| Prospectus Supplement No. 5 | Filed Pursuant to Rule 424(b)(3) |
| (to Prospectus dated November 17, 2020) | Registration No. 333-249949 |
17,715,000 Shares of Common Stock
Up to 102,359,084 Shares of Common Stock by the Selling Stockholders
465,000 Warrants by the Selling Stockholders
This prospectus supplement updates and supplements the prospectus dated November 17, 2020 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1 (Registration No. 333-249949). This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, filed with the Securities and Exchange Commission on August 6, 2021 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.
The Prospectus relates to the offer and sale of (a) up to 17,715,000 shares of our Common Stock, upon the exercise of warrants, each exercisable for one share of Common Stock at a price of $11.50 per share (“Warrants”) and (b) the resale from time to time of (i) up to 102,359,084 shares of Common Stock, consisting of 87,894,084 shares of Common Stock, 465,000 shares of Common Stock issuable upon the exercise of Warrants and up to 14,000,000 shares of Common Stock to be issued if certain threshold price conditions are met and (ii) 465,000 Warrants by the selling security holders named in the Prospectus.
This prospectus supplement should be read in conjunction with the Prospectus. This prospectus supplement updates and supplements the information in the Prospectus. If there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.
Our Common Stock and Warrants are listed on the Nasdaq Capital Market under the symbols “PAYA” and “PAYAW,” respectively. On August 6, 2021, the closing sale prices of our Common Stock and Warrants were $10.52 and $2.40, respectively.
Investing in our Common Stock and Warrants involves risks that are described in the “Risk Factors” section beginning on page 6 of the Prospectus and under similar headings in any further amendments or supplements to the Prospectus before you decide whether to invest in our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is August 9, 2021.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For
the quarterly period ended June
30, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For
the transition period from __ to __
Commission
file number 001-819881
Paya
Holdings Inc.
(Exact
Name of Registrant as Specified in Charter)
| Delaware | 85-2199433 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
303
Perimeter Center North, Suite
600, Atlanta,
Georgia
30346
(Address,
including zip code, of principal executive offices)
(800)
261-0240
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
|
Common
stock, par value $0.001 per share |
PAYA | The Nasdaq Capital Market | ||||||
| Warrants to purchase common stock | PAYAW | The Nasdaq Capital Market | ||||||
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days. Yes
☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes
☒
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer |
☐ |
Accelerated
filer |
☒ | ||||||||||||||
|
Non-accelerated
filer |
☐ |
Smaller
reporting company |
☒ | ||||||||||||||
|
Emerging
growth company |
☒ | ||||||||||||||||
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
No ☒
There
were 127,380,384
shares of Common Stock, par value $0.001 per share, issued and outstanding as of August 5, 2021.
1
Paya
Holdings Inc.
TABLE
OF CONTENTS
Quarterly
Report on FORM 10-Q
June 30, 2021
2
Cautionary
Statement Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These forward-looking statements relate to expectations for future financial performance, business strategies
or expectations for the Company. Specifically, forward-looking statements may include statements relating to:
•operational,
economic, political and regulatory risks;
•natural
disasters and other business disruptions including outbreaks of epidemic or pandemic disease;
•changes
in demand within a number of key industry end-markets and geographic regions;
•failure
to retain key personnel;
•our
inability to recognize deferred tax assets and tax loss carry forwards;
•our
future operating results fluctuating, failing to match performance or to meet expectations;
•unanticipated
changes in our tax obligations;
•our
obligations under various laws and regulations;
•the
effect of litigation, judgments, orders or regulatory proceedings on our business;
•our
ability to successfully acquire and integrate new operations;
•global
or local economic and political movements;
•our
ability to effectively manage our credit risk and collect on our accounts receivable;
•our
ability to fulfill our public company obligations;
•any
failure of our management information systems and data security;
•our
ability to meet our debt service requirements and obligations;
•changes
in the payment processing market in which Paya competes;
•changes
in the vertical markets that Paya targets;
•Paya’s
relationships within the payment ecosystem;
•Paya’s
growth strategies;
•changes
in accounting policies applicable to Paya;
•the
development and maintenance of effective internal controls; and
•other
risks and uncertainties discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form
10-Q and elsewhere in this Report, and those set forth in Part I, Item 1A of our Annual Report on Form 10-K and our other filings with
the Securities and Exchange Commission.
These
forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s
current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking
statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking
statements to reflect events or
3
circumstances
after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable
securities laws.
4
Part
I
Item
1. Unaudited Condensed Consolidated Financial Statements
Paya
Holdings Inc.
Condensed
Consolidated Statements of Income and Other Comprehensive Income
(In
thousands except per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
|
Revenue |
$ | 63,984 | $ | 51,087 | $ | 119,239 | $ | 100,226 | |||||||||||||||
|
Cost of services
exclusive of depreciation and amortization |
(30,199) | (24,911) | (56,336) | (49,409) | |||||||||||||||||||
|
Selling, general
& administrative expenses |
(20,846) | (14,005) | (37,760) | (29,585) | |||||||||||||||||||
|
Depreciation
and amortization |
(7,519) | (6,011) | (14,551) | (12,007) | |||||||||||||||||||
|
Income from
operations |
5,420 | 6,160 | 10,592 | 9,225 | |||||||||||||||||||
|
Other income
(expense) |
|||||||||||||||||||||||
|
Interest expense |
(3,822) | (4,694) | (7,865) | (9,339) | |||||||||||||||||||
|
Other income
(expense) |
(8,467) | 12 | (7,975) | (5) | |||||||||||||||||||
|
Total other
expense |
(12,289) | (4,682) | (15,840) | (9,344) | |||||||||||||||||||
|
Income (loss)
before income taxes |
(6,869) | 1,478 | (5,248) | (119) | |||||||||||||||||||
|
Income tax (expense)
benefit |
3,715 | (853) | 3,139 | 69 | |||||||||||||||||||
|
Net income (loss) |
$ | (3,154) | $ | 625 | $ | (2,109) | $ | (50) | |||||||||||||||
| Weighted average shares outstanding of common stock | 127,213,455 | 54,534,022 | 122,511,009 | 54,534,022 | |||||||||||||||||||
| Basic net income (loss) per share | $ | (0.02) | $ | 0.01 | $ | (0.02) | $ | 0.00 | |||||||||||||||
| Diluted net income (loss) per share | $ | (0.02) | $ | 0.01 | $ | (0.02) | $ | 0.00 | |||||||||||||||
See
accompanying notes to the unaudited condensed consolidated financial statements.
5
| Paya Holdings Inc. | |||||||||||
| Condensed Consolidated Balance Sheets | |||||||||||
| (In
thousands except share data) (Unaudited) | |||||||||||
| June 30, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
|
Assets |
|||||||||||
|
Current assets: |
|||||||||||
|
Cash
and cash equivalents |
$ | 135,573 | $ | 23,617 | |||||||
|
Trade
receivables, net |
24,174 | 17,493 | |||||||||
|
Prepaid
expenses |
2,643 | 2,218 | |||||||||
|
Income
taxes receivable |
3,545 | 541 | |||||||||
|
Other
current assets |
973 | 457 | |||||||||
|
Total current
assets before funds held for clients |
166,908 | 44,326 | |||||||||
|
Funds
held for clients |
83,497 | 78,505 | |||||||||
|
Total current
assets |
$ | 250,405 | $ | 122,831 | |||||||
|
Non-current
assets: |
|||||||||||
|
Property
and equipment, net |
14,413 | 12,805 | |||||||||
|
Goodwill |
216,446 | 206,308 | |||||||||
|
Intangible
assets, net |
144,682 | 132,616 | |||||||||
|
Other
non-current assets |
1,261 | 781 | |||||||||
|
Total Assets |
$ | 627,207 | $ | 475,341 | |||||||
|
Liabilities
and stockholders’ equity |
|||||||||||
|
Current liabilities: |
|||||||||||
|
Trade
payables |
4,459 | 3,967 | |||||||||
|
Accrued
liabilities |
13,319 | 10,435 | |||||||||
|
Accrued
revenue share |
9,445 | 7,535 | |||||||||
|
Other
current liabilities |
2,692 | 3,071 | |||||||||
|
Total current
liabilities before client funds obligations |
29,915 | 25,008 | |||||||||
|
Client
funds obligations |
83,194 | 78,658 | |||||||||
|
Total current
liabilities |
$ | 113,109 | $ | 103,666 | |||||||
|
Non-current
liabilities: |
|||||||||||
|
Deferred
tax liability, net |
11,204 | 14,618 | |||||||||
|
Long-term
debt |
242,725 | 220,152 | |||||||||
| Tax receivable agreement liability | 19,179 | 19,627 | |||||||||
|
Other
non-current liabilities |
1,227 | 1,246 | |||||||||
|
Total liabilities |
$ | 387,444 | $ | 359,309 | |||||||
|
Stockholders’
Equity: |
|||||||||||
|
Common
stock, $0.001
par value; 500,000,000
authorized; 127,380,384
and 116,697,441
issued and outstanding as of June 30, 2021 and December 31, 2020, respectively |
127 | 12 | |||||||||
|
Additional
Paid-in-Capital |
255,178 | 129,453 | |||||||||
|
Accumulated
deficit |
(15,542) | (13,433) | |||||||||
|
Total stockholders’
equity |
239,763 | 116,032 | |||||||||
|
Total liabilities
and stockholders’ equity |
$ | 627,207 | $ | 475,341 | |||||||
6
Paya
Holdings Inc.
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
(In
thousands except share data)
(Unaudited)
| Common stock | |||||||||||||||||||||||||||||
| Shares | Amount | Additional
paid-in-capital |
Retained earnings | Total stockholders’ equity | |||||||||||||||||||||||||
| Balance at December 31, 2019 | 54,534,022 | $ | 5 | $ | 147,268 | $ | (12,909) | $ | 134,364 | ||||||||||||||||||||
| Net loss | — | — | — | (675) | (675) | ||||||||||||||||||||||||
| Stock based compensation - Class C incentive units | — | — | 392 | — | 392 | ||||||||||||||||||||||||
| Balance at March 31, 2020 | 54,534,022 | $ | 5 | $ | 147,660 | $ | (13,584) | $ | 134,081 | ||||||||||||||||||||
| Net loss | — | — | — | 625 | 625 | ||||||||||||||||||||||||
| Stock based compensation - Class C incentive units | — | — | 276 | — | 276 | ||||||||||||||||||||||||
| Balance at June 30, 2020 | 54,534,022 | $ | 5 | $ | 147,936 | $ | (12,959) | $ | 134,982 | ||||||||||||||||||||
| Balance at December 31, 2020 | 116,697,441 | $ | 12 | $ | 129,453 | $ | (13,433) | $ | 116,032 | ||||||||||||||||||||
| Net income | — | — | — | 1,045 | 1,045 | ||||||||||||||||||||||||
| Stock based compensation - Class C incentive units | — | — | 259 | — | 259 | ||||||||||||||||||||||||
| Stock based compensation - Common stock | — | — | 451 | — | 451 | ||||||||||||||||||||||||
| Equity offering | 10,000,000 | 1 | 116,970 | — | 116,971 | ||||||||||||||||||||||||
| Warrant exercise | 51 | — | 1 | — | 1 | ||||||||||||||||||||||||
| Balance at March 31, 2021 | 126,697,492 | $ | 13 | $ | 247,134 | $ | (12,388) | $ | 234,759 | ||||||||||||||||||||
| Net income | — | — | — | (3,154) | (3,154) | ||||||||||||||||||||||||
| Stock based compensation - Class C incentive units | — | — | 74 | — | 74 | ||||||||||||||||||||||||
| Stock based compensation - Common stock | — | — | 790 | — | 790 | ||||||||||||||||||||||||
| Equity offering | — | — | (206) | — | (206) | ||||||||||||||||||||||||
| Reclassification - see Note 1 | — | 113 | (113) | — | — | ||||||||||||||||||||||||
| Shares issued for acquisition | 682,892 | 1 | 7,499 | — | 7,500 | ||||||||||||||||||||||||
| Balance at June 30, 2021 | 127,380,384 | $ | 127 | $ | 255,178 | $ | (15,542) | $ | 239,763 | ||||||||||||||||||||
See
accompanying notes to the unaudited condensed consolidated financial statements.
7
Paya
Holdings Inc.
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (2,109) | $ | (50) | |||||||
| Depreciation & amortization expense | 14,551 | 12,007 | |||||||||
| Deferred taxes | (3,414) | 71 | |||||||||
| Bad debt expense | 658 | 896 | |||||||||
| Stock based compensation | 1,574 | 668 | |||||||||
| Change in tax receivable agreement liability | (448) | — | |||||||||
| Amortization of debt issuance costs | 444 | 549 | |||||||||
| Loss on debt extinguishment | 6,187 | — | |||||||||
| Changes in assets and liabilities, net of impact of business acquisitions: | |||||||||||
| Trade receivables | (4,581) | (7,410) | |||||||||
| Prepaid expenses | (227) | (304) | |||||||||
| Other current assets | 3 | 259 | |||||||||
| Other non-current assets | (77) | 161 | |||||||||
| Trade payables | (916) | (216) | |||||||||
| Accrued liabilities | 1,222 | (4,600) | |||||||||
| Accrued revenue share | 1,830 | 1,157 | |||||||||
| Income tax payable/receivable, net | (3,004) | (210) | |||||||||
| Other current liabilities | 57 | (154) | |||||||||
| Movements in cash held on behalf of customers, net | (876) | 445 | |||||||||
| Other non-current liabilities | 8 | (60) | |||||||||
| Net cash provided by operating activities | $ | 10,882 | $ | 3,209 | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (3,669) | (2,384) | |||||||||
| Purchases of customer lists | (8,665) | (115) | |||||||||
| Acquisition of business, net of cash received | (18,289) | — | |||||||||
| Net cash (used in) investing activities | $ | (30,623) | $ | (2,499) | |||||||
| Cash flows from financing activities: | |||||||||||
| Payments on long-term debt | (228,677) | (1,182) | |||||||||
| Borrowings under long-term debt | 250,000 | — | |||||||||
| Payment of debt issuance costs | (6,390) | — | |||||||||
| Distribution to Ultra | — | (585) | |||||||||
| Proceeds from equity offering | 116,764 | — | |||||||||
| Net cash provided by (used in) financing activities | $ | 131,697 | $ | (1,767) | |||||||
| Net change in cash and cash equivalents | 111,956 | (1,057) | |||||||||
| Cash and cash equivalents, beginning of period | 23,617 | 25,957 | |||||||||
| Cash and cash equivalents, end of period | $ | 135,573 | $ | 24,900 | |||||||
| Supplemental disclosures: | |||||||||||
| Cash interest paid | $ | 7,308 | $ | 5,789 | |||||||
| Cash taxes paid, including estimated payments | $ | 2,958 | $ | 69 | |||||||
| Non-cash investing activity: | |||||||||||
| Non-cash stock issuance related to Paragon acquisition | $ | 7,500 | $ | — | |||||||
See
accompanying notes to the unaudited condensed consolidated financial statements.
