Priority Technology Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in U.S. dollars. The company provides merchant acquiring and commercial payment solutions through Consumer Payments, Commercial Payments, and Integrated Partners.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $110.0 million | $103.6 million | $317.4 million | $323.9 million |
| Operating income | $2.7 million | $3.6 million | $6.1 million | $14.6 million |
| Net loss | $5.8 million | $2.6 million | $26.4 million | $11.4 million |
| Basic and diluted loss per share | $(0.09) | $(0.04) | $(0.39) | $(0.19) |
| Operating margin | 2.5% | 3.4% | 1.9% | 4.5% |
- Revenue and segments: Q3 revenue increased 6.1%, while nine-month revenue declined 2.0%. Q3 Consumer Payments revenue was $94.1 million, Commercial Payments $7.0 million, and Integrated Partners $8.9 million. Integrated Partners growth primarily reflected the March 2019 YapStone asset acquisition.
- Cash flow: For the first nine months, operating activities provided $10.6 million, investing activities used $93.6 million, and financing activities provided $76.0 million. Cash and restricted cash declined by $7.0 million to $26.8 million; unrestricted cash was $4.2 million.
- Liquidity: Working capital was $4.3 million at September 30, down from $21.1 million at year-end 2018. The company reported approximately $13.5 million available on its revolving facility.
- Debt and interest: Debt carrying value, including the revolver and current maturities, was approximately $488.9 million. The senior term loan rate was 7.12%; subordinated debt carried a 10.5% rate including payment-in-kind interest. Nine-month interest expense rose to $30.6 million from $21.9 million.
- Non-GAAP measure: Adjusted EBITDA was $15.3 million for Q3 and $42.7 million for the first nine months, compared with $12.4 million and $38.3 million, respectively, in 2018. These are company-defined non-GAAP measures, not substitutes for GAAP results.
Material changes versus prior periods
- Consumer Payments was affected by closures of high-margin subscription-billing e-commerce merchants following industry-wide card-association compliance changes. Related revenue was $1.2 million in Q3 2019 versus $11.7 million in Q3 2018, and $6.8 million for nine months versus $57.8 million. Excluding this impact, management reported Consumer Payments revenue growth of 10.4% in Q3 and 10.0% for the nine-month period.
- Consolidated card-processing dollar value and transaction volume increased 11.0% and 9.2% in Q3, and 11.5% and 9.2% for nine months. Despite this volume growth, operating income fell, reflecting lost merchant contribution and higher depreciation and amortization.
- Depreciation and amortization increased to $10.1 million in Q3 from $4.9 million, and to $28.8 million for nine months from $12.7 million, mainly due to acquired portfolios, intangible assets, and internally developed software.
- Interest expense increased with higher acquisition-related borrowings. Nine-month net loss also reflected a $7.8 million valuation allowance related to deferred tax assets for business-interest carryforwards.
Outlook, risks, and unusual items
- Refinancing and covenant risk: Borrowers were in compliance with debt covenants at September 30. Management said that without refinancing or modifying the credit agreements, it was probable the borrowers would fail the 5.25:1.00 maximum Total Net Leverage Ratio covenant at December 31, 2019. The company expected refinancing in Q4 2019 and anticipated compliance; failure could permit acceleration of debt and restrict revolver access. This is an expectation, not a completed refinancing.
- Liquidity outlook: Management expected cash, operating cash generation, and available revolver borrowings to meet working-capital requirements for at least the next 12 months, subject to the refinancing and covenant risks described above. The filing provides no specific revenue or earnings guidance.
- Acquisitions and commitments: Nine-month investing cash use included $81.8 million for merchant portfolios and acquired assets, including YapStone. Contingent purchase consideration could reach $7.3 million for a 2018 portfolio acquisition and $6.4 million for a 2019 acquisition, subject to the agreements’ terms.
- Related-party and lending disclosures: Assets of eTab and Cumulus were contributed to a subsidiary; the CEO owned 80% of eTab before the transaction and holds 83.3% of the subsidiary’s redeemable preferred interests, which may receive up to $4.5 million plus a 6% preferred yield. Separately, the company had loaned another entity $3.0 million and committed to lend up to an additional $10.0 million subject to conditions; the loan bears 12% interest.
- Controls and other risks: Management concluded disclosure controls were not effective at a reasonable assurance level because of material weaknesses involving financial-reporting resources and close/review processes; remediation was underway. The filing identifies payment-network compliance, data security, processing-system reliability, regulation, third parties, and acquisition execution among relevant risks. Ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether the expected Q4 2019 refinancing was completed and whether the year-end leverage covenant was met or amended.
- Whether growth excluding closed subscription-billing merchants can continue, and the ongoing impact of card-network compliance requirements.
- Whether cash generation and revolver availability are sufficient given low unrestricted cash, substantial debt service, and acquisition-related spending.
- Whether acquired assets, particularly YapStone, deliver expected revenue and operating returns after amortization and transition costs.
- Progress in remediating material weaknesses in internal controls, and any subsequent updates to the related-party interests, loan commitment, or contingent acquisition payments.