Priority Technology Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Priority provides merchant acquiring, integrated payment software and commercial payment services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $125.0 | $92.4 | $238.3 | $189.3 |
| Operating income | $7.4 | $4.0 | $11.9 | $7.6 |
| Net loss | $9.5 | $7.9 | $12.2 | $13.7 |
| Net loss attributable to common stockholders | $24.2 | $7.9 | $26.8 | $13.7 |
| Loss per common share | $0.35 | $0.12 | $0.39 | $0.20 |
- Revenue increased 35.4% in Q2 and 25.9% in the first half. Consumer Payments led growth, increasing 46.4% and 35.9%, respectively; Commercial Payments and Integrated Partners revenue declined in both comparisons.
- Operating margin was approximately 5.9% in Q2 versus 4.4% a year earlier, and 5.0% in the first half versus 4.0%. Costs of services rose faster than revenue in Q2, increasing 44.0%.
- Q2 common-stockholder loss includes $3.9 million of preferred dividends and accretion and $10.8 million related to the PHOT non-controlling preferred-unit redemption. First-half common-stockholder loss includes the same items.
- Interest expense declined to $7.3 million in Q2 and $16.5 million in the first half, from $11.7 million and $22.0 million, respectively, reflecting lower debt and refinancing. The first half also included $8.3 million of debt extinguishment and modification costs.
Cash flow, balance sheet and financing
- For the first half, reported operating cash flow was negative $45.1 million, investing cash flow negative $83.1 million and financing cash flow positive $69.4 million. The operating cash outflow primarily reflects a $60.6 million reduction in restricted cash after customer funds were moved from company-controlled accounts to bank-owned FBO accounts. Unrestricted operating activities generated $15.5 million.
- At June 30, cash was $11.1 million and restricted cash $18.2 million. Working capital was $2.2 million. Total assets were $442.9 million; total liabilities were $410.7 million.
- Debt principal was $330.0 million: a $300.0 million term loan and $30.0 million drawn on a $40.0 million revolver. The term loan bears interest at LIBOR, subject to a 1% floor, plus 5.75%, and matures in April 2027. The company reported a 3.43x total net leverage ratio and compliance with financial covenants at quarter-end.
- In April, the company refinanced prior facilities and issued $150 million of redeemable senior preferred stock for $139.5 million net proceeds after discounts and fees. The preferred stock carries cumulative dividends initially based on LIBOR plus 12%; part of the Q2 dividend was paid in cash and part in kind. Warrants to purchase up to 1.8 million common shares were also issued.
Material changes, outlook and risks
- Management attributed much of the year-over-year revenue growth to recovery from pandemic-related disruption in 2020 and cautioned that the comparison benefited from the weak prior-year period. The company said the pandemic’s precise contribution to growth was not quantifiable.
- Priority announced a pending Finxera acquisition for a stated base purchase price of $425 million, subject to adjustments and closing conditions, and expected it to close in Q3 2021. The company had a $290 million delayed-draw term loan facility and commitments for up to an additional $100 million of preferred financing that could help fund acquisitions.
- 2021 acquisitions included residual portfolio rights and a business acquisition. The residual portfolio purchase price recorded at June 30 was $46.2 million, with further contingent payments possible; the June business acquisition had an initial $35 million cash price and total consideration capped at $60 million subject to earn-outs.
- Management said cash on hand, operating cash generation and available revolver borrowings were expected to meet working-capital needs for at least 12 months. This outlook depends on estimates, including the uncertain effects of COVID-19. The filing provides no specific revenue or earnings guidance.
- Risks include leverage and debt covenants, acquisition execution and contingent payments, payment-network and third-party processor dependence, merchant losses and chargebacks, and economic or pandemic disruption. One ISO with potential merchant portability rights generated approximately 23.2% of consolidated Q2 revenue. Management said ordinary-course legal proceedings were not expected to have a material effect; no material legal proceeding was identified.
- Disclosure controls were assessed as effective at June 30, 2021, and no material second-quarter change in internal control over financial reporting was reported.
Investor verification priorities
- Confirm the Finxera closing, final purchase price and funding mix, including any delayed-draw debt or additional preferred issuance.
- Track preferred dividend accumulation, redemption terms and warrant-related dilution, alongside the company’s leverage, interest costs and covenant headroom.
- Assess whether Consumer Payments growth persists beyond pandemic-affected comparisons and whether weakness in Commercial Payments and Integrated Partners continues.
- Reconcile reported operating cash flow to unrestricted cash generation and monitor settlement-fund movements, working capital and liquidity.
- Review acquisition earn-outs and portfolio performance, and monitor the concentrated ISO relationship and merchant portability exposure.