8
Notes
to Unaudited Condensed Consolidated Financial Statements
(In
Thousands, unless otherwise noted)
1.Organization,
basis of presentation and summary of accounting policies
Organization
Paya
Holdings, Inc., a Delaware corporation, conducts operations through its wholly-owned subsidiaries. These operating subsidiaries are comprised
of Paya, Inc., Paya EFT, Inc., Stewardship Technology, Inc., First Mobile Trust, LLC, The Payment Group, LLC, and Blue Parasol Group,
LLC (Paragon Payment Solutions).
On
October 16, 2020, we consummated the business combination (the “Business Combination”) contemplated by that certain Agreement
and Plan of Merger, dated as of August 3, 2020 (“Merger Agreement”), by and among Paya Holdings Inc. (f/k/a FinTech Acquisition
Corp. III Parent Corp.) (“we,” “us,” “Paya” or the “Company”), FinTech Acquisition Corp.
III (“FinTech”), FinTech III Merger Sub Corp., GTCR-Ultra Holdings, LLC (“Ultra”), GTCR-Ultra Holdings II, LLC
(n/k/a Paya Holdings II, LLC, “Holdings”), GTCR/Ultra Blocker, Inc. and GTCR Fund XI/C LP. See Note 3, Business combination
for more information.
The
Company is a leading independent integrated payments platform providing card, ACH, and check payment processing solutions via software
to middle-market businesses in the United States. Paya’s solutions integrate with customers’ core business software to enable
payments acceptance, reconcile invoice detail, and post payment information to their core accounting system. In this manner, Paya enables
its customers to collect revenue from their B2C and B2B customers with a seamless experience and high-level of security across payment
types.
The
Company is headquartered in Atlanta, Georgia and also has operations in Reston, VA, Fort Walton Beach, FL, Mount Vernon, OH, Miamisburg,
OH, Dallas, TX and Tempe, AZ.
Basis
of presentation
The
Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of the U.S.
Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under accounting principles generally
accepted in the United States of America (“U.S. GAAP”), certain notes and other information have been omitted from the interim
unaudited condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements
should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed
with the SEC.
In
management’s opinion, the condensed consolidated financial statements include all normal and recurring adjustments necessary for
a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for any
interim period are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31,
2021 or any future period.
Emerging
growth company
The
Company currently qualifies as an emerging growth company (“EGC”) as defined in Section 2(a) of the Securities Act of 1933,
as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),
and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that
are not emerging growth companies, including, but not limited to, not being required to comply with the independent registered public
accounting firm attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote
on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a
9
Securities
Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to
comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended
transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.
The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it
has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised
standard at the time private companies adopt the new or revised standard.
Based
on the Company’s aggregate worldwide market value of voting and non-voting common equity held by non-affiliates as of June 30, 2021,
the Company expects that it will become a “large accelerated filer” and lose emerging growth company status beginning with
its Annual Report on Form 10-K for the year ended December 31, 2021. At such time, the Company will be subject to the independent registered
public accounting firm attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and will no longer be eligible to take advantage
of the extended transition period for adoption of new or revised financial accounting standards under the JOBS Act. However, because the
Company will continue to qualify as a smaller reporting company with respect to its Annual Report on Form 10-K for the year ended December
31, 2021, the Company will continue to make use of reduced disclosure obligations regarding executive compensation in such Annual Report
and in its proxy statement for the year 2022.
Use
of estimates
The
preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. These
estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. The
more significant estimates made by management relate to income taxes, tax receivable agreement liability, contingent liability, and impairment
of intangibles and long-lived assets. The Company periodically evaluates the methodologies employed in making its estimates.
Principles
of Consolidation
These
condensed consolidated financial statements include the accounts of the Company and its subsidiary companies. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash
and cash equivalents
Cash
and cash equivalents are short-term, highly liquid investments with a maturity of ninety days or less at the time of purchase. The fair
value of our cash and cash equivalents approximates carrying value. At times, cash and cash equivalents exceed the amount insured by the
Federal Deposit Insurance Corporation. We maintain an immaterial balance of restricted cash for ACH and card processing as required by
certain financial institutions.
Concentration
of credit risk
Our
cash, cash equivalents, trade receivables, funds receivable and customer accounts are potentially subject to concentration of credit risk.
The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from
its customers. No individual customers represented more than 10% of the Company’s revenue.
Trade
receivables, net
Trade
receivables are recorded at net realizable value, which includes allowances for doubtful accounts. The Company estimates an allowance
for doubtful accounts related to balances that it estimates it cannot collect from merchants. These uncollectible amounts relate to chargebacks,
uncollectible merchant fees, and ACH transactions that have been rejected subsequent to the payout date. The Company uses historical write-off
data to estimate losses
10
incurred
relating to uncollectible accounts. The allowance for doubtful accounts was $1.4
million and $1.2
million at June 30, 2021 and December 31, 2020, respectively.
Prepaid
expenses
Prepaid
expenses primarily consist of prepaid insurance, rent and supplier invoices.
Other
current assets
Other
current assets primarily consist of current deferred tax assets, current deferred debt issuance costs for the revolving credit facility
(the “Revolver”), other receivables and equipment inventory.
Funds
held for clients and client funds obligation
Funds
held for clients and client funds obligations result from the Company’s processing services and associated settlement activities,
including settlement of payment transactions. Funds held for clients are generated principally from merchant services transactions and
are comprised of both settlements’ receivable and cash as of period end. Certain merchant settlement assets that relate to settlement
obligations accrued by the Company are held by partner banks. The Company records corresponding settlement obligations for amounts payable
to merchants and for payment instruments not yet presented for settlement. Differences in the funds held for clients and client funds
obligation are due to timing differences between when transactions are settled and when payment instruments are presented for settlement
and are considered to be immaterial. The changes in settlement assets and obligations are presented on a net basis within operating activities
in the condensed consolidated statements of cash flows.
Property
and equipment, net
Property
and equipment, is stated at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. These lives are 3
years for computers and equipment, 5
years for furniture, fixtures, and office equipment, and the lesser of the asset useful life or remaining lease term for leasehold improvements.
Also, the Company capitalizes software development costs and website development costs incurred in accordance with ASC 350-40, Internal
Use Software. The
useful lives are 3
to 5
years for internal-use software. Repair and maintenance costs are expensed as incurred and included in selling, general and administrative
expenses on the condensed consolidated statements of income and other comprehensive income.
Impairment
of long-lived assets
The
Company evaluates the recoverability of its long-lived assets in accordance with the provisions of ASC 360, Property,
Plant and Equipment (“ASC
360”). ASC 360 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. There was no impairment
of long-lived assets recognized in any period presented in the condensed consolidated financial statements.
Goodwill
and other intangible assets, net
Goodwill
represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s
business combinations. The Company evaluates goodwill and intangible assets in accordance with ASC 350, Goodwill
and Other Intangible Assets (“ASC
350”). ASC 350 requires goodwill to be either qualitatively or quantitatively assessed for impairment annually (or more frequently
if impairment indicators arise) for each reporting unit. The Company tests goodwill annually for impairment as of September 30 of each
year, and at interim periods upon a potential indication of impairment, using a qualitative approach. The Company tests goodwill for impairment
by comparing the estimated fair value of the reporting units to the related carrying value. If the fair value of the reporting units is
lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds fair value. The loss recognized
cannot exceed the carrying amount of the
11
goodwill.
There was no goodwill impairment recognized in any period presented in the condensed consolidated financial statements.
Intangible
assets with finite lives consist of developed technology and customer relationships and are amortized on a straight-line basis over their
estimated useful lives. From time to time, the Company acquires customer lists from sales agents in exchange for an upfront cash payment.
The purchase of customer lists are treated as asset acquisition, resulting in recording an intangible asset at cost on the date of acquisition.
The acquired customer lists intangible assets have a useful life of 5
years. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected
future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business
or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired,
the Company makes an assessment of the recoverability of the net book value of the asset over its remaining useful life. If this assessment
indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the asset over the remaining
amortization period, the Company reduces the net book value of the related intangible asset to fair value and may adjust the remaining
amortization period.
The
Company evaluates its intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate
that the net book value may not be recoverable. There were no indicators of impairment identified nor was impairment recognized in intangible
assets in any period presented in the condensed consolidated financial statements.
Long-term
debt and 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
condensed consolidated balance sheets as a direct reduction in the carrying value of the associated debt liability.
Revenue
The
Company’s business model provides payment services, card processing, and ACH, to merchants through enterprise or vertically focused
software partners, direct sales, reseller partners, other referral partners, and a limited number of financial institutions. The Company
recognizes processing revenues on bankcard merchant accounts and ACH merchant accounts at the time merchant transactions are processed
and periodic fees over the period the service is performed. See Note 2, Revenue recognition for more information on
the Company's revenue recognition policy.
Cost
of services exclusive of depreciation and amortization
Cost
of services includes card processing costs, ACH costs, and other fees paid to card networks, and equipment expenses directly attributable
to payment processing and related services to merchants. These costs are recognized as incurred. Cost of services also includes revenue
share amounts paid to reseller and referral partners and are calculated monthly based on monthly merchant activity. These expenses are
recognized as transactions are processed. Accrued revenue share represent amounts earned during the period but not yet paid at the end
of the period.
Selling,
general and administrative expenses
Selling,
general and administrative expenses consist primarily of salaries, stock based compensation expense, wages, commissions, marketing costs,
professional services costs, technology costs, occupancy costs of leased space, and bad debt expense.
Depreciation
& Amortization
12
Depreciation
and amortization consist primarily of amortization of intangible assets, mainly including customer relationships, internal-use software,
customer lists, trade names and to a lesser extent depreciation on our investments in property, equipment, and software. We depreciate
and amortize our assets on a straight-line basis in accordance with our accounting policies. Repair and maintenance costs are expensed
as incurred and included in selling, general and administrative expenses on the condensed consolidated statements of income and other
comprehensive income. Customer lists are amortized over a period of 5-16
years depending on the intangible, developed technology 3-7
years, and trade names over 25
years.
Derivative
financial instruments
The
Company accounts for its derivative instruments in accordance with ASC 815, Derivatives
and Hedging. ASC
815 establishes accounting and reporting standards for derivative instruments requiring the recognition of all derivative instruments
as assets or liabilities in the Company’s condensed consolidated balance sheets at fair value. The Company records its derivative
instruments as assets or liabilities, depending on its rights or obligations under the applicable derivative contract. Changes in fair
value are recognized in earnings in the affected period.
The
Company uses an interest rate cap contract to manage risk from fluctuations in interest rates on its Term Loan credit agreement. Interest
rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreement without exchange
of the underlying principal amount. The interest rate cap is not designated as a hedging instrument. Changes in the fair value of the
interest rate cap are recorded through other income (expense) in the condensed consolidated statement of income and other comprehensive
income, other current assets and other current liabilities on the condensed consolidated balance sheet, and in changes in other current
assets in the combined statement of cash flows.
Income
taxes
The
Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized principally for the expected tax consequences of temporary differences between the tax basis of assets and liabilities
and their reported amounts, using currently enacted tax rates. The measurement of a deferred tax asset is reduced, if necessary, by a
valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The
Company recognizes a tax benefit for uncertain tax positions if the Company believes it is more likely than not that the position will
be upheld on audit based solely on the technical merits of the tax position. The Company evaluates uncertain tax positions after the consideration
of all available information. Such tax positions must initially and subsequently be estimated as the largest amount of tax benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities, assuming full knowledge of the
position and relevant facts. The Company's policy is to recognize any interest and penalties related to income taxes as income tax expense
in the relevant period.
Fair-Value
Measurements
ASC
820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The determination of fair value is based on the principal
or most advantageous market in which the Company could participate and considers assumptions that market participants would use when pricing
the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Also, determination of fair value assumes
that market participants will consider the highest and best use of the asset.
The
Company uses the hierarchy prescribed in ASC 820 for fair value measurements, based on the available inputs to the valuation and the degree
to which they are observable or not observable in the market.
The
three levels of the hierarchy are as follows:
13
Level
1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the
measurement date;
Level
2 Inputs—Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or liability; and
Level
3 Inputs—Unobservable inputs for the asset or liability used to measure fair value allowing for inputs reflecting the Company’s
assumptions about what other market participants would use in pricing the asset or liability, including assumptions about risk.
Recently
Issued Pronouncements Not Yet Adopted
In
March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04,
Reference
Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected
by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020 through
December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date
from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from the date that the financial
statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments must be applied prospectively
for all eligible contract modifications for that Topic or Industry Subtopic. The Company may apply ASU 2020-04 as its contracts referenced
in London Interbank Offered Rate (“LIBOR”) are impacted by reference rate reform. The Company is currently evaluating the
effect of ASU 2020-04 on its condensed consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740):
Simplifying
the Accounting for Income Taxes,
which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain
exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating
income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies
and amends existing guidance to improve consistent application of the accounting for franchise taxes, enacted changes in tax laws or rates
and transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning
after December 15, 2021, with early adoption permitted. As the Company will cease to be an EGC as of December 31, 2021, the Company will
adopt the standard on December 31, 2021, with effect from January 1, 2021 in the annual financial statements. The Company is currently
evaluating the effect of ASU 2019-12 on our condensed consolidated financial statements.
