Priority Technology Holdings, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context
Priority provides payment processing and embedded-finance services through SMB Payments, B2B Payments and Enterprise Payments. Its platform supports card, ACH, check and wire payments, along with account and treasury services. The company reported approximately $113 billion in payment volume, 260,000 SMB and ISV customers and 75,000 supplier relationships. It acquired certain Ovvi assets in November 2022, adding restaurant, hospitality and retail point-of-sale capabilities.
Financial performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $663.6 | $514.9 | Up $148.7, or 28.9% |
| Operating income | $56.2 | $33.1 | Operating margin 8.5%, versus 6.4% |
| Net income (loss) | ($2.2) | $1.4 | Before preferred dividends and accretion |
| Net loss attributable to common stockholders | ($39.0) | ($24.6) | Includes $36.9 of preferred dividends and accretion in 2022 |
| Basic and diluted loss per share | ($0.50) | ($0.34) | |
| Operating cash flow | $70.5 | $9.4 | Up $61.1 |
| Capital expenditures for property, equipment and software | $18.9 | $9.7 | |
| Cash and cash equivalents | $18.5 | $20.3 | Excludes restricted and customer settlement funds |
| Working capital | $22.5 | $19.6 | |
| Debt obligations, gross of discounts and issuance costs | $623.2 | $631.9 | Net carrying value at FY2022 year-end was $605.1 |
Revenue growth reflected increased payment volume and a full year of Finxera operations, acquired in September 2021. Merchant card fees rose 18.0% to $553.0 million; money transmission revenue rose to $71.5 million from $19.4 million; outsourced and other services increased 41.0% to $29.6 million. The company reported $53.6 million in interest expense, up 46.8%, citing additional acquisition-related borrowings and higher variable rates. Income tax expense was $5.4 million despite $3.2 million of pretax income; the reported effective rate was 167.2%.
Segments and changes versus prior year
- SMB Payments: Revenue of $562.2 million, up 18.2%; operating income of $54.9 million, up 3.8%. Operating margin declined to 9.8% from 11.1%, with larger reseller commissions and higher operating costs offsetting revenue growth. Processing dollar volume rose to $59.4 billion from $53.4 billion.
- B2B Payments: Revenue of $18.9 million, up 10.5%; operating income was $0.2 million. Growth in CPX was partly offset by the wind-down of managed-services programs.
- Enterprise Payments: Revenue of $82.5 million, up from $22.1 million; operating income rose to $30.9 million from $6.8 million. The increase primarily reflected the full-year Finxera contribution and continued growth.
- Consolidated operating expenses rose 26.1% to $607.5 million. Depreciation and amortization increased to $70.7 million, largely reflecting acquired intangible assets.
Cash, debt and liquidity
Net cash provided by investing activities was $36.5 million, compared with $451.0 million used in 2021, when the company made major acquisitions. Financing activities provided $8.5 million in 2022, including $43.1 million from changes in settlement and customer-account obligations and $29.5 million of revolving-credit borrowings; outflows included debt repayments, preferred dividends and share repurchases. At year-end, restricted cash was $10.6 million. Customer settlement and subscriber balances are largely matched by related obligations and are not generally available for corporate operations.
Gross borrowings were $623.2 million, comprising $610.7 million under the term facility and $12.5 million under a $40 million revolving facility. The term loan’s stated interest rate was 9.82% at year-end; the revolver rate was 8.82%. The term facility matures in April 2027 and the revolver in April 2026. Management said cash, operating cash flow and available revolver capacity were expected to meet working-capital needs for at least 12 months; reported year-end revolver availability was approximately $27.5 million. The company was in compliance with credit covenants at year-end; the leverage covenant was not applicable then.
The $235.6 million carrying value of redeemable senior preferred stock is separate from debt. Its dividend rate was 15.7% at year-end, and $25.5 million of cumulative dividends were in arrears. The company reported $11.5 million of cash dividends paid during 2022 and no plans for common-stock cash dividends in the foreseeable future.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management’s liquidity statement is based on estimates and assumptions, and results could differ if economic or market conditions weaken.
- Management’s strategy emphasizes organic growth in reseller and merchant channels, embedded finance, B2B payment automation and selective acquisitions. These are strategic intentions, not quantified forecasts.
- Key risks include competition and merchant or reseller attrition; cyberattacks, fraud, chargebacks and system outages; dependence on sponsor banks, processors and other vendors; regulatory and payment-network requirements; and acquisition integration and valuation risks.
- Substantial variable-rate debt creates material exposure to interest-rate increases. The company estimated that a 1 percentage-point rate change would affect annual cash interest expense by approximately $6.3 million, ignoring the LIBOR floor; it did not hedge this risk. The filing also discusses the transition from LIBOR to SOFR.
- Preferred dividends and accretion materially widened the loss attributable to common stockholders despite positive operating income. The elevated tax rate reflected, among other factors, a larger valuation allowance against certain deferred tax assets.
- In 2022, the company repurchased 1.31 million shares under its repurchase programs for approximately $5.8 million, and paid $7.5 million in cash for repurchases and shares withheld for taxes. Ovvi was acquired for approximately $5.0 million in cash, plus seller profit-sharing interests.
- Ordinary-course legal proceedings were not expected by management to have a material effect, but an eventual accrual could be material. The auditor issued an unqualified opinion on the financial statements and identified accrued residual commissions as a critical audit matter; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported operating cash flow and liquidity with debt service, preferred dividends, capital commitments and customer settlement balances that are not available for general use.
- Review the preferred stock’s dividend accrual, redemption terms and arrears, and their effect on common-stockholder returns.
- Assess debt repricing and interest-rate exposure, covenant headroom, the LIBOR-to-SOFR transition and the large 2027 term-loan maturity.
- Track whether Enterprise Payments growth and Ovvi integration translate into sustained segment profitability, and whether SMB margin pressure continues.
- Review merchant/reseller concentration and attrition, including the filing’s disclosure that one ISO with portability rights generated approximately 21% of consolidated revenue in 2022.
- Examine the assumptions behind the tax valuation allowance, acquisition-related intangible amortization and contingent consideration, as well as the critical-audit-area procedures for residual commissions.