Paysafe (PSFE) - 2023 Q4 - Annual Report

Condensed Consolidated Interim Financial Statements (Unaudited) This section presents Paysafe's unaudited interim financial statements, including comprehensive income, financial position, shareholders' equity, and cash flows, along with detailed notes Condensed Consolidated Statement of Comprehensive Income / (Loss) Paysafe reported a net loss of $2.5 million for the three months and $8.1 million for the nine months ended September 30, 2023, a substantial reduction from the $1.8 billion net loss in the prior year Net Income / (Loss) and Revenue (USD in thousands) | Metric | 3 Months Ended Sep 30, 2023 (USD in thousands) | 3 Months Ended Sep 30, 2022 (USD in thousands) | 9 Months Ended Sep 30, 2023 (USD in thousands) | 9 Months Ended Sep 30, 2022 (USD in thousands) | | :-------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Revenue | $396,410 | $365,988 | $1,186,597 | $1,112,569 | | Net (Loss) / Income | $(2,549) | $978 | $(8,122) | $(1,828,573) | | Net (Loss) / Income per share – basic | $(0.04) | $0.02 | $(0.13) | $(30.24) | | Operating income / (loss) | $43,229 | $4,662 | $112,375 | $(1,890,172) | - Operating income for the three months ended September 30, 2023, increased significantly to $43.2 million from $4.7 million in the prior year, and for the nine months, it turned positive to $112.4 million from a loss of $1.89 billion[14] Condensed Consolidated Statement of Financial Position Paysafe's total assets decreased to $5.27 billion as of September 30, 2023, from $5.96 billion at December 31, 2022, primarily due to reduced customer accounts and restricted cash Financial Position Highlights (USD in thousands) | Metric | September 30, 2023 (USD in thousands) | December 31, 2022 (USD in thousands) | | :----------------------------------- | :------------------------------------ | :----------------------------------- | | Total Assets | $5,273,373 | $5,957,056 | | Total Liabilities | $4,395,466 | $5,097,419 | | Total Shareholders' Equity | $877,907 | $859,637 | | Cash and cash equivalents | $226,451 | $260,219 | | Customer accounts and other restricted cash | $1,291,662 | $1,866,976 | | Funds payable and amounts due to customers | $1,464,102 | $1,997,867 | - Current assets decreased from $2.49 billion to $1.92 billion, largely due to a decrease in customer accounts and other restricted cash. Current liabilities also saw a significant reduction from $2.29 billion to $1.72 billion[17] Condensed Consolidated Statement of Shareholders' Equity Shareholders' equity increased to $877.9 million as of September 30, 2023, from $859.6 million at January 1, 2023, driven by share-based compensation and liability conversions, partially offset by net losses Shareholders' Equity Changes (USD in thousands) | Item | January 1, 2023 (USD in thousands) | September 30, 2023 (USD in thousands) | | :------------------------------------ | :--------------------------------- | :------------------------------------ | | Total Shareholders' Equity | $859,637 | $877,907 | | Net loss (9 months) | - | $(8,122) | | Share-based compensation (9 months) | - | $23,061 | | Conversion of liability classified award to equity | - | $6,276 | | Gain on foreign currency translation (9 months) | - | $1,525 | | Loss on foreign currency translation (3 months) | - | $(8,853) | - Share-based compensation contributed $23.1 million to additional paid-in capital for the nine months ended September 30, 2023[19] Condensed Consolidated Statement of Cash Flows Paysafe experienced a $355.4 million net cash outflow from operating activities for the nine months ended September 30, 2023, a significant shift from a $1.37 billion inflow in the prior year Cash Flow Summary (USD in thousands) | Activity | 9 Months Ended Sep 30, 2023 (USD in thousands) | 9 Months Ended Sep 30, 2022 (USD in thousands) | | :---------------------------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash flows (used in) / provided by operating activities | $(355,368) | $1,373,219 | | Net cash flows used in investing activities | $(125,561) | $(533,588) | | Net cash flows used in financing activities | $(120,344) | $(91,604) | | Effect of foreign exchange rate changes | $(7,809) | $(284,334) | | (Decrease) / increase in cash and cash equivalents, including customer accounts and other restricted cash | $(609,082) | $463,693 | | Cash and cash equivalents, including customer accounts and other restricted cash, at end of period | $1,518,113 | $2,435,411 | - The substantial decrease in operating cash flow was primarily due to a $529.9 million outflow from movements in funds payable and amounts due to customers in 2023, compared to a $1.21 billion inflow in 2022[23][241][243] - Investing cash outflow decreased significantly, mainly due to the absence of a large acquisition like SafetyPay ($424.7 million) which occurred in the prior