In
August 2017, the FASB issued ASU 2017-12, Derivatives
and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The
new guidance amends the hedge accounting model in Accounting Standards Codification (“ASC”) 815 to better portray the economic
results of an entity’s risk management activities in its financial statements and simplifies the application of hedge accounting
in certain situations. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness. The ASU is effective
for annual periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2021. Early
adoption is permitted. The Company does not expect the adoption of this ASU to have a significant impact on its condensed consolidated
financial statements.
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The
ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test which
measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount.
As a result, an impairment charge will be recorded based on the excess of a reporting unit's carrying amount over its fair value. The
amendments of this ASU are effective for reporting periods beginning after December 15, 2022. Early adoption of this ASU is permitted
for interim and annual impairment tests performed on testing dates after January 1, 2017. As the Company will cease to be an EGC as of
December 31, 2021, the Company will adopt the standard
14
on
December 31, 2021, with effect from January 1, 2021 in the annual financial statements. The Company does not expect the adoption of this
ASU to have a significant impact on its condensed consolidated financial statements.
In June 2016,
the FASB issued ASU 2016-13, Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU presents a new methodology for calculating credit losses on financial instruments (e.g. trade receivables) based on expected
credit losses and expands the types of information companies must use when calculating expected losses. This ASU is effective for annual
periods beginning after December 15, 2021 and interim periods within those annual periods, with early adoption permitted. As the Company
will cease to be an EGC as of December 31, 2021, the Company will adopt the standard on December 31, 2021, presenting the initial application
of ASC 326 with effect from January 1, 2021 in the annual financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The ASU requires lessees to put most leases on their balance sheets. The guidance also modifies the classification criteria and the accounting
for sales-type and direct financing leases for lessors and provides new presentation and disclosure requirements for both lessees and
lessors. In June 2020, the FASB issued ASU 2020-05 which delayed the effective date of ASC 842. This standard is effective for fiscal
years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is
permitted. As the Company will cease to be an EGC as of December 31, 2021, the Company will adopt the standard on December 31, 2021, presenting
the initial application of ASC 842 with effect from January 1, 2021 in the annual financial statements. The Company does not expect the
adoption of this ASU to have a significant impact on its condensed consolidated financial statements.
Reclassification
During
the three and six months ended June 30, 2021, the Company identified an immaterial error in the par value of its Common stock impacting
the balance of Common stock and Additional Paid-in-Capital in the Company’s interim and annual financial statements beginning as
of and for the year ended December 31, 2020. The Company corrected the error, which results in an increase of $113 thousand
to Common stock and a corresponding decrease to Additional Paid-in-Capital as of June 30, 2021.
2.
Revenue
recognition
In
May 2014, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers (Topic 606)
(“ASC 606”). ASC 606 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (“ASC 605”).
The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The
Company adopted ASC 606 on January 1, 2019 using the modified retrospective approach. As a result of adopting the new standard, the Company
did not have material changes to the timing of its revenue recognition, nor an impact to the financial statements.
At
contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies performance obligations
for each promise to transfer to the customer a good or service that is distinct. The Company’s performance obligation relating to
its payment processing services revenue is to provide continuous access to the Company’s system to process as much as its customers
require. Since the number or volume of transactions to be processed is not determinable at contract inception, the Company’s payment
processing services consist of variable consideration under a stand-ready service of distinct days of service that are substantially the
same with the same pattern of transfer to the customer. As such, the stand-ready obligation is accounted for as a single-series performance
obligation whereby the variability of the transaction value is satisfied daily as the performance obligation is performed. In addition,
the Company applies the right to invoice practical expedient to payment processing services as each performance obligation is recognized
over time and the amounts invoiced are reflective of the value transferred to the customer.
15
The
Company uses each day as a time-based measure of progress toward satisfaction of the single performance obligation of each contract. This
method most accurately depicts the pattern by which services are transferred to the merchant, as performance depends on the extent of
transactions processed for that merchant on a given day. Likewise, consideration to which the Company expects to be entitled is determined
according to our efforts to provide service each day.
ASC
606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as
permitted by the standard, 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 discussed above, the Company’s core performance obligation
is a stand-ready obligation comprised of a series of distinct days of service, and revenue related to this performance obligation is generally
billed and recognized as the services are performed. The variable consideration allocated to this performance obligation meets the specified
criteria for disclosure exclusion. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater
than one year is not material.
The
Company’s customers are all domestic, small to medium size businesses who are underwritten to the credit standards of the Company
and who each have merchant processing agreements. The Company, through its risk informed bad debt and allowance accounting, appropriately
reserves for any potential risk to its revenue and cash flows. Since the cash is collected for the majority of transactions within a month,
there is not a significant time lag or risk of uncollectibility in the recognition of revenue.
We
do not have any material contract assets or liabilities for any period presented and we did not recognize any impairments of any contract
assets or liabilities for the three or six months ended June 30, 2021 and 2020, respectively.
The
Company generates its revenue from three revenue sources which include Transaction based revenue, Service based fee revenue and Equipment
revenue and are defined below:
Transaction
based revenue
Transaction
based revenue represents revenue generated from transaction fees based on volume, including interchange fees and convenience based fees.
The Company generates transaction based revenue from fees charged to merchants for card-based processing volume and ACH transactions.
Transaction based revenues are recognized on a net basis equal to the full amount billed to the bankcard merchant, net of interchange
fees and assessments. Interchange fees are fees paid to card-issuing banks and assessments paid to payment card networks. Interchange
fees are set by credit card networks based on various factors, including the type of bank card, card brand, merchant transaction processing
volume, the merchant’s industry and the merchant’s risk profile and are recognized at the time merchant transactions are processed.
Transaction based revenue was recorded net of interchange fees and assessments of $123,244
and $227,762
for the three and six months ended June 30, 2021, respectively. Transaction based revenue was recorded net of interchange fees and
assessments of $98,633
and $199,674
for the three and six months ended June 30, 2020, respectively.
Service
based fee revenue
Service
based fee revenue represents revenue generated from recurring and periodic service fees. The Company generates service based fee revenue
from charging a service fee, a fee charged to the client for facilitating bankcard processing, which are recognized on a gross basis.
The Company also generates service based fees related to ACH inclusive of monthly support fees and monthly statement fees.
Equipment
revenue
Equipment
revenue comprises sales of equipment which primarily consists of payment terminals.
16
The
Company generates its revenue from two
segments which are Integrated Solutions and Payment Services and are defined below:
Integrated
Solutions
Our
Integrated Solutions segment represents the delivery of our credit and debit card payment solutions, and to a lesser extent, ACH processing
solutions to customers via integrations with software partners across our strategic vertical markets. Our Integrated Solutions partners
include vertical focused front-end Customer Relationship Management software providers as well as back-end Enterprise Resource Planning
and accounting solutions.
Payment
Services
Our
Payment Services segment represents the delivery of card payment processing solutions to our customers through resellers, as well as ACH,
check, and gift card processing. Card payment processing solutions in this segment do not originate via a software integration but still
utilize Paya’s core technology infrastructure. ACH, check, and gift card processing may or may not be integrated with third-party
software.
The
following table presents the Company's revenue disaggregated by segment and by source as follows:
|
Integrated
Solutions | |||||||||||||||||||||||
|
Three
Months Ended June 30, |
Six
Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
|
Revenue
from contracts with customers |
|||||||||||||||||||||||
|
Transaction
based revenue |
$ | 37,032 | $ | 27,370 | $ | 67,225 | $ | 53,932 | |||||||||||||||
|
Service
based fee revenue |
2,486 | 2,723 | 5,116 | 5,488 | |||||||||||||||||||
|
Equipment
revenue |
46 | 34 | 114 | 96 | |||||||||||||||||||
|
Total revenue |
$ | 39,564 | $ | 30,127 | $ | 72,455 | $ | 59,516 | |||||||||||||||
|
Payment
Services | |||||||||||||||||||||||
|
Three
Months Ended June 30, |
Six
Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
|
Revenue
from contracts with customers |
|||||||||||||||||||||||
|
Transaction
based revenue |
$ | 20,137 | $ | 17,131 | $ | 38,209 | $ | 32,878 | |||||||||||||||
|
Service
based fee revenue |
4,251 | 3,815 | 8,524 | 7,787 | |||||||||||||||||||
|
Equipment
revenue |
32 | 14 | 51 | 45 | |||||||||||||||||||
|
Total revenue |
$ | 24,420 | $ | 20,960 | $ | 46,784 | $ | 40,710 | |||||||||||||||
3.
Business
combination & acquisitions
Business
combination transaction overview
On
October 16, 2020, FinTech consummated the Business Combination pursuant to the terms of the Merger Agreement and acquired all of the issued
and outstanding equity interests in Paya. As of June 30, 2021, there have been no material changes outside the ordinary course of
business related to the Business Combination from the amounts reported within our Annual Report on Form 10-K for the year ended December 31,
2020.
The
Payment Group transaction overview
Paya
purchased The Payment Group, LLC ("TPG" or "The Payment Group") on October 1, 2020 for total cash consideration of $22,270,
which was accounted for as a business combination as defined by ASC 805. The assets acquired and liabilities assumed are recorded at their
respective fair values as of the date of the acquisition with the
17
excess
of the purchase price over those fair values recorded as goodwill. The determination of the fair values of the acquired assets and assumed
liabilities required significant judgment, including estimates impacting the determination of estimated lives of tangible and intangible
assets, and their related fair values. The fair values were determined considering the income, market and cost approaches. The fair value
measurement is based on significant inputs that are not observable in the market and, therefore represents a Level 3 measurement.
As
of June 30, 2021, there have been no material changes outside the ordinary course of business related to the TPG acquisition from
the amounts reported within our Annual Report on Form 10-K for the year ended December 31, 2020. The measurement period remains open,
primarily due to continued refinement of intangibles valuation. In the three months ended March 31, 2021, the Company made measurement
period adjustments totaling $29
to increase goodwill to reflect facts and circumstances in existence as of the effective date of the acquisition. There were no
measurement period adjustments in the three months ended June 30, 2021.
Paragon
Payment Solutions transaction overview
On
April 23, 2021, the Company closed the acquisition of Paragon Payment Solutions (“Paragon”), which was accounted for as a
business combination as defined by ASC 805. The aggregate purchase price paid at closing was $26,624,
consisting of $19,124
in cash and $7,500
of common stock. In addition, up to $5,000
may become payable, subject to the achievement of certain future performance metrics. The assets acquired and liabilities assumed are
recorded at their respective fair values as of the date of the acquisition with the excess of the purchase price over those fair values
recorded as goodwill. The determination of the fair values of the acquired assets and assumed liabilities required significant judgment,
including estimates impacting the determination of estimated lives of tangible and intangible assets, and their related fair values. The
fair values were determined considering the income, market and cost approaches. The fair value measurement is based on significant inputs
that are not observable in the market and, therefore represents a Level 3 measurement.
Goodwill
of $10,109
resulted from the acquisition and is partially deductible for tax purposes. Qualitative factors that contribute to the recognition of
goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible
assets not recognized apart from goodwill consist primarily of the expected revenue synergies. The measurement period for goodwill remains
open and there have been no measurement period adjustments as of June 30, 2021.
Transaction
costs related to the transaction totaled $983
and are recorded in selling, general & administrative expenses on the consolidated statement of income and other comprehensive income
for 2021.
The
following table summarizes the fair values of the assets acquired and liabilities assumed by the Company and resulting goodwill at April
23, 2021:
18
| Assets | |||||
| Current Assets: | |||||
| Cash and cash equivalents | $ | 835 | |||
| Trade receivables | 2,758 | ||||
| Prepaid expenses | 198 | ||||
| Other current assets | 346 | ||||
| Funds held for clients | 3,846 | ||||
| Total current assets | 7,984 | ||||
| Other assets: | |||||
| Property and equipment | 52 | ||||
| Goodwill | 10,109 | ||||
| Intangible assets | 15,890 | ||||
| Other non-current assets | 60 | ||||
| Total assets | $ | 34,095 | |||
| Liabilities | |||||
| Current liabilities: | |||||
|
Trade
payables |
$ | 1,407 | |||
| Accrued liabilities | 1,513 | ||||
| Accrued revenue share | 80 | ||||
|
Other
current liabilities |
58 | ||||
|
Client
funds obligations |
4,266 | ||||
| Total current liabilities | 7,324 | ||||
| Total non-current liabilities | 147 | ||||
| Total liabilities | 7,471 | ||||
| Net assets | $ | 26,624 | |||
4.
Property
and equipment, net
Property
and equipment, net consists of the following:
| June 30, 2021 | December 31, 2020 | ||||||||||
|
Computers and
equipment |
$ | 7,763 | $ | 7,134 | |||||||
|
Internal-use
software |
13,660 | 10,708 | |||||||||
|
Office equipment |
141 | 130 | |||||||||
|
Furniture and
fixtures |
1,357 | 1,320 | |||||||||
|
Leasehold improvements |
1,396 | 1,353 | |||||||||
|
Other equipment |
26 | 26 | |||||||||
|
Total property
and equipment |
24,343 | 20,671 | |||||||||
|
Less: accumulated
depreciation |
(9,930) | (7,866) | |||||||||
|
Total property
and equipment, net |
$ | 14,413 | $ | 12,805 | |||||||
19
Depreciation
and amortization expense, including depreciation of assets under capital leases and internal-use software, totaled $1,075
and $2,113
for the three and six months ended June 30, 2021, respectively. Depreciation and amortization expense, including depreciation and
amortization of assets under capital leases and internal-use software, totaled $990
and $1,970
for the three and six months ended June 30, 2020, respectively.
5.
