Priority Technology Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019; comparative period is Q1 2018. Priority provides consumer payment processing and commercial payments and managed services. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $100.0 million | $115.6 million |
| Income from operations / margin | $1.0 million / 1.0% | $7.9 million / 6.8% |
| Interest expense | $9.4 million | $6.9 million |
| Net loss | $6.4 million | $3.2 million |
| Operating cash flow | Used $1.2 million | Provided $12.6 million |
| Investing cash flow | Used $82.2 million | Used $6.3 million |
| Financing cash flow | Provided $78.8 million | Used $12.3 million |
At March 31, cash was $9.1 million and restricted cash was $20.1 million; working capital was $11.7 million. The company reported $15.0 million available on its revolving facility. Long-term debt carrying value was $472.5 million, with $3.3 million current; an additional $10.0 million was outstanding on the revolver. The company said cash, operating cash generation and available revolver borrowings were expected to cover working-capital needs for at least the next 12 months. Borrowers were in compliance with debt covenants.
Q1 2019 non-GAAP Consolidated Adjusted EBITDA was $12.5 million versus $15.3 million in Q1 2018; Consolidated Earnout Adjusted EBITDA was $15.7 million versus $16.3 million. These company-defined non-GAAP measures are not substitutes for GAAP results.
Material changes and operating drivers
- Revenue fell 13.5%. Merchant card fee revenue declined 15.0%, while outsourced services and other revenue rose 7.4%.
- Consumer Payments revenue decreased 17.6% to $89.8 million, primarily due to closures of subscription-billing e-commerce merchants amid industry-wide card-network compliance changes. Revenue from those merchants was $3.9 million versus $31.7 million; associated operating income was $1.6 million versus $10.0 million.
- Excluding that merchant-channel impact, management cited growth in consumer processing: total company card-processing dollar volume increased 8.8% and transaction volume rose 6.7%. Commercial Payments and Managed Services revenue grew 53.5% to $10.2 million, but the segment recorded a $0.7 million operating loss.
- Operating income declined 87.7%. Higher depreciation and amortization—up $5.2 million, largely from acquired portfolios and assets—and higher salaries partly offset lower merchant-card costs and SG&A. Interest expense increased with acquisition-related borrowings.
- Operating cash flow swung from $12.6 million provided to $1.2 million used. Investing outflows included $63.8 million for YapStone assets and $15.8 million for merchant portfolios. Financing included $69.7 million of delayed-draw term debt and a $10.0 million revolver draw.
Acquisitions, outlook, risks and unusual matters
- In March, the company acquired YapStone net assets for $65.0 million cash and a non-controlling interest valued at about $5.7 million; most purchase price was assigned to customer relationships. It also paid $15.2 million for residual portfolio rights, with potential additional consideration of up to $6.4 million.
- In February, subsidiaries acquired eTab and Cumulus operating assets in related-party transactions without cash consideration. Sellers received redeemable preferred interests eligible for up to $4.5 million of PHT profits plus a preferred yield; the CEO held 83.3% of those interests.
- Management estimated a full-year 2019 effective tax rate of approximately 22%; it cautioned that the Q1 rate may not indicate future periods. The filing provides no broader revenue or earnings guidance.
- Interest-rate exposure is material: a hypothetical 1 percentage-point LIBOR change would affect annual interest expense by approximately $3.9 million on senior debt. The company did not hedge this risk. Substantially all borrower assets secure the credit facilities, and debt covenants restrict, among other things, additional debt, acquisitions and distributions.
- Management reported disclosure controls and procedures were not effective at a reasonable assurance level because of previously identified material weaknesses in financial reporting resources and close/review processes. Remediation included hiring, consultants and enhanced procedures; the weaknesses were still being addressed.
- Management said ordinary-course legal matters were not expected to have a material effect. Merchant-processing and receivables concentration, reliance on sponsor banks and third-party processors, card-network rules, system or data-security failures, competition and acquisition risks remain relevant. No material risk-factor changes were reported.
- After quarter-end, the company repurchased 445,298 shares for $2.4 million through May 13, 2019.
Most important facts for investors to verify
- Whether growth in processing volume can offset the loss of subscription-billing merchants and restore operating margins.
- Acquisition performance and integration, including YapStone and the related-party eTab/Cumulus transaction, and any additional residual-portfolio consideration.
- Debt levels, refinancing and covenant capacity, available revolver borrowings, and sensitivity to LIBOR increases.
- Cash conversion and liquidity, given negative Q1 operating cash flow and acquisition-driven investing outflows.
- Progress in remediating internal-control material weaknesses and whether controls become effective.
- Related-party preferred-interest economics, potential dilution from earn-out awards, and the assumptions behind non-GAAP adjustments and management’s tax-rate estimate.