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iso4217:USD
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ACCOUNTING POLICIES
The Business
Headquartered in Alpharetta, Georgia, Priority Technology Holdings, Inc. and subsidiaries (together, 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. Today, the Company is a leading provider of merchant acquiring and commercial payment solutions, offering unique product capabilities to small and medium size businesses ("SMBs") and enterprises and distribution partners in the United States. 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:
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Consumer payments processing solutions for business-to-consumer ("B2C") transactions through independent sales organizations ("ISOs"), financial institutions, independent software vendors ("ISVs"), and other referral partners. Our proprietary MX platform for B2C payments provides merchants a fully customizable suite of business management solutions.
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Commercial payments solutions such as automated vendor payments and professionally curated managed services to industry leading financial institutions and networks. Our proprietary business-to-business ("B2B") Commercial Payment Exchange (CPX) platform was developed to be a best-in-class solution for buyer/supplier payment enablement.
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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.
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Integrated partners solutions for ISVs and other third-parties that allow them to leverage the Company's core payments engine via robust application program interfaces ("APIs") resources and high-utility embeddable code.
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Consulting and development solutions focused on the increasing demand for integrated payments solutions for transitioning to the digital economy.
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The Company provides its services through three reportable segments: (1) Consumer Payments, (2) Commercial Payments, and (3) Integrated Partners. For additional information about our reportable segments, see Note 18, 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 financial institutions ("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 debit cards. Card association rules require that vendors and processors be sponsored by a member bank and register with 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.
Corporate History and Recapitalization
M I Acquisitions, Inc. ("MI Acquisitions") was incorporated under the laws of the state of Delaware as a special purpose acquisition company ("SPAC") whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities. MI Acquisitions completed an initial public offering ("IPO") in September 2016, and MI Acquisitions' common stock began trading on The Nasdaq Capital Market with the symbol MACQ. In addition, MI Acquisitions completed a private placement to certain initial stockholders of MI Acquisitions. MI Acquisitions received gross proceeds of approximately $54.0 million from the IPO and private placement.
On July 25, 2018, MI Acquisitions acquired all of the outstanding member equity interests of Priority Holdings, LLC ("Priority") in exchange for the issuance of MI Acquisitions' common stock (the "Business Combination") from a private placement. As a
result, Priority, which was previously a privately-owned company, became a wholly-owned subsidiary of MI Acquisitions. Simultaneously with the Business Combination, MI Acquisitions changed its name to Priority Technology Holdings, Inc. and its common stock began trading on The Nasdaq Global Market with the symbol PRTH.
As a SPAC, MI Acquisitions had substantially no business operations prior to July 25, 2018. For financial accounting and reporting purposes under accounting principles generally accepted in the United States ("U.S. GAAP"), the acquisition was accounted for as a "reverse merger," with no recognition of goodwill or other intangible assets. Under this method of accounting, MI Acquisitions was treated as the acquired entity whereby Priority was deemed to have issued common stock for the net assets and equity of MI Acquisitions consisting mainly of cash of $49.4 million, accompanied by a simultaneous equity recapitalization (the "Recapitalization") of Priority. The net assets of MI Acquisitions are stated at historical cost and, accordingly, the equity and net assets of the Company have not been adjusted to fair value. As of July 25, 2018, the consolidated financial statements of the Company include the combined operations, cash flows, and financial positions of both MI Acquisitions and Priority. Prior to July 25, 2018, the results of operations, cash flows, and financial position are those of Priority. The units and corresponding capital amounts and earnings per unit of Priority prior to the Recapitalization have been retroactively revised as shares reflecting the exchange ratio established in the Recapitalization.
The Company's President, Chief Executive Officer and Chairman controls a majority of the voting power of the Company's outstanding common stock. As a result, the Company is a "controlled company" within the meaning of the corporate governance standards of the Nasdaq Stock Market, LLC ("Nasdaq").
Emerging Growth Company
The Company is an "emerging growth company" (EGC), as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). The Company may remain an EGC until December 31, 2021. However, if the Company's non-convertible debt issued within a rolling three-year period or if its revenue for any year exceeds $1.07 billion, the Company would cease to be an EGC immediately, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year. As an EGC, the Company is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, the Company as an EGC may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, the Company's financial statements may not be comparable to companies that comply with public company effective dates.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include those of the Company and its controlled subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in "Other non-current 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.
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 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.
Components of Revenues and Expenses
Revenues
See Note 3, Revenue, for information about our revenue.
Costs of Services
Costs of services primarily consist of residual payments to ISOs and other direct costs of providing payment services. The residual payments represent commissions paid to ISOs is generally based upon a percentage of the net revenues generated from merchant transactions. Other costs of services consist of third-party costs related to the Company's commercial payment services, ACH processing services, salaries that are reimbursed under cost-plus business process outsourcing services, and the cost of equipment (point of sale terminals).
Selling, General and Administrative
SG&A expenses include mainly professional services, advertising, rent, office supplies, software licenses, utilities, state and local franchise and sales taxes, litigation settlements, executive travel, insurance, and expenses related to the Business Combination.
Interest Expense
Interest expense consists of interest on outstanding debt and amortization of deferred financing costs and original issue discounts.
Other, net
Other, net is composed of interest income, debt modification and extinguishment expenses, changes in fair value of warrant liabilities, and equity in losses and impairment of unconsolidated entities. Interest income consists mainly of interest received pursuant to notes receivable from independent sales agents and another entity (see Note 13, Related Party Matters). Debt modification and extinguishment expenses includes write-offs of unamortized deferred financing costs and original issue discount relating to the extinguished debt. Equity in loss and impairment of unconsolidated entities consists of the Company's share of the income or loss of its equity method investment as well as any impairment charges related to such investments.
Comprehensive Income (Loss)
Comprehensive income (loss) represents the sum of net income (loss) and other amounts that are not included in the audited consolidated statement of operations as the amounts have not been realized. For the years ended December 31, 2018, 2017, and 2016, there were no differences between the Company's net income (loss) and comprehensive income (loss). Therefore, no separate Statements of Other Comprehensive Income (Loss) are included in the financial statements for the reporting periods.
Significant Accounting Policies
Revenue Recognition
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 uses the 5-step model in ASC 606 to determine when and how much revenue to recognize:
Step 1 - Identify the contract with the customer
Step 2 - Identify the performance obligation
Step 3 - Determine the transaction price
Step 4 - Allocate the transaction price to the performance obligation
Step 5 - Recognize revenue when (or as) the Company satisfies the performance obligation
Instead of evaluating each contract with a customer on an individual basis, the Company elects 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.
Deferred revenues are not material.
The Company's reportable segments are organized by services the Company provides through distinct business units. Set forth below is a description of the Company's revenue recognition polices by segment.
Consumer Payments - Revenue in this segment represents merchant card fee revenues, which involves promises to the customer for services related to the electronic authorization, acceptance, processing, and settlement of credit, debit and electronic benefit payment transactions through the payment networks. Merchants, who are the Company’s customers, are charged rates which are based on various factors, including the type of bank card, card brand, merchant charge volume, the merchant's industry and the merchant's risk profile. 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 are charged for each transaction. The Company's merchant contracts involve three parties: the Company, the merchant and the sponsoring bank. 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 remaining amount which represents the Company's revenue. The Company recognizes its revenue net of the amounts retained by these third parties. The Company incurs internal costs and costs of other third parties related to processing services. Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services.
Commercial Payments - This segment provides business-to-business ("B2B") automated payment services for customers, including virtual payments, purchase cards, electronic funds transfers, ACH payments, and check 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, and sponsor bank fees. In this segment, a portion of the revenue is rebated to certain customers, and these rebates are reported as a reduction of revenue. Additionally, this segment provides outsourced business process services by providing a sales force to certain enterprise customers. Such business process services are provided on a cost-plus fee arrangement and revenue is recognized to the extent of billable rates times hours worked and other reimbursable costs incurred. For most performance obligations associated with outsourced services that are satisfied over time, the Company applies the permitted practical expedient known as the “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.
Integrated Partners - The Integrated Partners segment earns revenue by providing services for payment-adjacent technologies that facilitate the acceptance of electronic payments from customers who conduct business in the rental real estate, rental storage, medical, and hospitality industries. 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.
Cash and Restricted Cash
Cash includes cash held at financial institutions that is owned by the Company. 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 are 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.
Allowance for Doubtful Accounts Receivable
The Company records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected, based upon loss trends and an analysis of individual accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received. The allowance for doubtful accounts was $0.8 million and $0.5 million at December 31, 2019 and 2018, respectively.
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 non-current 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 statement of operations as the related costs are incurred by the Company in accordance with the agreement with the vendor.
Property and Equipment, Including Leases
Property and equipment are stated at cost, except for property and equipment acquired in a merger or 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.
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 amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.
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.
Costs Incurred to Develop Software for Internal Use
Costs incurred to develop computer software for internal use are capitalized once: (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a specific software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Post-implementation costs related to the internal use computer software, are expensed as incurred. Internal use software development costs are amortized using the straight-line method over its estimated useful life which ranges from three to five years. 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, 2019, 2018, and 2017, there was no impairment associated with internal use software. For the years ended December 31, 2019, 2018, and 2017, the Company capitalized software development costs of $8.2 million, $6.7 million, and $3.1 million, respectively. As of December 31, 2019 and 2018, capitalized software development costs, net of accumulated amortization, totaled $14.9 million and $10.8 million, respectively, and is 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, 2019, 2018, and 2017 was $4.1 million, $2.6 million, and $1.6 million, respectively.
Settlement Assets and Obligations
Settlement processing assets and obligations recognized on the Company's consolidated balance sheet represent intermediary balances arising in the Company's settlement process for merchants and other customers. See Note 5, Settlement Assets and Obligations.
Debt Issuance 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.
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.
Non-Controlling Interests
The Company has issued non-voting profit-sharing interests in three of its subsidiaries that were formed in 2018 or 2019 to acquire the operating assets of certain businesses (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions). The Company is still the majority owner of these subsidiaries and therefore the profit-sharing interests are deemed to be non-controlling interests ("NCI").
To estimate the initial fair value of a profit-sharing interest, the Company utilizes future cash flow scenarios with focus on those cash flow scenarios that could result in future distributions to the NCIs. In subsequent periods, profits or losses are attributed to an NCI based on the hypothetical-liquidation-at-book-value method that utilizes the terms of the profit-sharing agreement between the Company and the NCIs.
As the majority owner, the Company has call rights on the profit-sharing interests issued to the NCIs. These call rights can be executed only under certain circumstances and execution is always voluntary 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.
Goodwill
The Company tests goodwill for impairment for its reporting units 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. The Company performed its most recent annual goodwill impairment test as of November 30, 2019 using market data and discounted cash flow analysis. Based on this analysis, it was determined that the fair value exceeded the carrying value of its two reporting units with goodwill, Consumer Payments and Integrated Partners.
Intangible Assets
Intangible assets are initially recorded at cost upon acquisition by the Company. The carrying value of an intangible asset acquired in an asset acquisition may be subsequently increased for contingent consideration when due to the seller. 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, have finite lives and are subject to amortization. Intangible assets consist of acquired merchant portfolios, customer relationships, ISO relationships, residual buyouts, trade names, technology, and non-compete agreements.
Merchant portfolios
Merchant portfolios consist of the acquired rights to a portfolio of merchants such as those acquired from Direct Connect Merchant Services, LLC, and YapStone, Inc. The Company amortizes the cost of its acquired merchant portfolios over their estimated useful lives, which range from five to fifteen years using a straight-line amortization method.
Customer Relationships
Customer relationships represent the cost of the acquired customer relationship, which typically consists of a portfolio of merchants or contracted business relationships. The Company amortizes the cost of its acquired customer relationships over their estimated useful lives, which range from ten years to fifteen years, using either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
ISO Relationships
ISO relationships represent the cost of acquired relationships with ISOs. The Company amortizes the cost of its acquired ISO relationships over their estimated useful lives, which range from 11 years to 25 years, using an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Residual Buyouts
Most of the Company's merchant customers in its Consumer Payments reportable segment are associated with independent ISOs, and these ISOs typically have a right to receive commissions from the Company based on the revenue earned by the associated merchants. Although not obligated to do so, the Company may occasionally decide to pay an ISO an agreed-upon amount in exchange for the ISO's surrender of its right to receive future commissions from the Company, either temporarily or permanently. The amount that the Company pays for these residual buyouts is capitalized and subsequently amortized over the term of the residual buyout agreement, or if the residual buyout is permanent, over the expected life of the underlying merchant relationships. These amortization periods range between one year and nine years and the Company uses either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Technology
Technology intangible assets represent acquired technology, such as proprietary software and website domains. The Company amortizes the cost of acquired technology over their estimated useful lives, which range from 5 years to 7 years, using a straight-line amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.
Other Intangible Assets
The Company's intangible assets also include acquired trade names and non-compete agreements. These assets are amortized over their estimated useful lives ranging from five years to 25 years using a straight-line amortization method. All non-compete agreements were fully amortized at December 31, 2019 and 2018.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount 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 unamortized balance 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, 2019, 2018 and 2017.
Accrued Residual Commissions
Accrued residual commissions consist of amounts due to independent sales organizations ("ISOs") and independent sales agents on the processing volume of the Company's merchant customers. The commissions due are based on varying percentages of the volume processed by the Company on behalf of the merchants. Percentages vary based on the program type and transaction volume of each merchant. Residual commission expenses, adjusted for the Company's retrospective adoption of ASC 606 (see Note 1, Nature of Business and Accounting Policies) were $213.8 million, $230.2 million, and $238.5 million, respectively, for the years ended December 31, 2019, 2018 and 2017, 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 executive 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.
Equity-Based Compensation
The Company recognizes the cost resulting from all equity-based payment transactions in the financial statements at grant date fair value. Equity-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. The effects of forfeitures are recognized as they occur.
Stock options
Under the Company's 2018 Equity Incentive 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 stocks 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. As a newly-public company, the Company lacks sufficient exercise information for its stock option plan. Accordingly, the Company uses a method permitted by the Securities and Exchange Commission ("SEC") whereby the expected term is 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 used 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.
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 date of grant 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 equity awards based on the quoted closing price of the Company's common stock on the date of grant, adjusted for any market-based vesting criteria, and records equity-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved. The Company reassesses the probability of vesting at each reporting period and prospectively adjusts equity-based compensation expense based on its probability assessment.
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 labeled 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 Information.
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 earnings (loss) per share ("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.
The two-class method determines net income (loss) per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Prior to redemption in July 2018, the Goldman Sachs warrants were deemed to be participating securities because they had a contractual right to participate in non-forfeitable dividends on a one-for-one basis with the Company's common stock. Accordingly, the Company applied the two-class method for EPS when computing net income (loss) per common share. For periods beginning after September 30, 2018, EPS using the two-class method is no longer required due to the redemption of the Goldman Sachs warrant. See Note 10, Long-term Debt and Warrant Liability.
Income Taxes
Prior to July 25, 2018, Priority was a "pass-through" entity for income tax purposes and had no material income tax accounting reflected in its financial statements since taxable income and deductions were "passed through" to Priority's unconsolidated owners. As a limited liability company, Priority Holdings, LLC elected to be treated as a partnership for the purpose of filing income tax returns, and as such, the income and losses of Priority Holdings, LLC flowed through to its members. Accordingly, no provisions for federal and most state income taxes was provided in the consolidated financial statements. However, periodic distributions were made to members to cover company-related tax liabilities.
MI Acquisitions was a taxable "C-Corp" for income tax purposes. As a result of Priority's acquisition by MI Acquisitions, the combined Company is now a taxable "C-Corp" that reports all of Priority's income and deductions for income tax purposes. Accordingly, subsequent to July 25, 2018, the consolidated financial statements of the Company reflect the accounting for income taxes in accordance with Financial Accounting Standards Board 's ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC 740").
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 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.
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 fair value 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.
New Accounting and Reporting Standards
Prior to July 25, 2018, Priority was defined as a non-public entity for purposes of applying transition guidance related to new or revised accounting standards under U.S. GAAP, and as such was typically required to adopt new or revised accounting standards subsequent to the required adoption dates that applied to public companies. MI Acquisitions was classified as an EGC. Subsequent to the Business Combination, the Company will cease to be an EGC no later than December 31, 2021. The Company will maintain the election available to an EGC to use any extended transition period applicable to non-public companies when complying with a new or revised accounting standards. Therefore, as long as the Company retains EGC status, the Company can continue to elect to adopt any new or revised accounting standards on the adoption date (including early adoption) required for a private company.