year[23][244] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, segment information, and various financial instrument details 1. Basis of presentation and summary of significant accounting policies Paysafe, a global payment solutions provider, operates through Merchant Solutions and Digital Wallets segments, effected a 1-for-12 reverse stock split in December 2022, and adopted new accounting guidance in 2023 - Paysafe operates two reportable segments: Merchant Solutions (card not present/present solutions for SMBs) and Digital Wallets (wallet-based online payments, eCash, pay-by-bank solutions)[29][121] - A 1-for-12 reverse stock split was effected on December 12, 2022, adjusting all share and per-share amounts for all periods presented[30][31] - The company adopted new guidance for Business Combinations (ASU 2021-08) and Supplier Finance Programs (ASU 2022-04) effective January 1, 2023, with no material impact on financial statements[46][47] 2. Net loss per share attributable to the Company Basic and diluted net loss per share was $(0.04) for the three months and $(0.13) for the nine months ended September 30, 2023, with potentially dilutive instruments excluded due to their antidilutive effect Net Loss Per Share (USD) | Metric | 3 Months Ended Sep 30, 2023 (USD) | 3 Months Ended Sep 30, 2022 (USD) | 9 Months Ended Sep 30, 2023 (USD) | 9 Months Ended Sep 30, 2022 (USD) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) / income attributable to the Company - basic | $(2,549) | $978 | $(8,122) | $(1,828,944) | | Weighted average shares – basic | 61,623,820 | 60,592,461 | 61,349,985 | 60,471,705 | | Basic EPS | $(0.04) | $0.02 | $(0.13) | $(30.24) | | Diluted EPS | $(0.04) | $0.02 | $(0.13) | $(30.24) | - All potentially dilutive restricted stock units, stock options, warrants, and LLC units were excluded from diluted EPS calculations due to their antidilutive effect[50] 3. Taxation The effective tax rate was 117.6% for three months and 142.0% for nine months ended September 30, 2023, significantly higher than the U.K. statutory rate due to valuation allowances and discrete items Effective Tax Rates | Period | Effective Tax Rate | | :--------------------------- | :----------------- | | 3 Months Ended Sep 30, 2023 | 117.6% | | 3 Months Ended Sep 30, 2022 | 88.2% | | 9 Months Ended Sep 30, 2023 | 142.0% | | 9 Months Ended Sep 30, 2022 | 2.8% | - The U.K. statutory tax rate increased from 19% to 25% effective April 1, 2023, with a weighted average of 23.5% applied for the full year 2023[53] - The higher effective tax rates in 2023 compared to 2022 are mainly due to the valuation allowance on restricted interest carryforwards and discrete items, contrasting with the deferred tax impact of goodwill impairment in the prior year[54][55][56] 4. Goodwill Goodwill decreased slightly to $1.99 billion as of September 30, 2023, with no impairment recognized for the nine months, following a $1.88 billion impairment in the prior year Goodwill Carrying Value (USD in thousands) | Segment | Sep 30, 2023 (USD in thousands) | Dec 31, 2022 (USD in thousands) | | :---------------- | :---------------------------- | :---------------------------- | | Merchant Solutions | $637,446 | $637,446 | | Digital Wallets | $1,353,157 | $1,361,686 | | Total Goodwill | $1,990,603 | $1,999,132 | - In the prior year (2022), a goodwill impairment of $1.88 billion was recognized across both Merchant Solutions and Digital Wallets segments due to a sustained decline in stock price and market conditions[57][62][63] - The annual goodwill impairment test as of October 1, 2023, did not result in any impairment[59] 5. Intangible assets Net intangible assets decreased to $1.19 billion as of September 30, 2023, with $192.5 million in amortization expense and a minor $275 thousand impairment recognized on software development costs Intangible Assets, Net (USD in thousands) | Metric | Sep 30, 2023 (USD in thousands) | Dec 31, 2022 (USD in thousands) | | :-------------------- | :---------------------------- | :---------------------------- | | Intangible assets, net | $1,188,622 | $1,291,458 | | Total Gross carrying value | $2,567,339 | $2,497,471 | | Total Accumulated amortization | $1,378,717 | $1,206,013 | - Amortization expense for intangible assets was $192.5 million for the nine months ended September 30, 2023, slightly down from $194.1 million in the prior year[64] - Impairment expense of $275 thousand was recognized on software development costs for the nine months ended September 30, 2023, significantly lower than $4.0 million in the prior year[65] 6. Allowance for credit losses The allowance for credit losses decreased to $20.9 million as of September 30, 2023, with credit loss expense for the nine months decreasing to $13.6 million due to merchant type changes and a recovery Allowance for Credit Losses (USD in thousands) | Metric | Dec 31, 2022 (USD in thousands) | Sep 30, 2023 (USD