Priority Technology Holdings, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; unaudited. Priority provides merchant acquiring, payment software and commercial payment services. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $96.9 | $87.6 |
| Income from operations | $3.6 | $1.0 |
| Operating margin | 3.7% | 1.1% |
| Interest expense | $10.3 | $9.4 |
| Net loss | $(5.9) | $(6.4) |
| Basic and diluted loss per share | $(0.09) | $(0.10) |
| Net cash used in operating activities | $(7.3) | $(1.2) |
- Revenue increased 10.6%. Consumer Payments revenue rose 8.9%, Integrated Partners rose 129.1%, and Commercial Payments declined 4.4%.
- Operating income improved as Commercial Payments and Integrated Partners returned to operating profitability and corporate expenses fell. Consumer Payments operating income declined 7.3%; its segment margin decreased to 8.3% from 9.8%.
- Management-reported Adjusted EBITDA, a non-GAAP measure, was $15.8 million versus $12.5 million. It includes specified adjustments; it is not a substitute for GAAP results.
Financial position and liquidity
- At March 31, cash was $2.9 million and restricted cash was $36.9 million, principally held for customer settlement activity. Total cash and restricted cash was $39.7 million; restricted balances should not be treated as freely available liquidity.
- Working capital was negative $2.3 million, versus positive $1.2 million at year-end 2019. Total debt obligations were $499.4 million, including $15.0 million drawn on a $25.0 million revolving facility; approximately $10.0 million remained available. Long-term debt, net of discounts and issuance costs, was $483.3 million.
- Debt bears variable rates. At quarter-end, stated rates were 8.11% on the senior credit agreement and 12.5% on subordinated debt; effective rates including financing-cost amortization were 8.87% and 12.91%, respectively. Substantially all company assets are pledged as collateral.
- Operating cash use worsened year over year, driven principally by changes in settlement balances. Investing cash use was $3.2 million, versus $82.2 million in Q1 2019, which included the YapStone asset acquisition. Financing cash use was $0.3 million. Cash and restricted cash decreased $10.7 million during the quarter.
Material changes, outlook and risks
- COVID-19 had limited effect on most of Q1, but management reported consumer processing dollar volume down approximately 35% year over year from mid-March through April. In May, it reported a rebound and projected a 15%–20% year-over-year decline. Management expected the pandemic to adversely affect revenue and financial results for the remainder of 2020; no formal earnings guidance was provided.
- In mid-April, the company furloughed 47 employees, reduced its contractor count by 21, froze hiring and postponed certain capital spending to preserve cash.
- Management said cash on hand, operating cash generation and available revolver borrowings were expected to meet working-capital needs for at least 12 months and anticipated continued covenant compliance. It cautioned that pandemic effects could materially change this assessment.
- March 2020 debt amendments included a requirement for at least $100 million of permitted accelerated senior-term-loan principal payment by June 16, 2020 to avoid interest-margin increases. If unpaid, margins were scheduled to increase by 1 percentage point, with further 0.5-point increases every 30 days through October 14, up to 3 percentage points. The company said it was pursuing ways to raise the cash; the filing does not establish that the payment was made.
- The company reported compliance with its maximum 8.00:1.00 total net leverage covenant at March 31; the actual leverage ratio is not stated in the provided filing text. Future liquidity and covenant compliance remain exposed to COVID-19 impacts and variable borrowing costs.
- One ISO with merchant portability rights generated approximately 20% of consolidated revenue, versus 18% a year earlier. The company also noted possible merchant losses, processing/network disruption, fraud and cyber risks. It reported no legal proceedings expected to have a material adverse effect.
- Disclosure controls were deemed ineffective at quarter-end because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway.
- Unusual items included $0.9 million of YapStone transition-service expense, $0.5 million of legal expense, and a $0.2 million noncash write-off of an equity-method investment. The company also capitalized approximately $2.7 million of lender fees related to the debt amendments.
Important facts for investors to verify
- Whether the required $100 million accelerated debt payment was made by the deadline, and the resulting interest rates, maturity profile and covenant headroom.
- Subsequent consumer processing volumes, merchant closures or failures, and whether the reported May rebound continued.
- Cash generation excluding restricted settlement funds, revolver availability, and the effect of settlement-related working-capital swings.
- Progress remediating the material weaknesses in internal control and any subsequent assessment of control effectiveness.
- Potential impairment of goodwill or intangible assets and recoverability of deferred tax assets as pandemic-related estimates evolve.