Accounting Standards Adopted in 2019
Revenue Recognition (ASC 606) and Related Costs to Obtain or Fulfill a Contracts with Customers (ASC 340-40)
For the annual reporting period that began on January 1, 2019, the Company adopted ASU 2014-09 and the other clarifications and technical guidance issued by the Financial Accounting Standards Board ("FASB") related to this new revenue standard that have been collectively codified in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and the related ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, (together, "ASC 606"). As an emerging growth company, the Company adopted ASC 606 under the extended transition provisions available to a non-public business entity. Accordingly, the Company was not required to report under the new standards until the Company’s annual reporting period for the year ended December 31, 2019. As such, amounts previously reported in the Company’s unaudited condensed consolidated financial statements and related disclosures for prior quarterly periods in 2019 on Forms 10-Q were under the legacy guidance of ASC 605, Revenue Recognition, and the SEC’s Topic 13, Revenue Recognition.
In reporting the effects of the adoption of ASC 606 in its consolidated financial statements and related disclosures, the Company elected the full retrospective transition method. Under this method, all annual periods presented herein (2019, 2018, and 2017) in these consolidated financial statements and related disclosures have been retrospectively recasted to reflect the provisions of ASC 606. In connection with the Company’s evaluation and adoption of ASC 606, the classification of certain transactions previously presented in revenue at their gross amounts were re-evaluated under the principal-agent guidance and have been retrospectively recasted within the Company’s statements of operations to a net presentation (see Note 2, Restatement of Previously Issued Consolidated Financial Statements). There were no other adjustments as the result of the adoption of ASC 606 and, accordingly, no adjustment was required to the Company’s beginning retained earnings (deficit) at January 1, 2017 to reflect the cumulative effect of initially applying the new standards. These reclassifications did not have any impact on income from operations, income (loss) before income taxes, net income (loss), assets, liabilities, stockholders’ deficit, or cash flows for any period. Beginning first quarter 2020, all interim reporting periods, including comparative periods, will also reflect the provisions of ASC 606.
The effects on the Company's consolidated balance sheets and consolidated statements of cash flows related to the full retrospective adoption of ASC 606 were not material and therefore no adjustments have been made for the adoption of the new accounting standard.
For a summary of the effects of the adoption of ASC 606, along with the effects of certain error corrections, on line items in the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017, see Note 2, Restatement of Previously Issued Consolidated Financial Statements.
The following table summarizes the effects of the Company's full retrospective adoption of ASC 606 on line items in the Company's consolidated statements of operations for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Year Ended December 31, 2019
|
|
|
As recasted
|
|
Effects of Adoption of ASC 606
|
|
Balances Without Adoption of ASC 606
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
Revenues
|
|
$
|
371,854
|
|
|
$
|
(60,702
|
)
|
|
$
|
432,556
|
|
Costs of Services
|
|
$
|
252,569
|
|
|
$
|
(60,702
|
)
|
|
$
|
313,271
|
|
See Note 20, Selected Quarterly Financial Results (Unaudited), for information about how the full retrospective adoption of ASC 606 effected the Company's consolidated revenues and costs of services for each interim quarterly reporting period in the years ended December 31, 2019 and 2018.
See Note 18, Segment Information, for information on the effects that the full retrospective adoption of ASC 606 had on the revenues of the Company's reportable segments for the years ended December 31, 2019, 2018, and 2017.
Gains and Losses from Derecognition of Non-Financial Assets (ASU 2017-05)
Concurrent with the adoption of ASC 606, the Company was also required to adopt the provisions of ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Non-financial Assets ("ASU 2017-05"). ASU 2017-05 clarifies that the guidance in ASC 610-20 on accounting for derecognition of a non-financial asset and an in-substance non-financial asset applies only when the asset or asset group does not meet the definition of a business or is not a non-for-profit entity. Non-financial assets include, but are not limited to, intangible assets, property and equipment. This ASU also clarifies that the provisions of ASC 606 apply if an entity transfers an asset to a customer. If an asset transfer in within the scope of ASU 2017-05, an entity measures its gain or loss on derecognition of each distinct asset as the difference between the amount of consideration received and the carrying amount of the distinct asset. The adoption of ASU 2017-05 had no impact on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2019. However, the application of ASU 2017-05 to future transactions could be material.
Measurements of Certain Equity Investments (ASU 2016-01)
Under ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, entities have to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. However, for equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient in ASC 820 to estimate fair value using the net asset value per share (or its equivalent) of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company early adopted the provisions of ASU 2016-01 on April 1, 2019 and applied them to an acquired warrant to purchase equity of another entity, the same entity that borrowed $3.5 million from the Company during 2019 under a $10.0 million loan and loan commitment agreement. The carrying value, at cost, and fair value of the warrant were not material. See Note 13, Related Party Matters.
Statement of Cash Flows (ASU 2016-15)
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This ASU represents a consensus of the FASB's Emerging Issues Task Force on eight separate issues that each impact classifications on the statement of cash flows. In particular, issue number three addresses the classification of contingent consideration payments made after a business combination. Under ASU 2016-15, cash payments made soon after an acquisition's consummation date (i.e., approximately three months or less) will be classified as cash outflows from investing activities. Payments made thereafter will be classified as cash outflows from financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities. As an EGC, this ASU was effective for the Company's annual reporting period beginning in 2019 and will be effective for interim periods beginning in 2020. The Company made no payments in 2019 for contingent consideration related to business combinations.
Income Taxes for Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Inventory ("ASU 2016-16"). ASU 2016-16 removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The ASU is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. ASU 2016-16 was effective for the Company's annual reporting period ended December 31, 2019 and will be effective for interim periods beginning in 2020. The adoption of ASU 2016-16 did not have a material effect on the Company's results of operations, financial position, or cash flows. However, any future inter-entity transfers of assets within scope of this ASU may be affected.
Accounting Standards Adopted in 2018
Modifications to Share-Based Compensation Awards (ASU 2017-09)
As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-09, Compensation-Stock Compensation Topic 718 - Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms and conditions of share-based payment awards must be accounted for as modifications. Entities apply the modification accounting guidance if the value, vesting conditions, or classification of an award changes. The Company has not modified any share-based payment awards since the adoption of ASU 2017-09, therefore this new ASU has had no impact on the Company's financial position, operations, or cash flows. Should the Company modify share-based payment awards in the future, it will apply the provisions of ASU 2017-09.
Balance Sheet Classification of Deferred Income Taxes (ASU 2015-17)
In connection with the Business Combination and Recapitalization, the Company prospectively adopted the provisions of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), during the third quarter of 2018. ASU 2015-17 simplifies the balance sheet presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities for each tax-paying jurisdiction as non-current on the balance sheet. Prior guidance required the deferred taxes for each tax-paying jurisdiction to be presented as a net current asset or liability and net non-current asset or liability.
Definition of a Business (ASU 2017-01)
On October 1, 2018, the Company prospectively adopted the provisions of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 assists entities in determining if acquired assets constitute the acquisition of a business or the acquisition of assets for accounting and reporting purposes. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a business. The Company's December 2018 acquisition of certain assets of Direct Connect Merchant Services, LLC was not deemed to be the acquisition of a business under ASU 2017-01 because substantially all of the fair value was concentrated in a single identifiable group of similar identifiable assets.
Accounting for Share-Based Payments to Employees (ASU 2016-09)
For its annual reporting period beginning January 1, 2018, the Company adopted the provisions of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends ASC Topic 718, Compensation–Stock Compensation. This adoption of this new ASU had the following effects:
Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations. This change is required to be applied prospectively upon adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption. This particular provision of ASU 2016-09 had no material effect on the Company's financial position, operations, or cash flows.
Consolidated Statement of Cash Flows - ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments, such as excess income tax benefits, are to be reported as operating activities on the statement of cash flows, a change from the prior requirement to present windfall income tax benefits as an inflow from financing activities and an offsetting outflow from operating activities. This particular provision of ASU 2016-09 had no material effect on the Company's financial position, operations, or cash flows.
Additionally, ASU 2016-09 clarifies that:
|
|
•
|
All cash payments made to taxing authorities on an employee's behalf for withheld shares at settlement are presented as financing activities on the statement of cash flows. This change must be applied retrospectively. This particular provision of ASU 2016-09 had no material effect on the Company's financial position, operations, or cash flows.
|
|
|
•
|
Entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated or recognized when they occur. Estimates of forfeitures will still be required in certain circumstances, such as at the time of modification of an award or issuance of a replacement award in a business combination. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings. The Company made a policy election to recognize the impact of forfeitures when they occur. This policy election primarily impacted the Company's new equity compensation plans originating in 2018 (see Note 15, Equity-Based Compensation), thus not requiring a cumulative effect adjustment to opening retained earnings for these new plans. For the Company's previously existing equity compensation plan (the Management Incentive Plan), see Note 15, Equity-Based Compensation. The amount of the cumulative effect upon adoption of ASU 2016-09 was not material and therefore has not been reflected in opening retained earnings on the Company's consolidated balance sheets or consolidated statements of changes in stockholders' deficit.
|
Recently Issued Accounting Standards Pending Adoption
Leases (ASC 842)
In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. As an EGC, this standard is effective for the Company's annual reporting period beginning in 2021 and interim reporting periods beginning first quarter of 2022. The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but it is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.
Credit Losses (ASU 2016-13 and ASU 2018-19)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace 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. ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, was issued in November 2018 and excludes operating leases from the new guidance. The standard will require 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. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable. As a Smaller Reporting Company (as defined by the SEC), the Company must adopt this new standard no later than the beginning of 2023.
Goodwill Impairment Testing (ASU 2017-04)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (i.e., step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, the ASU will be applied prospectively. As an EGC, this ASU will be effective for annual and interim impairment tests performed in periods beginning in 2022. The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.
Share-Based Payments to Non-Employees (ASU 2018-07)
In June 2018, the FASB issued ASU 2018-07, Share-based Payments to Non-Employees, to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. As an EGC, the ASU is effective for annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such impact will be dependent on any share-based payments issued to non-employees.
Share-Based Payments to Customers (ASU 2019-08)
In November 2019, the FASB issued ASU 2019-08, Stock Compensation and Revenue from Contracts with Customers ("ASU 2019-08"). ASU 2019-08 will apply to share-based payments granted in conjunction with the sale of goods and services to a customer that are not in exchange for a distinct good or service. Entities will apply ASC 718 to measure and classify share-based sales incentives, and reflect the measurement of such incentives, as a reduction of the transaction price and also recognize such incentives in accordance with the guidance in ASC 606 on consideration payable to a customer. Entities that receive distinct goods or services from a customer will account for the share-based payment in the same manner as they account for other purchases from suppliers (i.e., by applying the guidance in ASC 718). Any excess of the fair-value-based measure of the share-based payment award over the fair value of the distinct goods or services received will be reflected as a reduction to the transaction price and recognized in accordance with the guidance in ASC 606 on consideration payable to a customer. ASU 2019-08 is effective for the Company at the same time it adopts ASU 2018-07, which is annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such such impact will be dependent on any shard-based payments issued to customer.
Disclosures for Fair Value Measurements (ASU 2018-13)
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. For all entities, this ASU is effective for annual and interim reporting periods beginning in 2020. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. As disclosure guidance, the adoption of this ASU will not have an effect on the Company's financial position, results of operations or cash flows.
Implementation Costs Incurred in Cloud Computing Arrangements (ASU 2018-15)
In August 2018, the FASB issued ASU 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As an EGC, this ASU is effective for the Company for annual
reporting periods beginning in 2021, and interim periods within annual periods beginning in 2022. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact this ASU will have on its consolidated financial statements.
Simplifying the Accounting for Income Taxes (ASU 2019-12)
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 will affect several topics of income tax accounting, including: tax-basis step-up in goodwill obtained in a transaction that is not a business combination; intra-period tax allocation; ownership changes in investments when an equity method investment becomes a subsidiary of an entity; interim-period accounting for enacted changes in tax law; and year-to-date loss limitation in interim-period tax accounting. This ASU is effective for the Company on January 1, 2022. The effects that the adoption of this ASU will have on the Company's results of operations, financial position, and cash flows will depend on specific events occurring for the Company after the adoption of ASU 2019-12.
Concentration of Risk
A substantial portion of the Company's revenues and receivables are attributable to merchants. In 2019, 2018, and 2017, no one 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 referral 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, 2019, 2018, and 2017, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 18%, 14%, and 10% of the Company's consolidated revenues.
A majority of the Company's cash and restricted cash is held in certain financial institutions, 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.
Reclassifications
Certain prior year amounts in these consolidated financial statements have been reclassified to conform to the current year presentation, with no net effect on the Company's income from operations, income (loss) before income tax expense (benefit), net income (loss), stockholders' deficit, or cash flows from operations, investing, or financing activities.
2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
Corrections of Errors
On March 26, 2020, the Audit Committee of the Board of Directors (the “Audit Committee”) of the Company, after considering the recommendations of management, and discussing such recommendations with counsel, concluded that its 2018 and 2017 audited financial statements included in its Annual Report on Form 10-K as of and for the year ended December 31, 2018 (the “2018 Annual Report”) and its unaudited condensed consolidated financial statements as of and for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018 included in the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2019 and 2018, June 30, 2019 and 2018, and September 30, 2019 and 2018 (the “2019 Quarterly Reports”) should no longer be relied upon due to misstatements that are described in greater detail below, and that the Company would restate such financial statements to make the necessary accounting corrections.
During the preparation of its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”), the Company noted two errors within its Consumer Payments reportable segment. First, the Company noted an understatement of losses related to certain settlement activities with the Company’s sponsor banks, merchants and ISOs. The second error noted involved an out-of-period recognition of certain chargeback revenues and related costs of services between 2018 and 2017. An
investigation was conducted with the assistance of outside accounting consultants. As a result of the investigation, the Company concluded that the errors had resulted in misstatements in its consolidated financial statements for the periods identified above that were due to a failure to appropriately reconcile certain settlement accounts with the Company’s general ledger.
The Company evaluated these errors and their effects on the its consolidated financial statements and related disclosures using the guidance in ASC No. 250, Accounting Changes and Error Corrections, Staff Accounting Bulletin Topic 1.M, Materiality ("SAB 99"), and Topic 1.N, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements ("SAB108"). The Company considered both quantitative and qualitative characteristics of the errors and as a result it has restated its consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in its 2018 Annual Report and the unaudited condensed consolidated financial statements as of and for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018 included in its 2019 Quarterly Reports.
Based on the analysis noted above, the correction of errors resulting from the failure to appropriately reconcile the settlement ledger to the Company's general ledger were not material to the previously reported consolidated financial statements for the year ended December 31, 2016. The restatement adjustments and error corrections and their impacts on previously reported consolidated financial statements are described below. The cumulative effect to correct the errors for all periods prior to 2017 resulted in a $5.0 reduction on January 1, 2017 to the Company’s consolidated statement of stockholders’ equity (deficit) presented herein.