Goodwill
and other intangible assets, net
Goodwill
recorded in the condensed consolidated financial statements was $216,446
and $206,308
as of June 30, 2021 and December 31, 2020, respectively. There were no indicators of impairment noted in the periods presented.
The
following table presents changes to goodwill for the six months ended June 30, 2021:
| Integrated Solutions | Payments Services | Total | |||||||||||||||
| Balance at December 31, 2020 | $ | 152,408 | $ | 53,900 | $ | 206,308 | |||||||||||
| Measurement period adjustment (Note 3) | 29 | — | 29 | ||||||||||||||
| Acquisitions - Paragon purchase accounting | 7,030 | 3,079 | 10,109 | ||||||||||||||
| Balance at June 30, 2021 | $ | 159,467 | $ | 56,979 | $ | 216,446 | |||||||||||
Intangible
assets other than goodwill at June 30, 2021 included the following:
|
Weighted
Average
Useful
Life
(Years) |
Useful
Lives |
Gross Carrying Amount at June 30, 2021 |
Accumulated
Amortization |
Net Carrying Value as of June 30, 2021 | |||||||||||||||||||||||||
|
Customer Relationships |
9.4 |
5-16
years |
$ | 178,032 | $ | (59,723) | $ | 118,309 | |||||||||||||||||||||
|
Developed Technology |
4.9 |
3-7
years |
35,920 | (16,521) | 19,399 | ||||||||||||||||||||||||
|
Trade name |
25 |
25
years |
7,420 | (446) | 6,974 | ||||||||||||||||||||||||
| 8.4 | $ | 221,372 | $ | (76,690) | $ | 144,682 | |||||||||||||||||||||||
Intangible
assets other than goodwill at December 31, 2020 included the following:
|
Weighted
Average
Useful
Life
(Years) |
Useful
Lives |
Gross Carrying Amount at December 31, 2020 |
Accumulated
Amortization |
Net Carrying Value as of December 31, 2020 | |||||||||||||||||||||||||
|
Customer Relationships |
10.4 |
5-15
years |
$ | 167,158 | $ | (50,477) | $ | 116,681 | |||||||||||||||||||||
|
Developed Technology |
4.2 |
3-5
years |
25,520 | (13,435) | 12,085 | ||||||||||||||||||||||||
|
Trade name |
25 |
25
years |
4,190 | (340) | 3,850 | ||||||||||||||||||||||||
| 8.6 | $ | 196,868 | $ | (64,252) | $ | 132,616 | |||||||||||||||||||||||
Amortization
expense totaled $6,443
and $12,438
for the three and six months ended June 30, 2021, respectively. Amortization expense totaled $5,021
and $10,037
for the three and six months ended June 30, 2020, respectively.
The
following table shows the expected future amortization expense for intangible assets at June 30, 2021:
20
|
Expected
Future Amortization Expense | |||||
| 2021 - remaining | $ | 11,994 | |||
| 2022 | 23,509 | ||||
| 2023 | 23,306 | ||||
| 2024 | 21,686 | ||||
| 2025 | 20,727 | ||||
| Thereafter | 43,460 | ||||
| Total expected future amortization expense | $ | 144,682 | |||
6.
Long-term
debt
On June 25,
2021, Paya Holdings III, LLC, as Parent borrower, Paya, Inc., as borrower (together, the “Borrowers”), and Holdings, each
a wholly-owned subsidiary of the Company, entered into a new senior secured credit agreement (the “Credit Agreement”) with
Credit Suisse AG, Cayman Islands Branch, as administrative agent, collateral agent and L/C issuer (the “Agent”), and the other
lenders and L/C issuers party thereto. The Credit Agreement governs new senior secured credit facilities (the “Senior Secured Credit
Facilities”), consisting of a $250.0
million senior secured term loan facility (the “Term Loan”) and a $45.0
million senior secured revolving credit facility (the “Revolver”). The Revolver includes borrowing capacity available for
letters of credit. Any issuance of letters of credit will reduce the amount available under the Revolver.
The proceeds
from the Term Loan were used (1) to repay, in full, the outstanding loans under the Credit Agreement, dated as of August 1, 2017, among
Holdings, the Borrowers, the financial institutions from time to time party thereto as lenders, and Antares Capital LP, as administrative
agent (as amended from time to time, the “Prior Credit Agreement”), permanently terminate all commitments thereunder, release
and terminate all liens securing such Prior Credit Agreement, and discharge all guarantees thereunder, (2) to pay certain fees and expenses
incurred in connection with the Credit Agreement and the repayment of the Prior Credit Agreement, and (3) for working capital and general
corporate purposes (including capital expenditures and acquisitions permitted thereunder). At closing of the Credit Agreement, the Revolver
was undrawn.
The Term Loan
has a seven-year
maturity and the Revolver has a five-year
maturity. The Credit Agreement provides that the Company may make one or more offers to the lenders, and consummate transactions with
individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or
revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate
class of term loans or revolving commitments.
All of the Borrowers’
obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein. In addition, the obligations
under the Senior Secured Credit Facilities are secured by a pledge of 100%
of the capital stock of certain domestic subsidiaries owned by the Holdings and a security interest in substantially all of the Borrowers’
and the guarantors’ tangible and intangible assets.
At the Borrowers’
option, the Borrowers may request an increase of the commitments under the Revolver or the Term Loan or may add one or more new term loan
facilities or revolving credit facilities in an aggregate amount not to exceed the sum of (x) the greater of 61
million and 100%
of consolidated EBITDA (as defined in the Credit Agreement) plus (y) unused amounts under the Credit Agreement’s general indebtedness
basket, so long as certain conditions, including a consolidated first lien net leverage ratio (as defined in the Credit Agreement) of
not more than 4.25
to 1.00 (on a pari passu basis) or 5.00
to 1.00 (on a junior basis), in each case on a pro forma basis, is satisfied.
Borrowings under
the Senior Secured Credit Facilities bear interest, equal to (i) an ABR rate equal to the greater of (a) the prime rate announced by the
Agent or the highest interest rate published by the Federal Reserve Board as the “bank prime loan” rate, (b) the Federal Reserve
Bank of New York rate plus 0.5%
per annum, and (c) the Eurodollar
21
rate for an
interest period of one-month beginning on such day plus 100
basis points, plus 2.25%
(provided that the Eurodollar rate applicable to the Term Loan shall not be less than 0.75%
per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan shall not be less than 0.75%
per annum), plus 3.25%
.. The Borrowers are also required to pay an unused commitment fee to the lenders under the Revolver equal to 0.50%
with step-downs to 0.375%
and 0.250%
when the Borrowers’ consolidated first lien net leverage ratio is less than or equal to 3.75
to 1.00 and 3.25
to 1.00, respectively. The Borrowers must also pay customary letter of credit fees, including a fronting fee as well as administration
fees.
Commencing December
31, 2021, the Borrowers are required to repay the Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments
equal to 0.25%
of the aggregate principal amount outstanding thereunder, with the balance payable at maturity.
The Credit Agreement
contains a financial covenant that requires Holdings to maintain at the end of each fiscal quarter, commencing with the quarter ending
December 31, 2021, a consolidated first lien net leverage ratio of not more than 6.50
to 1.00 but solely to the extent that the aggregate amount under letters of credit and loans outstanding under the Revolver exceeds 35%
of the aggregate amount of all revolving commitments.
The Credit Agreement
also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of Holdings and its
subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell
assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; and (vi) change their fiscal year. The Credit
Agreement contains customary affirmative covenants and events of default.
Net proceeds
from the issuance of the Term Loan totaled $243.6
million, which includes a debt discount of $1.3
million and related debt issuance costs of $5.1
million. The debt discount and related debt issuance costs are capitalized and amortized over the life of the agreement. Proceeds used
to repay the Prior Credit Agreement totaled $233.8
million, which includes principal payment of $228.1
million, interest payment of $3.4
million and a prepayment penalty of $2.3
million. The prepayment penalty and a write-off of debt issuance costs of $6.2 million
are included in other income (expense) in the condensed consolidated statement of income and other comprehensive income.
The Company’s
long-term debt consisted of the following for the six months ended June 30, 2021 and year ended December 31, 2020:
| June 30, 2021 | December 31, 2020 | ||||||||||
|
Term loan credit
agreement(1) |
$ | 250,000 | $ | 228,677 | |||||||
| Debt issuance costs, net | (5,405) | (6,161) | |||||||||
| Total debt | 244,595 | 222,516 | |||||||||
| Less: current portion of debt | (1,870) | (2,364) | |||||||||
| Total long-term debt | $ | 242,725 | $ | 220,152 | |||||||
(1)
Outstanding borrowings as of December 31, 2020 were under the Prior Credit Agreement. Outstanding borrowings as of June 30, 2021 are under
the new Credit Agreement.
There
were no borrowings outstanding under the Revolver as of June 30, 2021 and December 31, 2020, respectively.
The
current portion of debt was included within other current liabilities on the condensed consolidated balance sheet.
The
Company had $5,405
and $6,161
of unamortized Term Loan debt issuance costs that were netted against the outstanding loan balance and $972
and $457
of unamortized costs associated with the Revolver as of June 30, 2021 and December 31, 2020, respectively. The Revolver debt
issuance costs are recorded in other current and other long
22
term
assets and are amortized over the life of the Revolver. Amortization of the debt issuance costs are included in interest expense in the
condensed consolidated statement of income and other comprehensive income.
Total interest
expense was $3,822
and $7,865
for the three and six months ended June 30, 2021, respectively. This included the long-term debt interest expense of $3,405
and $6,979
for the three and six months ended June 30, 2021, respectively and amortization of debt issuance costs of $186
and $444
for the three and six months ended June 30, 2021.
Total interest
expense was $4,694
and $9,339
for the three and six months ended June 30, 2020, respectively. This included the long-term debt interest expense of $4,241
and $8,337
for the three and six months ended June 30, 2020, and amortization of debt issuance costs of $274
and $549
for the three and six months ended June 30, 2020, respectively.
Annual
principal payments on the Term Loan for the remainder of 2021 and the following years is as follows:
|
Future
Principal
Payments | |||||
| 2021 - remaining | $ | 625 | |||
| 2022 | 2,484 | ||||
| 2023 | 2,460 | ||||
| 2024 | 2,435 | ||||
| 2025 | 2,411 | ||||
| Thereafter | 239,585 | ||||
| Total future principal payments | $ | 250,000 | |||
7.
Derivatives
The
Company has historically utilized derivative instruments to manage risk from fluctuations in interest rates on its term loan and intends
to continue to do so in connection with the new Term Loan. On
February 3, 2021, the Company entered into an interest rate cap agreement with a notional amount of $171,525.
The effective date is March 31, 2021 and terminates on March 31, 2023. The Company paid a premium of $67
for
the right to receive payments if LIBOR rises above the cap rate of 1.00%.
The premium is recorded in other long-term assets on the condensed consolidated balance sheet. The interest rate cap agreement was a derivative
not designated as a hedging instrument for accounting purposes. There were no changes to the interest rate cap in connection with the
entry into the new Credit Agreement. The fair value of the interest rate cap agreement was $93
at June 30, 2021. The Company recognized $15
and $(26)
in other income (expense) for the three months and six months ended June 30, 2021, respectively.
8.
Equity
Common
Stock
The
holders of the Company's common stock, $0.001
par value per share, are entitled to one vote for each share of common stock held. Of the 127,380,384
shares of common stock outstanding at June 30, 2021, a total of 5,681,812
are considered contingently issuable as they require the trading price of our stock to exceed certain thresholds. In addition, should
our share price exceed a series of trading price thresholds, the Company is required to issue up to an additional 14,018,188
shares of common stock, for total contingently issuable shares of 19,700,000.
On
March 17, 2021, the Company priced an offering of 20,000,000
shares of its common stock. The Company and the selling stockholder each agreed to sell 10,000,000
shares of common stock to the underwriters at a price of $12.25
per share. The offering closed and the shares were delivered on March 22, 2021. As a result of the offering, the Company received cash
proceeds of $122,500,
net of transaction costs of $5,736.
23
Paya
Holdings Inc. Omnibus Incentive Plan
On
December 22, 2020, the Company adopted the Paya Holdings Inc. Omnibus Incentive Plan, which allows for issuance of up to 8,800,000
shares of its common stock. Under the Omnibus Incentive Plan, the Company may grant stock options, stock appreciation rights, restricted
shares, performance awards, and other stock-based and cash-based awards to eligible employees, consultants or non-employee directors of
the Company. The Company recognized $790
and $1,241
of share-based compensation for the three and six months ended June 30, 2021, respectively. Share-based compensation is recorded
in selling, general & administrative expenses on the condensed consolidated statement of income and other comprehensive income on
a straight-line basis over the vesting periods. As of June 30, 2021, the Company had two
stock-based compensation award types granted and outstanding: restricted stock units (RSUs) and stock options.
A
summary of RSUs activity under the Omnibus Incentive Plan is as follows for three and six months ended June 30, 2021:
| Three Months Ended June 30, 2021 | |||||||||||||||||
|
Number
of RSUs |
Weighted-Average
Grant Date Fair Value |
Weighted-Average Remaining Term | |||||||||||||||
| Balance at beginning of period balance | 334,090 | $ | 13.77 | 2.8 | |||||||||||||
|
Granted |
43,904 | $ | 11.68 | 1.4 | |||||||||||||
| Balance at end of period balance | 377,994 | $ | 13.53 | 2.6 | |||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||
|
Number
of RSUs |
Weighted-Average
Grant Date Fair Value |
Weighted-Average Remaining Term | |||||||||||||||
| Balance at beginning of period balance | 230,000 | $ | 13.73 | 3.4 | |||||||||||||
|
Granted |
147,994 | $ | 13.22 | 2.6 | |||||||||||||
| Balance at end of period balance | 377,994 | $ | 13.53 | 2.6 | |||||||||||||
On
December 22, 2020, the Company granted 185,000
stock options under the Omnibus Incentive Plan. These options generally vest in five
annual installments, starting on the first anniversary of the grant date and have ten-year
contractual terms. The grant date fair value of the stock options was $0.8 million
based on the use of the Black-Scholes option pricing model with the following assumptions: expected term of 6.5
years; risk-free interest rate of 0.57%;
expected volatility of 29.9%;
dividend yield of 0%;
and fair value at the grant date and weighted-average strike price of $13.73.