in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Balance at period end | $28,022 | $20,945 | | Credit loss expense (9 months) | - | $13,581 | | Write-Offs (9 months) | - | $(20,489) | - Credit loss expense decreased by $11.2 million for the nine months ended September 30, 2023, compared to the prior year, partially due to changes in merchant type and a credit loss recovery in the Merchant Solutions segment[69][70] - Write-offs increased to $20.5 million for the nine months ended September 30, 2023, from $18.3 million in the prior year, driven by an increase in write-off of aged receivables within the Merchant Solutions segment[70] 7. Derivative Instruments Paysafe uses an interest rate swap to manage interest rate risk on its variable rate Term Loan Facility, measured at fair value, with the reference rate converting from LIBOR to Term SOFR during Q3 2023 Derivative Financial Instrument Details (USD in thousands) | Metric | Sep 30, 2023 (USD in thousands) | Dec 31, 2022 (USD in thousands) | | :-------------------- | :---------------------------- | :---------------------------- | | Notional amount | $321,168 | $367,490 | | Fair value (asset) | $16,053 | $17,321 | | Fair value (loss) / gain (3 months) | $(682) | $9,360 | | Fair value (loss) / gain (9 months) | $(1,268) | $18,148 | - The reference rate index for the Company's derivative financial instrument converted from LIBOR to the term SOFR reference rate during the quarter ended September 30, 2023[72] 8. Debt Paysafe's total principal outstanding debt decreased to $2.53 billion as of September 30, 2023, from $2.66 billion at December 31, 2022, with interest expense increasing due to higher variable rates despite debt repurchases Debt Overview (USD in thousands) | Metric | Sep 30, 2023 (USD in thousands) | Dec 31, 2022 (USD in thousands) | | :-------------------------- | :---------------------------- | :---------------------------- | | Total Principal Outstanding | $2,531,159 | $2,658,023 | | Short-term debt | $10,190 | $10,190 | | Non-current debt | $2,504,498 | $2,633,269 | | Interest expense, net (3 months) | $38,421 | $34,631 | | Interest expense, net (9 months) | $112,639 | $89,013 | - On April 13, 2023, the company entered into a debt amendment agreement to replace LIBOR with SOFR for its USD Term Loan Facility and USD Revolving Credit Facility[76] - During the nine months ended September 30, 2023, the company repurchased $24.8 million of Secured Loan Notes and $109.1 million under the Term Loan Facility, resulting in a gain on repurchase of $9.6 million[82] - Paysafe was in compliance with its financial covenants, including the Consolidated First Lien Debt Ratio, as of September 30, 2023[85] 9. Contingent and deferred consideration payable Contingent and deferred consideration payable decreased to $19.0 million as of September 30, 2023, from $27.1 million at December 31, 2022, primarily due to $9.2 million in payments made Contingent and Deferred Consideration Payable (USD in thousands) | Metric | Dec 31, 2022 (USD in thousands) | Sep 30, 2023 (USD in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Balance at period end | $27,146 | $19,017 | | Payments made during the period | - | $(9,210) | | Additions in the period | - | $658 | | Fair value loss and other | - | $423 | | Current portion | - | $10,639 | | Non-current portion | - | $8,378 | - The contingent consideration arose from merchant buyouts and prior year acquisitions, payable in cash subject to future financial performance[87] 10. Share-based Compensation Share-based compensation expense decreased significantly to $4.9 million for three months and $23.1 million for nine months ended September 30, 2023, due to forfeitures and performance adjustments, with an Employee Share Purchase Plan introduced in April 2023 Share-based Compensation Expense (USD in thousands) | Period | Share-based Compensation Expense (USD in thousands) | | :--------------------------- | :------------------------------------------------ | | 3 Months Ended Sep 30, 2023 | $4,938 | | 3 Months Ended Sep 30, 2022 | $13,542 | | 9 Months Ended Sep 30, 2023 | $23,061 | | 9 Months Ended Sep 30, 2022 | $45,248 | Restricted Stock Unit Activity (9 Months Ended Sep 30, 2023) | Activity | Restricted Stock Units | | :-------------------------- | :--------------------- | | Nonvested as of Dec 31, 2022 | 2,859,385 | | Granted | 2,007,475 | | Vested | (1,326,243) | | Forfeited | (625,158) | | Performance adjustments | 75,183 | | Nonvested as of Sep 30, 2023 | 2,990,642 | - An Employee Share Purchase Plan was introduced on April 1, 2023, allowing employees to purchase shares with a matching RSU award that vests one year from the offering period[98][99] 11. Fair Value Measurements Paysafe measures financial instruments using a three-level fair value hierarchy, with derivative assets as Level 2, contingent consideration and share-based