Restated Consolidated Statements of Operations
For the years ended December 31, 2018 and 2017, the following tables show the effects, by line item, on the Company’s consolidated statements of operations presented herein for: 1) the correction of the errors related to certain settlement activities and out-of-period chargeback revenue described above and 2) the full retrospective adoption of ASC 606, Revenue from Contracts with Customers, described in the section "Accounting Standards Adopted in 2019" in Note 1, Nature of business and Accounting Policies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
Full
|
|
|
|
|
|
|
Error
|
|
Error
|
|
Retrospective
|
|
|
|
|
|
|
Corrections
|
|
Corrections
|
|
Adoption
|
|
|
|
|
As
|
|
Related to
|
|
Related to
|
|
of ASC 606
|
|
Originally
|
Line
|
|
Restated
|
|
Settlement
|
|
Chargebacks
|
|
(Note 1)
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
375,822
|
|
|
$
|
(471
|
)
|
|
|
|
$
|
(48,122
|
)
|
|
$
|
424,415
|
|
Costs of services
|
|
$
|
269,284
|
|
|
$
|
731
|
|
|
$
|
2,324
|
|
|
$
|
(48,122
|
)
|
|
$
|
314,351
|
|
Income from operations
|
|
$
|
16,393
|
|
|
$
|
(1,202
|
)
|
|
$
|
(2,324
|
)
|
|
|
|
$
|
19,919
|
|
Loss before income taxes
|
|
$
|
(20,326
|
)
|
|
$
|
(1,202
|
)
|
|
$
|
(2,324
|
)
|
|
|
|
$
|
(16,800
|
)
|
Income tax benefit
|
|
$
|
(2,490
|
)
|
|
$
|
(174
|
)
|
|
$
|
(557
|
)
|
|
|
|
$
|
(1,759
|
)
|
Net loss
|
|
$
|
(17,836
|
)
|
|
$
|
(1,028
|
)
|
|
$
|
(1,767
|
)
|
|
|
|
$
|
(15,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income tax benefit (unaudited)
|
|
$
|
(3,169
|
)
|
|
$
|
(187
|
)
|
|
$
|
(363
|
)
|
|
|
|
$
|
(2,619
|
)
|
Pro forma net loss (unaudited)
|
|
$
|
(17,157
|
)
|
|
$
|
(1,015
|
)
|
|
$
|
(1,961
|
)
|
|
|
|
$
|
(14,181
|
)
|
Pro forma loss per share (unaudited)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
Full
|
|
|
|
|
|
|
Error
|
|
Error
|
|
Retrospective
|
|
|
|
|
|
|
Corrections
|
|
Corrections
|
|
Adoption
|
|
|
|
|
As
|
|
Related to
|
|
Related to
|
|
of ASC 606
|
|
Originally
|
Line
|
|
Restated
|
|
Settlement
|
|
Chargebacks
|
|
(Note 1)
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
382,167
|
|
|
$
|
(319
|
)
|
|
$
|
4,178
|
|
|
$
|
(47,311
|
)
|
|
$
|
425,619
|
|
Costs of services
|
|
$
|
278,507
|
|
|
$
|
2,760
|
|
|
$
|
1,854
|
|
|
$
|
(47,311
|
)
|
|
$
|
321,204
|
|
Income from operations
|
|
$
|
34,494
|
|
|
$
|
(3,079
|
)
|
|
$
|
2,324
|
|
|
|
|
$
|
35,249
|
|
Net income
|
|
$
|
3,839
|
|
|
$
|
(3,079
|
)
|
|
$
|
2,324
|
|
|
|
|
$
|
4,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share
|
|
$
|
0.05
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income tax expense (unaudited)
|
|
$
|
1,279
|
|
|
$
|
774
|
|
|
$
|
(1,025
|
)
|
|
|
|
$
|
1,530
|
|
Pro forma net income (unaudited)
|
|
$
|
2,560
|
|
|
$
|
(3,853
|
)
|
|
$
|
3,349
|
|
|
|
|
$
|
3,064
|
|
Pro forma income per share (unaudited)
|
|
$
|
0.03
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.03
|
|
|
|
|
$
|
0.04
|
|
For information on the effects that the full retrospective adoption of ASC 606 had on line items in the Company's consolidated statement of operations for the year ended December 31, 2019, see the section “Accounting Standards Adopted in 2019” in Note 1, Nature of Business and Accounting Policies.
For information about the effects on revenues and income (loss) from operations of the Company's reportable segments related to the full retrospective adoption of ASC 606 and the corrections of errors for the years ended December 31, 2019, 2018, and 2017, see Note 18, Segment Information.
See Note 20, Selected Quarterly Financial Results (Unaudited), for information about how the full retrospective adoption of ASC 606 and the corrections of the errors affected the Company's consolidated revenues, income (loss) from operations, and earnings (loss) per share for each interim quarterly reporting period in the years ended December 31, 2019 and 2018.
Restated Consolidated Balance Sheet
As a result of the changes to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017 and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated balance sheet as of December 31, 2018 presented herein, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As of December 31, 2018
|
|
|
|
|
Error
|
|
Error
|
|
|
|
|
|
|
Corrections
|
|
Corrections
|
|
|
|
|
|
|
Related to
|
|
Related to
|
|
Originally
|
Line
|
|
As restated
|
|
Settlement
|
|
Chargebacks
|
|
Reported
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
36,257
|
|
|
$
|
(9,394
|
)
|
|
|
|
$
|
45,651
|
|
Settlement assets
|
|
$
|
383
|
|
|
$
|
(659
|
)
|
|
|
|
$
|
1,042
|
|
Total current assets
|
|
$
|
75,092
|
|
|
$
|
(10,053
|
)
|
|
|
|
$
|
85,145
|
|
Deferred income tax asset, net
|
|
$
|
50,423
|
|
|
$
|
174
|
|
|
$
|
557
|
|
|
$
|
49,692
|
|
Total assets
|
|
$
|
379,296
|
|
|
$
|
(9,879
|
)
|
|
$
|
557
|
|
|
$
|
388,618
|
|
|
|
|
|
|
|
|
|
|
Settlement obligations
|
|
$
|
10,355
|
|
|
$
|
(777
|
)
|
|
|
|
$
|
11,132
|
|
Total current liabilities
|
|
$
|
63,283
|
|
|
$
|
(777
|
)
|
|
|
|
$
|
64,060
|
|
Total liabilities
|
|
$
|
473,314
|
|
|
$
|
(777
|
)
|
|
|
|
$
|
474,091
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(94,085
|
)
|
|
$
|
(9,102
|
)
|
|
$
|
557
|
|
|
$
|
(85,540
|
)
|
Total stockholders' deficit
|
|
$
|
(94,018
|
)
|
|
$
|
(9,102
|
)
|
|
$
|
557
|
|
|
$
|
(85,473
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
379,296
|
|
|
$
|
(9,879
|
)
|
|
$
|
557
|
|
|
$
|
388,618
|
|
Restated Consolidated Statements of Changes in Stockholder's Equity (Deficit)
For reporting periods prior to January 1, 2017, the cumulative effect of correcting the errors related to the settlement matters was approximately $5.0 million. Opening cumulative earnings in the Company's consolidated statement of stockholders' equity (deficit) presented herein has been reduced as of January 1, 2017 by this amount.
As a result of the changes related to the error corrections to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017 and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated statements of stockholders' equity (deficit) at December 31, 2018, December 31, 2017, and January 1, 2017 presented herein, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of
|
|
December 31, 2018
|
|
December 31, 2017
|
|
January 1, 2017
|
|
|
|
|
|
|
Accumulated (deficit) earnings prior to error corrections
|
$
|
(85,540
|
)
|
|
$
|
(90,228
|
)
|
|
$
|
28,773
|
|
Correction of accumulated earnings at January 1, 2017
|
(4,995
|
)
|
|
(4,995
|
)
|
|
(4,995
|
)
|
Correction of net income for 2017
|
(755
|
)
|
|
(755
|
)
|
|
—
|
|
Correction of net loss for 2018, net of income taxes
|
(2,795
|
)
|
|
—
|
|
|
—
|
|
Corrected accumulated (deficit) earnings
|
$
|
(94,085
|
)
|
|
$
|
(95,978
|
)
|
|
$
|
23,778
|
|
|
|
|
|
|
|
Total stockholders' (deficit) equity prior to error corrections
|
$
|
(85,473
|
)
|
|
$
|
(90,155
|
)
|
|
$
|
116,007
|
|
Correction of accumulated earnings at January 1, 2017
|
(4,995
|
)
|
|
(4,995
|
)
|
|
(4,995
|
)
|
Correction of net income for 2017
|
(755
|
)
|
|
(755
|
)
|
|
—
|
|
Correction of net loss for 2018, net of income taxes
|
(2,795
|
)
|
|
—
|
|
|
—
|
|
Corrected total stockholders' (deficit) equity
|
$
|
(94,018
|
)
|
|
$
|
(95,905
|
)
|
|
$
|
111,012
|
|
Restated Consolidated Statements of Cash Flows
As a result of the error corrections to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017, its consolidated balance sheet as of December 2018, and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated statements of cash flows for the years ended December 31, 2018 and 2017 presented herein, as noted in the following table. The restatement did not change the Company's net cash flows from operations, investing, or financing activities for any reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2018
|
|
|
|
|
Error
|
|
Error
|
|
|
|
|
|
|
Corrections
|
|
Corrections
|
|
|
|
|
|
|
Related to
|
|
Related to
|
|
Originally
|
Line
|
|
As Restated
|
|
Settlements
|
|
Chargebacks
|
|
Reported *
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,836
|
)
|
|
$
|
(1,028
|
)
|
|
$
|
(1,767
|
)
|
|
$
|
(15,041
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for deferred income taxes
|
|
$
|
(2,871
|
)
|
|
$
|
(174
|
)
|
|
$
|
(557
|
)
|
|
$
|
(2,140
|
)
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities (net of business combinations):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
8,180
|
|
|
$
|
2,010
|
|
|
$
|
4,179
|
|
|
$
|
1,991
|
|
Settlement assets and obligations, net
|
|
$
|
6,016
|
|
|
$
|
(808
|
)
|
|
$
|
—
|
|
|
$
|
6,824
|
|
Accounts payable and other current liabilities
|
|
$
|
1,531
|
|
|
$
|
—
|
|
|
$
|
(1,855
|
)
|
|
$
|
3,386
|
|
* Reflects certain reclassifications to conform to current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2017
|
|
|
|
|
Error
|
|
Error
|
|
|
|
|
|
|
Corrections
|
|
Corrections
|
|
|
|
|
|
|
Related to
|
|
Related to
|
|
Originally
|
Line
|
|
As Restated
|
|
Settlements
|
|
Chargebacks
|
|
Reported *
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,839
|
|
|
$
|
(3,079
|
)
|
|
$
|
2,324
|
|
|
$
|
4,594
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(15,477
|
)
|
|
$
|
2,389
|
|
|
$
|
(4,179
|
)
|
|
$
|
(13,687
|
)
|
Settlement assets and obligations, net
|
|
$
|
5,159
|
|
|
$
|
690
|
|
|
$
|
—
|
|
|
$
|
4,469
|
|
Accounts payable and other current liabilities
|
|
$
|
14,886
|
|
|
$
|
—
|
|
|
$
|
1,855
|
|
|
$
|
13,031
|
|
* Reflects certain reclassifications to conform to current year presentation.
3. REVENUE
For all periods presented, most of the Company’s revenues were recognized over time. Revenues and commissions earned from the sales of payment equipment are typically recognized at a point in time.
Nature of our Customer Arrangements
The Company’s payment services customers contract with the Company for payment services, which the Company provides in exchange for consideration for completed transactions. Some of these payment services are performed by third parties.
The Company’s consumer payment services enable the Company’s customers to accept card, electronic, and digital-based payments at the point of sale. These services may include authorization services, settlement and funding services, customer support and help-desk functions, chargeback resolution, payment security services, consolidated billing and statements, and on-line reporting. The Company also earns revenue and commissions from resale of electronic point-of-sale (“POS”) equipment.
The Company’s commercial payment services enable 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 turnkey business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of electronic payments.
More recently, the Company formed its Integrated Partners segment which uses payment-adjacent technologies to facilitate the acceptance of electronic payments from customers in the rental real estate, rental storage businesses, medical, and hospitality industries.
Applying the Revenue Recognition Accounting Standard
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 to the customer a service or good that is distinct. For substantially all of the Company's services, the nature of the Company’s promise to the customer is to stand ready to accept and process the transactions that customers request on a daily basis over the contract term. Since the timing and quantity of transactions to be processed is not determinable, the services comprise an obligation to stand ready to process as many transactions as the customer requires. Under a stand-ready obligation, the evaluation of the nature of the Company’s performance obligation is focused on each time increment rather than the underlying activities. Therefore, the Company has determined that its services comprise a series of distinct days of
service that are substantially the same and have the same pattern of transfer to the customer. Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.
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. The Company follows the requirements of ASC 606-10, Principal Agent Considerations, which states that the determination of whether an entity should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement. To determine whether or not the Company controls the service or good, it assesses indicators including: 1) whether the Company or the third party is primarily responsible for fulfillment; 2) if the Company or the third party provides a significant service of integrating two or more services or goods into a combined item that is a service or good that the customer contracted to receive; 3) which party has discretion in determining pricing for the service or good; and 4) other considerations deemed to be applicable to the specific situation.
Based on assessments of these indicators, the Company concluded:
|
|
•
|
Promises to customers to provide certain payment services is distinct from the other payment services provided by the card-issuing financial institutions, payment networks, and sponsor banks. The Company does not have the ability to direct the use of and obtain substantially all of the benefits of the services provided by the card-issuing financial institutions, payment networks, and sponsor banks before those services are transferred to the customer, and on that basis, the Company does not control those services prior to being transferred to the customer. The Company has either no or little discretion in setting the price that the customer pays for these specific services. The Company therefore acts as agent for these payment services provided by the card-issuing financial institutions, payment networks, and sponsor banks.
|
|
|
•
|
For other promises to customers to provide other significant payment services such as onboarding, underwriting, processing, customer service, and fraud detection/prevention services, the Company has discretion in setting the price that the customer ultimately pays for these services and the Company either is responsible for fulfillment or has shared responsibility. If a third party is partially responsible for fulfillment, the Company provides a significant service of integrating two or more services, which may include services from other parties, and directs their use to create a combined item that is a specified service requested by the customer. For services that involve these other parties, the Company has direct contractual relationships with these parties.
|
Substantially all of the Company’s payment services are priced as a percentage of transaction value or a specified fee per transaction, or a combination of both. Given the nature of the promise and the underlying fees based on unknown quantities or outcomes of services to be performed over the contract terms with customers, the total consideration is determined to be variable consideration. The variable consideration for payment services is usage-based and therefore it specifically relates to efforts to satisfy the payment services obligation. Said another way, the variability is satisfied each day the service is provided to the customer. The Company directly ascribes variable fees to the distinct day of service to which it relates, and considers the services performed each day in order to ascribe the appropriate amount of total fees to that day. Therefore, the Company measures revenue for payment services on a daily basis based on the services that are performed on that day.
Once the Company determines the performance obligations and the transaction price, including an estimate of any variable consideration, the Company then allocates the transaction price to each performance obligation in the contract using a relative standalone selling price method. The Company determines standalone selling price based on the price at which the service or good is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by considering all reasonably available information, including market conditions, trends or other company-specific or customer-specific factors. Substantially all of the performance obligations described above that involve services are satisfied over time. Equipment sales are generally transferred to the customer at a point in time.
In delivering payment services to the customer, the Company may also provide a limited license agreement to the customer for 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, satisfied over time based on days elapsed.
Interest income is reported separately on the Company’s statement of operations within Other, net and was approximately $561,000, $617,000, and $637,000 for the years ended December 31, 2019, 2018, and 2017, respectively.
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.
Contract Costs
For new, renewed, or anticipated contracts with customers, the Company does not incur material amounts of incremental costs to obtain such contracts, as those costs are defined by ASC 340-40.
Fulfillment costs, as defined by ASC 340-40, typically benefit only the period (typically a month in duration) in which they are incurred and therefore are expensed in the period incurred (i.e., not capitalized) unless they meet criteria to be capitalized under other accounting guidance.
The Company pays commissions to most of its ISOs, and for certain ISOs the Company also pays (through a higher commission rate) them to provide customer service and other services directly to our merchant customers. The ISO is typically an independent contractor or agent of the Company. Although certain ISOs may have merchant portability rights, the merchant meets the definition of a customer for the Company even if the ISO has merchant portability rights. Since payments to ISOs are dependent substantially on variable merchant payment volumes generated after the merchant enters into a new or renewed contract, these payments to ISOs are not deemed to be a cost to acquire a new contract since the ISO payments are based on factors that will arise subsequent to the event of obtaining a new or renewed contract. Also, payments to ISOs pertain only to a specific month’s activity. For payments made, or due, to an ISO, the expenses are reported within income from operations on our statements of operations.
The Company from time-to-time may 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.
