Priority Technology Holdings, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021, compared primarily with FY2020. This annual filing does not provide a clear standalone fourth-quarter financial summary.
Business context
Priority is a payments technology company serving small and medium-sized businesses (SMB), business-to-business (B2B) customers and enterprise partners. Its platform supports payment acceptance, accounts-payable automation and embedded payment and banking services. The company reported approximately 240,000 SMB and ISV customers and more than 60 billion in payment volume processed.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $514.9 million | $404.3 million | +27.3% |
| Operating income | $33.1 million | $20.9 million | +58.6% |
| Operating margin | 6.4% | 5.2% | +1.2 percentage points |
| Net income | $1.4 million | $71.1 million | Down substantially |
| Net income (loss) attributable to common stockholders | $(24.6) million | $25.7 million | Shifted to loss |
| Adjusted EBITDA (non-GAAP) | $96.3 million | $70.3 million | +37.0% |
| Cash provided by operating activities | $9.4 million | $12.2 million | Down $2.8 million |
Merchant card fees were $468.8 million, up 24.2%; money transmission services added $19.4 million following the Finxera acquisition. Costs of services increased 29.7% to $359.9 million and rose to 69.9% of revenue from 68.6%, partly due to higher commissions from larger partners.
Revenue by segment was $475.6 million for SMB Payments, $17.1 million for B2B Payments and $22.1 million for Enterprise Payments. Segment operating income was $52.9 million, $0.1 million and $6.8 million, respectively; corporate costs were $26.7 million. B2B revenue declined 18.1%, while Enterprise revenue grew 71.6%, partly reflecting Finxera.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $20.3 million, restricted cash was $28.9 million, working capital was $19.6 million, and approximately $25.0 million was available under the revolving credit facility. Restricted and customer settlement funds are not generally available for operating needs.
- Gross debt was $631.9 million; balance-sheet debt net of discounts and issuance costs was $610.3 million, versus $377.3 million net at year-end 2020. The term facility carried a 6.75% rate and the revolver a 5.75% rate at year-end; both are principally variable-rate debt. The company reported covenant compliance.
- FY2021 financing included $211.0 million gross proceeds from redeemable senior preferred stock and new borrowing. Preferred stock had a $210.2 million year-end carrying value and a stated 13.0% dividend rate for 2021. Preferred dividends and accretion contributed to the common-stockholder loss.
- Management said cash on hand, operating cash generation and revolver availability were expected to meet working-capital needs for at least the next 12 months. No cash dividend was planned for the foreseeable future.
Material changes, outlook and risks
- Revenue growth reflected higher processing volumes amid economic recovery and acquisitions. Management said the recovery from the pandemic-related decline in early 2020 continued through 2021, while future COVID-19 effects remained uncertain.
- Priority acquired Finxera in September 2021 for approximately $407 million net of acquired cash, adding deposit-account management and money-transmission capabilities. It also acquired C&H Financial Services and residual portfolio rights. Acquisition-related costs and acquired intangible amortization increased expenses.
- Interest expense fell to $36.5 million from $44.8 million, mainly after the April 2021 refinancing, but refinancing and debt-modification costs were $8.3 million. The company also recorded a $7.6 million gain related to the termination of warrants in an entity sold during 2021; potential earn-out adjustments remained possible.
- No quantitative revenue or earnings guidance is provided. Management’s stated growth priorities include expanding reseller and enterprise distribution, BaaS and B2B electronic-payments offerings, and pursuing selective acquisitions.
- Key risks include substantial variable-rate debt and refinancing exposure; competition and merchant or reseller attrition; dependence on sponsor banks, processors and other vendors; cyberattacks, outages, fraud and chargebacks; regulatory and payment-network requirements; COVID-19 and economic conditions; and acquisition integration and valuation risks. A 1 percentage-point change in applicable LIBOR was estimated to affect annual cash interest by about $6.4 million, before considering the LIBOR floor.
- Ordinary-course legal matters were not expected by management to have a material effect, although an eventual accrual could be material. The auditor issued an unqualified opinion on the financial statements; the critical audit matter concerned valuation of acquired intangible assets. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Reconcile the $24.6 million common-stockholder loss with positive net income, including preferred dividends and accretion and the NCI preferred-unit redemption charge.
- Assess debt-service capacity using operating cash flow, cash available for operations, revolver capacity, variable-rate exposure and preferred-stock obligations; distinguish company cash from settlement and customer funds.
- Review acquisition performance and integration, especially Finxera’s contribution, acquired-asset valuations, goodwill and expected amortization.
- Track SMB partner concentration and B2B program recovery: one ISO with merchant portability rights generated about 22% of consolidated revenue in 2021.
- Examine the sustainability and composition of Adjusted EBITDA, a non-GAAP measure, relative to GAAP earnings and cash flow.