compensation as Level 3, and warrant liabilities as Level 1 Fair Value Hierarchy of Financial Instruments (USD in thousands) | Instrument | Level 1 (Sep 30, 2023, USD in thousands) | Level 2 (Sep 30, 2023, USD in thousands) | Level 3 (Sep 30, 2023, USD in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Derivative financial asset | - | $16,053 | - | | Contingent consideration payable | - | - | $19,017 | | Warrant liabilities | $2,264 | - | - | | Liability for share-based compensation | - | - | $5,470 | Valuation Techniques and Unobservable Inputs for Level 3 Instruments | Financial instrument | Valuation technique used | Significant unobservable inputs | | :-------------------------------- | :----------------------- | :------------------------------ | | Contingent consideration payable | Discounted cashflow | Discount rate of 7.5% | | Liability for share-based compensation | Market and income approach | Discount rate of 16.5% | - The carrying value of debt approximated fair value (a Level 2 measurement) based on market yields for similar debt facilities and observable trading data[109] 12. Commitments, Contingencies and Guarantees Paysafe maintains a litigation provision of $2.2 million, is involved in a class action lawsuit, manages credit risk from merchant chargebacks, and has an accrual of $3.3 million for foreign exchange rate disclosures - A litigation provision of $2.2 million was recognized as of September 30, 2023, down from $10.3 million at December 31, 2022, due to a settlement[110] - The company is vigorously defending against a consolidated class action lawsuit alleging false and misleading statements, with potential losses currently unable to be estimated but could be material[111][112] - An accrual of $3.3 million remains for customer payments related to foreign exchange rate disclosures in the Digital Wallets business, with no additional provision recorded for the three and nine months ended September 30, 2023[118] 13. Other income, net Other income, net, significantly decreased to $9.7 million for three months and $19.6 million for nine months ended September 30, 2023, primarily due to reduced foreign exchange gains and lower fair value gains on warrant liabilities Other Income, Net (USD in thousands) | Metric | 3 Months Ended Sep 30, 2023 (USD in thousands) | 3 Months Ended Sep 30, 2022 (USD in thousands) | 9 Months Ended Sep 30, 2023 (USD in thousands) | 9 Months Ended Sep 30, 2022 (USD in thousands) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Other income, net | $9,661 | $38,230 | $19,584 | $97,863 | | Foreign exchange gain / (loss) | $4,460 | $20,680 | $(244) | $57,304 | | Fair value (loss) / gain on contingent consideration | $(220) | $147 | $(620) | $(7,742) | | Fair value (loss) / gain on derivative instruments | $(682) | $9,360 | $(1,268) | $18,148 | | Fair value gain on warrant liability | $313 | $6,435 | $830 | $27,489 | | Gain on debt repurchases | $1,680 | $6,760 | $9,632 | $9,752 | - The nine-month period saw a foreign exchange loss of $244 thousand in 2023, a stark contrast to a $57.3 million gain in 2022[119] 14. Operating segments Paysafe operates in Merchant Solutions and Digital Wallets segments, with performance evaluated by the CODM based on Adjusted EBITDA, and shared costs allocated using drivers like headcount and revenue - Paysafe's operating segments are Merchant Solutions (card not present/present solutions for SMBs) and Digital Wallets (wallet-based online payments, eCash, pay-by-bank solutions)[121] - The CODM (CEO, CFO, COO) evaluates performance and allocates resources based on Adjusted EBITDA for each operating segment[121][122] Revenue and Adjusted EBITDA by Segment (3 Months Ended Sep 30, 2023 vs 2022, USD in thousands) | Segment | 2023 Revenue (USD in thousands) | 2022 Revenue (USD in thousands) | 2023 Adj. EBITDA (USD in thousands) | 2022 Adj. EBITDA (USD in thousands) | | :---------------- | :------------------------------ | :------------------------------ | :---------------------------------- | :---------------------------------- | | Merchant Solutions | $216,847 | $203,733 | $57,467 | $45,631 | | Digital Wallets | $182,855 | $162,992 | $79,930 | $68,142 | | Corporate | $0 | $0 | $(21,321) | $(18,303) | | Total | $396,410 | $365,988 | $116,076 | $95,470 | Revenue and Adjusted EBITDA by Segment (9 Months Ended Sep 30, 2023 vs 2022, USD in thousands) | Segment | 2023 Revenue (USD in thousands) | 2022 Revenue (USD in thousands) | 2023 Adj. EBITDA (USD in thousands) | 2022 Adj. EBITDA (USD in thousands) | | :---------------- | :------------------------------ | :------------------------------ | :---------------------------------- | :---------------------------------- | | Merchant Solutions | $651,066 | $608,848 | $165,572 | $149,282 | | Digital Wallets | $543,382 | $509,024 | $236,350 | $212,286 | | Corporate | $0 | $0 | $(65,000) | $(59,178) | | Total | $1,186,597 | $1,112,569 | $336,922 | $302,390 | 15. Related party transactions Paysafe engages in related party transactions, which are not significant to the financial statements, including a lease with a director's affiliate with a $3.0 million right-of-use asset - Related party transactions, including services provided and purchased from affiliates, are not significant to the financial statements[128] - A lease with an affiliate of one of the directors had a right-of-use asset of $3.0 million and a lease liability of $3.4 million as of September 30, 2023[129] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Paysafe's financial condition, operational results, and key factors influencing future performance, including market risks and liquidity CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section provides a standard disclaimer emphasizing that forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from expectations - Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from expectations[132][133] - Readers are cautioned not to place undue reliance on these statements, and the company does not undertake to update them except as required by law[133] Our Company Paysafe, a global digital commerce pioneer, processed $35 billion in volume for three months and $104 billion for nine months ended September 30, 2023, offering a full spectrum of payment solutions across two segments - Paysafe processed $35 billion in volume for the three months and $104 billion for the nine months ended September 30, 2023[134] Revenue (USD in thousands) | Period | Revenue (USD in thousands) | | :--------------------------- | :------------------------- | | 3 Months Ended Sep 30, 2023 | $396,410 | | 3 Months Ended Sep 30, 2022 | $365,988 | | 9 Months Ended Sep 30, 2023 | $1,186,597 | | 9 Months Ended Sep 30, 2022 | $1,112,569 | - The company operates through two business segments: Merchant Solutions (merchant acquiring, transaction processing, fraud management) and Digital Wallets (NETELLER, Skrill, paysafecard, Paysafecash, Rapid Transfer)[136][138][139] Trends and Factors Affecting Our Future Performance Paysafe's future performance is influenced by global economic conditions and foreign currency fluctuations, with recent executive changes and the LIBOR to SOFR transition also impacting operations - Global and regional economic conditions, including acts of war and terrorism, significantly impact operations and performance[142] - Foreign currency fluctuations, particularly against the U.S. dollar, can materially impact results, with the Digital Wallets segment being affected by unfavorable foreign exchange during the three and nine months ended September 30, 2023[143] - Recent company events include Chirag Patel stepping down as President of Digital Wallets (Feb 2023), Afshin Yazdian stepping down as President of Merchant Solutions (July 2023), and the replacement of LIBOR with SOFR in debt agreements (April 2023)[144][145] Key Performance Indicators Paysafe monitors gross dollar volume and take rate as key performance indicators, with gross dollar volume increasing to $35.1 billion for three months and $104.4 billion for nine months, while the overall take rate remained stable at 1.1% - Gross dollar volume (volume) is a key indicator, reflecting the dollar value of payment transactions processed, and is used to generate revenue based on per transaction fees[148] - Take rate, calculated as operating segment revenue divided by gross dollar volume, indicates the percentage of revenue collected by Paysafe on processed transactions[150] Gross Dollar Volume and Take Rate (USD in millions) | Metric | 3 Months Ended Sep 30, 2023 (USD in millions) | 3 Months Ended Sep 30, 2022 (USD in millions) | 9 Months Ended Sep 30, 2023 (USD in millions) | 9 Months Ended Sep 30, 2022 (USD in millions) | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Total Gross dollar volume | $35,102 | $32,495 | $104,393 | $97,025 | | Total Take Rate | 1.1% | 1.1% | 1.1% | 1.1% | | Merchant Solutions Volume | $29,644 | $27,826 | $88,516 | $82,080 | | Digital Wallets Volume | $5,645 | $4,786 | $16,482 | $15,325 | Non-GAAP Financial Measure Paysafe uses Adjusted EBITDA as a non-GAAP financial measure to assess performance and reflect underlying business trends, acknowledging its limitations despite its usefulness for management and investors - Adjusted EBITDA is a non-GAAP measure used by management to assess performance and reflect underlying business trends, improving comparability across reporting periods[153][156][157] - Adjusted EBITDA is defined as net income/(loss) before income tax, interest expense, depreciation and amortization, share-based compensation, impairment expense, restructuring and other costs, loss/(gain) on disposal of subsidiaries, and other (expense)/income, net[156] - Limitations of Adjusted EBITDA include not reflecting cash expenditures, working