Contract Assets and Contract Liabilities
A contract with a customer creates legal rights and obligations. 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 sheet 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 as of December 31, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Location
|
|
December 31, 2019
|
|
December 31, 2018
|
Liabilities:
|
|
|
|
|
|
|
Contract liabilities, net (current)
|
|
Customer deposits and advance payments
|
|
$
|
1,912
|
|
|
$
|
1,776
|
|
The balance for the contract liabilities was approximately $2.2 million and $3.4 million at January 1, 2018 and January 1, 2017, respectively. Substantially all of these balances are recognized as revenue within twelve months. The changes in the balances during the years ended December 31, 2019, 2018, and 2017 were due to the timing of advance payments received from the customer.
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, 2019, 2018, or 2017.
Disaggregation of Revenues
The following table presents a disaggregation of our consolidated revenues by type for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
|
|
|
As recasted
|
|
As restated
|
|
As restated
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Revenue Type:
|
|
|
|
|
|
|
Merchant card fees
|
|
$
|
339,450
|
|
|
$
|
343,791
|
|
|
$
|
355,826
|
|
Outsourced services
|
|
23,396
|
|
|
24,640
|
|
|
23,308
|
|
Other services
|
|
5,316
|
|
|
4,459
|
|
|
1,530
|
|
Equipment
|
|
3,692
|
|
|
2,932
|
|
|
1,503
|
|
Total revenues
|
|
$
|
371,854
|
|
|
$
|
375,822
|
|
|
$
|
382,167
|
|
4. BUSINESS COMBINATIONS, ASSET ACQUISITIONS, AND ASSET CONTRIBUTIONS
Asset Acquisitions in 2019
See Note 12, Commitments and Contingencies, for information about a merchant portfolio acquired in 2019 for a contingent purchase price.
YapStone
In March 2019, the Company, through one of its subsidiaries, Priority Real Estate Technology, LLC ("PRET"), acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone under an asset purchase and contribution agreement. The purchase price for the YapStone net assets was $65.0 million in cash plus a non-controlling interest in PRET with a fair value that was estimated to be approximately $5.7 million. The total purchase price was assigned to customer relationships, except for $1.0 million and $1.2 million which were assigned to a software license agreement and a services agreement, respectively. The $65.0 million of cash was funded from the Company's Senior Credit Facility. PRET is part of the Company's Integrated Partners reportable segment.
During the year ended December 31, 2019, no earnings of PRET were allocated to the non-controlling interest pursuant to the profit-sharing agreement between the Company and the non-controlling interest.
Residual Portfolio Rights Acquired
On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. Of the $15.2 million, $5.0 million was funded from the Senior Credit Facility, $10.0 million was funded from revolving credit facility under the Senior Credit Facility, and cash on hand was used to fund the remaining amount. The purchase price may be subject to an increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers. Additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset. This acquisition became part of the Company's Consumer Payments reportable segment.
Asset Contributions in 2019
eTab and Cumulus (Related Party)
In February 2019, a subsidiary of the Company, Priority Hospitality Technology, LLC ("PHOT"), received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements. No material liabilities were assumed by PHOT. These contributed assets were composed substantially of technology-related assets. Prior to these transactions, eTab was 80% owned by the Company's Chairman and Chief Executive Officer. No cash consideration was paid to the contributors of the eTab or Cumulus assets on the date of the transactions. As consideration for these contributed assets, the contributors were issued redeemable preferred equity interests in PHOT. Under these redeemable preferred equity interests, the contributors are eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6% per annum) on any of the $4.5 million amount that has not been distributed to them. The Company's Chairman and Chief Executive Officer owns 83.3% of the redeemable preferred equity interests in PHOT. Once a total of $4.5 million plus the preferred yield has been distributed to the holders of the redeemable preferred equity interests, the redeemable preferred equity interests will cease to exist. The Company determined that the contributor's carrying value of the eTab net assets (as a common control transaction under GAAP) was not material. Under the guidance for a common control transaction, the contribution of the eTab net assets did not result in a change of entity or the receipt of a business, therefore the Company's financial statements for prior periods have not been adjusted to reflect the historical results attributable to the eTab net assets. Additionally, no material amount was estimated for the fair value of the contributed Cumulus net assets. PHOT is a part of the Company's Integrated Partners reportable segment.
Pursuant to the limited liability company agreement of PHOT, any material future earnings generated by the eTab and Cumulus assets that are attributable to the holders of the preferred equity interests will be reported by the Company as a form of non-controlling interests classified as mezzanine equity on the Company's consolidated balance sheet until $4.5 million and the preferred yield have been distributed to the holders of the preferred equity interests. Subsequent changes, if material, in the value of the NCI will be reported as an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the non-controlling interests in mezzanine equity. Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through December 31, 2019, and therefore no recognition of the NCI has been reflected in the Company's unaudited condensed consolidated financial statements.
Business Combinations in 2018
PayRight
In April 2018, Priority PayRight Health Solutions, LLC ("PPRHS"), a subsidiary of the Company, purchased the majority of the operating assets and certain operating liabilities of PayRight Health Solutions LLC ("PayRight"). This purchase allowed PPRHS to gain control over the PayRight business and therefore the Company's consolidated financial statements include the financial position, results of operations, and cash flows of PayRight from the date of acquisition. PayRight utilizes technology assets to
deliver customized payment solutions to the health care industry. The results of the acquired business and goodwill of $0.3 million from the transaction are being reported by the Company as part of the Commercial Payments and Managed Services reportable segment. Additionally, the acquisition resulted in the recognition of intangible and net tangible assets with a fair value of $0.6 million. The Company transferred total consideration with a fair value of $0.9 million consisting of: $0.5 million in cash and forgiveness of amounts owed to the Company by PayRight; $0.3 million fair value of the Company's previous equity-method investment in PayRight described in the following paragraph; and $0.1 million of other consideration. Certain PayRight sellers were provided profit-sharing rights in PayRight as non-controlling interests, however, based on this arrangement no losses or earnings were allocated to the non-controlling interests for the years ended December 31, 2019 and 2018. PayRight is part of the Company's Integrated Partners reportable segment.
Previously, in October 2015, the Company purchased a non-controlling interest in the equity of PayRight, and prior to April 2018 the Company accounted for this investment using the equity method of accounting. At December 31, 2017, the Company's carrying value of this investment was $1.1 million. Immediately prior to PPRHS' April 2018 purchase of substantially all of PayRight's business assets, the Company's existing non-controlling investment in PayRight had a carrying value of approximately $1.1 million with an estimated fair value on the acquisition date of approximately $0.3 million. The Company recorded an impairment loss of $0.8 million during the second quarter of 2018 for the difference between the carrying value and the fair value of the non-controlling equity-method investment in PayRight. The loss is reported within Other, net in the Company's consolidated statements of operations for the year ended December 31, 2018.
RadPad and Landlord Station
In July 2018, the Company acquired substantially all of the net operating assets of RadPad Holdings, Inc. ("RadPad") and Landlord Station, LLC ("Landlord Station"). RadPad is a marketplace for the rental real estate market. Landlord Station offers a complementary toolset that focuses on facilitation of tenant screening and other services to the fast-growing independent landlord market. These asset purchases were deemed to be a business under ASC 805. The Company formed a new entity, Priority Real Estate Technology, LLC ("PRET"), to acquire and operate these businesses. Due to the related nature of the two sets of business assets, same acquisition dates, and how the Company intends to operate them under the "RadPad" name and operating platform within PRET, the Company deemed them to be one business for accounting and reporting purposes. PRET is reported within the Company's Integrated Partners reportable segment.
Total consideration paid for RadPad and Landlord Station was $4.3 million consisting of $3.9 million in cash plus forgiveness of pre-existing debt owed by the sellers to the Company of $0.4 million. Additionally, the Company paid and expensed $0.1 million for transaction costs. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.1 million were acquired along with goodwill with an initial value of $2.2 million. Non-controlling equity interests in PRET were issued to certain sellers in the form of residual profit interests and distribution rights, however the fair value of these non-controlling interests was deemed to be immaterial at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the operating agreement for PRET. Under the terms of the profit-sharing arrangement between the controlling and non-controlling interests, no losses or earnings were allocated to the non-controlling interests for the years ended December 31, 2019 and 2018.
During the fourth quarter of 2018, the Company received additional information about the fair values of assets acquired and liabilities assumed. Accordingly, measurement period adjustments were made to the opening balance sheet to decrease net assets acquired and increase goodwill by $0.2 million.
Priority Payment Systems Northeast
In July 2018, the Company acquired substantially all of the net operating assets of Priority Payment Systems Northeast, Inc. ("PPS Northeast"). This purchase of these net assets was deemed to be a business under ASC 805. Prior to this acquisition, PPS Northeast was an independent brand-licensed office of the Company where it developed expertise in software-integrated payment services designed to manage turnkey installations of point-of-sale and supporting systems, as well as marketing programs that place emphasis on online ordering systems and digital marketing campaigns. PPS Northeast is reported within the Company's Consumer Payments reportable segment.
Initial consideration of $3.5 million consisted of $0.5 million plus 285,117 shares of common stock of the Company with a fair value of approximately of $3.0 million. In addition, contingent consideration in an amount up to $0.5 million was deemed to have a fair value of $0.4 million at acquisition date. If earned, the seller can receive this contingent consideration in either cash or additional shares of the Company's common stock, as mutually agreed by the Company and seller. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.0 million were acquired along with goodwill with an initial value of $1.9 million, including the $0.4 million estimated fair value of the contingent consideration due to the seller. Transaction costs were not material and were expensed. At December 31, 2019, the fair value of the contingent consideration was estimated to be approximately $0.2 million, which resulted in a $0.2 million reduction in the carrying value. No amount has been paid to the seller.
Priority Payment Systems Tech Partners
In August 2018, the Company acquired substantially all of the net operating assets of M.Y. Capital, Inc. and Payments In Kind, Inc., collectively doing business as Priority Payment Systems Tech Partners ("PPS Tech"). These related asset purchases were deemed to be a business under ASC 805. Due to the related nature of the two sets of business assets and how the Company intends to operate them, the Company deemed them to be one business for accounting and reporting purposes. Prior to this acquisition, PPS Tech was an independent brand-licensed office of the Company where it developed a track record and extensive network in the integrated payments and B2B marketplaces. PPS Tech is reported within the Company's Consumer Payments reportable segment.
Initial consideration of $5.0 million consisted of $3.0 million plus 190,078 shares of common stock of the Company with a fair value of approximately $2.0 million. In addition, contingent consideration in an amount up to $1.0 million was deemed to have a fair value of $0.6 million at acquisition date. If earned, the seller will receive half of any contingent consideration in cash and the other half in a number of shares of common stock of the Company equal to the portion of the earned contingent consideration payable in shares of common stock of the Company. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.2 million were acquired along with goodwill with an initial value of $3.4 million, including the $0.6 million estimated fair value of the contingent consideration due to the seller. Transaction costs were not material and were expensed. At December 31, 2019, the fair value of the contingent consideration was estimated to be approximately $0.2 million, which resulted in a $0.4 million reduction in the carrying value. No amount has been paid to the seller.
Other Information
Based on their purchase prices and pre-acquisition operating results and assets, none of the business combinations consummated by the Company in 2018, as described above, met the materiality requirements for disclosure of pro-forma financial information, either individually or in the aggregate. The measurement periods, as defined by ASC 805, Business Combination ("ASC 805"), is closed for these 2018 business combinations.
Goodwill for all 2018 business combinations is deductible by the Company for income tax purposes.
Asset Acquisitions in 2018
In December 2018, the Company acquired a merchant portfolio for $44.8 million from Direct Connect Merchant Services, LLC. The purchase price included cash contingent consideration of up to approximately $7.3 million, determinable over a period that ended on December 31, 2019. At December 31, 2019, the Company has determined that it will owe no contingent consideration.
5. SETTLEMENT ASSETS AND OBLIGATIONS
Consumer Payments Segment
In the Company’s Consumer 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 restrict non-members, such as the Company, from performing funds settlement or accessing merchant settlement funds. Instead, these funds must be in the possession of a member bank until the merchant is funded. The Company has agreements with member banks which allow the Company to route transactions under the member bank's control to clear transactions through the card networks. Timing differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations are not liabilities of the Company. Therefore, neither is recognized in the Company’s consolidated balance sheets. Member banks held merchant funds of approximately $79.8 million and $186.2 million at December 31, 2019 and 2018, 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 the Company is attempting to collect from the merchants through the funds settlement process, merchant reserves or from the ISO partners are recognized as settlement assets in the Company’s consolidated balance sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover. Provisions for merchant losses are included as a component of costs of services in the Company’s consolidated statements of operations.
Commercial Payments Segment
In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing ACH transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in bank accounts controlled by the Company until such time as the ACH transactions are made. The Company recognizes these cash balances within restricted cash and settlement obligations in its consolidated balance sheets.
The Company's settlement assets and obligations at December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As restated - Note 2
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Settlement Assets:
|
|
|
|
Card settlements due from merchants, net of estimated losses
|
$
|
446
|
|
|
$
|
311
|
|
Card settlements due from processors
|
87
|
|
|
72
|
|
Total Settlement Assets
|
$
|
533
|
|
|
$
|
383
|
|
|
|
|
|
Settlement Obligations:
|
|
|
|
Card settlements due to merchants
|
$
|
44
|
|
|
$
|
—
|
|
Due to ACH payees (1)
|
37,745
|
|
|
10,355
|
|
Total Settlement Obligations
|
$
|
37,789
|
|
|
$
|
10,355
|
|
(1) Amounts due to ACH payees are held by the Company in restricted cash.
6. NOTES RECEIVABLE
The Company has notes receivable from ISOs and another entity (see Note 13, Related Party Matters) totaling approximately $5.7 million and $1.8 million as of December 31, 2019 and 2018, respectively. These notes receivable are reported as current and non-current on the Company's consolidated balance sheet. The notes bear an average interest rate of 12.4% and 12.8% as of December 31, 2019 and 2018, respectively.
Under the terms of the agreements with ISOs, the Company preserves the right to holdback residual payments due to the ISOs and to apply such residuals against future payments due to the Company. The term note due to the other party is secured by business assets and a personal guarantee. Based on the terms of these agreements and historical experience, no reserves have been recorded for notes receivable as of December 31, 2019 and 2018.
Principal contractual maturities on the notes receivable at December 31, 2019 were as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year Ended December 31,
|
|
Maturities
|
2020
|
|
$
|
1,326
|
|
2021
|
|
820
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
2024
|
|
3,623
|
|
Total principal due
|
|
5,769
|
|
Discount
|
|
(48
|
)
|
Carrying amount of loans
|
|
$
|
5,721
|
|
7. GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying tangible and intangible assets acquired and the liabilities assumed. The Company's goodwill is allocated to reporting units as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Consumer Payments
|
$
|
106,832
|
|
|
$
|
106,832
|
|
Integrated Partners
|
2,683
|
|
|
2,683
|
|
|
$
|
109,515
|
|
|
$
|
109,515
|
|
The Company's intangible assets include acquired merchant portfolios, customer relationships, ISO relationships, trade names, technology, non-compete agreements, and residual buyouts. For the year ended December 31, 2019, the Company acquired $69.8 million of merchant portfolios (including $68.7 million related to the asset acquisition from YapStone, Inc.), $19.9 million in residual buyouts, and $1.0 million of technology intangibles. For the year ended December 31, 2018, the Company acquired a $44.8 merchant portfolio from Direct Connect Merchant Services, LLC, $46.1 million in residual buyouts, $4.9 million in customer relationships, and $0.3 million for a trade name.
There were no business combinations consummated or changes in the carrying amount of goodwill for the year ended December 31, 2019. The following table summarizes goodwill as of December 31, 2019 and 2018:
|
|
|
|
|
(in thousands)
|
Amount
|
|
|
Balance at January 1, 2018
|
$
|
101,532
|
|
Addition for the year ended December 31, 2018:
|
|
PayRight
|
298
|
|
RadPad/Landlord Station
|
2,385
|
|
PPS Northeast
|
1,920
|
|
PPS Tech
|
3,380
|
|
Balance at December 31, 2019 and 2018
|
$
|
109,515
|
|
For business combinations consummated during the year ended December 31, 2018, goodwill is deductible for income tax purposes.
