Priority Technology Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Priority provides merchant acquiring, integrated payment software, licensed money transmitter services and commercial payment solutions.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $132.5 million | $109.0 million | $370.9 million | $298.3 million |
| Operating income | $8.3 million | $7.0 million | $20.2 million | $14.6 million |
| Net income (loss) | $(0.5) million | $85.7 million | $(12.7) million | $72.0 million |
| Net income (loss) attributable to common stockholders | $(6.4) million | $40.4 million | $(33.2) million | $26.7 million |
| Basic and diluted EPS | $(0.09) | $0.60 | $(0.48) | $0.40 |
- Q3 operating margin was approximately 6.2%, compared with 6.5% a year earlier; nine-month margin was approximately 5.4%, versus 4.9%. Operating income improved despite higher operating costs.
- Consumer Payments drove growth: Q3 revenue rose 24.9% and nine-month revenue rose 31.8%. Consolidated merchant processing volume increased 22.1% in Q3 and 27.7% for the nine months.
- Commercial Payments and Integrated Partners revenue declined year over year for the nine-month period, by 31.1% and 50.1%, respectively. Commercial Payments reported a nine-month operating loss of $0.4 million.
- Operating cash flow was $(2.6) million for the first nine months, versus $10.4 million provided in 2020. Investing cash flow was $(462.9) million, including $407.1 million for business acquisitions and $48.2 million for intangible assets. Financing cash flow was $871.0 million.
- At September 30, cash and cash equivalents were $17.0 million and restricted cash was $17.3 million. Reported settlement assets and customer account balances of $480.3 million largely correspond to customer obligations of $489.3 million; these customer funds are not available for day-to-day operations. Working capital was $11.5 million.
- Debt obligations totaled $648.5 million gross, including $30.0 million drawn on a $40.0 million revolver; balance-sheet debt, net of discounts and issuance costs, was $626.2 million including current debt. The company reported a 4.27x covenant net leverage ratio and compliance with financial covenants.
- Redeemable senior preferred stock had a carrying value of $205.3 million. Its stated dividend rate was 13% at the reported rate, and preferred dividends and accretion reduced earnings attributable to common stockholders.
Material changes and unusual items
- Priority completed its $407.0 million Finxera acquisition on September 17, 2021, funded with cash, debt, preferred stock and common shares. Finxera contributed $3.0 million revenue and $1.0 million operating income from closing through quarter-end. Purchase accounting remained preliminary; the acquisition added $252.1 million of goodwill.
- Priority also acquired C&H Financial Services and residual portfolio rights during 2021. The acquisitions expanded goodwill and intangible assets and increased amortization expense.
- April 2021 debt refinancing replaced prior facilities with a new first-lien credit agreement. Interest expense fell year over year, but the company recorded $8.3 million of debt extinguishment and modification costs during the first nine months.
- The prior-year comparison includes a $107.2 million gain on the September 2020 sale of the RentPayment business. This one-time gain materially lifted 2020 net income; there was no comparable gain in 2021.
- Nine-month 2021 net loss attributable to common stockholders also reflects $9.7 million of preferred dividends and accretion and a $10.8 million charge related to redemption of PHOT non-controlling preferred interests.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided. Management expects cash on hand, operating cash generation and available revolver borrowings to meet working-capital needs for at least 12 months, while cautioning that COVID-19 effects could alter that assessment.
- Management described a recovery in processing volumes following the pandemic downturn, but noted uncertainty from COVID-19 and variants. It also identified competition, technology and data security, regulatory and card-network requirements, third-party processors, and acquisition execution as risks.
- Merchant revenue depends substantially on Visa and Mastercard transactions and referral partners. Merchants referred by one ISO with portability rights generated approximately 23.4% of consolidated Q3 revenue.
- Minimum third-party processor fees were approximately $14.8 million for 2021 and $7.8 million annually for 2022 and 2023. Management said ordinary-course legal matters were not expected to have a material effect; adverse outcomes could nevertheless be material if probable and estimable.
- Disclosure controls were assessed as effective at September 30, 2021. The filing reported no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether Finxera delivers the expected growth and integration benefits, and how final purchase accounting or working-capital adjustments affect reported results.
- Cash available for corporate use, distinguishing operating cash and restricted cash from customer account balances and settlement funds.
- Debt-service capacity and covenant headroom, including the effects of variable interest rates, preferred dividends and acquisition-related obligations.
- Whether Consumer Payments growth offsets weakness in Commercial Payments and the post-sale changes in Integrated Partners.
- The impact of ISO portability, processor commitments, COVID-19 conditions and other disclosed operational and regulatory risks.