Priority Technology Holdings, Inc. quarterly report, Q3 FY2022

Business context and reporting period

Priority Technology Holdings, Inc. provides merchant acquiring, payment software, money transmission and commercial payment solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021. The company reports SMB Payments, B2B Payments and Enterprise Payments; 2021 segment comparisons were recast to match the current structure.

Financial performance and position

Revenue increased 25.6% in Q3 and 31.1% in the nine-month period. Merchant card fees remained the largest revenue source; money transmission revenue primarily reflects Finxera, acquired in September 2021. Cost of revenue excluding depreciation and amortization fell to 64.9% of revenue in Q3 and 65.9% for the nine months, from 70.0% and 71.3%, respectively. Higher depreciation and amortization and interest expense partly offset operating income growth. Preferred-stock dividends and accretion—at a 13% annual rate—substantially increased the loss attributable to common stockholders.

For the nine months, operating cash flow was $50.6 million, versus cash used of $2.6 million in 2021. Investing used $21.1 million, mainly for software and equipment, intangible assets and loans to independent sales organizations. Financing used $8.1 million; it included debt repayments, $11.5 million of cash preferred dividends and $4.7 million for repurchases and shares withheld for taxes. The reported $21.4 million increase in cash and restricted cash includes customer-related balances and should not be read as an increase in freely available cash.

At September 30, cash and cash equivalents were $12.7 million and restricted cash was $11.6 million. Working capital was $18.6 million. Gross debt was $618.3 million ($612.3 million term facility and $6.0 million revolver); debt net of discounts and issuance costs was $599.3 million, including current debt. Term-loan and revolver rates were 8.27% and 7.24%, respectively. The company reported approximately $34.0 million of revolver availability and compliance with applicable covenants; its leverage-ratio test was not applicable at quarter-end. Redeemable senior preferred stock had a carrying value of $225.1 million.

Changes versus prior comparable periods

• Growth reflected increased merchant processing volumes, fee-based revenue and the inclusion of Finxera; Finxera drove most of Enterprise Payments’ year-over-year increase.
• SMB Payments revenue rose, but operating income declined 8.2% in Q3 and 5.9% year to date, with management citing partner mix, compensation and other growth-related costs.
• B2B Payments returned to operating profitability, reporting $0.2 million in Q3 and $1.3 million year to date, compared with losses in 2021.
• Interest expense increased 63.4% in Q3 and 51.6% year to date, reflecting acquisition-related borrowing and higher interest rates. The 2021 comparison also included $8.3 million of debt extinguishment and modification costs.
• Common-stock repurchases under the 2022 program totaled approximately 1.0 million shares for $4.2 million through September 30; about 1.0 million authorized shares remained available.

Outlook, commentary and risks

No numerical revenue or earnings guidance is provided in the supplied filing text. Management expects cash on hand, operating cash generation and available revolver borrowings to meet working-capital requirements for at least the next 12 months. Management attributed revenue growth to processing volume, acquisitions and fee revenue, while noting rate decreases and partner mix as offsets. The company recorded a high effective tax rate, primarily due to a valuation allowance on certain business-interest carryover deferred tax assets, and continues to assess deferred-tax-asset recoverability.

Key risks include variable-rate debt and rising rates; dependence on Visa and Mastercard transactions, sponsoring member banks and third-party processors; payment-system outages, cybersecurity and regulatory risks; economic conditions and consumer or commercial spending; acquisition integration and partner concentration; and cash balances at financial institutions that substantially exceed FDIC insurance limits. Minimum third-party processor fees were approximately $15.7 million for 2022 and $17.0 million for 2023. Ordinary-course legal matters were not expected by management to have a material effect, though a future loss accrual, if required, could be material. The Inflation Reduction Act’s share-repurchase excise tax and corporate alternative minimum tax take effect after 2022; management did not expect a material effect but was evaluating the provisions. Management reported effective disclosure controls as of September 30, 2022.

Important facts for investors to verify

• How much revenue and operating income growth is organic versus attributable to Finxera and other acquisitions, and whether processing volume and fee trends persist.
• Whether improved cost-of-revenue ratios can be sustained amid partner mix, compensation and growth-related expenses.
• Cash available for corporate use after excluding customer and settlement funds, and the assumptions supporting management’s 12-month liquidity outlook.
• Debt-service capacity under higher rates, revolver availability, covenant headroom and the substantial preferred-stock dividend and accretion burden.
• The sustainability and collectability of B2B revenue recognized when recovery became probable, along with contingent consideration and processor commitments.