Priority Technology Holdings, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter results filing. Priority provides payments processing, B2B payables automation, and embedded finance/BaaS services. It reported approximately 860,000 active customers, $120 billion in annual transaction volume, and three operating segments: SMB Payments, B2B Payments, and Enterprise Payments.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $755.6 million | $663.6 million |
| Operating income | $81.5 million | $56.2 million |
| Operating margin | 10.8% | 8.5% |
| Net income (loss) | $(1.3) million | $(2.2) million |
| Net loss attributable to common stockholders | $(49.1) million | $(39.0) million |
| Basic and diluted loss per share | $(0.63) | $(0.50) |
| Operating cash flow | $81.3 million | $70.5 million |
| Cash and cash equivalents | $39.6 million | $18.5 million |
| Working capital | $29.2 million | $22.5 million |
Revenue rose 13.9%. Merchant card fees increased 7.6% to $595.2 million; money transmission services rose 37.2% to $98.1 million; and outsourced and other services increased 67.4% to $49.6 million. Growth reflected higher merchant fee rates, customer enrollments, Passport activity and interest income, as well as Plastiq revenue following its acquisition. The filing reports $33.4 million of interest income in outsourced and other services, versus $7.5 million in 2022.
Operating expenses increased 11.0% to $674.1 million. Costs of services rose 10.0% but declined as a share of revenue, from 65.8% to 63.6%. Salary and benefits increased 22.9% to $80.0 million, and selling, general and administrative expense rose 29.9% to $45.4 million. Interest expense increased 42.1% to $76.1 million, reflecting higher rates and debt used to fund Plastiq.
Common-stockholder losses widened despite improved consolidated net loss, principally because preferred dividends and accretion attributable to redeemable senior preferred stockholders increased to $47.7 million from $36.9 million. FY2023 preferred dividends declared were $44.4 million; the preferred dividend rate was 17.7% at year-end.
Segment results were mixed: SMB Payments revenue grew 3.7% to $582.9 million, while operating income fell 15.3% to $46.5 million and margin declined to 8.0% from 9.8%. B2B Payments revenue more than doubled to $40.7 million, but the segment recorded a $2.5 million operating loss. Enterprise Payments revenue increased 60.0% to $132.0 million; operating income rose to $74.0 million and margin to 56.0% from 37.5%.
Investing cash outflow was $55.7 million, including $28.2 million for business acquisitions and $21.3 million for property, equipment and software. Financing cash inflow was $210.1 million, including a $211.1 million increase in net settlement and customer-account obligations. That customer-related funding is not equivalent to cash available for general corporate use. Cash and restricted cash totaled $51.5 million outside settlement/customer balances; restricted cash was $11.9 million.
Debt obligations were $654.4 million gross at year-end, with a $638.7 million balance-sheet carrying amount after current maturities and unamortized discounts and costs. The term facility carried an 11.21% rate and matures in April 2027; the revolving facility was undrawn, with $65.0 million of availability, and matures in April 2026. Debt is variable-rate and unhedged; management estimated a 1 percentage-point SOFR change would alter annual cash interest by approximately $6.7 million. The company reported compliance with its credit agreement covenants at year-end.
Material changes, outlook and risks
- Plastiq acquisition: Priority acquired substantially all of Plastiq’s assets through a Chapter 11 process, closing July 31, 2023, for approximately $37.0 million, including $28.5 million cash. Plastiq contributed $27.4 million of post-acquisition revenue and a $2.0 million operating loss before acquisition costs. The purchase price allocation included $30.5 million of acquired intangible assets and $7.3 million of goodwill; contingent consideration is subject to remeasurement.
- SMB concentration and performance: SMB bankcard processing dollar value declined slightly, and a referral partner diversified its processing services. One reseller contributed approximately 14% of bankcard processing volume; merchants referred by one ISO with portability rights represented approximately 15% of consolidated revenue, down from 21% in 2022.
- Restructuring: Priority is winding down PayRight’s customer-advance business, effective June 30, 2024, after it failed to deliver desired financial results amid higher cost of capital. FY2023 included $3.5 million of related restructuring costs and $0.3 million of accelerated depreciation and amortization.
- Outlook: No specific revenue, earnings or margin guidance is provided. Management stated that cash on hand, operating cash generation and available revolver borrowings are expected to cover working-capital needs for at least the next 12 months, subject to economic and other assumptions.
- Key risks: High variable-rate debt and substantial preferred-stock dividends; competition and merchant/reseller attrition; dependence on sponsor banks, processors and other vendors; cybersecurity, service interruption, fraud and chargebacks; and extensive, evolving payments and financial-services regulation. Management disclosed ongoing federal and state investigations concerning a prepaid debit-card program offered through an independent program manager.
- Contingencies and unusual items: A putative California class action alleges non-consensual recording of business telephone calls and seeks $5,000 per alleged violation; as of March 12, 2024, loss was not considered probable or reasonably estimable. A separate fiduciary-duty lawsuit concerning a 2021 preferred-unit exchange was settled in January 2024 for $0.4 million and unwinding the transaction; it was treated as a nonrecognized subsequent event at year-end.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2023. The auditor issued an unqualified opinion on the financial statements; it did not audit internal-control effectiveness. Critical audit matters included Plastiq acquisition valuation and accrued residual commissions.
Important facts for investors to verify
- Whether Enterprise Payments growth, including Passport interest income, is sustainable if rates or customer deposit balances decline.
- Whether SMB processing volume and margins stabilize, and how exposed results remain to the major referral partner and ISO portability.
- How Plastiq performs after integration, including its operating losses, contingent consideration and the assumptions behind acquired-asset valuations.
- Debt repayment capacity and sensitivity to SOFR, alongside the preferred stock’s 17.7% dividend rate and accumulating unpaid dividends.
- Developments in the prepaid-card regulatory investigations and the California recording class action, including any change in potential exposure.