On
April 13, 2021, the Company granted 22,500
additional stock options under the Omnibus Incentive Plan. Similar to other stock options granted under the Omnibus Incentive Plan, these
stock options generally vest in five
annual installments, starting on the anniversary of the grant date and have ten-year
contractual terms. The grant date fair value of the stock options was $137.4
thousand based on the use of the Black-Scholes option pricing model with the following assumptions: expected term of 6.5
years; risk-free interest rate of 1.2%;
expected volatility of 53.4%;
dividend yield of 0%;
and fair value at the grant date and weighted-average strike price of $11.68.
The
risk-free interest rate is based on the yield of a zero
coupon United States Treasury Security with a maturity equal to the expected life of the stock option from the date of the grant. The
assumption for expected volatility is based on the historical volatility of a peer group of market participants as the Company has limited
historical volatility. It is the Company's intent to retain all profits for the operations of the business for the foreseeable future,
as such the dividend yield assumption is zero.
The Company applied the simplified method (as described in Staff Accounting Bulletin 110), which is the mid-point between the vesting
date and the end of the contract term in
24
determining
the expected term of the stock options as the Company has limited historical basis upon which to determine historical exercise periods.
All stock options exercised will be settled in common stock.
Class
C Incentive Units
Ultra,
our principal stockholder, provides Class C Incentive Units as part of their incentive plan. As certain employees of the Company were
recipients of the Class C Incentive Units, the related share-based compensation was recorded by the Company.
The
total number of units associated with share-based compensation granted and forfeited during the period from December 31, 2019 to
June 30, 2020 and December 31, 2020 to June 30, 2021 is as follows:
|
Total
Units |
|||||
| December 31, 2019 balance | 43,451,157 | ||||
|
Granted |
1,022,954 | ||||
|
Forfeited |
(818,225) | ||||
| June 30, 2020 balance | 43,655,886 | ||||
| December 31, 2020 balance | 42,881,437 | ||||
|
Granted |
— | ||||
|
Forfeited |
(3,274,532) | ||||
| June 30, 2021 balance | 39,606,905 | ||||
As
of June 30, 2021, 20,725,782
of the units had vested. The units vest on a straight-line basis over the terms of the agreement as described below.
There
were 39,606,905
and 42,881,437
Class C Incentive Units issued as of June 30, 2021 and December 31, 2020, respectively. Of these units outstanding as of June 30,
2021, 39,308,610
units were time vesting units with a five-year
vesting period (vesting date varies by employee contract) and 298,296
units were time vesting units within a one-year
vesting period. Of these units issued as of December 31, 2020, 42,583,437
units were time vesting units with a five-year
vesting period (vesting date varies by employee contract) and 298,296
units were time vesting units with a one-year
vesting period.
The
Company recognized $74
and $333
of share-based compensation related to the Class C Incentive Units, for the three and six months ended June 30, 2021, respectively.
The Company recognized $276
and $668
of share-based compensation related to the Class C Incentive Units, for the three and six months ended June 30, 2020, respectively.
Share-based compensation is recorded in selling, general & administrative expenses on the condensed consolidated statement of income
and other comprehensive income. The Company used the fair value of the awards on the grant date to determine the share-based compensation
expense. To determine the fair value of units issued in 2020, Ultra estimated its enterprise value (“EV”) and evaluated the
value of units based on the distribution waterfall outlined below.
To
determine the fair value of units issued in early 2020, Ultra used a third-party valuation firm to calculate an EV of $574,000
as determined by discounted cash flow, guideline public company, and merger and acquisition valuation methodologies. Ultra used the aggregate
implied equity value based on capital contributions and a Black-Scholes Option Pricing Model utilizing certain assumptions, such as the
risk-free interest rate and equity volatility, to determine total equity value. A risk-free interest rate of 0.3%
was utilized with a 5-year
term. Volatility of 60.0%
was utilized based on comparable companies publicly traded common stock prices and the capital structure of Ultra. A weighted average
cost of capital of 12.0%
was used in the discounted cash flow analysis. Multiples of 13.0x
EV/Last twelve months (“LTM”) earnings before interest taxes depreciation and amortization (“EBITDA”) and 12.5x
EV/2019 EBITDA and 10.5x
EV / 2020 EBITDA were utilized in the guideline public company analysis. Multiples
25
of
13.0x
EV/LTM EBITDA and 12.5x
EV/Next twelve months EBITDA were utilized in the merger and acquisition analysis.
Warrants
The
Company currently has 17,714,945
warrants outstanding as of June 30, 2021. Each warrant entitles the registered holder to purchase one whole share of the Company's
common stock at a price of $11.50
per share. The warrants will expire on October 16, 2025 or earlier upon redemption or liquidation.
Earnings
per Share
Earnings
per share has been computed by dividing net income or loss available to common stockholders by the weighted average number of common shares
outstanding during the respective period. Diluted earnings per share has been computed by dividing net loss available to common stockholders
by the weighted average number of common shares and dilutive potential common shares outstanding during the respective period. Diluted
earnings per share reflect the assumed exercise, settlement, and vesting of all dilutive securities, except when the effect is anti-dilutive.
Diluted earnings per share is calculated as the weighted-average number of common shares outstanding, including the dilutive impact of
the Company’s stock option grants, RSU’s and warrants as determined per the treasury stock method. Potentially dilutive securities
consist of shares issuable upon the exercise of stock options, issuance of earnout shares, exercise of warrants, and vesting of RSU awards.
The
following table provides the summary of anti-dilutive shares excluded from calculation of diluted earnings per share:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Anti-dilutive shares excluded from calculation of diluted EPS: | |||||||||||||||||||||||
| RSUs - granted | 377,994 | — | 377,994 | — | |||||||||||||||||||
| Stock options - granted | 207,500 | — | 207,500 | — | |||||||||||||||||||
| Warrants - outstanding | 17,714,945 | — | 17,714,945 | — | |||||||||||||||||||
| Earnout shares | 19,700,000 | — | 19,700,000 | — | |||||||||||||||||||
| Total anti-dilutive shares | 38,000,439 | — | 38,000,439 | — | |||||||||||||||||||
9.
Income
taxes
The
Company’s effective tax rate for the six months ended June 30, 2021 and June 30, 2020 was 59.81%
and 57.98%,
respectively. The Company’s effective tax rate for the three months ended June 30, 2021 and June 30, 2020 was 54.08%
and 57.71%,
respectively. The Company recorded income tax benefit of $3,139
thousand and $69
thousand for the six months ended June 30, 2021 and June 30, 2020, respectively. The Company recorded income tax benefit of
$3,715
thousand and an income tax expense of $853
thousand for the three months ended June 30, 2021 and June 30, 2020, respectively. The increase in income tax benefit was primarily
attributable to a decrease in pre-tax income and an increase in valuation allowance benefit, partially offset by an increase in transaction
and deferred financing costs anticipated to be non-deductible for tax purposes. The difference in the Company’s effective income
tax rate for the six months ended June 30, 2021 and its federal statutory tax rate of 21% is primarily related to an increase in
the rate due to changes in the valuation allowance, state and local income taxes, and stock compensation, partially offset by the impact
of transaction and deferred financing costs anticipated to be non-deductible for tax purposes.
ASC
740, Income Tax requires deferred tax assets to be reduced by a valuation allowance, if, based on the weight of available positive and
negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In accordance
with this requirement, the Company regularly reviews the recoverability of its deferred tax assets and establishes a valuation allowance
if appropriate. In determining the amount of any required
26
valuation
allowance, the Company considers the history of profitability, projections of future profitability, the reversal of future taxable temporary
differences, the overall amount of deferred tax assets, and the timeframe necessary to utilize the deferred tax assets prior to their
expiration. Based on the weight of all positive and negative quantitative and qualitative evidence available as outlined above, management
has concluded that it is more likely than not that the Company will not be able to realize a portion of its federal and state deferred
tax assets in the foreseeable future and has recorded a valuation allowance of $9,797
thousand and $9,459
thousand against these assets as of June 30, 2021, and December 31, 2020, respectively. The change in the valuation allowance
is predominantly as a result of limitations on the utilization of certain deferred tax assets brought over as part of the Paragon acquisition.
There
are no material uncertain tax positions as of June 30, 2021.
10.
Fair
Value
The
Company makes recurring fair value measurements for derivative instruments. Refer to Note 7.
Derivatives
for additional information.
There
were no transfers into or out of Level 3 during the six months ended June 30, 2021 or the year ended December 31, 2020.
Other
financial instruments not measured at fair value on the Company’s condensed consolidated balance sheets at June 30, 2021 and
December 31, 2020 include cash, trade receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses
and other current liabilities as their estimated carrying values reasonably approximate their fair value as reported on the condensed
consolidated balance sheets. The Company’s debt obligations are carried at amortized cost less debt issuance costs. Amortized cost
approximates fair value.
11.
Commitments
and contingencies
Operating
leases
The
Company leases certain property and equipment for various periods under noncancellable operating leases. The
Company’s future minimum lease payments under such agreements at June 30, 2021 were approximately:
| Year ending December 31, | (In thousands) | ||||
| 2021 - remaining | $ | 800 | |||
| 2022 | 1,611 | ||||
| 2023 | 1,595 | ||||
| 2024 | 1,335 | ||||
| 2025 | 899 | ||||
| Thereafter | 609 | ||||
| Total | $ | 6,849 | |||
Rental
expense was $471
and $883
for the three and six months ended June 30, 2021, respectively. Rental expense was $442
and $842
for the three and six months ended June 30, 2020, respectively.
Liabilities
under Tax Receivable Agreement
The
Company is party to a Tax Receivable Agreement (the “TRA”) under which we are contractually committed to pay Ultra 85%
of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions.
The Company is not obligated to make any payments under the TRA until the tax benefits associated with the transaction that gave rise
to the payment are realized. Amounts payable under the TRA are contingent upon, among other things, generation of future taxable income
over the term of the TRA. If the Company does not generate sufficient taxable income in the aggregate over the term of the TRA to utilize
the tax
27
benefits,
then the Company would not be required to make the related TRA payments. As of June 30, 2021 and December 31, 2020, the Company
recognized $19,179
and $19,627
of liabilities, respectively, relating to our obligations under the TRA, based on our estimate of the probable amount of future benefit.
The total potential payments to be made under the TRA, assuming sufficient future taxable income to realize 100%
of the tax benefits is $31,970.
Any changes in the value of the TRA liability are recorded in other income (expense) on the condensed consolidated statements of income
and other comprehensive income.
Legal
and regulatory matters
From
time to time the Company is a party to legal proceedings arising in the ordinary course of business. In accordance with U.S. GAAP, the
Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel,
and other information and events pertaining to a particular case.
12.
Related
party transactions
Related
party transactions – Antares
Antares
Capital LP is an investor in GTCR, LLC and was the administrative agent and a lender under the Prior Credit Agreement. As such, Antares
is considered a related party. The Company recorded interest expense of $3,267
and $6,841
in expense on the condensed consolidated statement of income and other comprehensive income for the three and six months ended June 30,
2021, respectively, related to the Prior Credit Agreement. The Company recorded interest expense of $4,241
and $8,337
in expense on the condensed consolidated statement of income and other comprehensive income for the three and six months ended June 30,
2020, respectively, related to the Prior Credit Agreement. On June 25, 2021, the Company repaid the remaining principal and interest on
the Prior Credit agreement and as such, Antares is no longer the administrative agent or a lender under the Company's current Credit Agreement.
See note 6 for further details.
13.
Defined
contribution plan
The
Company maintains a 401(k) Plan as a defined contribution retirement plan for all eligible employees. The 401(k) Plan provides for tax-deferred
contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. The
plan enrolls employees immediately with no age or service requirement. The Company matches 50%
of employees’ contributions up to the first 7%
contributed. Matching contributions made to an employee’s account are 100% vested as of the date of contribution. The 401(k) Plan
employer match was $204
and $447
in the three and six months ended June 30, 2021, respectively. The 401(k) Plan employer match was $190
and $422
in the three and six months ended June 30, 2020, respectively.
14.
Segments
The
Company determines its operating segments based on ASC 280, Segment
Reporting.
The Company reorganized its segments in 2020. Based on the manner in which the chief operating decision making group (“CODM”)
manages and monitors the performance of the business, the Company currently has two
operating and reportable segments: Integrated Solutions and Payment Services. All prior periods, are presented based on the current segment
structure.
More
information about our two
reportable segments:
•Integrated
Solutions -
Our Integrated Solutions segment represents the delivery of our credit and debit card payment solutions, and to a lesser extent, ACH processing
solutions to customers via integrations with software partners across our strategic vertical markets. Our Integrated Solutions partners
include vertical focused front-end Customer Relationship Management software providers as well as back-end Enterprise Resource Planning
and accounting solutions.
28
•Payment
Services -
Our Payment Services segment represents the delivery of card payment processing solutions to our customers through resellers, as well
as ACH, check, and gift card processing. Card payment processing solutions in this segment do not originate via a software integration
but still utilize Paya’s core technology infrastructure. ACH, check, and gift card processing may or may not be integrated with
third-party software.
All
segment revenue is from external customers.
