Priority Technology Holdings, Inc. — Q1 2021 Form 10-Q
Business context and period. Priority provides merchant acquiring, integrated payment software, and commercial payment solutions. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020; balance-sheet comparisons are with December 31, 2020. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $113.3 | $96.9; up 16.9% |
| Operating income | $4.5 | $3.6; up 27.2% |
| Operating margin | 4.0% | 3.7% |
| Interest expense | $9.2 | $10.3 |
| Net loss | $(2.7); $(0.04) per share | $(5.9); $(0.09) per share |
| Cash flows from operations | $(13.4) reported, including settlement-related restricted cash movements; unrestricted operating activities generated $6.5 | $(7.3) reported |
| Investing / financing cash flows | $(5.7) / $(4.2) | $(3.2) / $(0.3) |
| Cash and restricted cash | $5.8 unrestricted; $58.9 restricted | $9.2 and $78.9 at Dec. 31, 2020 |
| Total debt obligations | $379.1 gross; $350.7 long-term debt net of discounts and costs | $382.0 gross at Dec. 31, 2020 |
| Working capital | $(18.0) | $(13.0) at Dec. 31, 2020 |
Q1 2021 operating cash use included a $19.9 million decrease in restricted cash related to customer settlement timing. Capital spending and software additions were $2.8 million, and intangible-asset acquisitions used $2.9 million. At March 31, gross debt comprised $274.6 million under the senior term facility and $104.5 million under the subordinated term loan; the $25 million revolving facility was undrawn. The company reported a 5.44x total net leverage ratio and compliance with its then-current financial covenants. Stockholders’ deficit was $99.8 million, versus $98.6 million at year-end.
Material changes and operating drivers
- Consumer Payments: Revenue rose 26.0% to $108.4 million, with operating income increasing 86.8% to $13.4 million. Growth included $9.7 million from specialized ecommerce merchants and $12.7 million from the base business. Processing dollar volume grew 14.3% and transactions grew 6.7%.
- Commercial Payments: Revenue fell 45.0% to $3.5 million and the segment recorded a $0.4 million operating loss. The main driver was a customer’s curtailed merchant-financing program and changed business model; accounts-payable automation revenue edged higher.
- Integrated Partners: Revenue fell 69.0% to $1.4 million, primarily because RentPayment was sold in September 2020. The segment reported $0.1 million of operating income.
- Costs of services rose 23.4% to $81.9 million, while SG&A increased 25.4% to $8.3 million. Q1 2021 corporate SG&A included $3.6 million of professional fees tied to the pending Finxera acquisition, April debt refinancing, and preferred-stock issuance.
- The net loss narrowed by 54.4%; lower interest expense, operating improvement, and a larger income-tax benefit contributed. The effective tax rate was 45.4%, and the company maintained a full valuation allowance against deferred tax assets for nondeductible interest expense.
Outlook, financing, and risks
- Management said available cash, operating funds, and revolver capacity were expected to cover working-capital needs for at least the next 12 months and anticipated covenant compliance. It cautioned that COVID-19’s magnitude, duration, and effects remain uncertain and could adversely affect liquidity, results, and covenant compliance. No quantitative earnings guidance was provided.
- After quarter-end, on April 27, 2021, the company issued $150 million of senior preferred stock and warrants, and entered a new credit agreement with facilities totaling $630 million: a $300 million initial term loan, a $40 million revolver, and a $290 million delayed-draw term loan. The prior credit agreements were refinanced; management said the refinancing reduced current debt to $3.0 million, improved working capital, and increased revolver capacity. Additional preferred-stock issuances were contemplated subject to conditions.
- The announced Finxera acquisition had a stated base purchase price of $425 million, subject to adjustments, and was expected to be funded in part with the delayed-draw facility. The filing describes the transaction as pending; it does not establish that it had closed by the report date.
- On April 28, a subsidiary completed a $42.4 million residual-portfolio asset acquisition, paying $37.4 million cash after netting a $5.0 million seller note.
- Risks include COVID-related uncertainty; reliance on card networks and sponsor banks; processing-system, data-security, regulatory, and third-party-provider risks; and merchant relationships referred through ISOs. Merchants referred by one ISO with potential portability rights represented 23.3% of consolidated revenue in Q1 2021. Minimum third-party processing-fee commitments were approximately $14.8 million for 2021 and $7.8 million in each of 2022 and 2023.
- Ordinary-course legal matters were not expected by management to have a material effect, though an estimable unfavorable outcome could require a material accrual. The company reported no goodwill impairment in Q1 and no additional intangible-asset impairment indicators.
Important facts for investors to verify
- Closing status, final purchase-price adjustments, funding, and integration risks for the Finxera acquisition.
- Terms and potential dilution from the preferred stock and warrants, including any additional preferred-stock issuances.
- Post-refinancing debt balances, interest costs, maturity profile, covenant headroom, and use of the delayed-draw and revolving facilities.
- Whether Consumer Payments growth and margins persist, and how much was influenced by the Q1 2020 COVID comparison and specialized ecommerce activity.
- Cash conversion excluding restricted settlement movements, and the effect of settlement timing on reported operating cash flow and liquidity.
- Exposure to the significant ISO referral relationship, customer program changes, processor commitments, and contingent payments.