Paysafe Ltd current report, Q3 FY2023

Paysafe Limited Form 6-K Summary

Filing date: August 16, 2023. The filing presents unaudited condensed consolidated financial statements and management’s discussion and analysis for the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Paysafe provides payment processing, merchant acquiring, digital wallet, eCash and related payment solutions through its Merchant Solutions and Digital Wallets segments.

Financial performance

Metric	Three months ended June 30, 2023	Three months ended June 30, 2022	Six months ended June 30, 2023	Six months ended June 30, 2022
Revenue	$402.3 million	$378.9 million	$790.2 million	$746.6 million
Operating income/(loss)	$34.2 million	$(703.1) million	$69.1 million	$(1,894.8) million
Net loss attributable to Paysafe	$(1.8) million	$(658.7) million	$(5.6) million	$(1,829.9) million
Adjusted EBITDA	$113.0 million	$103.0 million	$220.8 million	$206.9 million
Operating margin	8.5%	(185.5)%	8.7%	(253.8)%
Adjusted EBITDA margin	28.1%	27.2%	27.9%	27.7%
Net loss per share	$(0.03)	$(10.89)	$(0.09)	$(30.29)

Revenue increased 6.2% in the quarter and 5.8% year to date. Merchant Solutions revenue increased 6.1% and 7.2%, respectively; Digital Wallets revenue increased 6.5% and 4.2%.
Transaction volume increased to $35.5 billion in the quarter and $69.3 billion year to date, from $33.4 billion and $64.5 billion, respectively. Reported total take rate was approximately 1.1% in the quarter and year to date.
Adjusted EBITDA increased 9.8% in the quarter and 6.7% year to date. Digital Wallets generated the larger segment contribution, with quarterly Adjusted EBITDA of $77.2 million versus $55.8 million for Merchant Solutions.
Interest expense increased 29.3% in the quarter and 36.5% year to date, primarily due to higher variable interest rates, partly offset by debt repurchases.

Cash flow, liquidity and debt

Net cash used in operating activities was $352.9 million for the six months ended June 30, 2023, compared with $1.379 billion of operating cash flow in the prior-year period. The principal driver was a $473.2 million decrease in funds payable and amounts due to customers.
Net cash used in investing activities was $75.0 million, including $23.5 million for merchant portfolios and $49.5 million for other intangible assets. The prior-year period included $424.7 million for the SafetyPay acquisition.
Net cash used in financing activities was $97.7 million, including $83.6 million of debt repurchases.
Cash and cash equivalents were $206.7 million at June 30, 2023, compared with $260.2 million at December 31, 2022. Customer accounts and other restricted cash were $1.426 billion; these funds are primarily subject to safeguarding requirements and are not equivalent to unrestricted corporate liquidity.
Total debt principal outstanding was $2.591 billion, compared with $2.658 billion at December 31, 2022. Carrying-value debt was $2.576 billion, including $10.2 million of short-term debt and $2.566 billion of non-current debt.
The revolving credit facility had $27.6 million drawn and $277.4 million available at June 30, 2023. The company also had a $75.0 million line of credit restricted to funding merchant settlements.
Management stated that available cash, borrowing capacity and expected operating cash flows should be sufficient to fund existing operations and planned requirements for the next 12 months. The company reported compliance with its debt covenants at June 30, 2023.

Material changes from the prior comparable period

The prior-year periods included $1.882 billion of goodwill impairment expense, including $1.159 billion in Merchant Solutions and $723.0 million in Digital Wallets. Only $275,000 of impairment expense was recorded in the first half of 2023, although management identified an impairment indicator related to the sustained decline in the stock price and market capitalization and concluded that fair value exceeded carrying value.
Restructuring and other costs fell to $1.3 million in the quarter and $3.3 million year to date, compared with $41.6 million and $54.2 million, respectively, in 2022. The prior year included a $33.6 million provision for customer payments and higher acquisition-related costs.
Other income declined to $7.4 million in the quarter and $9.9 million year to date, partly because 2023 included foreign exchange losses rather than the prior-year foreign exchange gains and lower warrant-liability fair value gains.
Credit loss expense decreased to $8.6 million year to date from $14.9 million, although write-offs increased to $15.2 million from $11.3 million, primarily due to aged receivables in Merchant Solutions.
The company amended its U.S. dollar debt facilities in April 2023 to replace LIBOR with term SOFR. The interest-rate derivative converted from LIBOR to SOFR after June 30, 2023.
Effective April 1, 2023, the U.K. statutory tax rate increased from 19% to 25%; management applied a 23.5% weighted-average rate for 2023. The reported effective tax rates were unusually high at 136.9% for the quarter and 214.9% year to date because of valuation allowances and discrete items.

Outlook, commentary and risks

The filing does not provide specific quantitative revenue, Adjusted EBITDA or cash-flow guidance for full-year 2023.
Management cited global economic conditions, consumer and business spending, foreign exchange volatility, interest rates, seasonality, regulatory requirements, credit losses and merchant chargebacks as factors that may affect future performance.
Management reported unfavorable foreign-exchange effects on Digital Wallets revenue and stated that a 100-basis-point increase in interest rates would have an estimated $16.8 million unfavorable impact on annualized net loss at June 30, 2023.
Liquidity is affected by safeguarding obligations for customer funds and by fluctuations in funds payable and settlement balances. Restricted customer cash and corresponding customer liabilities should be distinguished from unrestricted corporate cash.
The company is subject to litigation, including consolidated securities litigation alleging misleading market disclosures. Paysafe stated that it cannot estimate the potential loss or range of loss, which could be material.
A preliminary settlement was reached in litigation related to a 2020 cybersecurity incident that potentially affected approximately 91,000 merchants and agents. The final timing and amount of potential settlements remain uncertain.
A remaining accrual of $3.8 million related to customer payments arising from disclosures of foreign-exchange rates in the Digital Wallets business remained at June 30, 2023. Management did not expect additional liability from that matter.
Management changes included the announced departures of the President of Digital Wallets and the President of Merchant Solutions, the latter effective July 1, 2023.

Investor verification items

Verify the sustainability of revenue and Adjusted EBITDA growth, particularly the contribution from higher interest income in Digital Wallets and the effect of foreign exchange.
Assess operating cash conversion, including the impact of movements in funds payable, customer safeguarding balances and settlement timing.
Review debt maturities, variable-rate exposure, covenant headroom and the company’s ability to reduce leverage while funding operations.
Monitor goodwill and intangible-asset valuations given the continuing stock-price impairment indicator and the company’s sensitivity to projected cash flows, discount rates and growth assumptions.
Evaluate credit-loss, chargeback and aged-receivable trends in Merchant Solutions.
Track the securities litigation, cybersecurity-related settlement and other contingencies for potential cash outflows or disclosure changes.
Reconcile Adjusted EBITDA to GAAP results; the filing states that Adjusted EBITDA is not a measure of liquidity or cash flow and excludes interest, taxes, working-capital changes, capital expenditures and debt service.