The
following table presents total revenues and segment gross profit, excluding depreciation and amortization, for each reportable segment
and includes a reconciliation of segment gross profit to total U.S. GAAP operating profit, excluding depreciation and amortization, by
including certain corporate-level expenses.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Integrated Solutions | $ | 39,564 | $ | 30,127 | $ | 72,455 | $ | 59,516 | |||||||||||||||
| Payment Services | 24,420 | 20,960 | 46,784 | 40,710 | |||||||||||||||||||
| Total Revenue | 63,984 | 51,087 | 119,239 | 100,226 | |||||||||||||||||||
| Integrated Solutions gross profit | 21,152 | 16,305 | 39,352 | 31,789 | |||||||||||||||||||
| Payment Services gross profit | 12,633 | 9,871 | 23,551 | 19,028 | |||||||||||||||||||
| Total segment gross profit | 33,785 | 26,176 | 62,903 | 50,817 | |||||||||||||||||||
| Selling, general & administrative expenses | (20,846) | (14,005) | (37,760) | (29,585) | |||||||||||||||||||
| Depreciation and amortization | (7,519) | (6,011) | (14,551) | (12,007) | |||||||||||||||||||
| Interest expense | (3,822) | (4,694) | (7,865) | (9,339) | |||||||||||||||||||
| Other income (expense) | (8,467) | 12 | (7,975) | (5) | |||||||||||||||||||
| Income (loss) before income taxes | $ | (6,869) | $ | 1,478 | $ | (5,248) | $ | (119) | |||||||||||||||
Segment
assets are not included in the CODM reporting package as they are not considered as part of the CODM’s allocation of resources.
The Company does not have any revenue or material assets outside the United States. There were no single customers from either operating
segment that represented 10% or more of the Company’s condensed consolidated revenues for the six months ended June 30, 2021
and 2020, respectively.
29
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the
significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Paya Holdings
Inc. and is intended to help the reader understand Paya Holdings Inc., our operations and our present business environment.
This discussion should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included
in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and the unaudited condensed
consolidated
financial statements and notes thereto included in Part I, Item 1 within this Quarterly Report on Form 10-Q. References to “we,”
“us,” “our”, “Paya”, “Paya Holdings”, or “the Company” refer to Paya Holdings
Inc. and its consolidated subsidiaries.
Overview
We
are a leading independent integrated payments platform providing card, ACH, and check payment processing solutions via software to middle-market
businesses in the United States. Our solutions integrate with customers’ core business software to enable payments acceptance, reconcile
invoice detail, and post payment information to their core accounting system. In this manner, we enable our customers to collect revenue
from their B2C and B2B customers with a seamless experience and high-level of security across payment types.
Recent
Developments
On
June 25, 2021, the Company entered into a new senior secured credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative
agent, collateral agent and L/C issuer (the “Agent”), and the other lenders and L/C issuers party thereto. The Company repaid
in full all outstanding indebtedness and terminated all commitments and obligations under its Credit Agreement, dated as of August 1,
2017, among Holdings, the Borrowers, the financial institutions from time to time party thereto as lenders, and Antares Capital LP, as
administrative agent.
The
proceeds from the New Credit Agreement were used to repay, in full, the outstanding loans under the Credit Agreement, dated as of August
1, 2017, among Holdings, the Borrowers, the financial institutions from time to time party thereto as lenders, and Antares Capital LP,
as administrative agent, and to pay certain fees and expenses incurred in connection with the Credit Agreement and the repayment of the
Prior Credit Agreement.
On
April 23, 2021, the Company closed the acquisition of Paragon Payment Solutions (“Paragon”). The aggregate purchase price
paid at closing was $26.6 million, consisting of $19.124 million in cash and $7.5 million of common stock. In addition,
up to $5 million may become payable, subject to the achievement of certain future performance metrics.
Impact
of the COVID-19 Pandemic
The
COVID-19 pandemic and subsequent shelter-in-place and social distancing policies, as well as the broader economic decline, had a material
impact on our business in 2020 and continued to have an adverse effect in the first six months of 2021. Many of our customers continue
to experience a decline in transaction volumes from pre COVID-19 levels. However, given many of our customers leverage our payment technology
to accept transactions in a card-not-present environment, their business operations were not impacted dramatically. Further, most of our
recurring or contractual transactions are B2B and not tied to consumer discretionary spend and, as such, were not significantly impacted.
This was evident by stable or growing volumes in our B2B Goods & Services, Government & Utilities, and Non-Profit verticals. Lastly,
we benefited from our lack of concentration in end markets which saw steep declines, such as restaurants, travel, hospitality, and brick-and-mortar
retail.
In
response to COVID-19, we took precautionary measures to ensure the safety of our employees, support our customers, and mitigate the impact
on our financial position and operations. We seamlessly implemented remote working capabilities for our entire organization with minimal
disruption to our operations or key operating
30
performance
indicators. We also identified opportunistic expense reductions which increased operating efficiencies and provided additional profitability
in the period.
While
our business has been impacted by the COVID-19 pandemic, we have demonstrated resilience due to our portfolio of attractive, less-cyclical
end markets. The impact that COVID-19 will have on our consolidated results of operations for the remainder of 2021 continue to remain
uncertain. While we have not seen a meaningful degradation in new customer enrollment or an increase in existing customer attrition as
a result of COVID-19, it is possible that those business trends change if economic hardship across the country forces new or additional
business closures or other detrimental actions. We will continue to evaluate the nature and extent of these potential impacts to our business,
consolidated results of operations, and liquidity.
Factors
Affecting Results of Operations
A number of
factors impact our business, results of operations, financial condition, and forecasts, including, but not limited to, the following:
•Increased
adoption of integrated payments solutions. We generate revenue through volume-based rates and per item fees attributable to payment transactions
between our customers and their customers. We expect to grow our customer base by bringing on new software partners, continuing to sell
payment capabilities to customers of our existing software partners not yet leveraging our payment integrations, and by adding integrations
within existing multi-platform software partners to access additional customer bases. Further, we expect to benefit from the natural growth
of our partners who are typically growing franchises within their respective verticals.
•Acquisition,
retention, and growth of software partnerships. Paya leverages a partner-first distribution network to grow our client base and payment
volume. Continuing to innovate and deliver new commerce products and wraparound services is critical to our ability to attract, retain,
and grow relationships with software partners in our Paya verticals and adjacent markets.
•Growth
in customer life-time value. We benefit from, and aid-in, the growth of online electronic payment transactions to our customers. This
is dependent on the sales growth of the customers’ businesses, the overall adoption of online payment methods by their customer
bases, and the adoption of our additional integrated payment modules such as our proprietary ACH capabilities. Leveraging these solutions
helps drive increased customer retention, as well as higher volume and revenue per customer.
•Pursuit
and integration of strategic acquisitions. We look to opportunistically make strategic acquisitions to enhance our scale, expand into
new verticals, add product capabilities, and embed payments in vertical software. These acquisitions are intended to increase the long-term
growth of the business, while helping us achieve greater scale, but may increase operating expenses in the short-term until full synergies
are realized. During October 2020, we completed the acquisition of The Payment Group (“TPG”). We continue to integrate TPG’s
online billing and software applications into Paya Connect. This acquisition has enhanced our suite of integration tools, as well as the
commerce solutions Paya Connect is able to provide to Paya’s partners and their clients. In April 2021, we completed the acquisition
of Paragon Payment Solutions, which further expands our position within the non-profit and healthcare verticals.
•Economic
conditions. Changes in macro-level consumer spending trends, including those related to COVID-19, could affect the amount of volumes processed
on our platform, thus resulting in fluctuations to our revenue streams.
Basis
of Presentation
We have presented
results of operations, including the related discussion and analysis, for the following periods:
•the
three months ended June 30, 2021 compared to the three months ended June 30, 2020; and
31
•the
six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Key
Components of Revenue and Expenses
The
period to period comparisons of our results of operations have been prepared using the historical periods included in our condensed consolidated
financial statements. The following discussion should be read in conjunction with the condensed consolidated financial statements and
related notes included elsewhere in this document.
Revenue
The
Company’s business model provides payment services, credit and debit card processing, and ACH processing to customers through enterprise
or vertically focused software partners, direct sales, reseller partners, other referral partners, and a limited number of financial institutions.
The Company recognizes processing revenues at the time customer transactions are processed and periodic fees over the period the service
is performed. Transaction based revenue represents revenue generated from transaction fees based on volume and are recognized on a net
basis. Service based fee revenue is generated from charging a service fee, a fee charged to the client for facilitating bankcard processing,
which are recognized on a gross basis.
Cost
of services
Cost
of services includes card processing costs, ACH costs, other fees paid to card networks, and equipment expenses directly attributable
to payment processing and related services to customers. These costs are recognized as incurred. Cost of services also includes revenue
share amounts paid to reseller and referral partners and are calculated monthly based on monthly customer activity. These expenses are
recognized as transactions are processed. Accrued revenue share represents amounts earned during the month but not yet paid at the end
of the period.
Selling
general & administrative
Selling,
general and administrative expenses consist primarily of salaries, stock based compensation expense, wages, commissions, marketing costs,
professional services costs, technology costs, occupancy costs of leased space, and bad debt expense.
Depreciation
& Amortization
Depreciation
and amortization consist primarily of amortization of intangible assets, including customer relationships, internal-use software, acquired
customer lists, trade names, and to a lesser extent, depreciation on our investments in property, equipment, and software. We depreciate
and amortize our assets on a straight-line basis. These lives are 3 years for computers and equipment and acquired internal-use software,
5 years for furniture, fixtures, and office equipment, and the lesser of the asset useful life or remaining lease term for leasehold improvements.
Repair and maintenance costs are expensed as incurred and included in selling, general and administrative expenses on the condensed consolidated
statements of income and other comprehensive income. Customer lists are amortized over a period of 5-15 years depending on the intangible,
developed technology 3-5 years, and trade names over 25 years.
Results
of Operations
The
period to period comparisons of our results of operations have been prepared using the historical periods included in our audited consolidated
financial statements. The following discussion should be read in conjunction with the audited consolidated financial statements and related
notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and the unaudited condensed consolidated
financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
32
Three
Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
| (in millions) | Three
Months Ended June 30, |
Change | |||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| Revenue | $ | 63.9 | $ | 51.1 | $ | 12.8 | 25.2 | % | |||||||||||||||
| Cost of services exclusive of depreciation and amortization | (30.2) | (24.9) | (5.3) | (21.2 | %) | ||||||||||||||||||
| Selling, general & administrative expenses | (20.8) | (14.1) | (6.7) | (48.8 | %) | ||||||||||||||||||
| Depreciation and amortization | (7.5) | (6.0) | (1.5) | (25.1 | %) | ||||||||||||||||||
| Income from operations | 5.4 | 6.1 | (0.7) | (12.0 | %) | ||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | (3.8) | (4.7) | 0.9 | 18.6 | % | ||||||||||||||||||
| Other income (expense) | (8.4) | — | (8.4) | NM | |||||||||||||||||||
| Total other expense | (12.2) | (4.7) | (7.5) | 159.6 | % | ||||||||||||||||||
| Income (loss) before income taxes | (6.8) | 1.4 | (8.2) | NM | |||||||||||||||||||
| Income tax benefit (expense) | 3.7 | (0.8) | 4.5 | NM | |||||||||||||||||||
| Net income (loss) | $ | (3.1) | $ | 0.6 | $ | (3.7) | NM | ||||||||||||||||
| NM - not meaningful | |||||||||||||||||||||||
Revenue
Total
revenue was $63.9 for the three months ended June 30, 2021 as compared to total revenue of $51.1 for the three months ended June 30,
2020. The increase of $12.8, or 25.2%, was driven by a $9.5 or 31.3% increase in Integrated Solutions and $3.4 or 16.5% increase in Payment
Services for the three months ended June 30, 2021.
Cost
of services exclusive of depreciation and amortization
Cost
of services increased by $5.3, or 21.2%, to $30.2 for the three months ended June 30, 2021 from $24.9 for the three months ended
June 30, 2020. The increase was driven by revenue growth and higher processing costs in Integrated Solutions and offset by lower
revenue share in Payment Services.
Selling,
general & administrative
Selling,
general and administrative expenses increased by $6.7, or 48.8%, to $20.8 for the three months ended June 30, 2021 from $14.1 for
the three months ended June 30, 2020. The increase is primarily due to a $2.7 increase in compensation and benefits, $0.8 in professional
services including accounting and consulting fees, $0.7 in insurance, $0.6 in technology related costs and $0.8 from contingent tax liability.
Depreciation
and amortization
Depreciation
and amortization increased by $1.5, or 25.1%, to $7.5 for the three months ended June 30, 2021 as compared to $6.0 for the three
months ended June 30, 2020. The increase is primarily due to $0.8 in customer list amortization from additional customer list acquisitions
in the three months ended June 30, 2021, $0.5 in technology amortization from the TPG acquisition, and $0.3 in internal-use software
amortization. This was offset by a decrease in depreciation expense of $0.2 in the three months ended June 30, 2021.
33
Interest
Expense
Interest
expense decreased by $0.9, or 18.6%, to $3.8 for the three months ended June 30, 2021 from $4.7 for the three months ended June 30,
2020, primarily due to lower LIBOR based interest rates on the Revolver and Term Loan credit facilities.
Other
expense
Other
expense of $8.4 for the three months ended June 30, 2021 is primarily due to a prepayment penalty of $2.3 and write off of debt issuance
costs of $6.2 related to our Prior Credit Agreement.
Six
Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
| (in millions) | Six
Months Ended June 30, |
Change | |||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| Revenue | $ | 119.2 | $ | 100.2 | $ | 19.0 | 19.0 | % | |||||||||||||||
| Cost of services exclusive of depreciation and amortization | (56.3) | (49.4) | (6.9) | (14.0 | %) | ||||||||||||||||||
| Selling, general & administrative expenses | (37.8) | (29.6) | (8.2) | (27.6 | %) | ||||||||||||||||||
| Depreciation and amortization | (14.5) | (12.0) | (2.5) | (21.2 | %) | ||||||||||||||||||
| Income from operations | 10.6 | 9.2 | 1.4 | 14.8 | % | ||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | (7.8) | (9.3) | 1.5 | 15.8 | % | ||||||||||||||||||
| Other income (expense) | (8.0) | — | (8.0) | NM | |||||||||||||||||||
| Total other expense | (15.8) | (9.3) | (6.5) | (69.5 | %) | ||||||||||||||||||
| Income (loss) before income taxes | (5.2) | (0.1) | (5.1) | NM | |||||||||||||||||||
| Income tax benefit (expense) | 3.1 | 0.1 | 3.0 | NM | |||||||||||||||||||
| Net income (loss) | $ | (2.1) | — | $ | (2.1) | NM | |||||||||||||||||
| NM - not meaningful | |||||||||||||||||||||||
Revenue
Total
revenue was $119.2 for the six months ended June 30, 2021 as compared to total revenue of $100.2 for the six months ended June 30,
2020. The increase of $19.0, or 19.0%, was driven by a $13.0 or 21.7% increase in Integrated Solutions and $6.1 or 14.9% increase in Payment
Services for the six months ended June 30, 2021.
