Priority Technology Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Priority provides merchant acquiring, integrated payment software, money transmission, and commercial payment solutions. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $182.3 million | $166.4 million | $367.3 million | $319.7 million |
| Operating income | $19.1 million | $13.1 million | $36.0 million | $23.9 million |
| Net income (loss) | $(0.6) million | $0.3 million | $(1.1) million | $(0.05) million |
| Net loss attributable to common stockholders | $(12.4) million | $(8.3) million | $(24.2) million | $(17.0) million |
| Diluted loss per common share | $(0.16) | $(0.11) | $(0.31) | $(0.22) |
Revenue increased 9.6% in Q2 and 14.9% for the first half. Operating income rose about 46% and 51%, respectively. Cost of revenue was $115.3 million in Q2 and $237.2 million for the first half; revenue less cost of revenue was approximately 36.8% and 35.4% of revenue, respectively, versus 33.5% and 33.6% in 2022. Consolidated operating margin was about 10.5% in Q2 and 9.8% for the first half, compared with 7.8% and 7.5%.
- Segment trends: Enterprise Payments revenue grew 68.8% in Q2 and 63.1% year to date, benefiting from more enrollments and billed clients and higher interest income; operating income rose to $16.1 million and $28.7 million. SMB Payments revenue grew 3.8% in Q2 and 11.1% year to date, but operating income declined to $11.5 million and $23.6 million amid mix-related margin compression and higher personnel and operating costs. B2B Payments revenue fell 43.4% in Q2 and 48.2% year to date as managed-services programs wound down; the segment reported a small Q2 operating loss and a $0.9 million first-half loss.
- Interest, taxes, and preferred stock: Interest expense rose 44.7% in Q2 and 48.5% for the first half, primarily due to higher rates. The effective tax rate was 135.1% in Q2 and 201.3% year to date, affected by a valuation allowance on certain business-interest deferred tax assets. Preferred-stock dividends and accretion attributable to preferred holders were $11.8 million in Q2 and $23.1 million for the first half, materially increasing the loss attributable to common stockholders. The preferred stock’s stated dividend rate was 17.2% at June 30.
Cash flow, balance sheet, and liquidity
For the six months ended June 30, operating cash flow was $46.9 million, versus $30.3 million in 2022; investing cash outflow was $13.1 million, versus $12.7 million. Financing cash inflow was $144.1 million, driven largely by a $175.5 million increase in net settlement and customer/subscriber obligations. This movement relates to funds held for customers and should not be treated as ordinary operating liquidity. Cash and cash equivalents were $17.6 million, with restricted cash of $12.4 million at quarter-end. Settlement assets and customer/subscriber balances of $710.7 million were substantially offset by related obligations of $710.6 million and are not generally available for company operations.
Total debt obligations before discounts and issuance costs were $612.7 million, including $607.2 million under the term facility and $5.5 million drawn on the revolver; the balance-sheet carrying amount, including current debt, was approximately $596.1 million. The term loan rate was 11.23% as reported in the debt table (11.28% using SOFR terms effective June 30); the revolver rate was 9.94% in the table (9.97% using SOFR terms). The term loan matures in April 2027 and the revolver in April 2026. The company reported $49.5 million of revolver availability at June 30 and compliance with debt covenants; the leverage test was not applicable at that date. Working capital was $3.4 million.
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 specific revenue or earnings guidance was provided.
Material developments, outlook, and risks
- On June 30, the credit agreement was amended to transition reference rates from LIBOR to SOFR and increase the revolving commitment. The filing describes a $65 million facility, with $10 million of the increase contingent on the Plastiq transaction; the contingent amount had not closed as of quarter-end.
- After quarter-end, on July 31, Priority completed its acquisition of substantially all of Plastiq’s assets for approximately $43.8 million, including $28.5 million in cash funded by revolver borrowings, with the balance in deferred or contingent consideration and equity interests. Plastiq had filed for Chapter 11 in May.
- A partner-bank invoice dispute was resolved in Q2: Priority recorded a revised $1.0 million invoice and expects to recognize approximately $1.3 million of future price concessions as related revenue is recognized. Contingent consideration liabilities increased to $11.4 million at June 30.
- Other disclosed risks include exposure to payment-network and sponsor-bank relationships, third-party processors and vendors, cybersecurity and system interruptions, regulation, competition, economic conditions, and acquisition execution. The company noted that a majority of its cash and restricted cash is held at financial institutions in amounts substantially above FDIC limits. Ordinary-course legal proceedings were not expected by management to have a material effect, though an eventual recorded loss could be material.
Key facts for investors to verify
- Whether Plastiq integration, deferred or contingent consideration, and additional revolver borrowing affect leverage, liquidity, and results after the reporting date.
- Whether Enterprise Payments growth and higher interest income are sustainable, and whether SMB margin pressure or B2B program wind-down continues.
- How higher floating-rate debt costs and the preferred stock’s dividend obligations affect cash available to common stockholders.
- Whether cash generation remains adequate after excluding customer settlement balances, and whether the company maintains covenant compliance and revolver availability.
- Potential outcomes of contingent consideration, legal matters, the partner-bank price concessions, and the company’s valuation allowance for deferred tax assets.