capital needs, interest/principal payments on debt, income tax payments, or cash requirements for asset replacements[159] Results of Operations This section analyzes Paysafe's financial performance for the three and nine months ended September 30, 2023, comparing key metrics like revenue, operating income, and net loss to prior periods Three months ended September 30, 2023 compared to three months ended September 30, 2022 For the three months ended September 30, 2023, Paysafe's revenue increased by 8.3% to $396.4 million, operating income surged by 827.3% to $43.2 million, while net loss increased to $2.5 million, and Adjusted EBITDA grew by 21.6% to $116.1 million Key Financial Results (3 Months Ended Sep 30, USD in thousands) | Metric | 2023 (USD in thousands) | 2022 (USD in thousands) | Variance ($ in thousands) | Variance (%) | | :------------------------------------------ | :---------------------- | :---------------------- | :------------------------ | :----------- | | Revenue | $396,410 | $365,988 | $30,422 | 8.3% | | Operating income / (loss) | $43,229 | $4,662 | $38,567 | 827.3% | | Net (loss) / income | $(2,549) | $978 | $(3,527) | (360.6)% | | Adjusted EBITDA | $116,076 | $95,470 | $20,606 | 21.6% | | Selling, general and administrative | $121,195 | $132,250 | $(11,055) | (8.4)% | | Impairment expense on goodwill and intangible assets | $0 | $4,036 | $(4,036) | n/m | | Restructuring and other costs | $835 | $6,443 | $(5,608) | (87.0)% | | Other income, net | $9,661 | $38,230 | $(28,569) | (74.7)% | | Income tax expense | $17,018 | $7,283 | $9,735 | 133.7% | - Revenue growth was driven by a 6.4% increase in Merchant Solutions and a 12.2% increase in Digital Wallets, benefiting from higher volumes, growth initiatives, and favorable foreign exchange[161] - Selling, general and administrative expenses decreased by 8.4%, primarily due to a reduction in share-based compensation expense ($8.6 million) driven by forfeitures and performance adjustments[164] Nine months ended September 30, 2023 compared to nine months ended September 30, 2022 For the nine months ended September 30, 2023, Paysafe's revenue increased by 6.7% to $1.19 billion, operating income turned positive to $112.4 million, net loss decreased substantially by 99.6% to $8.1 million, and Adjusted EBITDA increased by 11.4% to $336.9 million Key Financial Results (9 Months Ended Sep 30, USD in thousands) | Metric | 2023 (USD in thousands) | 2022 (USD in thousands) | Variance ($ in thousands) | Variance (%) | | :------------------------------------------ | :---------------------- | :---------------------- | :------------------------ | :----------- | | Revenue | $1,186,597 | $1,112,569 | $74,028 | 6.7% | | Operating income / (loss) | $112,375 | $(1,890,172) | $2,002,547 | (105.9)% | | Net loss | $(8,122) | $(1,828,573) | $1,820,451 | (99.6)% | | Adjusted EBITDA | $336,922 | $302,390 | $34,532 | 11.4% | | Impairment expense on intangible assets | $275 | $1,886,223 | $(1,885,948) | (100.0)% | | Restructuring and other costs | $4,165 | $60,636 | $(56,471) | (93.1)% | | Other income, net | $19,584 | $97,863 | $(78,279) | (80.0)% | | Income tax expense / (benefit) | $27,442 | $(52,749) | $80,191 | n/m | - The significant decrease in net loss was primarily driven by the $1.89 billion goodwill impairment expense in the prior period and a $56.5 million decrease in restructuring and other costs, partially offset by a $78.3 million decrease in other income, net[181][182][183][186] - Interest expense, net, increased by 26.5% to $112.6 million due to higher variable interest rates on Term Loan facilities, partially offset by loan note repurchases[184] Analysis by Segment This section provides a detailed analysis of Paysafe's financial performance across its Merchant Solutions and Digital Wallets segments for the three and nine months ended September 30, 2023 Three months ended September 30, 2023 compared to three months ended September 30, 2022 For the three months ended September 30, 2023, Merchant Solutions revenue increased by 6.4% to $216.8 million, and Digital Wallets revenue grew 12.2% to $182.9 million, both segments showing Adjusted EBITDA growth Segment Performance (3 Months Ended Sep 30, USD in thousands) | Segment | 2023 Revenue (USD in thousands) | 2022 Revenue (USD in thousands) | 2023 Adj. EBITDA (USD in thousands) | 2022 Adj. EBITDA (USD in thousands) | | :---------------- | :------------------------------ | :------------------------------ | :---------------------------------- | :---------------------------------- | | Merchant Solutions | $216,847 | $203,733 | $57,467 | $45,631 | | Digital Wallets | $182,855 | $162,992 | $79,930 | $68,142 | | Corporate | $0 | $0 | $(21,321) | $(18,303) | - Merchant Solutions' Adjusted EBITDA increased by $11.8 million, or 25.9%, due to higher revenue and decreased credit losses, partially offset by increased cost of