At December 31, 2019 and December 31, 2018, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Capitalized:
|
|
|
|
Merchant portfolios
|
$
|
114,554
|
|
|
$
|
44,784
|
|
Customer relationships
|
40,740
|
|
|
40,740
|
|
Residual buyouts
|
112,731
|
|
|
92,792
|
|
Non-compete agreements
|
3,390
|
|
|
3,390
|
|
Trade names
|
2,870
|
|
|
2,870
|
|
Technology
|
15,390
|
|
|
14,390
|
|
ISO relationships
|
15,200
|
|
|
15,200
|
|
Total capitalized
|
304,875
|
|
|
214,166
|
|
|
|
|
|
Less accumulated amortization:
|
|
|
|
Merchant portfolios
|
(12,655
|
)
|
|
(1,076
|
)
|
Customer relationships
|
(25,836
|
)
|
|
(21,113
|
)
|
Residual buyouts
|
(59,796
|
)
|
|
(47,416
|
)
|
Non-compete agreements
|
(3,390
|
)
|
|
(3,390
|
)
|
Trade names
|
(1,273
|
)
|
|
(1,017
|
)
|
Technology
|
(12,758
|
)
|
|
(10,222
|
)
|
ISO relationships
|
(6,341
|
)
|
|
(5,295
|
)
|
Total accumulated amortization
|
(122,049
|
)
|
|
(89,529
|
)
|
|
|
|
|
Net carrying value
|
$
|
182,826
|
|
|
$
|
124,637
|
|
The weighted-average amortization periods for intangible assets held at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
Useful Life
|
|
Amortization Method
|
|
Weighted-Average Life
|
|
|
|
|
|
|
Merchant portfolios
|
5 - 15 years
|
|
Straight-line
|
|
7.7 years
|
Residual buyouts
|
1 - 9 years
|
|
Straight-line and double declining
|
|
5.9 years
|
Non-compete agreements
|
3 years
|
|
Straight-line
|
|
3.0 years
|
Trade name
|
5 - 12 years
|
|
Straight-line
|
|
11.6 years
|
Technology
|
5 - 7 years
|
|
Straight-line
|
|
6.0 years
|
ISO relationships
|
11 - 25 years
|
|
Sum-of-years digits
|
|
22 years
|
Customer relationships
|
10 - 15 years
|
|
Straight-line and sum-of-years digits
|
|
10.9 years
|
Amortization expense for intangible assets was $32.4 million, $14.7 million, and $10.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The estimated amortization expense of intangible assets as of December 31, 2019 for the next five years and thereafter is:
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Estimated
|
Year Ending December 31,
|
|
Amortization Expense
|
2020
|
|
$
|
32,877
|
|
2021
|
|
30,869
|
|
2022
|
|
28,958
|
|
2023
|
|
22,852
|
|
2024
|
|
12,776
|
|
Thereafter
|
|
54,494
|
|
Total
|
|
$
|
182,826
|
|
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.
See Note 12, Commitments and Contingencies, for information about a merchant portfolio acquisition with a contingent purchase price.
The Company tests goodwill for impairment for each of its reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company performed its most recent annual goodwill impairment test as of November 30, 2019 using market data and discounted cash flow analysis. The Company concluded there were no indicators of impairment as of December 31, 2019 and December 31, 2018. As such, there was no impairment loss for the years ended December 31, 2019, 2018, and 2017.
8. PROPERTY, EQUIPMENT AND SOFTWARE
The Company's property, equipment, and software balance primarily consists of furniture, fixtures, and equipment used in the normal course of business, computer software developed for internal use, and leasehold improvements. 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.
A summary of property, equipment, and software as of December 31, 2019 and December 31, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
Useful Life
|
Furniture and fixtures
|
$
|
2,787
|
|
|
$
|
2,254
|
|
|
2-7 years
|
Equipment
|
10,101
|
|
|
8,164
|
|
|
3-7 years
|
Computer software
|
37,440
|
|
|
27,804
|
|
|
3-5 years
|
Leasehold improvements
|
6,367
|
|
|
5,935
|
|
|
5-10 years
|
|
56,695
|
|
|
44,157
|
|
|
|
Less accumulated depreciation
|
(33,177
|
)
|
|
(26,675
|
)
|
|
|
Property, equipment, and software, net
|
$
|
23,518
|
|
|
$
|
17,482
|
|
|
|
Depreciation expense totaled $6.6 million, $5.1 million, and $4.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company accrues for certain expenses that have been incurred and not paid, which are classified within accounts payable and accrued expenses in the accompanying consolidated balance sheets.
The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities consisted of the following at December 31, 2019 and December 31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Accounts payable
|
$
|
6,968
|
|
|
$
|
8,030
|
|
Accrued compensation
|
$
|
3,975
|
|
|
$
|
6,193
|
|
Accrued network fees
|
$
|
6,950
|
|
|
$
|
6,971
|
|
10. LONG-TERM DEBT AND WARRANT LIABILITY
Long-term debt owed by certain subsidiaries (the "Borrowers") of the Company consisted of the following as of December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Term Loan - Senior, matures January 3, 2023 and bears interest at LIBOR plus 5.0% at December 31, 2019 and December 31, 2018 (actual rate of approximately 6.71% at December 31, 2019 and 7.5% at December 31, 2018)
|
$
|
388,837
|
|
|
$
|
322,666
|
|
Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus payment-in-kind interest (actual rate of 10.5% at December 31, 2019 and December 31, 2018)
|
95,142
|
|
|
90,016
|
|
Revolving Credit Facility, matures January 22, 2022
|
11,500
|
|
|
—
|
|
Total debt
|
495,479
|
|
|
412,682
|
|
Less: current portion of long-term debt
|
(4,007
|
)
|
|
(3,293
|
)
|
Less: unamortized debt discounts
|
(2,855
|
)
|
|
(3,300
|
)
|
Less: deferred financing costs
|
(3,039
|
)
|
|
(3,994
|
)
|
Total long-term debt, net
|
$
|
485,578
|
|
|
$
|
402,095
|
|
Substantially all of the Company's assets are pledged as collateral under the long-term debt agreements, which are described in more detail in the following sections of this footnote. The Company's parent entity, Priority Technology Holdings, Inc., is neither a borrower nor a guarantor of the long-term debt.
Long-Term Debt
On January 3, 2017, the Company refinanced existing long-term debt whereby the Borrowers entered into a credit agreement with a syndicate of lenders (the "Senior Credit Agreement"). The Senior Credit Agreement had an original maximum borrowing amount of $225.0 million, consisting of a $200.0 million term loan and a $25.0 million revolving credit facility. As part of the debt refinancing on January 3, 2017, the Borrowers also entered into a Credit and Guaranty Agreement (the "GS Credit Agreement") with Goldman Sachs Specialty Lending Group, L.P. ("Goldman Sachs" or "GS") for an $80.0 million term loan, the proceeds of which were used to refinance the amounts previously outstanding with Goldman Sachs. This refinancing was deemed to be a debt modification for GAAP purposes.
The term loans under the Senior Credit Agreement and the GS Credit Agreement were issued at a discount of $3.7 million. The Company determined that the 2018 debt refinancing should be accounted for as a debt extinguishment. The Company recorded an extinguishment loss of approximately $1.8 million, which consisted primarily of lender fees incurred in connection with the refinancing and the write-off of unamortized deferred financing fees and original issue discount. The extinguishment loss is reported within "Other, net" on the Company's consolidated statements of operations.
Amendments
The following table summarizes key changes made as the results of amendments to the Senior Credit Agreement and the GS Credit Agreements through December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
GS Credit
|
|
|
|
|
|
|
Senior Credit Agreement
|
|
Agreement
|
|
Discounts and Costs
|
|
|
|
Revolving
|
|
|
|
|
|
|
|
|
|
Principal
|
Line
|
Amendment
|
|
Principal
|
|
Issue
|
Costs
|
Costs
|
Amendment
|
|
Established
|
Established
|
Type
|
|
Established (a)
|
|
Discount
|
Expensed (b)
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
|
|
$
|
200.0
|
|
$
|
25.0
|
|
Extinguishment
|
|
$
|
80.0
|
|
|
$
|
3.7
|
|
$
|
1.8
|
|
$
|
3.3
|
|
January 2018
|
|
67.5
|
|
—
|
|
Modification
|
|
—
|
|
|
$
|
0.4
|
|
$
|
0.8
|
|
$
|
0.7
|
|
December 2018
|
|
130.0
|
|
—
|
|
Modification
|
|
—
|
|
|
$
|
0.3
|
|
$
|
1.2
|
|
$
|
0.1
|
|
|
|
$
|
397.5
|
|
$
|
25.0
|
|
|
|
$
|
80.0
|
|
|
|
|
|
(a) The GS Credit Agreement allows for payment-in-kind interest which will subsequently increase the amount outstanding.
(b) Reported within "Other, net" on the Company's consolidated statements of operations.
The Senior Credit Agreement and the GS Credit Agreement were also amended on November 14, 2017. The First Amendment allows for loan advances of less than $5.0 million and for certain liens on cash securing the Company's funding obligations under a new product involving a virtual credit card program. This amendment did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.
Additionally, two amendments were executed in 2019 that concerned procedural changes to the quarterly and annual reporting for lenders and did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.
Amendments in March 2020
On March 18, 2020, the Borrowers modified the Senior Credit Agreement and the GS Credit Amendment (collectively, the "Sixth Amendment"). Under the Sixth Amendment, calculation of the permitted Total Net Leverage Ratio was modified to include certain expenses of the Company's parent entity and the permitted maximum ratio for each test period was adjusted to the ratios described in the subsequent disclosures for covenants. Neither the existing applicable margins or interest rates changed as a result of the Sixth Amendment. The terms of the GS Credit Agreement were amended to allow for amendments under the Senior Credit Agreement, but otherwise the terms of the GS Credit Agreement were not substantively changed by the Sixth Amendment.
Additional Information
Beginning with the January 2018 amendment, borrowings under the Senior Credit Agreement are subject to an applicable margin, or percentage per annum, equal to: (i) with respect to initial term loans, (a) for LIBOR rate loans, 5.00% per annum, and (b) for base rate loans, 4.00% per annum; and (ii) with respect to revolving loans (a) for LIBOR rate loans and letter of credit fees, 5.00%, (b) for base rate loans, 4.00%, and (c) for unused commitment fees, 0.50%.
At December 31, 2019, there was $11.5 million outstanding on the revolving credit facility. The revolving credit facility bears interest at LIBOR plus 5.0% at December 31, 2019, which resulted in an interest rate of 6.71%. No amounts were outstanding on the revolving credit facility at December 31, 2018.
The Senior Credit Agreement matures on January 3, 2023, with the exception of the revolving credit facility which expires on January 2, 2022. Any amounts outstanding under the revolving credit facility must be paid in full before the maturity date of January 2, 2022. The GS Credit Agreement matures on July 3, 2023.
Under the Senior Credit Agreement, the Company is required to make quarterly principal payments of approximately $1.0 million. Additionally, the Company may be obligated to make certain additional mandatory prepayments based on excess cash flow, as defined in the Senior Credit Agreement. No such prepayments were due for the years ended December 31, 2019 and 2018. Principal
contractual maturities on long-term debt, including amount outstanding on the revolving line of credit, at December 31, 2019 are as follows:
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Year Ending December 31,
|
|
Maturities
|
2020
|
|
$
|
4,007
|
|
2021
|
|
4,007
|
|
2022
|
|
15,507
|
|
2023
|
|
471,958
|
|
|
|
$
|
495,479
|
|
For the years ended December 31, 2019 and 2018, the payment-in-kind (PIK) interest under the GS Credit Agreement added $5.1 million and $4.9 million, respectively, to the principal amount of the subordinated debt, which totaled $95.1 million and $90.0 million as of December 31, 2019 and 2018, respectively.
For the years ended December 31, 2019, 2018, and 2017, the Company recorded interest expense, including amortization of deferred financing costs and debt discounts, of $40.7 million, $29.9 million, and $25.1 million, respectively.
Covenants
The Senior Credit Agreement and the GS Credit Agreement, as amended, contain representations and warranties, financial and collateral requirements, mandatory payment events, events of default, and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Company's subsidiaries to Priority Technology Holdings, Inc., 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. Substantially all of the borrowers' assets are pledged as collateral under the Senior Credit Agreement and GS Credit Agreement.
The borrowers are also required to comply with certain restrictions for the Total Net Leverage Ratio, which is defined in the Senior Credit Agreement and GS Credit Agreement as: the consolidated total debt of the Borrowers, less unrestricted cash subject to certain restrictions, divided by the Consolidated Adjusted EBITDA (a non-GAAP measure) of the Borrowers for the prior four quarters.
The table below sets forth the maximum permitted Total Net Leverage Ratio for the indicated test periods:
|
|
|
|
Test Period Ending
|
|
Total Net Leverage Ratio Maximum Permitted
|
|
|
|
December 31, 2019 to March 31, 2020
|
|
8.00 : 1.00
|
June 30, 2020 to December 31, 2020
|
|
7.75 : 1.00
|
March 31, 2021
|
|
7.71 : 1.00
|
June 30, 2021
|
|
7.44 : 1.00
|
September 30, 2021
|
|
7.19 : 1.00
|
December 31, 2021
|
|
7.00 : 1.00
|
March 31, 2022
|
|
6.75 : 1.00
|
June 30, 2022
|
|
6.72 : 1.00
|
September 30, 2022 to December 31, 2022
|
|
6.50 : 1.00
|
Each test period thereafter
|
|
5.50 : 1.00
|
As of December 31, 2019, the Borrowers were in compliance with the covenants, as amended in the Sixth Amendment.
Deferred Financing Costs and Debt Discount
Unamortized capitalized deferred financing costs related to the Company's credit facilities totaled $3.0 million and $4.0 million at December 31, 2019 and December 31, 2018, respectively. Unamortized debt discount related to the Company's credit facilities totaled $2.9 million and $3.3 million at December 31, 2019 and 2018, respectively. Deferred financing costs and debt discount are being amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense. Interest expense related to amortization of deferred financing costs and debt discount, including accelerated amortization due to debt modification or extinguishment, was $1.7 million, $1.4 million, and $3.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Unamortized deferred financing costs and debt discount are included in net long-term debt in the Company's consolidated balance sheets.
Redeemed Goldman Sachs Warrant ("GS Warrant")
In connection with the prior GS Credit Agreement, Priority Holdings, LLC issued a warrant to GS to purchase 1.0% of Priority Holdings, LLC's outstanding Class A common units. As part of the 2017 debt amendment, the 1.0% warrant with GS was extinguished and Priority Holdings, LLC issued a new warrant to GS to purchase 1.8% of Priority Holding, LLC's outstanding Class A common units. As of December 31, 2017, the warrant had a fair value of $8.7 million and was presented as a warrant liability in the accompanying consolidated balance sheets.
On January 11, 2018, the 1.8% warrant was amended to provide GS with a warrant to purchase 2.2% of Priority Holdings, LLC's outstanding Class A common units. The change in the warrant percentage was the result of anti-dilution provisions in the warrant agreement, which were triggered by Priority Holdings, LLC's Class A common unit redemption that occurred during the first quarter of 2018. The warrant had a term of 7 years and an exercise price of $0. Since the obligation was based solely on the fact that the 2.2% interest in equity of Priority Holdings, LLC was fixed and known at inception as well as the fact that GS could exercise the warrant with a settlement in cash any time prior to the expiration date of December 31, 2023, the warrant was recorded as a liability in the Company's historical financial statements prior to redemption on July 25, 2018. On July 25, 2018, Priority Holdings, LLC and GS agreed to redeem the warrant in full in exchange for $12.7 million in cash.
11. INCOME TAXES
In connection with the Business Combination as disclosed in Note 1, Nature of Business and Accounting Policies, the partnership tax status was terminated on July 25, 2018. Under the former partnership status, Priority Holdings, LLC was a dual member limited liability company and as such its financial statements reflected no income tax provisions as a pass-through entity. As a result of the Business Combination, for income tax purposes Priority Holdings, LLC became a disregarded subsidiary of the Company, the successor entity to MI Acquisitions, Inc., whereby its operations became taxable. For all periods subsequent to the Business Combination, the income tax provision reflects the taxable status of the Company as a corporation. The initial net deferred tax asset from the Business Combination is the result of the difference between initial tax basis, generally substituted tax basis, and the reflective carrying amounts of the assets and liabilities for financial statement purposes. The net deferred tax asset as of July 25, 2018 was approximately $47.5 million, which was recorded and classified on the Company's consolidated balance sheet in accordance with ASU 2015-17 and as an adjustment to Additional Paid-In Capital in the Company's consolidated statement of changes in stockholders' deficit. In addition, the Company's consolidated financial statements for the years ended December 31, 2018 and 2017 reflect unaudited pro-forma income tax disclosure amounts to illustrate the income tax effects had the Company been subject to federal and state income taxes for both full years.
