Priority Technology Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 31, 2021. The filing reports annual results and unaudited quarterly results. Priority provides merchant acquiring, integrated payment software and commercial payable solutions.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $404.3 million | $371.9 million |
| Operating income / margin | $20.9 million / 5.2% | $7.2 million / 1.9% |
| Interest expense | $44.8 million | $40.7 million |
| Net income (loss) attributable to Priority stockholders | $25.7 million | $(33.6) million |
| Operating cash flow | $47.1 million | $39.4 million |
| Consolidated Adjusted EBITDA (non-GAAP) | $63.8 million | $72.1 million |
- Revenue rose 8.7%, while operating expenses increased 5.2%. Operating margin improved, but Adjusted EBITDA declined about 11.5%.
- Net income included a $107.2 million pre-tax gain on the sale of RentPayment. Consolidated net income was $71.1 million before $45.4 million attributable to redeemable or redeemed non-controlling interests; the remaining $25.7 million was attributable to Priority stockholders.
- Fourth-quarter revenue was $106.1 million and operating income was $6.2 million. Priority stockholders recorded a fourth-quarter net loss of $1.0 million.
- Bankcard processing volume was $42.3 billion, down 1.6%; transactions were 456.7 million, down 11.0%. Consumer Payments revenue increased 11.3% to $367.8 million; Commercial Payments revenue fell 19.5% to $20.9 million; Integrated Partners revenue increased 2.2% to $15.6 million.
- Cash was $9.2 million and restricted cash was $78.9 million at year-end. Restricted cash primarily relates to settlement funds and reserves, and is not equivalent to unrestricted liquidity. Working capital was negative $13.0 million; approximately $25.0 million was available on the revolver, with no revolving balance outstanding.
- Term debt was $382.0 million, versus $495.5 million of debt obligations at year-end 2019; debt net of unrestricted cash produced a reported leverage ratio of 5.85x, against a 7.75x covenant limit. Debt was floating-rate, with principal maturities in 2023. Management said available cash, operating cash generation and revolving availability should cover requirements for at least the next 12 months.
- Investing cash flow was positive $166.4 million, principally reflecting $179.4 million of RentPayment sale proceeds; financing cash flow was negative $175.8 million, including debt repayments and distributions/redemptions of non-controlling interests.
Material changes and unusual items
- The September 2020 RentPayment sale generated a $107.2 million pre-tax gain. Priority used $106.5 million of proceeds to prepay senior term debt. The sold business had generated $12.0 million of 2020 revenue, and its sale affects future Integrated Partners results.
- COVID-19 sharply reduced processing dollars from mid-March through April 2020; management reported a roughly 35% decline versus comparable 2019 weeks. Processing dollars subsequently rebounded, with year-over-year growth of 3.0% in the fourth quarter. A specialized merchant acquiring program contributed $28.8 million to 2020 Consumer Payments revenue, compared with $7.4 million in 2019.
- Higher interest margins and revolving borrowings raised interest expense; a $106.5 million senior debt prepayment partly offset the debt balance. A $1.8 million intangible-asset impairment and a $0.5 million note-receivable allowance were also recorded.
- After year-end, Priority agreed to acquire Finxera for a stated $425 million base purchase price, subject to adjustments and closing conditions, with closing expected in the third quarter of 2021. Committed financing includes term and delayed-draw loans and preferred equity. The preferred securities carry initial dividends of LIBOR plus 12% annually, with at least LIBOR plus 5% payable in cash; the transaction and financing were not completed as of the filing.
Outlook, risks and other disclosures
- No quantified operating guidance was provided. Management described growth plans spanning reseller and merchant expansion, value-added products, B2B electronic payments and selective acquisitions.
- Key risks include continuing COVID-19 effects, competition and pricing pressure, merchant or reseller attrition, cyber incidents and service outages, reliance on processors and sponsor banks, payment-network rules, fraud and chargebacks, and acquisition integration and financing risks.
- Concentration warrants attention: one reseller represented approximately 17.1% of bankcard processing volume; merchants referred by one ISO with portability rights generated about 21% of consolidated revenue in 2020. No single merchant customer accounted for 10% or more of consolidated revenue.
- Debt is substantial, largely floating-rate and subject to restrictive covenants; management reported covenant compliance at year-end. The company did not hedge interest-rate risk. Ordinary-course legal matters were not expected by management to be material, though an eventual recorded loss could be material.
- The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective at year-end and that previously identified material weaknesses had been remediated. The auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Reconcile reported earnings and Adjusted EBITDA to continuing operating performance, excluding the RentPayment gain and the sold business’s future contribution.
- Assess unrestricted cash and actual revolver availability separately from restricted settlement cash, and review working-capital needs and debt maturities.
- Verify the Finxera acquisition’s closing status, final consideration, funding terms, preferred dividends, dilution and covenant impact.
- Monitor COVID-related processing trends, the large reseller and portable-ISO relationships, and the performance of Commercial Payments after its revenue decline.
- Review the debt covenant headroom, floating-rate exposure, refinancing plans and assumptions underlying management’s liquidity outlook.