes(1) | | 106,477 | |
Common Stock available for issuance at December 31, 2021 | | 3,363,040 | |
| New shares authorized for issuance | | 2,500,000 | |
| Stock options forfeited | | 221,733 | |
| RSUs granted | | (3,223,949) | |
| RSUs forfeited | | 353,196 | |
Shares withheld for taxes(1) | | 291,266 | |
Common Stock available for issuance at December 31, 2022 | | 3,505,286 | |
(1)The number of shares surrendered to satisfy withholding taxes owed are subsequently added back to the shares available for grant under the 2018 Plan.
Details about the time-based equity-classified stock options granted under the plan are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-average Exercise Price | | Weighted-average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding, December 31, 2021 | 1,227,625 | | | $ | 6.90 | | | | | |
| | | | | | | |
| | | | | | | |
| Forfeited | (221,733) | | | 6.95 | | | | | |
| | | | | | | |
Outstanding, December 31, 2022 | 1,005,892 | | | 6.88 | | | 5.7 years | | $ | 42 | |
| | | | | | | |
Exercisable at December 31, 2022 | 998,392 | | | $ | 6.92 | | | 5.7 years | | $ | 21 | |
The weighted-average grant date fair value of options granted in 2020 was $1.99. There were no options granted in 2022 or 2021. The intrinsic value of options exercised in 2021 was $0.2 million, there were no options exercised in 2022 or 2020. As of December 31, 2022, there was $11.7 thousand of unrecognized compensation costs related to stock options, which is expected to be recognized over a remaining weighted-average period of 1.6 years.
The table below presents the assumptions used to calculate the fair value of the stock options issued in 2020:
| | | | | | | |
| 2020 | | |
| Expected volatility | 94 | % | | |
| Risk-free interest rate | 0.5 | % | | |
| Expected term (years) | 7.5 | | |
| Dividend yield | — | % | | |
| Exercise price | $ | 2.47 | | |
Equity-classified Restricted Stock Units
Below is a summary of the Company's equity-classified RSUs for the periods presented:
| | | | | | | | | | | | | | | | |
| | Underlying Common Shares | | Weighted-average Grant Date Fair Value | | |
| Service-based vesting: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Unvested at January 1, 2020 | | 53,571 | | | $ | 7.00 | | | |
Granted(1) | | 892,142 | | | $ | 2.93 | | | |
| Forfeited | | (21,277) | | | $ | 2.35 | | | |
| Vested | | (328,035) | | | $ | 3.18 | | | |
Unvested at December 31, 2020 | | 596,401 | | | $ | 3.18 | | | |
Granted(1) | | 647,512 | | | $ | 6.63 | | | |
| Forfeited | | (1,957) | | | $ | 7.92 | | | |
| Vested | | (362,706) | | | $ | 3.65 | | | |
Unvested at December 31, 2021 | | 879,250 | | | $ | 5.51 | | | |
Granted(1) | | 2,878,948 | | | $ | 6.14 | | | |
| Forfeited | | (353,196) | | | $ | 6.04 | | | |
| Vested | | (822,602) | | | $ | 5.44 | | | |
Unvested at December 31, 2022 | | 2,582,400 | | | $ | 5.70 | | | |
| | | | | | |
| Performance-based vesting: | | | | | | |
| | | | | | |
| | | | | | |
| Unvested at January 1, 2020 | | 71,383 | | | $ | 10.52 | | | |
Granted(2) | | 139,598 | | | $ | 2.56 | | | |
| Forfeited | | (71,383) | | | $ | 10.52 | | | |
Unvested at December 31, 2020 | | 139,598 | | | $ | 2.56 | | | |
Granted(2) | | 64,475 | | | $ | 6.90 | | | |
| Vested | | (104,620) | | | $ | 7.24 | | | |
Unvested at December 31, 2021 | | 99,453 | | | $ | 4.46 | | | |
Granted(2) | | 64,366 | | | $ | 5.00 | | | |
| | | | | | |
| Vested | | (64,366) | | | $ | 6.90 | | | |
Unvested at December 31, 2022 | | 99,453 | | | $ | 3.24 | | | |
(1)Includes 228,347 shares with an estimated fair value of $1.1 million, 55,689 shares with an estimated fair value of $0.5 million and 212,768 shares with an estimated fair value of $0.4 million issued to non-employees in December 31, 2022, 2021 and 2020, respectively.
(2)Includes only the portions of grants for which the performance goals have been determined and communicated to the grant recipient. Any grants for which the required performance goals have not been determined and communicated to the grant recipient are not considered to have been granted for accounting purposes.
As of December 31, 2022, there was $13.1 million and $0.2 million of unrecognized compensation costs for equity-classified service-based RSUs and performance-based RSUs, respectively, which are expected to be recognized over a remaining weighted-average period of 2.5 years and 0.5 years, respectively. The total fair value of RSUs that vested in 2022, 2021 and 2020 was $0.9 million, $3.2 million and $1.3 million, respectively.