Components of income tax (benefit) expense for the years ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the Year Ended
|
|
|
|
As restated - Note 2
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
U.S. current income tax expense
|
|
|
|
Federal
|
$
|
(11
|
)
|
|
$
|
29
|
|
State and local
|
75
|
|
|
418
|
|
Total current income tax expense
|
$
|
64
|
|
|
447
|
|
|
|
|
|
U.S. deferred income tax expense (benefit)
|
|
|
|
Federal
|
$
|
1,920
|
|
|
$
|
(2,541
|
)
|
State and local
|
(1,154
|
)
|
|
(396
|
)
|
Total deferred income tax expense (benefit)
|
$
|
766
|
|
|
(2,937
|
)
|
|
|
|
|
Total income tax expense (benefit)
|
$
|
830
|
|
|
$
|
(2,490
|
)
|
The Company's effective income tax benefit rate was 2.5% for the year ended December 31, 2019. For the year ended December 31, 2018, the Company's effective income tax rate was 12.5%. For 2019, this rate differed from the statutory federal rate of 21% primarily due to valuation allowance changes against certain business interest carryover deferred tax assets. For 2018, this rate differed from the statutory federal rate of 21% primarily due to the partnership status of Priority Holdings, LLC. for periods prior to July 25, 2018. The following table provides a reconciliation of the income tax benefit at the statutory U.S. federal tax rate to actual income tax benefit for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
(in thousands)
|
For the Year Ended
|
|
|
|
As restated - Note 2
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
U.S. federal statutory (benefit)
|
$
|
(6,879
|
)
|
|
$
|
(4,268
|
)
|
Earnings as dual-member LLC
|
—
|
|
|
1,643
|
|
State and local income taxes, net
|
(1,564
|
)
|
|
(2
|
)
|
Excess tax benefits pursuant to ASU 2016-09
|
309
|
|
|
140
|
|
Valuation allowance changes
|
9,302
|
|
|
(66
|
)
|
Nondeductible items
|
125
|
|
|
86
|
|
Tax credits
|
(323
|
)
|
|
(123
|
)
|
Other, net
|
(140
|
)
|
|
100
|
|
Income tax expense (benefit)
|
$
|
830
|
|
|
$
|
(2,490
|
)
|
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 deferred income taxes were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of
|
|
|
|
As restated - Note 2
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
Accruals and reserves
|
$
|
1,566
|
|
|
$
|
861
|
|
Intangible assets
|
53,600
|
|
|
53,383
|
|
Net operating loss carryforwards
|
4,114
|
|
|
1,308
|
|
Interest limitation carryforwards
|
9,266
|
|
|
2,857
|
|
Other
|
1,877
|
|
|
1,098
|
|
Gross deferred tax assets
|
70,423
|
|
|
59,507
|
|
Valuation allowance
|
(10,144
|
)
|
|
(842
|
)
|
Total deferred tax assets
|
60,279
|
|
|
58,665
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
Prepaid assets
|
(521
|
)
|
|
(632
|
)
|
Investments in partnership
|
(5,408
|
)
|
|
(3,896
|
)
|
Property and equipment
|
(4,693
|
)
|
|
(3,714
|
)
|
Total deferred tax liabilities
|
(10,622
|
)
|
|
(8,242
|
)
|
|
|
|
|
Net deferred tax assets
|
$
|
49,657
|
|
|
$
|
50,423
|
|
In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), 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, 2019 and 2018, the Company has recorded a valuation allowance of approximately $10.1 million and $0.8 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." As of December 31, 2019 and 2018, the net amounts of our unrecognized tax benefits were not material.
The Company is subject to U.S. federal income tax and income tax in multiple state jurisdictions. Tax periods for 2016 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2015 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.
A change in MI Acquisitions' beneficial ownership occurred concurrent with the Business Combination and Recapitalization on July 25, 2018, which likely caused a stock ownership change for purposes of Section 382 of the Internal Revenue Code. However, this ownership change should have no material impact to the net operating losses ("NOLs") available as of this date. At December 31, 2019, the Company had federal NOL carryforwards of approximately $14.5 million which can offset future taxable income as follows: 1) approximately $14.3 million can offset 80% of future taxable income for an indefinite period of time and 2) approximately $0.2 million can offset 100% of future taxable income through expiration dates ranging from 2036 to 2038. At December 31, 2018, the Company had federal NOL carryforwards of approximately $5.1 million which can offset future taxable income as follows: 1) approximately $4.9 million can offset 80% of future taxable income for an indefinite period of time and 2) approximately $0.2 million can offset 100% of future taxable income through expiration dates ranging from 2036 to 2038. Also, at December 31, 2019 and 2018, the Company had state NOL carryforwards of approximately $19.5 million and $6.6 million, respectively, with expirations dates ranging from 2023 to 2044.
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted. The Tax Act included a number of changes to existing U.S. tax laws. The most notable provisions of the Tax Act that impacted the Company included a reduction of the U.S. corporate income tax rate from 35% to 21% and the limitations on interest deductibility, both effective January 1, 2018, as well as immediate expensing for certain assets placed into service after September 27, 2017. The Company did not experience any material impacts of the provisions of the Tax Act for the year ended December 31, 2018 other than the impact of the reduction of the U.S. corporate rate from 35% to 21% and the limitation on interest deductibility. As of December 31, 2018, the Company has completed the accounting for the income tax effects of all elements of the Tax Act in accordance with the SEC's Staff Accounting Bulletin No. 118.
The Company was affected by the new interest deductibility rule under the Tax Act. This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income, as defined. For the years ended December 31, 2019 and 2018, the Company's interest deduction was limited to $29.3 million and $12.6 million, respectively. The excess interest not deducted for the year ended December 31, 2019 and 2018 can be carried forward indefinitely for use in future years.
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company has various operating leases for office space and equipment. These leases range in terms from one to 16 years. Most of these leases are renewable at expiration, subject to terms acceptable to the lessors and the Company.
Future minimum lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows:
|
|
|
|
|
|
(in thousands)
|
Due In
|
|
Amount Due
|
2020
|
|
$1,829
|
2021
|
|
1,760
|
2022
|
|
1,736
|
2023
|
|
1,745
|
2024
|
|
1,501
|
Thereafter
|
|
4,008
|
Total
|
|
$12,579
|
Total rent expenses for the years ended December 31, 2019, 2018, and 2017 was $2.0 million, $1.9 million, and $1.5 million, respectively, which is included in SG&A expenses in the Company's consolidated statements of operations.
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 payments transactions. Some of these agreements have minimum annual requirements for processing volumes. As of December 31, 2019, the Company is committed to pay minimum processing fees under these agreements of approximately $14.0 million over the next two years.
Merchant Reserves
See Note 5, Settlement Assets and Obligations, for information about merchant reserves.
Commitment to Lend
See Note 13, Related Party and Other Transactions, for information on a loan commitment extended by the Company to another entity.
Contingent Consideration
See Note 4, Business Combination, Asset Acquisitions, and Asset Contributions, for information about contingent consideration related to acquisitions consummated in 2019 and 2018.
Merchant Portfolio Rights and Reseller Agreement
During the year ended December 31, 2019, the Company simultaneously entered into two agreements with another entity. These two related agreements 1) transfer to the Company certain perpetual rights to a merchant portfolio and 2) form a 5-year reseller arrangement whereby the Company will offer and sell to its customer base certain on-line services to be fulfilled by the other entity. No cash consideration was paid to, or received from, the other entity at execution of either agreement. Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both: 1) the actual financial performance of the acquired merchant portfolio rights and 2) actual sales and variable wholesale costs for the on-line services sold by the Company under the reseller arrangement. Amounts subsequently paid to the other entity are accounted for as either 1) standard costs of the services sold by the Company under the 5-year reseller agreement or 2) consideration for the merchant portfolio rights. Amounts paid that are accounted for as consideration for the merchant portfolio rights are capitalized and amortized over the estimated useful life of the merchant portfolio rights. For the year ended December 31, 2019, approximately $1.1 million was capitalized as contingent cost for the merchant portfolio. The capitalized cost is being amortized using an accelerated method. At this time, the Company cannot reasonably estimate the allocation of future cash payments. However, under the two contracts the Company does not anticipate any net losses.
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.
13. RELATED PARTY MATTERS
Contributed Assets of eTab and Cumulus
See Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions, for information about the contributions from related parties of certain assets and liabilities of eTab and Cumulus.
Loan with Warrant
During 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity. The Company loaned the entity a total of $3.5 million during 2019, with a commitment to loan 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. The Company's commitment to make additional advances under the loan agreement is dependent upon such advances not conflicting with covenants or restrictions under any of the Company's debt or other applicable agreements. Amounts loaned to this entity by the Company are secured by substantially all of the assets of the entity and by a personal guarantee. The note receivable has an interest rate of 12.0% per annum and is repayable in full in May 2024. The Company also received a warrant to purchase a non-controlling interest in this entity's equity at a fixed amount. The loan agreement also gives the Company certain rights to purchase some or all of this entity's equity in the future, at the entity's then-current fair value. The fair values of the warrant, loan commitment, and purchase right were not material at inception or at December 31, 2019.
Prior Management Services Agreement
During the years ended December 31, 2018 and 2017, Priority Holdings, LLC had a management services agreement with PSD Partners LP, which is owned by Mr. Thomas Priore, the Company's President, Chief Executive Officer and Chairman. The Company incurred total expenses of $1.1 million and $0.8 million for the years ended December 31, 2018 and 2017 related to management service fees, annual bonus payout, and occupancy fees, which are recorded in SG&A expenses in the Company's consolidated statements of operations.
Due from Members of Priority Holdings, LLC
As noted in Note 1, Nature of Business and Accounting Policies, on July 25, 2018 the owners of Priority Holdings, LLC contributed their member equity interests in exchange for the issuance of MI Acquisitions Inc.'s common stock, and MI Acquisitions, Inc. simultaneously changed its name to Priority Technology Holdings, Inc. Subsequent to July 25, 2018, the Company has made cash payments to, and received cash refund payments from, the former owners of Priority Holdings, LLC, mostly related to pass-through tax amounts for periods prior to July 25, 2018. At December 31, 2019 and 2018, the net amounts receivable from these parties were approximately $0.2 million and $0.3 million, respectively.
Underwriting Commissions
During the year ended December 31, 2018, the Company paid and capitalized in additional paid-in capital underwriting commissions of $8.0 million related to the recapitalization. See Note 14, Stockholders' Deficit Information.
Call Right
The Company's President, Chief Executive Officer and Chairman was given the right to require any of the founders of MI Acquisitions to sell all or a portion of their Company securities at a call-right purchase price, payable in cash. The call right purchase price for common stock will be based on the greater of: 1) $10.30; 2) a preceding volume-weighted average closing price (as defined in the governing document); or 3) a subsequent volume-weighted average closing price (as defined in the governing document). The call right purchase price for warrants will be determined by the greater of: 1) a preceding volume-weighted average closing price (as defined in the governing document) of the called security or 2) a subsequent volume-weighted average closing price of the called security. For the Company, the call right does not constitute a financial instrument or derivative under GAAP since it does not represent an asset or obligation of the Company, however the Company discloses it as a related party matter.
14. STOCKHOLDERS' DEFICIT INFORMATION
As disclosed in Note 1, Nature of Business and Accounting Policies, on July 25, 2018 the Company executed the Business Combination which was accounted for as a "reverse merger" between Priority Holdings, LLC and MI Acquisitions, resulting in the Recapitalization of the Company's equity. The combined entity was renamed Priority Technology Holdings, Inc.
Common and Preferred Stock
For periods prior to July 25, 2018, equity has been retroactively revised to reflect the number of shares received as a result of the Recapitalization.
The equity structure of the Company was as follows on December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
Authorized
|
|
Issued and Outstanding
|
Common stock, par value $0.001
|
|
1,000,000
|
|
|
67,512
|
|
|
67,061
|
|
|
1,000,000
|
|
|
67,038
|
|
Preferred stock, par value $0.001
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
In connection with the Business Combination and Recapitalization, the following occurred in 2018:
|
|
•
|
In exchange for the 4.6 million common units of Priority Holdings, LLC, 60.1 million shares of common stock were issued in a private placement that resulted in the Company receiving approximately $49.4 million. The 60.1 million shares exclude 0.5 million shares issued as partial consideration in two business acquisitions (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions) and includes 3.0 million shares issued in connection with the 2014 Management Incentive Plan (see Note 15, Equity-Based Compensation).
|
|
|
•
|
Approximately 4.9 million shares of common stock were deemed to have been issued through share conversion in exchange for the publicly-traded shares of MI Acquisitions that originated from MI Acquisitions' 2016 IPO.
|
|
|
•
|
$2.1 million was paid to MI Acquisitions' founding shareholders (the "MI Founders") in exchange for 421,107 units and 453,210 shares of common stock held by the MI Founders. Each unit consisted of one share and one warrant of MI Acquisitions.
|
|
|
•
|
The MI Founders forfeited 174,863 shares of their common stock.
|
At December 31, 2018, the Company had 67,038,304 shares of common stock outstanding, of which: 1) 60,071,200 shares were issued in the Recapitalization through the private placement; 2) 874,317 shares were transferred to the sellers of Priority Holdings, LLC that were purchased from the MI Founders; 3) 4,918,138 shares were issued in MI Acquisitions' 2016 IPO; 4) 699,454 shares were issued to the MI Founders; and 5) 475,195 shares were issued as partial consideration for two business acquisitions. Certain holders of common stock from the private placement may be subject to holding period restrictions under applicable securities laws.
During the second quarter of 2019, the Company repurchased a total of 451,224 shares of its common stock at an average price of $5.29 per share. Total cash paid by the Company was approximately $2.4 million. The repurchases were authorized under a December 2018 resolution by the Company's board of directors, which expired during the second quarter of 2019.
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. Since the Business Combination and Recapitalization, 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, 2019, the Company has not issued any shares of preferred stock.
Warrants issued by MI Acquisitions
Prior to July 25, 2018, MI Acquisitions issued warrants that allow the holders to purchase up to 5,731,216 shares of the Company's common stock at an exercise price of $11.50 per share, subject to certain adjustments (5,310,109 of these warrants are designated as "public warrants" and 421,107 are designated as "private warrants"). The warrants may only be exercised during the period commencing on the later to occur of (i) 30 days following the completion of the MI Acquisitions' initial business combination and (ii) 12 months following the closing of MI Acquisitions' IPO, and terminating on the earlier to occur of (i) five years following the date the warrants became exercisable, and (ii) the date fixed for redemption upon the Company electing to redeem the warrants. The Company has the option to redeem all (and not less than all) of the outstanding public warrants at any time from and after the warrants become exercisable, and prior to their expiration, at the price of $0.01 per warrant; provided that the last sales price of the Company's common stock has been equal to or greater than $16.00 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events), for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given and provided further that (i) there is a current registration statement in effect with respect to the shares of common stock underlying the public warrants for each day in the 30-day trading period and continuing each day thereafter until the redemption date or (ii) the cashless exercise is exempt from the registration requirements under the Securities Act of 1933, as amended. The warrants are classified as equity.
The outstanding purchase option that was sold to the underwriters (in addition to the warrants discussed above) for an aggregate purchase price of $100, allows 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 commencing on the later of the consummation of a business combination and six months from September 13, 2016 (the "Purchase Option"). The Purchase Option expires on August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018. The units issuable upon exercise of the Purchase Option are identical to the units offered in MI Acquisitions' IPO. The Purchase Option is classified as equity.