services[195] - Digital Wallets' Adjusted EBITDA increased by $11.8 million, or 17.3%, driven by increased revenues, partially offset by higher personnel costs and credit losses[197] Nine months ended September 30, 2023 compared to nine months ended September 30, 2022 For the nine months ended September 30, 2023, Merchant Solutions revenue increased by 6.9% to $651.1 million, and Digital Wallets revenue grew 6.7% to $543.4 million, both segments showing Adjusted EBITDA growth Segment Performance (9 Months Ended Sep 30, USD in thousands) | Segment | 2023 Revenue (USD in thousands) | 2022 Revenue (USD in thousands) | 2023 Adj. EBITDA (USD in thousands) | 2022 Adj. EBITDA (USD in thousands) | | :---------------- | :------------------------------ | :------------------------------ | :---------------------------------- | :---------------------------------- | | Merchant Solutions | $651,066 | $608,848 | $165,572 | $149,282 | | Digital Wallets | $543,382 | $509,024 | $236,350 | $212,286 | | Corporate | $0 | $0 | $(65,000) | $(59,178) | - Merchant Solutions' Adjusted EBITDA increased by $16.3 million, or 10.9%, due to increased revenue, decreased credit losses, and lower personnel costs, partially offset by higher cost of services[202] - Digital Wallets' Adjusted EBITDA increased by $24.1 million, or 11.3%, driven by increased revenues and a reduction in cost of services due to growth in higher margin verticals, partially offset by higher personnel and technology costs[204] Seasonality Paysafe's business experiences seasonal fluctuations with increased activity during traditional holiday periods, national holidays, and sporting events, potentially leading to volatility in financial results - The business historically experiences increased activity during traditional holiday periods, national holidays, and around sporting events[206] - Volatility in revenue or key operating metrics can result in fluctuations in financial condition or results of operations[206] Inflation While inflation may impact Paysafe's revenue and expenses, its effects on the company's results of operations and financial condition have not been significant to date - The effects of inflation on results of operations and financial condition have not been significant[207] - There is no assurance that future results will not be materially impacted by inflation[207] Quantitative and Qualitative Disclosure about Market Risk This section details Paysafe's exposure to market risks, including interest rate, foreign currency, credit, and liquidity risks, and the strategies employed to manage them Interest Rate Risk Paysafe manages interest rate risk from variable-rate borrowings using interest rate swaps, with a 100 basis point increase in rates resulting in a $16.2 million unfavorable impact on annualized net loss - Paysafe is exposed to interest rate risk on variable-rate borrowings and interest revenue, managed through interest rate swaps[209] - A 100 basis point increase in interest rates would result in a $16.2 million unfavorable impact on annualized net loss as of September 30, 2023[210] - Due to interest rate floors (0.5% on SOFR, 0% on EURIBOR), the company may not realize the full benefit of a 100 basis point decrease in rates[210][211] Foreign Currency Risk Paysafe manages foreign currency risk by transacting materially in USD, EUR, and GBP, and matching borrowing currencies to operational currencies, with a 1% U.S. dollar strengthening decreasing net assets by $2.1 million - Paysafe is exposed to movements in exchange rates of various currencies against the U.S. dollar, primarily GBP, EUR, CAD, NOK, CHF, SEK, and PLN[212] - Currency risk is managed by transacting materially in USD, EUR, and GBP, and matching borrowing currencies to expected operational currencies[213][214] - A 1% strengthening of the U.S. dollar would result in a $2.1 million decrease in net assets as of September 30, 2023[215] Credit Risk Paysafe faces credit risk from financial assets and merchant chargebacks, managed through monitoring credit exposures, utilizing credit limits, insurance, collateral, and assessing customer credit quality - Credit risk arises from financial loss if a counterparty fails to meet contractual obligations, primarily from cash, settlement receivables, restricted cash, and trade receivables[217] - The company is exposed to potential losses from merchant-related chargebacks, especially for merchants promising future delivery of goods/services[218] - Credit risk is managed through regular monitoring, credit limits, insurance, collateral (bank guarantees, cash deposits), and assessing customer/distributor credit quality[219][220][221] Liquidity Risk Paysafe manages liquidity risk by monitoring cash levels, utilizing a $305 million revolving credit facility, and maintaining compliance with debt covenants, with total external borrowings at $2.53 billion - Liquidity