Liability-classified Stock-based Arrangements
In March 2020, the Company was authorized by the compensation committee of its Board of Directors to issue an RSU award to its Chairman and CEO if certain annual performance goals and achievement criteria were attained for 2020. The award was
accounted for as a liability-classified award. In March 2021, the performance goals and achievement criteria were met and the award was converted to an equity-classified award.
In June 2021, the Company committed to issue an additional liability-classified award with a target value of $0.9 million in 2022 to its Chairman and CEO if certain annual performance goals and achievement criteria were attained for 2021. The Company has accrued $0.3 million in compensation expense for this liability-classified award, which is included in salary and employee benefit expenses in the Company's Consolidated Statement of Operations for the year ended December 31, 2021. In the first quarter of 2022, the Company determined that the performance criteria was not met and this award was subsequently forfeited.
Employee Stock Purchase Plan
On April 16, 2021, the 2021 Stock Purchase Plan was authorized by the Company's Board of Directors. The maximum number of shares available for purchase under the 2021 Stock Purchase Plan is 200,000 shares.The shares issued under the 2021 Stock Purchase 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 during the first quarter of 2022. The 2021 Stock Purchase Plan provides eligible employees the opportunity to purchase shares of the Company's Common Stock on a quarterly basis through payroll deductions at a price equal to 95% of the lesser of the fair value on the first and last trading day of each quarter. The compensation expense for the year ended December 31, 2022 was immaterial and is included in stock-based compensation expense.
16. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution savings plan that covers substantially all of its eligible employees. Under the plan, the Company contributes safe-harbor matching contributions to eligible plan participants on an annual basis. The Company may also contribute additional discretionary amounts to plan participants. The Company's contributions to the plan were $1.7 million, $1.2 million and $1.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company offers a comprehensive medical benefit plan to eligible employees. All obligations under the plan are fully insured through third-party insurance companies. Employees participating in the medical plan pay a portion of the costs for the insurance benefits.
17. Related Party Transactions
PHOT Preferred Unit Redemption - Distribution to NCIs
In February 2019, PHOT a subsidiary of the Company, received a contribution of substantially all of the operating assets of certain companies under an asset contribution agreement. 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 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 received 413,081 shares of Common Stock of the Company in exchange for her 24.1% interest. Subsequent to establishing the Common Stock valuation in
November 2020 and the date of exchange in May 2021, the Company's Common Stock price appreciated to $7.75 per share. The Company's financial statements for the year ended December 31, 2021 reflect this exchange as a distribution to NCIs at an appreciated Common Stock value of $6.975 per share, which incorporates a 10% liquidity discount of $0.775 per share due to trading restrictions under Securities Rule 144. Therefore, the total distribution amounted to $10.8 million, comprised of $10.0 million of Common Stock and $0.8 million of cash. In addition, the Company recorded a $2.8 million tax benefit related to an increase in the tax basis associated with the share exchange, for a net impact to equity of $8.0 million.
Commitment to Lend and Warrant to Acquire
During 2019, the Company, through one if its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity to loan the entity up to $10.0 million based on certain growth metrics of the entity and continued compliance by the entity with the terms and covenants of the agreement.
In December 2021, the entity was sold to a third party. In connection with the sale, the Company's note receivable was fully repaid and the Company's warrants were cancelled in exchange for cash consideration. The Company recognized a gain of $7.6 million in its Consolidated Statements of Operations for the year ended December 31, 2021 related to this transaction.
Advance to Affiliate
During 2022, the Chairman and CEO, who is considered to be an affiliate of the Company, received an advance of incentive compensation of $1.2 million. Subsequent to December 31, 2022, the advance was satisfied in full.
18. Commitments and Contingencies
Minimum Annual Commitments with Third-party Processors
The Company has multi-year agreements with third parties to provide certain payment processing services to the Company. The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed payment transactions. Some of these agreements have minimum annual requirements for processing volumes. Based on existing contracts in place at December 31, 2022, the Company is committed to pay minimum processing fees under these agreements of approximately $15.7 million in 2023 and $17.0 million in 2024.
Annual Commitment with Vendor
Effective January 1, 2022, the Company entered into a three year business cooperation agreement with a vendor to resell its services. Under the agreement, the Company purchased vendor services worth $0.7 million for the year ended December 31, 2022, and is committed to purchase vendor services worth $1.5 million in 2023 and $2.3 million in 2024.
Capital Commitments
The Company committed to capital contributions to fund the operations of certain subsidiaries totaling $22.0 million. The Company is obligated to make the contributions within 10 business days of receiving notice for such contribution from the subsidiary. As of December 31, 2022, the Company contributed $6.9 million.