In August 2018, the Company was informed by Nasdaq that it intended to delist the Company's outstanding warrants and units due to an insufficient number of round lot holders for the public warrants. The Company subsequently filed a Registration Statement on Form S-4 with the SEC for the purpose of offering holders of the Company's outstanding 5,310,109 public warrants and 421,107 private warrants the opportunity to exchange each warrant for 0.192 shares of the Company's common stock. The exchange offer expired in February 2019 resulting in a total of 2,174,746 warrants being tendered in exchange for 417,538 shares of the Company's common stock plus cash in lieu of fractional shares. Nasdaq proceeded to delist the remaining outstanding warrants and units, which were comprised of one share of common stock and one warrant, from The Nasdaq Global Market at the open of business on March 6, 2019. The delisting of the remaining outstanding warrants and units had no impact on the Company's financial statements.
Business Combination and Recapitalization Costs
In connection with the Business Combination and Recapitalization, the Company incurred $13.3 million in fees and expenses, of which $9.7 million of recapitalization costs were charged to Additional Paid in Capital in 2018 since these costs were less than the cash received in conjunction with the Recapitalization costs and were directly related to the issuance of equity for the Recapitalization. These costs are presented as Recapitalization costs in the accompanying consolidated statements of changes in stockholders' deficit. The remaining $3.6 million of expenses were related to the Business Combination and are presented in SG&A expenses in the accompanying consolidated statements of operations.
Equity Events for Priority Holdings, LLC that Occurred Prior to July 25, 2018 (date of Business Combination)
On January 3, 2017, Priority used the proceeds from the 2017 debt refinancing (see Note 10, Long-Term Debt and Warrant Liability) to redeem 4,681,590 Class A common units for $200.0 million (the "Redemption"). Concurrent with the Redemption, (i) Priority and its members entered into an amended and restated operating agreement that eliminated the Class A preferred units and the Class C common units and (ii) the Plan of Merger, dated as of May 21, 2014 between Priority Payment Systems Holdings, LLC and Pipeline Cynergy Holdings, LLC was terminated which resulted in the cancellation of related contingent consideration due to holders of Class A preferred units.
On January 31, 2017, Priority entered into a redemption agreement with one of its minority unit holders to redeem their former Class A common membership units for a total redemption price of $12.2 million. Priority accounted for the Common Unit Repurchase Obligation as a liability because it was required to redeem these former Class A common units for cash. The liability was recorded at fair value at the date of the redemption agreement, which was equal to the redemption value. Under this agreement, Priority redeemed $3.0 million of 69,450 former Class A common units in April 2017. As of December 31, 2018, the Common Unit Repurchase Obligation had a redemption value of $9.2 million.
The remaining $9.2 million was redeemed through the January 17, 2018 redemption of 115,751 former Class A common units for $5.0 million and the February 23, 2018 redemption of 96,999 former Class A common units for $4.2 million.
In addition to the aforementioned redemptions, Priority redeemed 295,834 former Class A common units for $25.9 million on January 17, 2018 and 445,410 former Class A common units for $39.0 million on January 19, 2018. As a result of the aforementioned redemptions, Priority was 100% owned by Priority Investment Holdings, LLC and Priority Incentive Equity Holdings, LLC until July 25, 2018.
The former Class A common units redeemed in January and February 2018 were then canceled by Priority. The redemption transactions and the amended and restated operating agreement resulted in one unit-holder gaining control and becoming the majority unit holder of the Company. These changes in the equity structure of Priority were recorded as capital transactions.
At December 31, 2017, Priority had 5,249 voting former Class A common stock authorized and issued, and 335 and 302 non-voting former Class B common stock authorized and issued, respectively.
Prior to the Business Combination, Priority recorded distributions of $7.1 million, $3.4 million, and $10.0 million to its members during the years ended December 31, 2018, 2017 and 2016, respectively.
15. EQUITY-BASED COMPENSATION PLANS
During 2019 and 2018, the Company had three equity-based compensation plans: 2018 Equity Incentive Plan; Earnout Incentive Plan; and 2014 Management Incentive Plan. Total equity-based compensation expense was approximately $3.7 million, $1.6 million, and $1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively, which is included in Salary and employee benefits in the accompanying consolidated statements of operations. For the years ended December 31, 2019 and 2018, the Company recognized an income tax benefit of approximately $0.5 million and $0.1 million, respectively, for equity-based compensation expense. No tax benefit was recognized for the year ended December 31, 2017 due to the Company's tax status.
For the years ended December 31, 2019, 2018, and 2017, equity-based compensation was recognized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Plan:
|
|
|
|
|
|
|
2018 Equity Incentive Plan
|
|
$
|
2,385
|
|
|
$
|
187
|
|
|
$
|
—
|
|
Earnout Incentive Plan
|
|
—
|
|
|
—
|
|
|
—
|
|
2014 Management Incentive Plan
|
|
1,267
|
|
|
1,462
|
|
|
1,021
|
|
Total
|
|
$
|
3,652
|
|
|
$
|
1,649
|
|
|
$
|
1,021
|
|
No equity-based compensation has been capitalized. Beginning in 2018, the Company elected to recognize the effects of forfeitures on compensation expense as the forfeitures occur for all plans.
2018 Equity Incentive Plan
The 2018 Equity Incentive Plan ("2018 Plan") was approved by the Company's board of directors and shareholders in July 2018. The 2018 Plan provides for the issuance of up to 6,685,696 of the Company's common stock. Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights ("SARs"), restricted stock awards ("RSU"), restricted stock units, 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.
A summary of the activity for the 2018 Plan that occurred during the years ended December 31, 2019 and 2018 is as follows:
|
|
|
|
|
6,685,696
|
|
|
Common stock authorized for the 2018 Plan
|
(2,044,815
|
)
|
|
Stock options granted in December 2018
|
7,558
|
|
|
Stock option grants forfeited in 2018
|
(202,200
|
)
|
|
RSUs granted in 2018
|
4,446,239
|
|
|
Common stock available for issuance under the 2018 Plan at December 31, 2018
|
|
|
|
326,173
|
|
|
Stock option grants forfeited in 2019
|
(36,657
|
)
|
|
RSUs granted in 2019
|
60,421
|
|
|
RSUs forfeited in 2019
|
4,796,176
|
|
|
Common stock available for issuance under the 2018 Plan at December 31, 2019
|
Stock Options
In December 2018, the Company issued stock option grants to substantially all of the Company's employees excluding the Company's executive officers. The stock options vest as follows: 50% on July 27, 2019; 25% on July 27, 2020; and 25% on July 27, 2021. 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 date of grant.
Details about the time-based stock options issued under the plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Options for
|
average
|
|
Weighted-average
|
|
Aggregate
|
|
|
number of
|
exercise
|
|
remaining
|
|
intrinsic value
|
|
|
shares
|
price
|
|
contractual terms
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2018
|
|
—
|
|
—
|
|
|
|
|
|
Granted in 2018
|
|
2,044,815
|
|
$
|
6.95
|
|
|
|
|
|
Exercised in 2018
|
|
—
|
|
—
|
|
|
|
|
|
Forfeited in 2018
|
|
(7,558
|
)
|
$
|
6.95
|
|
|
|
|
|
Expired in 2018
|
|
—
|
|
—
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
2,037,257
|
|
$
|
6.95
|
|
|
9.6 years
|
|
$
|
2,139
|
|
|
|
|
|
|
|
|
|
Granted in 2019
|
|
—
|
|
|
|
|
|
|
Exercised in 2019
|
|
—
|
|
|
|
|
|
|
Forfeited or expired in 2019
|
|
(326,173
|
)
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
1,711,084
|
|
$
|
6.95
|
|
|
8.6 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest
|
|
1,711,084
|
|
$
|
6.95
|
|
|
8.6 years
|
|
$
|
—
|
|
Exercisable at December 31, 2019
|
|
873,420
|
|
$
|
6.95
|
|
|
8.4 years
|
|
$
|
—
|
|
No stock options have been exercised as of December 31, 2019. For the years ended December 31, 2019 and 2018, compensation expense of $2.0 million and $0.2 million was recognized for these stock option grants. As of December 31, 2019, there was approximately $1.3 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a remaining weighted-average period of 1.6 years.
No stock options were issued during the year ended December 31, 2019.
The table below presents the assumptions used to calculate the fair value of the stock options issued during the year ended December 31, 2018:
|
|
|
|
|
Expected volatility
|
|
30
|
%
|
Risk-free interest rate
|
|
2.4
|
%
|
Expected term (years)
|
|
4.3
|
Dividend yield
|
|
—
|
%
|
Exercise price
|
|
$6.95
|
Restricted Stock Units - Service Based
During December 2018, the Company issued 107,143 RSUs with a grant-date fair value of $7.00 each and a total grant-date fair value of approximately $0.8 million. These RSUs have service-based vesting with 50% vesting in each of the years 2019 and 2020. In December 2019, 53,571.5 of these RSUs vested as scheduled and resulted in the issuance of 53,571 shares of the Company's common stock with a value of $3.20 per share and an aggregate value of $0.2 million. At December 31, 2019, all remaining unrecognized compensation of approximately $0.4 million is expected to be recognized at the end of 2020. Compensation expense for the year ended December 31, 2019 was approximately $0.4 million. Compensation expense for the year ended December 31, 2018 was not material.
During 2019, the Company issued 36,657 service-vesting RSUs with a grant-date fair value of $6.82 each. All of these RSUs subsequently were forfeited in 2019 before any had vested, resulting in no net compensation expense for the year ended December 31, 2019.
Restricted Stock Units - Performance Based
During the third quarter of 2018, the Company issued 95,057 RSUs with a fair value of $10.52 each. In addition to the service vesting requirements, these RSUs vest only if certain performance metrics are achieved for various periods of time the four-year period subsequent to grant date. At December 31, 2019, none of the performance metrics have been achieved, which resulted in the forfeiture of 23,764 of these RSUs. At December 31, 2019, it is not probable that any of the remaining performance metrics will be be achieved subsequent to 2019. No compensation expense has ever been recognized for these RSU grants. At the end of each subsequent reporting period, the Company will evaluate the probability of achievement for the performance metrics and adjust cumulative recognized compensation expense accordingly if the service requirements are also expected to be achieved.
Earnout Incentive Plan
The Company's Earnout Incentive Plan (the "EIP") expired on December 31, 2019. No shares were issued under the EIP. During the fourth quarter of 2019, a total of 95,057 RSUs expired under the EIP with a grant-date fair value of $10.52 each (these grants were in addition to the 95,057 RSUs issued under the 2018 Plan, as previously noted above). Prior to December 31, 2019, it was not probable that the performance metrics would be achieved, thus no compensation expense was recognized for these RSUs for any reporting period.
2014 Management Incentive Plan
The Priority Holdings Management Incentive Plan (the "MIP") was established in 2014 to issue equity-based compensation awards to selected employees. Simultaneously with the Business Combination and Recapitalization (see Note 14, Stockholders' Deficit Information), the fair value of the outstanding equity awards under the MIP were exchanged for approximately 3.0 million shares of common stock of Priority Technology Holdings, Inc. having approximately the same fair value. As such, this exchange was not deemed to be a modification for accounting purposes. During the year ended December 31, 2019, the Company elected to accelerate vesting for all remaining unvested awards under the MIP, resulting in accelerated compensation expense. Compensation expense under the MIP was approximately $1.3 million, $1.5 million, and $1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. At December 31, 2019, there is no unrecognized compensation cost for the MIP.
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. Company contributions to the plan were $1.3 million, $0.9 million, and $1.0 million for the years ended December 31, 2019, 2018, and 2017, 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. FAIR VALUE
Fair Value Measurements
The following is a description of the valuation methodologies used for contingent consideration and for the Goldman Sachs warrant prior to its July 2018 redemption (see Note 10, Long-Term Debt and Warrant Liability), both of which were initially recorded and remeasured at fair value at the end of each reporting period.
Redeemed Goldman Sachs Warrant
Prior to its redemption in July 2018, the Goldman Sachs warrant was classified as level 3 in the fair value hierarchy. Historically, the fair value of the Goldman Sachs warrant was estimated based on the fair value of Priority Holdings, LLC using a weighted-average of values derived from generally accepted valuation techniques, including market approaches, which consider the guideline public company method, the guideline transaction method, the recent funding method, and an income approach, which considers discounted cash flows. Priority Holdings, LLC adjusted the carrying value of the warrant to fair value as determined by the valuation model and recognized the change in fair value as an increase or decrease in interest and other expense. On July 25, 2018, the Goldman Sachs warrant was fully redeemed in exchange for $12.7 million cash, which resulted in a gain of $0.1 million, as the value of the Goldman Sachs warrant immediately prior to the cancellation was $12.8 million. The warrant is no longer outstanding as of December 31, 2019 or 2018.
Contingent Consideration for Business Combinations
The initial estimated fair value of approximately $1.0 million for the contingent consideration related to the 2018 business combinations for PPS Tech and PPS Northeast (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions) were based on a weighted payout probability at the measurement date, which falls within Level 3 on the fair value hierarchy. At December 31, 2019 and 2018, the fair value of this contingent consideration was estimated to be an aggregate of approximately $0.4 million and $1.0 million, respectively. During the year ended December 31, 2019, the carrying values of these contingent consideration arrangements were reduced by approximately $0.6 million, and this amount is reported within SG&A expense on the Company's consolidated statement of operations. As of December 31, 2019, the Company has paid no amounts under either of these earnout arrangements.
The following table shows a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 in the fair value hierarchy for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Warrant Liability
|
|
Contingent Consideration
|
|
|
|
|
Balance at January1, 2017
|
$
|
8,701
|
|
|
$
|
—
|
|
Extinguishment of GS 1.8% warrant liability (Note 10)
|
(8,701
|
)
|
|
—
|
|
GS 2.2% warrant liability (Note 10)
|
12,182
|
|
|
—
|
|
Adjustment to fair value included in earnings
|
591
|
|
|
—
|
|
Extinguishment of GS 2.2% warrant liability (Note 10)
|
(12,701
|
)
|
|
—
|
|
Change in fair value of warrant liability
|
(72
|
)
|
|
—
|
|
Earnout liabilities arising from business combinations (Note 4)
|
—
|
|
|
980
|
|
Balance at December 31, 2018
|
—
|
|
|
980
|
|
Adjustment to fair value included in earnings
|
—
|
|
|
(620
|
)
|
Balance at December 31, 2019
|
$
|
—
|
|
|
$
|
360
|
|
There were no transfers among the fair value levels during the years ended December 31, 2019, 2018, and 2017.
Fair Value of Debt
The Company's outstanding debt obligations (see Note 10, Long-term Debt and Warrant Liability) are reflected in the consolidated balance sheets at carrying value since the Company did not elect to remeasure its debt obligations to fair value at the end of each reporting period. The carrying values of the Company's long-term debt approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates.
18. SEGMENT INFORMATION
The Company has three reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's President, Chief Executive Officer and Chairman. The Consumer Payments operating segment is one reportable segment. The Commercial Payments and Institutional Services (aka Managed Services) operating segments are aggregated into one reportable segment, Commercial Payments. The Integrated Partners operating segment is one reportable segment.
Prior to second quarter of 2019, the Integrated Partners operating segment was aggregated with the Commercial Payments and Institutional Services operating segments and reported as one aggregated reportable segment, Commercial Payments. As of the second quarter of 2019, the Integrated Partners operating segment is no longer aggregated into the Commercial Payments operating segment. All comparative periods have been adjusted to reflect the current three reportable segments.
More information about our three reportable segments:
|
|
•
|
Consumer Payments – represents consumer-related services and offerings including merchant acquiring and transaction processing services including the proprietary MX enterprise suite. Either through acquisition of merchant portfolios or through resellers, the Company becomes a party or enters into contracts with a merchant and a sponsor bank. Pursuant to the contracts, for each card transaction, the sponsor bank collects payment from the credit, debit or other payment card issuing bank, net of interchange fees due to the issuing bank, pays credit card association (e.g., Visa, MasterCard) assessments and pays the transaction fee due to the Company for the suite of processing and related services it provides to merchants, with the remainder going to the merchant.
|
|
|
•
|
Commercial Payments – represents services provided to certain enterprise customers, including outsourced sales force to those customers and accounts payable automation services to commercial customers.
|
|
|
•
|
Integrated Partners - represents payment adjacent services that are provided primarily to the health care and residential real estate industries. Integrated Partners had no material operations prior to 2018.
|
Corporate includes costs of corporate functions and shared services not allocated to our reportable segments. For the year ended December 31, 2018, the Company adjusted its methodology of allocating certain corporate overhead costs to its reportable segments. The current and all prior periods presented herein have been adjusted to reflect the current allocation methodology.
