Paysafe Limited Form 6-K Summary
Filing date: October 19, 2022. The filing contains unaudited condensed consolidated financial statements and management’s discussion and analysis for the three and six months ended June 30, 2022, with comparable 2021 periods. Amounts are in U.S. dollars thousands unless otherwise stated.
Business Context and Reporting Period
Paysafe is a global payments provider operating through two reportable segments: US Acquiring and Digital Commerce. Its offerings include card processing, digital wallets, eCash, pay-by-bank and other payment solutions across more than 120 countries. The company processed approximately $33.4 billion of gross dollar volume in the second quarter and $64.5 billion in the first six months of 2022.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $378,913 | $384,343 | $746,581 | $761,767 |
| Operating income/(loss) | $(703,086) | $39,567 | $(1,894,834) | $2,946 |
| Net income/(loss) | $(658,739) | $6,785 | $(1,829,551) | $(53,744) |
| Net income/(loss) attributable to Paysafe | $(658,739) | $6,597 | $(1,829,922) | $(54,050) |
| Adjusted EBITDA | $102,953 | $118,804 | $206,920 | $232,034 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,379,447 | $41,010 |
Second-quarter revenue declined 1.4% year over year, while six-month revenue declined 2.0%. Adjusted EBITDA declined 13.3% in the quarter and 10.8% for the six-month period. The company reported a basic loss per share of $0.91 for the quarter and $2.52 for the six months, compared with 2021 basic earnings per share of $0.01 and a loss of $0.07, respectively.
Reported operating margins and net income were substantially affected by goodwill impairment expense of $676,456 in the second quarter and $1,882,187 for the six months. The effective tax rate was 2.5% for the quarter and 3.2% for the six months, compared with 71.1% and 25.0% in the prior-year periods.
Segment Performance
| Segment | Q2 2022 Revenue | Q2 2021 Revenue | Q2 2022 Adjusted EBITDA | Q2 2021 Adjusted EBITDA |
|---|---|---|---|---|
| US Acquiring | $187,150 | $164,642 | $53,036 | $40,660 |
| Digital Commerce | $191,763 | $219,701 | $71,722 | $95,064 |
| Corporate | — | — | $(21,805) | $(16,920) |
- US Acquiring revenue increased 13.7% in the quarter and 12.0% for the six months, primarily from higher transaction volumes and inflationary increases in ticket prices. Segment Adjusted EBITDA increased 30.4% in the quarter and 25.5% for the six months.
- Digital Commerce revenue declined 12.7% in the quarter and 12.1% for the six months, primarily due to European regulatory changes, lower promotional activity and unfavorable foreign exchange, partly offset by acquisitions. Segment Adjusted EBITDA declined 24.6% and 20.9%, respectively.
- Total gross dollar volume increased 3.3% in the quarter to $33,361 million and 7.9% for the six months to $64,530 million. The total take rate declined to 1.1% in the quarter and 1.2% for the six months.
Cash Flow, Liquidity and Debt
- Net cash provided by operating activities was $1,379,447 for the six months, compared with $41,010 in 2021. The increase primarily reflected a $1,250,221 increase in funds payable and amounts due to customers and therefore includes customer-related settlement balances; it was not driven by positive GAAP earnings.
- Investing cash outflows were $494,262, including $424,722 for acquisitions, principally SafetyPay, and $66,875 for purchases of merchant portfolios and other intangible assets.
- Cash and cash equivalents were $243,533 at June 30, 2022, compared with $313,439 at December 31, 2021. Customer accounts and other restricted cash totaled $2,467,780, bringing cash and restricted cash included in the cash flow statement to $2,711,313.
- Total debt principal outstanding was $2,696,124, with carrying value of debt of $2,667,378. Non-current debt was $2,657,188 and short-term debt was $10,190.
- The company had $268,939 available under its $305,000 revolving credit facility. A settlement-related line of credit was increased from $50,000 to $75,000 and extended to June 2025; $73,000 was outstanding at June 30, 2022.
- Paysafe was in compliance with its financial covenants at June 30, 2022. Management stated that available cash, borrowing capacity and expected operating cash flows should be sufficient to fund existing operations and planned requirements for the foreseeable future.
Material Changes, Unusual Items and Outlook
- The company recognized $1,882,187 of goodwill impairment for the first six months, allocated between US Acquiring and Digital Commerce. Management cited sustained declines in stock price and market capitalization, lower debt fair values, and adverse market and macroeconomic conditions. Further impairment remains possible if forecasts, discount rates, growth assumptions, stock price or debt values deteriorate.
- A $33,603 provision was recorded for payments to certain customers following an internal review of foreign-exchange disclosures in the Digital Commerce business. Management does not expect additional liability or ongoing operating impact from this matter.
- Restructuring and other costs increased to $54,193 for the six months, including the customer-payment provision, acquisition costs and CEO transition costs.
- Paysafe completed the acquisition of SafetyPay in January 2022 for cash consideration of $449,790, including $284,239 of goodwill. The acquisition contributed $14,166 of revenue and a net loss of $8,312 during the six months after acquisition.
- Subsequent to June 30, 2022, the company repurchased $28,618 of secured notes for $21,794 and purchased $21,336 of merchant portfolios.
- Alex Gersh became CFO on October 3, 2022, succeeding Ismail Dawood. Bruce Lowthers became CEO in May 2022, succeeding Philip McHugh.
- Risks highlighted include macroeconomic weakness, foreign exchange volatility, interest-rate exposure, chargebacks and credit losses, regulatory requirements, cybersecurity, litigation, seasonality, COVID-19 effects and the company’s substantial leverage. A 100-basis-point increase in borrowing rates was estimated to adversely affect annualized net loss by approximately $17.4 million as of June 30, 2022.
- A consolidated securities class action alleges misleading statements concerning Paysafe securities. The company cannot estimate any potential loss or range of loss, which could be material. A litigation provision of $8,550 was recorded for other proceedings.
Investor Verification Checklist
- Verify the sustainability and composition of the unusually high operating cash flow, particularly the increase in funds payable and amounts due to customers and the treatment of restricted customer funds.
- Assess whether Digital Commerce revenue and profitability can stabilize following European regulatory changes, reduced promotional activity and foreign exchange effects.
- Review goodwill impairment assumptions and test for additional impairment risk, including sensitivity to share price, discount rates, growth rates and operating forecasts.
- Evaluate leverage, variable-rate debt exposure, covenant headroom, refinancing requirements and the availability of unrestricted liquidity.
- Review the customer-payment provision, securities litigation, cybersecurity-related claims and other contingencies for potential amounts exceeding recorded liabilities.
- Reconcile Adjusted EBITDA to GAAP results and consider that Adjusted EBITDA excludes interest, taxes, capital expenditures, working-capital needs and debt service.