risk is managed by controlling and monitoring cash levels and cash flow, ensuring sufficient liquidity to meet financial obligations[222] - The company has a $305 million revolving credit facility available to mitigate short-term liquidity risk and fund future M&A activity[223] - As of September 30, 2023, the total principal amount of external borrowings was $2.53 billion, and the company was in compliance with all financial covenants, including maintaining a first lien debt ratio below 7.5x LTM EBITDA[224][225] Liquidity and Capital Resources Paysafe's primary liquidity sources are operations, debt issuance, and credit facilities, with $226.5 million in cash and $255.1 million available under its revolving credit facility as of September 30, 2023 - Primary sources of liquidity include funds from operations, debt issuance, and revolving credit facilities[227] Liquidity Position (USD in thousands) | Metric | Sep 30, 2023 (USD in thousands) | Dec 31, 2022 (USD in thousands) | | :------------------------------------------------ | :---------------------------- | :---------------------------- | | Cash and cash equivalents | $226,451 | $260,219 | | Available under Revolving Credit Facility | $255,055 | $283,592 | - In November 2023, the Board approved a share repurchase program authorizing up to $50 million of common shares, to be funded by cash on hand, operations, or future financing[229] Cash Flow This section provides a detailed analysis of Paysafe's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2023, compared to the prior year Comparison of Cash Flows For the nine months ended September 30, 2023, Paysafe experienced a significant decrease in cash and cash equivalents, including restricted cash, by $609.1 million, primarily due to a shift to cash used in operating activities Summary Consolidated Cash Flow Information (9 Months Ended Sep 30, USD in thousands) | Activity | 2023 (USD in thousands) | 2022 (USD in thousands) | | :---------------------------------------------------------------- | :---------------------- | :---------------------- | | Net cash flows (used in) / provided by operating activities | $(355,368) | $1,373,219 | | Net cash flows used in investing activities | $(125,561) | $(533,588) | | Net cash flows used in financing activities | $(120,344) | $(91,604) | | Effect of foreign exchange rate changes | $(7,809) | $(284,334) | | (Decrease) / increase in cash and cash equivalents, including customer accounts and other restricted cash | $(609,082) | $463,693 | - The company includes customer accounts and other restricted cash in the cash and cash equivalents balance reported in the consolidated statements of cash flows[234] Operating Activities Net cash flows used in operating activities increased by $1.73 billion to an outflow of $355.4 million for the nine months ended September 30, 2023, mainly due to a cash outflow from movements in funds payable and amounts due to customers - Net cash flows used in operating activities increased by $1.73 billion, primarily due to a cash outflow of $529.9 million from movements in funds payable and amounts due to customers in 2023, compared to a $1.21 billion inflow in 2022[241][242][243] - Non-cash items for the nine months ended September 30, 2023, included $197.0 million in depreciation and amortization, $23.1 million in share-based compensation, and $17.5 million in deferred tax expense[242] - Regulatory obligations require safeguarding customer funds, which are recorded as customer accounts and other restricted cash and are not presented within net cash flows from operating activities[238] Investing Activities Net cash used in investing activities decreased by $408.0 million to $125.6 million for the nine months ended September 30, 2023, mainly due to the absence of large business acquisitions like SafetyPay - Net cash used in investing activities decreased by $408.0 million, primarily due to the absence of a $424.7 million cash outflow for the acquisition of SafetyPay in the prior year[244] - This decrease was partially offset by cash outflows of $24.4 million for merchant reserves held at a partner bank in 2023[244] Financing Activities Net cash used in financing activities increased by $28.7 million to $120.3 million for the nine months ended September 30, 2023, primarily due to $124.3 million in debt repurchases - Net cash used in financing activities increased by $28.7 million, primarily due to $124.3 million in repurchases of borrowings[245] - This was partially offset by an increase in borrowings on the revolving credit facility[245] Accounting Pronouncements Not Yet Adopted This section refers to Note 1 for details on recently issued accounting pronouncements that may be relevant to operations but have not yet been adopted - Details on recently issued accounting pronouncements not yet adopted are provided in Note 1 of the financial statements[247]