Priority Technology Holdings, Inc. — Q3 2023 Form 10-Q
Business context and period. Priority provides merchant acquiring, integrated payment software, money transmission and commercial payment solutions. This unaudited filing covers the quarter and nine months ended September 30, 2023, compared with the same periods in 2022. Results include Plastiq from August 1, 2023, following its acquisition on July 31.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $189.0 million | $166.4 million | $556.3 million | $486.1 million |
| Operating income | $23.5 million | $14.1 million | $59.5 million | $38.0 million |
| Operating margin | 12.4% | 8.5% | 10.7% | 7.8% |
| Net loss | $0.1 million | $0.8 million | $1.2 million | $0.8 million |
| Net loss attributable to common stockholders | $12.3 million | $10.3 million | $36.5 million | $27.3 million |
| Loss per common share, basic and diluted | $0.16 | $0.13 | $0.47 | $0.35 |
| Operating cash flow | Not presented separately | Not presented separately | $72.7 million | $50.6 million |
Revenue and profitability. Revenue increased 13.6% in Q3 and 14.4% for the nine-month period. Enterprise Payments revenue rose 62.2% in Q3 and 63.0% year to date, supported by more customers and enrollments and higher interest income. SMB Payments revenue was nearly flat in Q3; segment operating income declined 11.9%. B2B Payments revenue increased sharply in Q3, mainly reflecting Plastiq, but the segment reported a nine-month operating loss of $0.8 million. Higher interest expense and preferred-stock dividends meant common-stockholder losses increased despite higher operating income.
Cash flow and liquidity. Nine-month investing cash use was $51.2 million, including $28.2 million for the Plastiq acquisition and $15.3 million of property, equipment and software additions. Financing cash provided was $157.0 million, including a $165.6 million net increase in settlement and customer-account obligations; this is not equivalent to freely available operating cash. Cash and cash equivalents were $24.6 million and restricted cash was $13.9 million at September 30. A further $700.6 million of settlement/customer balances is included in current assets and is not available for general operations. Working capital was $16.6 million, versus $18.6 million at September 30, 2022. Management said cash on hand, operating cash generation and available revolver borrowings should meet working-capital needs for at least 12 months.
Debt and preferred stock. At September 30, gross debt was $639.1 million, consisting of $606.1 million under the term facility and $33.0 million drawn on the revolver; carrying debt, net of discounts and issuance costs, was approximately $623.0 million. Term-loan and revolving rates were 11.43% and 10.20%, respectively. The $65 million revolving facility had approximately $32 million available, and the company was in covenant compliance. After quarter-end, on October 2, the company increased its term loan by $50 million; proceeds were to repay the revolver and support general corporate needs. Redeemable preferred stock had a $270.7 million redemption value and a 17.5% dividend rate at quarter-end; the nine-month declared dividends were $32.8 million.
Changes, outlook and risks
- Plastiq was acquired through a Chapter 11 process for approximately $37.3 million of consideration, including $28.5 million cash funded from revolver borrowings. Its Q3 revenue was $9.9 million and its reported operating loss was $0.7 million, excluding $1.3 million of acquisition costs. The purchase price allocation remains preliminary.
- Interest expense rose 49.3% in Q3 and 48.8% year to date, reflecting higher rates and increased revolver borrowing. The term-loan rate rose from 9.82% at year-end 2022 to 11.43% at September 30, 2023.
- No specific revenue or earnings guidance is provided. Management’s liquidity statement covers at least the next 12 months; actual results remain subject to the risks described in the filing.
- Risks include reliance on Visa and Mastercard transactions and sponsor-bank relationships, payment processing and data-security disruptions, regulation, third-party vendors, competition, economic conditions and acquisition execution. A majority of cash and restricted cash is held at financial institutions in amounts substantially above FDIC insurance limits. Ordinary-course legal claims are not expected by management to be material, though a future accrual could adversely affect results.
- The company reported approximately $19.4 million of minimum third-party processing commitments for 2023 and $22.0 million for 2024, plus subsidiary capital-contribution commitments totaling $26.0 million at quarter-end. The effective tax rate was unusually high—102.1% in Q3 and 122.5% year to date—primarily due to a valuation allowance on certain business-interest deferred tax assets.
Important facts for investors to verify
- Plastiq’s post-acquisition performance, integration costs and final purchase-price allocation, including contingent consideration.
- Whether operating cash generation can sustain debt service, preferred dividends and planned investment; distinguish corporate cash from settlement and restricted funds.
- Floating-rate debt exposure, the impact and final terms of the October 2 term-loan increase, and continued compliance with credit covenants.
- Preferred-stock dividend accumulation and redemption value, which materially exceed the carrying amount shown on the balance sheet.
- SMB merchant-volume trends and margin pressure, B2B Payments profitability, and the sustainability of Enterprise Payments’ growth and interest income.