Cost
of services exclusive of depreciation and amortization
Cost
of services increased by $6.9, or 14.0%, to $56.3 for the six months ended June 30, 2021 from $49.4 for the six months ended June 30,
2020. The increase was driven by higher revenue share related to revenue growth in Integrated Solutions and Payment Services and higher
processing costs in Integrated Solutions.
Selling,
general & administrative
Selling,
general and administrative expenses increased by $8.2, or 27.6%, to $37.8 for the six months ended June 30, 2021 from $29.6 for the
six months ended June 30, 2020. The increase is primarily due to a $2.6 increase in
34
compensation
and benefits, $1.3 in professional services including accounting and consulting fees, $1.2 in insurance, $0.9 in technology related costs
and $0.8 from contingent tax liability.
Depreciation
and amortization
Depreciation
and amortization increased by $2.5, or 21.2%, to $14.5 for the six months ended June 30, 2021 as compared to $12.0 for the six months
ended June 30, 2020. The increase is primarily due to $1.4 in customer list amortization from additional customer list acquisitions
in the three months ended June 30, 2021, $0.8 in technology amortization from the TPG acquisition, and $0.6 in internal-use software
amortization. This was offset by a decrease in depreciation expense of $0.4 in the six months ended June 30, 2021.
Interest
Expense
Interest
expense decreased by $1.5, or 15.8%, to $7.8 for the six months ended June 30, 2021 from $9.3 for the six months ended June 30,
2020, primarily due to lower LIBOR based interest rates on the Revolver and Term Loan credit facilities.
Other
expense
Other
expense of $8.0 for the six months ended June 30, 2021 is primarily due to a prepayment penalty of $2.3 and write off of debt issuance
costs of $6.2 related to our Prior Credit Agreement offset by gain on the change in value of the Tax Receivable Agreement liability.
Key
Performance Indicators and Non-GAAP Financial Measures
Our management
uses a variety of financial and operating metrics to evaluate our business, analyze our performance, and make strategic decisions. We
believe these metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating
our operating results in the same manner as management. However, some of these measures are not financial measures calculated in accordance
with U.S. GAAP and should not be considered as substitutes for financial measures that have been calculated in accordance with U.S. GAAP.
We primarily review the following key performance indicators and non-GAAP measures when assessing our performance:
Revenue
(U.S. GAAP)
We analyze our
revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance. We
believe that revenues are a meaningful indicator of the demand and pricing for our services. Key drivers to change in revenues are primarily
dollar volume, basis point spread earned, and number of transactions processed in a given period.
Payment
Volume
Payment volume
is defined as the total dollar amount of all payments processed by our customers through our services. Volumes for the three and six months
ended June 30, 2021 and June 30, 2020 are shown in the table below:
35
| Three
Months Ended June 30, |
Change | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Amount | % | ||||||||||||||||||||||
| Payment volume | $ | 10,684.8 | $ | 7,809.5 | $ | 2,875.3 | 36.8 | % | ||||||||||||||||||
The
increase in volume for the three months ended June 30, 2021 was primarily driven by continued strong growth in Payment Services,
specifically ACH, as well as from growth in Integrated Solutions.
| Six
Months Ended June 30, |
Change | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Amount | % | ||||||||||||||||||||||
| Payment volume | $ | 20,147.1 | $ | 15,434.2 | $ | 4,712.9 | 30.5 | % | ||||||||||||||||||
The
increase in volume for the six months ended June 30, 2021 was primarily driven by continued strong growth in Payment Services, specifically
ACH, as well as from growth in Integrated Solutions.
Adjusted
EBITDA
Adjusted EBITDA
is a non-GAAP financial measure that represents earnings before interest and other expense, income taxes, depreciation, and amortization
(“EBITDA”), and further adjustments to EBITDA to exclude certain non-cash items and other non-recurring items that we believe
are not indicative of ongoing operations to come to Adjusted EBITDA.
We disclose
EBITDA, Adjusted EBITDA, and Adjusted Net Income (as defined below) in this report because these non-GAAP measures are key measures used
by us to evaluate our business, measure our operating performance and make strategic decisions. We believe EBITDA, Adjusted EBITDA, and
Adjusted Net Income are useful for investors and others in understanding and evaluating our results of operations in the same manner as
we do. However, EBITDA, Adjusted EBITDA, and Adjusted Net Income are not financial measures calculated in accordance with U.S. GAAP and
should not be considered as a substitute for net income, income before income taxes, or any other operating performance measure calculated
in accordance with U.S. GAAP. Using these non-GAAP financial measures to analyze our business would have material limitations because
the calculations are based on the subjective determination of management regarding the nature and classification of events and circumstances
that investors may find significant. In addition, although other companies in our industry may report measures titled EBITDA, Adjusted
EBITDA and Adjusted Net Income or similar measures, such non-GAAP financial measures may be calculated differently from how we calculate
non-GAAP financial measures, which reduces their overall usefulness as comparative measures. Because of these limitations, you should
consider EBITDA, Adjusted EBITDA, and Adjusted Net Income alongside other financial performance measures, including net income and our
other financial results presented in accordance with U.S. GAAP. The following table presents a reconciliation of net income (loss) to
EBITDA and Adjusted EBITDA for each of the periods indicated:
36
Three
and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020
| Three
Months Ended June 30, |
Six
Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net income (loss) | $ | (3.1) | $ | 0.6 | $ | (2.1) | $ | — | ||||||||||||||||||
| Depreciation & amortization | 7.5 | 6.0 | 14.5 | 12.0 | ||||||||||||||||||||||
| Tax expense (benefit) | (3.7) | 0.8 | (3.1) | (0.1) | ||||||||||||||||||||||
|
Interest and
other expense(a) |
12.2 | 4.7 | 15.8 | 9.3 | ||||||||||||||||||||||
| EBITDA | 12.9 | 12.1 | 25.1 | 21.2 | ||||||||||||||||||||||
|
Transaction-related
expenses(b) |
0.7 | 0.4 | 1.5 | 0.4 | ||||||||||||||||||||||
|
Stock based
compensation(c) |
0.9 | 0.3 | 1.6 | 0.7 | ||||||||||||||||||||||
|
Restructuring
costs(d) |
0.8 | 0.6 | 1.0 | 1.2 | ||||||||||||||||||||||
|
Discontinued
service costs(e) |
— | — | 0.2 | — | ||||||||||||||||||||||
|
Management fees
and expenses(f) |
— | 0.4 | — | 0.6 | ||||||||||||||||||||||
|
Business combination
costs(g) |
0.3 | — | 0.6 | — | ||||||||||||||||||||||
|
Contingent non-income
tax liability(h) |
0.8 | — | 0.8 | — | ||||||||||||||||||||||
|
Other costs(i) |
0.4 | 0.4 | 0.8 | 0.7 | ||||||||||||||||||||||
| Total adjustments | 3.9 | 2.1 | 6.5 | 3.6 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 16.8 | $ | 14.2 | $ | 31.6 | $ | 24.8 | ||||||||||||||||||
(a)Represents
ordinary interest expense as well as one-time fees including the write-off of debt issuance costs and an early termination penalty.
(b)Represents
professional service fees related to mergers and acquisitions such as legal fees, consulting fees, accounting advisory fees, and other
costs.
(c)Represents
non-cash charges
associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring
expense in our business and an important part of our compensation strategy
(d)Costs
associated with restructuring plans designed to streamline operations and reduce costs including costs associated with the relocation
of headquarters from Reston, VA to Atlanta, GA, certain staff restructuring charges, including severance, and acquisition related restructuring
charges in connection with the Paragon transaction.
(e)Represents
costs incurred to retire certain tools, applications and services that are no longer in use.
(f)Represents
advisory fees that we will not be required to pay going forward.
(g)Represents
business combination costs.
(h)Represents
non recurring contingent non-income tax liability.
(i)Represents
non-operational gains or losses, non-standard project expense, non-operational legal expense and legal debt refinancing expense.
Adjusted
Net Income
Adjusted
Net Income is a non-GAAP financial measure that represents net income prior to amortization and further adjustments to exclude certain
non-cash items and other non-recurring items that management believes are not indicative of ongoing operations to come to Adjusted Net
Income.
37
Three
and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Net income (loss) | $ | (3.1) | $ | 0.6 | $ | (2.1) | $ | — | ||||||||||||||||||
| Amortization add back | 6.4 | 5.1 | 12.4 | 10.1 | ||||||||||||||||||||||
|
Loss on debt
extinguishment(a) |
8.5 | — | 8.5 | — | ||||||||||||||||||||||
|
Transaction-related
expenses(b) |
0.7 | 0.4 | 1.5 | 0.4 | ||||||||||||||||||||||
|
Stock based
compensation(c) |
0.9 | 0.3 | 1.6 | 0.7 | ||||||||||||||||||||||
|
Restructuring
costs(d) |
0.8 | 0.6 | 1.0 | 1.2 | ||||||||||||||||||||||
|
Discontinued
service costs(e) |
— | — | 0.2 | — | ||||||||||||||||||||||
|
Management fees
and expenses(f) |
— | 0.4 | — | 0.6 | ||||||||||||||||||||||
|
Business combination
costs(g) |
0.3 | — | 0.6 | — | ||||||||||||||||||||||
|
Contingent non-income
tax liability(h) |
0.8 | — | 0.8 | — | ||||||||||||||||||||||
|
Other costs(i) |
0.4 | 0.4 | 0.8 | 0.7 | ||||||||||||||||||||||
| Total adjustments | 18.8 | 7.2 | 27.4 | 13.7 | ||||||||||||||||||||||
|
Tax effect of
adjustments(j) |
(2.0) | — | (2.4) | — | ||||||||||||||||||||||
| Adjusted Net Income | $ | 13.7 | $ | 7.8 | $ | 22.9 | $ | 13.7 | ||||||||||||||||||
(a)Represents
one-time debt refinancing expenses for the prepayment penalty and write-off of debt issuance costs.
(b)Represents
professional service fees related to mergers and acquisitions such as legal fees, consulting fees, accounting advisory fees, and other
costs.
(c)Represents
non-cash charges
associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring
expense in our business and an important part of our compensation strategy.
(d)Costs
associated with restructuring plans designed to streamline operations and reduce costs including costs associated with the relocation
of headquarters from Reston, VA to Atlanta, GA, certain staff restructuring charges, including severance, and acquisition related restructuring
charges in connection with the Paragon transaction.
(e)Represents
costs incurred to retire certain tools, applications and services that are no longer in use.
(f)Represents
advisory fees that we will not be required to pay going forward.
(g)Represents
business combination costs.
(h)Represents
non recurring contingent non-income tax liability.
(i)Represents
non-operational gains or losses, non-standard project expense, non-operational legal expense and legal debt refinancing expense.
(j)Represents
pro forma income tax adjustment effect, at the anticipated blended rate, for all items expected to have a cash tax impact (i.e. items
that were not originally recorded through goodwill). Any impact to the valuation allowance assessment for these adjustments has not been
considered. The Company has not applied a pro forma tax adjustment in 2020 due to the different ownership structure.
Segments
We provide our
services through two reportable segments 1) Integrated Solutions and 2) Payment Services. The Company’s reportable segments are
the same as the operating segments.
More
information about our two reportable segments:
38
•Integrated
Solutions
— Our Integrated Solutions segment represents the delivery of our credit and debit card payment solutions, and to a lesser extent,
ACH processing solutions to customers via integrations with software partners across our strategic vertical markets. Our Integrated Solutions
partners include vertical focused front-end Customer Relationship Management software providers as well as back-end Enterprise Resource
Planning and accounting solutions.
•Payment
Services —
Our Payment Services segment represents the delivery of card payment processing solutions to our customers through resellers, as well
as ACH, check, and gift card processing. Card payment processing solutions in this segment do not originate via a software integration
but still utilize Paya’s core technology infrastructure. ACH, check, and gift card processing may or may not be integrated with
third-party software.
All segment
revenue is from external customers.
The following
table shows our segment income statement data and selected performance measures for the periods indicated:
Three
Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
| Three
Months Ended June 30, |
Change | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Amount | % | ||||||||||||||||||||||
| Integrated Solutions | ||||||||||||||||||||||||||
| Segment revenue | $ | 39.6 | $ | 30.1 | $ | 9.5 | 31.3 | % | ||||||||||||||||||
|
Segment gross
profit(1) |
$ | 21.2 | $ | 16.3 | $ | 4.9 | 29.7 | % | ||||||||||||||||||
| Segment gross profit margin | 53.5 | % | 54.1 | % | ||||||||||||||||||||||
| Payment Services | ||||||||||||||||||||||||||
| Segment revenue | $ | 24.4 | $ | 21.0 | $ | 3.4 | 16.5 | % | ||||||||||||||||||
|
Segment gross
profit(1) |
$ | 12.7 | $ | 9.9 | $ | 2.8 | 28.0 | % | ||||||||||||||||||
| Segment gross profit margin | 52.0 | % | 47.1 | % | ||||||||||||||||||||||
(1)Segment
gross profit is revenue less cost of services excluding depreciation and amortization.
Integrated
Solutions
Revenue
for the Integrated Solutions segment was $39.6 for the three months ended June 30, 2021 as compared to $30.1 for the three months
ended June 30, 2020. The increase of $9.5 was primarily driven by Integrated Card and government growth.