Information on segments and reconciliations to consolidated revenues, consolidated income (loss) from operations, and consolidated depreciation and amortization are as follows for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
|
|
|
As recasted
|
|
As restated
|
|
As restated
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
Consumer Payments (a) (b)
|
|
$
|
330,599
|
|
|
$
|
347,013
|
|
|
$
|
357,168
|
|
Commercial Payments (a)
|
|
25,980
|
|
|
27,056
|
|
|
24,999
|
|
Integrated Partners (a)
|
|
15,275
|
|
|
1,753
|
|
|
—
|
|
Consolidated revenues (a)
|
|
$
|
371,854
|
|
|
$
|
375,822
|
|
|
$
|
382,167
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
Consumer Payments (b)
|
|
$
|
32,237
|
|
|
$
|
47,002
|
|
|
$
|
54,718
|
|
Commercial Payments
|
|
(891
|
)
|
|
(952
|
)
|
|
972
|
|
Integrated Partners
|
|
725
|
|
|
(1,969
|
)
|
|
—
|
|
Corporate
|
|
(24,887
|
)
|
|
(27,688
|
)
|
|
(21,196
|
)
|
Consolidated income from operations (b)
|
|
$
|
7,184
|
|
|
$
|
16,393
|
|
|
$
|
34,494
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
32,842
|
|
|
$
|
17,945
|
|
|
$
|
13,336
|
|
Commercial Payments
|
|
323
|
|
|
557
|
|
|
451
|
|
Integrated Partners
|
|
4,398
|
|
|
145
|
|
|
—
|
|
Corporate
|
|
$
|
1,529
|
|
|
$
|
1,093
|
|
|
$
|
887
|
|
Consolidated depreciation and amortization
|
|
$
|
39,092
|
|
|
$
|
19,740
|
|
|
$
|
14,674
|
|
(a) Revenue for the years ended December 2019, 2018, and 2017 have been adjusted to reflect the full retrospective adoption of ASC 606, Revenues from Contracts with Customers, as presented in following table. See the section "Accounting Standards Adopted in 2019" in Note 1, Nature of Business and Accounting Policies, for additional information. However, the Integrated Partners reportable segment was not affected in 2018 by the retrospective adoption of ASC 606 and this reportable segment had no material operations prior to 2018.
(b) In addition to certain adjustments made to revenues noted above for the years ended December 31, 2019, 2018, and 2017 related to the full retrospective adoption of ASC 606, the results of operations for the Consumer Payments reportable segment and consolidated results of operations for the years ended December 31, 2018 and 2017 have been restated to correct certain errors, as presented in the following table. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Year Ended December 31, 2019
|
|
|
As recasted
|
|
Effects of Adoption of ASC 606 - Note 1
|
|
Balances Before Adoption of ASC 606
|
|
|
|
|
|
|
|
Revenues by reportable segment:
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
330,599
|
|
|
$
|
(44,765
|
)
|
|
$
|
375,364
|
|
Commercial Payments
|
|
25,980
|
|
|
(2,395
|
)
|
|
28,375
|
|
Integrated Partners
|
|
15,275
|
|
|
(13,542
|
)
|
|
28,817
|
|
Consolidated revenues
|
|
$
|
371,854
|
|
|
$
|
(60,702
|
)
|
|
$
|
432,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2018
|
|
|
As restated
|
|
Effect of Adoption of ASC 606 - Note 1
|
|
Corrections of Errors - Note 2
|
|
Balances Before Adoption of ASC 606 and Error Corrections
|
|
|
|
|
|
|
|
|
|
Revenues by reportable segment:
|
|
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
347,013
|
|
|
$
|
(47,502
|
)
|
|
$
|
(471
|
)
|
|
$
|
394,986
|
|
Commercial Payments
|
|
27,056
|
|
|
(620
|
)
|
|
—
|
|
27,676
|
|
Integrated Partners
|
|
1,753
|
|
|
—
|
|
|
—
|
|
1,753
|
|
Consolidated revenues
|
|
$
|
375,822
|
|
|
$
|
(48,122
|
)
|
|
$
|
(471
|
)
|
|
$
|
424,415
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
47,002
|
|
|
—
|
|
$
|
(3,526
|
)
|
|
$
|
50,528
|
|
Consolidated
|
|
$
|
16,393
|
|
|
—
|
|
$
|
(3,526
|
)
|
|
$
|
19,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2017
|
|
|
As restated
|
|
Effect of Adoption of ASC 606 - Note 1
|
|
Corrections of Errors - Note 2
|
|
Balances Before Adoption of ASC 606 and Error Corrections
|
|
|
|
|
|
|
|
|
|
Revenues by reportable segment:
|
|
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
357,168
|
|
|
$
|
(47,011
|
)
|
|
$
|
3,859
|
|
|
$
|
400,320
|
|
Commercial Payments
|
|
24,999
|
|
|
(300
|
)
|
|
—
|
|
25,299
|
|
Consolidated revenues
|
|
$
|
382,167
|
|
|
$
|
(47,311
|
)
|
|
$
|
3,859
|
|
|
$
|
425,619
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
Consumer Payments
|
|
$
|
54,718
|
|
|
—
|
|
$
|
(755
|
)
|
|
$
|
55,473
|
|
Consolidated
|
|
$
|
34,494
|
|
|
—
|
|
$
|
(755
|
)
|
|
$
|
35,249
|
|
The Integrated Partners reportable segment had no material operations prior to 2018.
A reconciliation of total income from operations of reportable segments to the Company's net (loss) income is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
|
As restated - Note 2
|
|
As restated - Note 2
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Total income from operations of reportable segments
|
|
$
|
32,071
|
|
|
$
|
44,081
|
|
|
$
|
55,690
|
|
Less Corporate
|
|
(24,887
|
)
|
|
(27,688
|
)
|
|
(21,196
|
)
|
Less interest expense
|
|
(40,653
|
)
|
|
(29,935
|
)
|
|
(25,058
|
)
|
Add (less) other, net
|
|
710
|
|
|
(6,784
|
)
|
|
(5,597
|
)
|
Income tax (expense) benefit
|
|
(830
|
)
|
|
2,490
|
|
|
—
|
|
Net (loss) income
|
|
$
|
(33,589
|
)
|
|
$
|
(17,836
|
)
|
|
$
|
3,839
|
|
The Company is not significantly reliant upon any single customer for the years ended December 31, 2019, 2018, or 2017. Most of the Company's merchant customers were referred to the Company by an ISO or other referral partners. Some of these ISOs have merchant portability rights whereby the ISO can move certain merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. In the years ended December 31, 2019, 2018, and 2017, merchants referred by one ISO organizations with merchant portability rights generated approximately 18%, 14% and 10% of the Company's consolidated revenues.
Total assets, all located in the United States, by reportable segment reconciled to consolidated assets as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As of December 31,
|
|
|
|
|
As restated - Note 2
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Consumer Payments
|
|
$
|
274,136
|
|
|
$
|
293,114
|
|
Commercial Payments
|
|
45,152
|
|
|
13,296
|
|
Integrated Partners
|
|
74,386
|
|
|
6,776
|
|
Corporate
|
|
70,831
|
|
|
66,110
|
|
Total consolidated assets
|
|
$
|
464,505
|
|
|
$
|
379,296
|
|
Assets in Corporate at December 31, 2019 and 2018 primarily represent internally-developed software and net deferred income tax assets. Substantially all assets related to business operations are assigned to one of the Company's three reportable segments even though some of those assets result in Corporate expenses.
19. (LOSS) EARNINGS PER SHARE
As a result of the Recapitalization, the Company has retrospectively adjusted the weighted-average Class A units outstanding prior to July 25, 2018 by multiplying them by the exchange ratio used to determine the number of Class A common stock into which they converted.
The following tables set forth the computation of the Company's (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands except per share amounts)
|
Year Ended December 31,
|
|
|
|
As restated - Note 2
|
|
As restated - Note 2
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net (loss) income
|
$
|
(33,589
|
)
|
|
$
|
(17,836
|
)
|
|
$
|
3,839
|
|
Less: Income allocated to participating securities
|
—
|
|
|
(45
|
)
|
|
(236
|
)
|
Net (loss) income available to common stockholders
|
$
|
(33,589
|
)
|
|
$
|
(17,881
|
)
|
|
$
|
3,603
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted
|
67,086
|
|
|
61,607
|
|
|
67,144
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share
|
$
|
(0.50
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.05
|
|
Anti-dilutive securities that were excluded from EPS that could potentially be dilutive in future periods are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As of December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Stock options
|
1,711
|
|
|
2,091
|
|
|
—
|
|
Restricted stock awards
|
125
|
|
|
202
|
|
|
—
|
|
Earnout incentive awards subject to vesting
|
—
|
|
|
95
|
|
|
—
|
|
Warrants on common stock (see Note 14, Stockholders' Deficit Information)
|
3,556
|
|
|
5,731
|
|
|
3,402
|
|
Earnout incentive awards subject to issuance
|
—
|
|
|
9,705
|
|
|
—
|
|
Total
|
5,392
|
|
|
17,824
|
|
|
3,402
|
|
20. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The Company's consolidated financial statements for all annual reporting periods presented elsewhere in this Annual Report on Form 10-K reflect the full retrospective adoption of the new revenue accounting standard, ASC 606 (see Note 1, Nature of Business and Accounting Policies).
As an emerging growth company, the Company elected to take advantage of the extended transition provisions for the adoption of ASC 606. As a result, unaudited quarterly financial results previously reported by the Company in its Unaudited Condensed Consolidated Statements of Operations included in its Form 10-Q for each of the first three quarterly periods of 2019, and the applicable year-to-date reporting periods and comparative prior-period reporting periods presented in each of these Form 10-Q, were not required to reflect the adoption of ASC 606 and were therefore presented using a different basis of accounting than the basis used to prepare the consolidated financial statements for all annual reporting periods presented.
The following tables show a summary of the Company's quarterly financial information for each of: 1) the four quarters of 2019 as effected for the full retrospective adoption of ASC 606 (see the section "Accounting Principles Adopted in 2019" in Note 1, Nature of Business and Accounting Principles) and 2) the four quarters of 2018 for the full retrospective adoption of ASC 606 and the correction of errors (see Note 2, Restatement of Previously Issued Consolidated Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2019 - As recasted
|
|
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
Revenues prior to ASC 606
|
|
$
|
99,977
|
|
|
$
|
107,425
|
|
|
$
|
109,954
|
|
|
$
|
115,200
|
|
|
$
|
432,556
|
|
Full retrospective adoption of ASC 606 (1)
|
|
(12,331
|
)
|
|
(15,283
|
)
|
|
(16,071
|
)
|
|
(17,017
|
)
|
|
(60,702
|
)
|
Revenues, adjusted
|
|
$
|
87,646
|
|
|
$
|
92,142
|
|
|
$
|
93,883
|
|
|
$
|
98,183
|
|
|
$
|
371,854
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses prior to ASC 606
|
|
$
|
99,011
|
|
|
$
|
104,989
|
|
|
$
|
107,229
|
|
|
$
|
114,143
|
|
|
$
|
425,372
|
|
Full retrospective adoption of ASC 606 (1)
|
|
(12,331
|
)
|
|
(15,283
|
)
|
|
(16,071
|
)
|
|
(17,017
|
)
|
|
(60,702
|
)
|
Operating expenses, adjusted
|
|
$
|
86,680
|
|
|
$
|
89,706
|
|
|
$
|
91,158
|
|
|
$
|
97,126
|
|
|
$
|
364,670
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
966
|
|
|
$
|
2,436
|
|
|
$
|
2,725
|
|
|
$
|
1,057
|
|
|
$
|
7,184
|
|
Interest expense
|
|
(9,363
|
)
|
|
(10,776
|
)
|
|
(10,463
|
)
|
|
(10,051
|
)
|
|
(40,653
|
)
|
Other, net
|
|
227
|
|
|
138
|
|
|
158
|
|
|
187
|
|
|
710
|
|
Income tax (benefit) expense
|
|
(1,724
|
)
|
|
5,928
|
|
|
(1,736
|
)
|
|
(1,638
|
)
|
|
830
|
|
Net loss
|
|
$
|
(6,446
|
)
|
|
$
|
(14,130
|
)
|
|
$
|
(5,844
|
)
|
|
$
|
(7,169
|
)
|
|
$
|
(33,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share (2)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
2018 - As restated
|
|
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
Revenues prior to ASC 606 and error corrections
|
|
$
|
115,596
|
|
|
$
|
104,762
|
|
|
$
|
103,591
|
|
|
$
|
100,466
|
|
|
$
|
424,415
|
|
Full retrospective adoption of ASC 606 (1)
|
|
(12,635
|
)
|
|
(11,956
|
)
|
|
(11,925
|
)
|
|
(11,606
|
)
|
|
(48,122
|
)
|
Errors corrections (3)
|
|
(89
|
)
|
|
(115
|
)
|
|
(125
|
)
|
|
(142
|
)
|
|
(471
|
)
|
Revenues, restated
|
|
$
|
102,872
|
|
|
$
|
92,691
|
|
|
$
|
91,541
|
|
|
$
|
88,718
|
|
|
$
|
375,822
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses prior to ASC 606 and error corrections
|
|
$
|
107,718
|
|
|
$
|
101,557
|
|
|
$
|
100,031
|
|
|
$
|
95,190
|
|
|
$
|
404,496
|
|
Full retrospective adoption of ASC 606 (1)
|
|
(12,635
|
)
|
|
(11,956
|
)
|
|
(11,925
|
)
|
|
(11,606
|
)
|
|
(48,122
|
)
|
Error corrections (3)
|
|
137
|
|
|
137
|
|
|
321
|
|
|
2,460
|
|
|
3,055
|
|
Operating expenses, restated
|
|
$
|
95,220
|
|
|
$
|
89,738
|
|
|
$
|
88,427
|
|
|
$
|
86,044
|
|
|
$
|
359,429
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations, restated
|
|
$
|
7,652
|
|
|
$
|
2,953
|
|
|
$
|
3,114
|
|
|
$
|
2,674
|
|
|
$
|
16,393
|
|
Interest expense
|
|
(6,929
|
)
|
|
(7,630
|
)
|
|
(7,334
|
)
|
|
(8,042
|
)
|
|
(29,935
|
)
|
Other, net
|
|
(4,126
|
)
|
|
(1,203
|
)
|
|
221
|
|
|
(1,676
|
)
|
|
(6,784
|
)
|
Income tax benefit, restated (3)
|
|
—
|
|
|
—
|
|
|
(1,098
|
)
|
|
(1,392
|
)
|
|
(2,490
|
)
|
Net loss, restated
|
|
$
|
(3,403
|
)
|
|
$
|
(5,880
|
)
|
|
$
|
(2,901
|
)
|
|
$
|
(5,652
|
)
|
|
$
|
(17,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share, restated (2)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.29
|
)
|
(1) See Note 1, Nature of Business and Accounting Policies.
(2) May not be additive to the net loss per common share amounts for the year due to the calculation provision of ASC 260, Earnings Per Share.
(3) Affected the Company's Consumer Payments reportable segment. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, and Note 18, Segment Information.
21. SUBSEQUENT EVENTS
Amendments to Credit Agreements
On March 18, 2020, amendments were executed for the Senior Credit Agreement and the GS Credit Amendment. See Note 10, Long-Term Debt and Warrant Liability.
COVID-19 Pandemic (Coronavirus)
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the U.S., and efforts to contain the spread of this coronavirus intensified. In March 2020, the World Health Organization declared the COVID-19 virus outbreak a global pandemic. The outbreak and any preventative or protective actions that governments or others may take in respect of this coronavirus may result in global business disruptions, including for the Company's customers and business partners, and in a period of business disruption, reduced customer demand and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the Company's business, financial condition, results of operations, and cash flows, despite the fact that such impacts may not be felt for a significant period of time. Although the Company is diligently working to ensure that it can operate with minimal disruption, prepare to mitigate the impact of the outbreak on the Company's employees’ health and safety, and address potential business interruptions on the Company and its customers, the full extent to which the coronavirus could affect the global and U.S. economies and the Company will depend on future developments and factors that cannot be predicted.