Merchant Reserves
Contingent Consideration
For asset acquisitions that do not meet the definition of a business, the portion of the unpaid purchase price that is contingent on future activities is not initially recorded by the acquirer on the date of acquisition. Rather, the acquirer generally recognizes contingent consideration when it becomes probable and estimable.
On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. This asset acquisition became part of the Company's SMB Payments reportable segment. The initial purchase price is subject to an increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers. As of December 31, 2021, the Company paid $4.0 million to the seller and the fair value of the contingent consideration was increased by $0.2 million. On April 14, 2022, the Company amended the purchase agreement related to its acquisition of certain residual portfolio rights to provide for an additional earnout opportunity to be earned during the 12 months ending March 31, 2023. As of December 31, 2022, the fair value of the contingent consideration was increased for $0.3 million and the Company paid $2.7 million. As of December 31, 2022, it is not probable the seller will meet criteria for any future earnout opportunities.
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 inside and outside counsel, the results of any of these matters, individually and in the aggregate, are not expected to have a material effect on the Company's results of operations, financial condition or cash flows. As more information becomes available, and the Company determines that an unfavorable outcome is probable on a claim and that the amount of probable loss that the Company will incur on that claim is reasonably estimable, the Company will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact the Company's results of operations, financial condition and cash flows.
Concentration of Risks
The Company's revenue is substantially derived from processing Visa and Mastercard bankcard transactions. Because the Company is not a member bank, in order to process these bankcard transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card association.
A majority of the Company's cash and restricted cash is held in certain FIs, substantially all of which is in excess of federal deposit insurance corporation limits. The Company does not believe it is exposed to any significant credit risk from these transactions.
19. Fair Value
Fair Value Measurements
Contingent consideration liabilities related to certain of the Company's acquisition is uncertain due to the utilization of unobservable inputs and management's judgement in determining the likelihood of achieving the earn-out criteria or the years ended December 31, 2022 and 2021. These liabilities measured at fair value on a recurring basis consisted of the following:
| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands) | Fair Value Hierarchy | | 2022 | | 2021 |
| Contingent consideration, current portion | Level 3 | | $ | 6,079 | | | $ | 4,006 | |
| Contingent consideration, noncurrent portion | Level 3 | | 2,000 | | | 6,680 | |
| Total contingent consideration | | | $ | 8,079 | | | $ | 10,686 | |
During the year ended December 31, 2022, there were no transfers into, out of, or between levels of the fair value hierarchy.
The following table provides a reconciliation of the beginning and ending balance of the Company's contingent consideration for the years ended December 31, 2022 and 2021.
| | | | | |
| (in thousands) | Contingent Consideration Liability |
| Balance at January 1, 2021 | $ | — | |
| Contingent consideration related to the acquisitions | 10,686 | |
Balance at December 31, 2021 | 10,686 | |
| Accretion of discount on contingent consideration | 864 | |
| Fair value adjustments | 1,195 | |
| Payment of contingent consideration | (4,666) | |
Balance at December 31, 2022 | $ | 8,079 | |
Fair Value Disclosures
Notes Receivable
Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company provides for allowances when it believes that certain notes receivable may not be collectible. The carrying value of the Company's notes receivable, net approximates fair value and was approximately $4.7 million and $0.4 million at December 31, 2022 and December 31, 2021, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.
Debt Obligations
Outstanding debt obligations (see Note 11. Debt Obligations) are reflected in the Company's Consolidated Balance Sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period. The fair value of the of the term loan facility was estimated to be approximately $606.1 million and $613.8 million at December 31, 2022 and 2021, respectively, and was estimated using binding and non-binding quoted market prices in an active secondary market, which considers the 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.
20. Segment Information
Prior to the fourth quarter of 2021, the Company's three reportable segments included the Consumer Payments segment, the Commercial Payments segment and the Integrated Partners segment. As a result of the Company's organic growth and recent acquisitions, a new internal reporting structure was implemented which resulted in changes to the Company's reportable segments. The three new reportable operating segments are SMB Payments, B2B Payments and Enterprise Payments. All comparative periods have been adjusted to reflect the new reportable segments. The Company does not have dedicated assets assigned to any particular reportable segment and such information is not available and continues to be aggregated.
More information about our 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).
•Enterprise Payments: Provides embedded payment and treasury solutions to enterprise customers to modernize legacy platforms and accelerate software partners' strategies to monetize payments.
Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.