Gross
profit for the Integrated Solutions segment was $21.2 resulting in a gross profit margin of 53.5% for the three months ended June 30,
2021 as compared to $16.3 with a gross profit margin of 54.1% for the three months ended June 30, 2020. The increase of $4.9 in segment
gross profit was primarily driven by revenue growth partially offset by higher revenue share related to revenue growth and higher processing
costs.
Payment
Services
Revenue
for the Payment Services segment was $24.4 for the three months ended June 30, 2021 as compared to $21.0 for the three months ended
June 30, 2020. The increase of $3.4 was driven by ACH growth and non-integrated card growth.
39
Gross
profit for the Payment Services segment was $12.7 resulting in a gross profit margin of 52.0% for the three months ended June 30,
2021 as compared to $9.9 with a gross profit margin of 47.1% for the three months ended June 30, 2020. The increase of $2.8 in segment
gross profit was primarily driven by ACH growth.
Six
Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
| Six
Months Ended June 30, |
Change | |||||||||||||||||||||||||
| (in millions) | 2021 | 2020 | Amount | % | ||||||||||||||||||||||
| Integrated Solutions | ||||||||||||||||||||||||||
| Segment revenue | $ | 72.5 | $ | 59.5 | $ | 13.0 | 21.7 | % | ||||||||||||||||||
|
Segment gross
profit(1) |
$ | 39.4 | $ | 31.8 | $ | 7.6 | 23.8 | % | ||||||||||||||||||
| Segment gross profit margin | 54.3 | % | 53.4 | % | ||||||||||||||||||||||
| Payment Services | ||||||||||||||||||||||||||
| Segment revenue | $ | 46.8 | $ | 40.7 | $ | 6.1 | 14.9 | % | ||||||||||||||||||
|
Segment gross
profit(1) |
$ | 23.6 | $ | 19.0 | $ | 4.6 | 24.2 | % | ||||||||||||||||||
| Segment gross profit margin | 50.4 | % | 46.7 | % | ||||||||||||||||||||||
(1)Segment
gross profit is revenue less cost of services excluding depreciation and amortization.
Integrated
Solutions
Revenue
for the Integrated Solutions segment was $72.5 for the six months ended June 30, 2021 as compared to $59.5 for the six months ended
June 30, 2020. The increase of $13.0 was primarily driven by Integrated Card and government growth.
Gross
profit for the Integrated Solutions segment was $39.4 resulting in a gross profit margin of 54.3% for the six months ended June 30,
2021 as compared to $31.8 with a gross profit margin of 53.4% for the six months ended June 30, 2020. The increase of $7.6 in segment
gross profit was primarily driven by revenue growth partially offset by higher processing costs.
Payment
Services
Revenue
for the Payment Services segment was $46.8 for the six months ended June 30, 2021 as compared to $40.7 for the six months ended June 30,
2020. The increase of $6.1 was primarily driven by ACH growth.
Gross
profit for the Payment Services segment was $23.6 resulting in a gross profit margin of 50.4% for the six months ended June 30, 2021
as compared to $19.0 with a gross profit margin of 46.7% for the six months ended June 30, 2020. The increase of $4.6 in segment
gross profit was primarily driven by ACH growth.
For
a reconciliation of segment gross profit to total U.S. GAAP operating profit, excluding depreciation and amortization, and including certain
corporate-level expenses, see notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
Liquidity
and Capital Resources
Overview
We have historically
sourced our liquidity requirements primarily with cash flow from operations and, when needed, with borrowings under our credit facilities
and more recently with an equity issuance. We have historically sourced
40
our acquisitions
with cash flow from operations, and when needed, with capital infusions from Ultra and borrowings under our credit facilities and more
recently an equity issuance. As of June 30, 2021, we had $135.6 million of cash and cash equivalents on hand and borrowing capacity
of $45.0 million from our Revolver. We believe that our cash on hand and additional availability under the Revolver, combined with cash
flows from operations, will enable us to fund our operations and our debt service for at least the next 12 months. However, our anticipated
results are subject to significant uncertainty and may be affected by events beyond our control, including the prevailing economic, financial
and industry conditions, including the continued impact of COVID-19.
On March 17,
2021, the Company priced an offering of 20 million shares of its common stock, $0.001 par value per share. The Company and the selling
stockholder each agreed to sell 10 million shares of common stock to the underwriters at a price of $12.25 per share. The offering closed
and the shares were delivered on March 22, 2021. As a result of the offering, the Company received cash proceeds of $122.5 million, net
of transaction costs of $5.7 million.
On June 25,
2021, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Prior Credit Agreement,
dated as of August 1, 2017, using the proceeds of a new Credit Agreement, by and among the Borrowers, Holdings and Credit Suisse AG, Cayman
Islands Branch, as administrative agent, collateral agent and L/C issuer, and the other lenders and L/C issuers party thereto. The Credit
Agreement governs new senior secured credit facilities, consisting of a $250.0 million senior secured term loan facility (the “Term
Loan”) and a $45.0 million senior secured revolving credit facility (the “Revolver”).
The following
tables present a summary of cash flows from operating, investing and financing activities for the following comparative periods.
Six
Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
| Six
Months Ended June 30, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| (in millions) | ||||||||||||||
| Net cash provided (used) by operating activities | $ | 10.9 | $ | 3.2 | ||||||||||
| Net cash provided (used) by investing activities | (30.6) | (2.5) | ||||||||||||
| Net cash provided (used) by financing activities | 131.7 | (1.8) | ||||||||||||
| Change in cash | $ | 112.0 | $ | (1.1) | ||||||||||
Operating
Activities
Net
cash provided by operating activities increased $7.7 to $10.9 for the six months ended June 30, 2021 compared to $3.2 used by operating
activities for the six months ended June 30, 2020. The increase in net cash provided by operating activities was primarily due to
higher volume and EBITDA in the six months ended June 30, 2021.
Investing
Activities
Net
cash used in investing activities increased $28.1 to $30.6 in the six months ended June 30, 2021 from $2.5 in the six months ended
June 30, 2021. The increase in cash used by investing activities was primarily driven by the purchase of Paragon Payment Solutions
for $19.1 less cash received of $0.8 and an increase in purchases of customers lists of $8.5 in the six months ended June 30, 2021.
In addition, we used $3.7 for capital expenditures and capitalization of internal use software in the six months ended June 30, 2021
compared to $2.4 in the six months ended June 30, 2020.
Financing
Activities
41
Net
cash provided by financing activities increased $133.5 to $131.7 for the six months ended June 30, 2021 from a use of $1.8 for the
six months ended June 30, 2020. The increase in cash used in financing activities was primarily due to proceeds from the Equity Offering
of $116.8 in the six months ended June 30, 2021. In addition the Company repaid its long-term debt of $228.1 under its Prior Credit
Agreement and borrowed $250.0 under a new Credit Agreement along with payment of debt issuance costs of $6.4 in the six months ended June 30,
2021.
Indebtedness
On
June 25, 2021, the Borrowers and Holdings entered into the new Credit Agreement. On the same date, the Borrowers repaid in full all outstanding
indebtedness and terminated all commitments and obligations under the Prior Credit Agreement. Proceeds used to repay the indebtedness
outstanding under the Prior Credit Agreement totaled $233.8 million which satisfied all of the Borrowers’ debt obligations. In connection
with the repayment of outstanding indebtedness, the Borrowers were automatically and permanently released from all commitments, liens
and guarantees under the Prior Credit Agreement. See note 6 for details.
Contractual
Obligations
In the ordinary
course of business, we entered into various contractual obligations for varying terms and amounts. The following table sets forth our
contractual obligations and commitments for the periods indicated as of June 30, 2021:
| Payments due by period | ||||||||||||||||||||||||||||||||
| Total | 1 year | 2 - 3 years | 4 - 5 years | More than 5 years | ||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Long-term debt(i) |
$ | 250.0 | 0.6 | 4.9 | 4.9 | 239.6 | ||||||||||||||||||||||||||
|
Interest on
long-term debt(ii) |
$ | 67.9 | 5.1 | 19.8 | 19.4 | 23.6 | ||||||||||||||||||||||||||
|
Rent payments(iii) |
$ | 1.1 | 0.2 | 0.6 | 0.3 | 0.0 | ||||||||||||||||||||||||||
i.Reflects
contractual principal payments. See note 6 for discussion of the new Term Loan.
ii.Reflects
minimum interest payable under the Term Loan. We have assumed a Eurodollar rate of 0.75% plus a spread of 3.25% for purposes of calculating
interest payable on the Term Loan. Payments herein are subject to change as payments for variable rate debt have been estimated.
iii.Reflects
rent payments due on new operating leases acquired through the acquisition of Paragon.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
During
the periods presented, we did not engage in any off-balance sheet financing activities other than those reflected in the notes to our
condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical
Accounting Policies and Estimates
A
summary of our critical accounting policies is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended
42
December
31, 2020. There have been no material changes to the critical accounting policies disclosed in our 2020 Form 10-K.
Recently
Issued Accounting Standards
Refer
to Note 1 of the notes to our unaudited condensed consolidated financial statements included in Part 1, Item 1 within this Quarterly Report
on Form 10-Q for our assessment of recently issued and adopted accounting standards.
43
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Our
principal market risks are our exposure to effects of inflation and interest rates.
Effects
of Inflation
While
inflation may impact our revenues and cost of services, we believe the effects of inflation, if any, on our results of operations and
financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition
will not be materially impacted by inflation in the future.
Interest
Rates
Our
future income, cash flows and fair values relevant to financial instruments are subject to risks relating to interest rates. We are subject
to interest rate risk in connection with our Term Loan and Revolver, which have variable interest rates. The interest rates on these facilities
are based on a fixed margin plus a market interest rate, which can fluctuate accordingly but is subject to a minimum rate. Interest rate
changes do not affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our future
earnings and cash flows, assuming other factors are held constant.
The
Company utilizes derivative instruments to manage risk from fluctuations in interest rates on its Term Loan. In February 2021, the Company
entered into an interest rate cap agreement with a notional amount of $171.5 million, with an effective date of March 31, 2021, expiring
on March 31, 2023. There were no changes to the interest rate cap in connection with the entry into the new Credit Agreement. Refer to
Note 7 of the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 within this Quarterly Report
on Form 10-Q for more information.
We
may incur additional borrowings, under our Revolver or otherwise, from time to time for general corporate purposes, including working
capital and capital expenditures.
Item
4. Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed in Company reports filed or submitted under the Exchange Act is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2021. Based upon their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of June 30, 2021.
Changes
in Internal Control over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the three months ended June 30, 2021 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
44
Part
II - Other Information
Item
1. Legal Proceedings
We
are currently not a party to any legal proceedings that would be expected to have a material adverse effect on our business or financial
condition. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature
in the ordinary course of business.
Item
1A. Risk Factors
There
have been no material changes in our risk factors from those disclosed under "Item 1A. Risk Factors" included in our 2020 Annual Report
on Form 10-K, except that the risk factor entitled “As a public reporting company, we are subject to rules and regulations established
from time to time by the SEC and Nasdaq regarding our internal control over financial reporting. If we fail to establish and maintain
effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our
financial results, or report them in a timely manner” is hereby updated and replaced as follows:
As
a public reporting company, we are subject to rules and regulations established from time to time by the SEC and Nasdaq regarding our
internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and
disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.
We
are a public reporting company subject to the rules and regulations established from time to time by the SEC and Nasdaq. As a public company
we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so
that our management can certify as to the effectiveness of our internal control over financial reporting. Likewise, our independent registered
public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting
when we cease to be an “emerging growth company,” as defined in the JOBS Act. Based on the Company’s aggregate worldwide
market value of voting and non-voting common equity held by non-affiliates as of June 30, 2021, the Company expects that it will become
a “large accelerated filer” and lose emerging growth company status beginning with its Annual Report on Form 10-K for the
year ended December 31, 2021. Therefore, our independent registered public accounting firm will be required to provide an attestation
report on the effectiveness of our internal control over financial reporting in such Annual Report. If we are unable to assert that our
internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an
opinion as to the effectiveness of our internal control over financial reporting, or expresses an adverse opinion, investors may lose
confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock
price may be adversely affected.
In addition,
we expect to continue to incur costs related to our internal control over financial reporting in the upcoming years to further improve
our internal control environment. If we identify deficiencies in our internal control over financial reporting or if we are unable to
comply with the requirements applicable to us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act,
in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the
SEC. If this occurs, we also could become subject to sanctions or investigations by the SEC or other regulatory authorities.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 23,
2021, the Company closed the acquisition of Paragon Payment Solutions. The aggregate purchase price paid at closing included an aggregate
of 682,892
shares of the Company’s common stock. These shares were issued to the sellers in a private placement exempt from registration under
Section 4(a)(2) of the Securities Act of 1933, as amended. A portion of the shares is subject to transfer restrictions.
45
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not applicable.
Item
5. Other Information
None.
46
Item
6. Exhibits
| Exhibit No. | Description | ||||
| Credit
Agreement, dated as of June 25, 2021, by and among Paya Holdings III, LLC, as Parent borrower, Paya, Inc., as borrower, Paya Holdings
II, LLC, as Holdings, Credit Suisse AG, Cayman Islands Branch, as administrative agent, collateral agent and L/C issuer, and the other
lenders and L/C issuers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on June 28, 2021). | |||||
| Certification of the Chief Executive Officer pursuant to Exchange Act Rules Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |||||
| Certification of the Chief Financial Officer pursuant to Exchange Act Rules Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |||||
| Certification of the Chief Accounting Officer pursuant to Exchange Act Rules Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |||||
|
32.1* |
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350. | ||||
|
32.2* |
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | ||||
|
32.3* |
Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350. | ||||
| 101.INS | XBRL Instance Document. | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 1010.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File (Formatted as inline XBRL). | ||||
-----------------
*
The certifications furnished in Exhibits 32.1, 32.2 and 32.3 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will
not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent
that the registrant specifically incorporates it by reference.
47
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
| Date: August 6, 2021 | PAYA HOLDINGS INC. | |||||||
| /s/ Glenn Renzulli | ||||||||
| Glenn Renzulli | ||||||||
| Chief Financial Officer | ||||||||
48