Priority Technology Holdings, Inc. — Q2 2022 Form 10-Q
Business context and period: The company provides merchant acquiring, integrated payment software, money transmission and commercial payment solutions. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Results include Finxera, acquired in September 2021; the filing cautions interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $166.4 million | $125.0 million | $319.7 million | $238.3 million |
| Operating income | $13.1 million | $7.4 million | $23.9 million | $11.9 million |
| Net income (loss) | $0.3 million | $(9.5) million | $(0.05) million | $(12.2) million |
| Net loss attributable to common stockholders | $(8.3) million | $(24.2) million | $(17.0) million | $(26.8) million |
| Basic and diluted loss per share | $(0.11) | $(0.35) | $(0.22) | $(0.39) |
| Operating cash flow | Not reported by quarter | $30.3 million | $(9.8) million |
Q2 gross margin was approximately 33.5%, up from 28.1%; operating margin was approximately 7.8%, versus 5.9%. For the first half, gross margin was approximately 33.6%, versus 28.0%, and operating margin approximately 7.5%, versus 5.0%. Gross margin is calculated as revenue less cost of revenue, divided by revenue.
At June 30, cash and cash equivalents were $22.2 million, with restricted cash of $11.7 million. Working capital was $23.8 million. Total debt obligations were $628.3 million gross, including $613.8 million under the term facility and $14.5 million under the revolver; debt net of discounts and issuance costs was $608.4 million. The company reported approximately $25.5 million of revolver availability and said the $14.5 million revolver balance was repaid after quarter-end. Cash balances include neither the $502.4 million of customer account balances nor their corresponding obligations, which are not available for general operations.
For the first half, investing activities used $12.7 million and financing activities provided $0.6 million. Cash paid for interest was $21.4 million. The 13% annual preferred dividend totaled $15.3 million for the half, of which $7.1 million was paid in cash; dividends and accretion attributable to preferred holders reduced earnings available to common shareholders.
Material changes versus prior period
- Revenue increased 33.1% in Q2 and 34.2% for the first half. Merchant card fees rose 18.1% and 18.4%, respectively, supported by higher processing volumes; rate decreases partially offset growth.
- Money transmission services contributed $17.2 million in Q2 and $33.5 million in the first half, primarily from the Finxera acquisition. Enterprise Payments revenue rose to $18.6 million in Q2 from $0.7 million and to $36.0 million for the half from $1.4 million.
- Cost of revenue grew more slowly than revenue, and management attributed improved gross margin primarily to Finxera, partly offset by merchant mix and higher commissions to larger partners.
- Depreciation and amortization increased to $17.5 million in Q2 and $34.9 million for the half, mainly reflecting acquired intangible assets. Salary and benefits also rose, including from Finxera headcount and company growth.
- Interest expense increased to $12.3 million in Q2 and $23.9 million for the half, primarily due to additional borrowing to fund Finxera. Prior-year periods included $8.3 million of debt extinguishment and modification costs.
- Cash from operations improved to $30.3 million for the half from a $9.8 million outflow. The company reclassified prior-period cash flows related to customer settlement balances and PIK interest; these presentation changes did not affect previously reported cash balances or net cash change.
Outlook, risks and unusual items
Management expects cash on hand, operating cash generation and available revolver borrowings to meet working-capital needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management noted uncertainty around COVID-19 and its potential effects on business, asset recoverability, liquidity and capital resources.
The term facility and revolver bear variable rates based on LIBOR or a base rate; stated term-facility interest was 6.81% at quarter-end. The credit agreement includes restrictive covenants, and the company reported compliance at June 30, 2022. The preferred stock dividend rate is also LIBOR-based. Management was evaluating the transition from LIBOR to alternative reference rates.
Risks highlighted include economic weakness and reduced spending, competition, reliance on distribution partners and third-party processors, payment-network rules and fees, data security and processing-system disruptions, regulation, and acquisition-related risks. The company relies substantially on Visa and Mastercard processing and holds significant cash above FDIC insurance limits. Ordinary-course legal matters were not expected to have a material effect, though a future loss accrual could be material if warranted. Minimum third-party processing fees were approximately $15.7 million for 2022 and $16.6 million for 2023.
In Q2, the board authorized repurchases of up to 2.0 million shares for up to $10.0 million; 379,425 shares were purchased under the program during the quarter. A separate $2.1 million payment related to an amended earnout for previously acquired merchant portfolio rights, including an advance subject to repayment if specified metrics are not achieved. The company reported no goodwill or intangible-asset impairment indicators as of June 30.
Important facts for investors to verify
- How much of revenue and margin growth is recurring and organic versus attributable to Finxera and other acquisitions, and how merchant volume and pricing trends develop.
- Whether operating cash flow remains strong after working-capital movements and customer settlement activity, and how much cash is freely available for corporate use.
- Debt service capacity under variable-rate borrowings, future interest costs, covenant headroom and the effect of preferred dividends on common-stockholder returns.
- Whether the post-quarter revolver repayment and share repurchases affect liquidity or planned investment and acquisition spending.
- Potential exposure from contingent payments, processing commitments, legal claims, customer-fund handling and the LIBOR transition.