Information on reportable segments and reconciliations to consolidated revenues, consolidated depreciation and amortization, and consolidated operating income are as follows:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Revenues: | | | | | | | |
| SMB Payments | $ | 562,237 | | | $ | 475,630 | | | $ | 370,521 | | | |
| B2B Payments | 18,890 | | | 17,138 | | | 20,922 | | | |
| Enterprise Payments | 82,514 | | | 22,133 | | | 12,899 | | | |
| Consolidated revenues | $ | 663,641 | | | $ | 514,901 | | | $ | 404,342 | | | |
| | | | | | | |
| Depreciation and amortization: | | | | | | | |
| SMB Payments | $ | 43,925 | | | $ | 41,144 | | | $ | 35,627 | | | |
| B2B Payments | 744 | | | 294 | | | 306 | | | |
| Enterprise Payments | 24,892 | | | 7,158 | | | 3,674 | | | |
| Corporate | 1,120 | | | 1,101 | | | 1,168 | | | |
| Consolidated depreciation and amortization | $ | 70,681 | | | $ | 49,697 | | | $ | 40,775 | | | |
| | | | | | | |
| Operating income: | | | | | | | |
| SMB Payments | $ | 54,866 | | | $ | 52,884 | | | $ | 37,897 | | | |
| B2B Payments | 208 | | | 135 | | | 923 | | | |
| Enterprise Payments | 30,937 | | | 6,763 | | | 1,899 | | | |
| Corporate | (29,846) | | | (26,689) | | | (19,858) | | | |
| Consolidated operating income | $ | 56,165 | | | $ | 33,093 | | | $ | 20,861 | | | |
A reconciliation of total operating income of reportable segments to the Company's net (loss) income is provided in the following table:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Years Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Total operating income of reportable segments | $ | 86,011 | | | $ | 59,782 | | | $ | 40,719 | | | |
| Corporate | (29,846) | | | (26,689) | | | (19,858) | | | |
| Interest expense | (53,554) | | | (36,485) | | | (44,839) | | | |
| Debt modification and extinguishment costs | — | | | (8,322) | | | (1,899) | | | |
| Gain on sale of business | — | | | 7,643 | | | 107,239 | | | |
| Other income, net | 589 | | | 202 | | | 596 | | | |
| Income tax (expense) benefit | (5,350) | | | 5,258 | | | (10,899) | | | |
| Net (loss) income | $ | (2,150) | | | $ | 1,389 | | | $ | 71,059 | | | |
| | | | | | | |
| | | | | | | |
21. (Loss) Earnings per Common Share
The following tables set forth the computation of the Company's basic and diluted earnings (loss) per common share:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands except per share amounts) | Years Ended December 31, | | | | | | |
| 2022 | | 2021 | | 2020 | | | | | | |
| Numerator: | | | | | | | | | | | |
| Net (loss) income | $ | (2,150) | | | $ | 1,389 | | | 71,059 | | | | | | | |
| Less: Dividends and accretion attributable to redeemable senior preferred stockholders | (36,880) | | | (18,009) | | | — | | | | | | | |
| Less: NCI preferred unit redemptions | — | | | (8,021) | | | — | | | | | | | |
| Less: Earnings attributable to NCI | — | | | — | | | (45,398) | | | | | | | |
| Net (loss) income attributable to common stockholders | $ | (39,030) | | | $ | (24,641) | | | $ | 25,661 | | | | | | | |
| Denominator: | | | | | | | | | | | |
| Basic: | | | | | | | | | | | |
Weighted-average common shares outstanding(1) | 78,233 | | | 71,902 | | | 67,158 | | | | | | | |
| Basic (loss) earnings per common share | $ | (0.50) | | | $ | (0.34) | | | $ | 0.38 | | | | | | | |
| Diluted: | | | | | | | | | | | |
Weighted-average common shares outstanding(1) | 78,233 | | | 71,902 | | | 67,158 | | | | | | | |
| Effect of potentially dilutive common stock equivalents | — | | | — | | | 105 | | | | | | | |
| Diluted weighted-average common shares outstanding | 78,233 | | | 71,902 | | | 67,263 | | | | | | | |
| Diluted (loss) earnings per common share | $ | (0.50) | | | $ | (0.34) | | | $ | 0.38 | | | | | | | |
Potentially anti-dilutive securities that were excluded from (loss) earnings per common share that could potentially be dilutive in future periods are as follows: | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Equivalents at December 31, | | | | |
| (in thousands) | 2022 | | 2021 | | 2020 | | | | |
Outstanding warrants on common stock(1) | 3,556 | | | 3,556 | | | 3,556 | | | | | |
Outstanding options and warrants issued to adviser(2) | 600 | | | 600 | | | 600 | | | | | |
Restricted stock awards(3) | 2,440 | | | 442 | | | 280 | | | | | |
| Liability-classified restricted stock units | — | | | 129 | | | 107 | | | | | |
Outstanding stock option awards(3) | 1,098 | | | 1,313 | | | 1,506 | | | | | |
| Total | 7,694 | | | 6,040 | | | 6,049 | | | | | |
(3)Granted under the 2018 Plan.