Priority Technology Holdings, Inc. — Q3 2020 Form 10-Q
Business context and period: Priority provides merchant acquiring, integrated payment software, and commercial payment solutions. This unaudited report covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $109.0 | $93.9 | $298.3 | $273.7 |
| Income from operations | $7.0 | $2.7 | $14.6 | $6.1 |
| Operating margin | 6.5% | 2.9% | 4.9% | 2.2% |
| Net income (loss) | $85.7 | $(5.8) | $72.0 | $(26.4) |
| Net income (loss) attributable to Priority stockholders | $40.4 | $(5.8) | $26.7 | $(26.4) |
| Basic and diluted EPS | $0.60 | $(0.09) | $0.40 | $(0.39) |
Q3 revenue increased 16.1%; nine-month revenue rose 9.0%. Operating income improved in both comparisons. Reported net income includes a $107.2 million pretax gain on the sale of the RentPayment business; excluding this unusual gain, net income was substantially lower. Q3 interest expense was $13.5 million and nine-month interest expense was $35.5 million, up 28.7% and 15.9%, respectively.
Cash flow and liquidity: For the first nine months, operating cash flow was $3.1 million, versus $10.6 million in 2019. Investing cash flow was $169.0 million, largely reflecting $179.4 million of sale proceeds; financing cash flow was $(163.8) million, including debt repayments and distributions/redemptions to non-controlling interests. September 30 cash was $21.7 million, plus $37.1 million restricted cash held for settlement activity. Working capital was $3.6 million; approximately $14.0 million was available on the revolving facility.
Debt: Total debt obligations were $392.1 million at September 30, 2020, down from $495.5 million at December 31, 2019. The company applied $106.5 million of sale proceeds to term debt in September. Debt is secured by substantially all assets; the parent company is neither borrower nor guarantor. The reported covenant leverage ratio was 6.16:1 against a maximum of 7.75:1, and the company stated it was in compliance.
Material changes and segment results
- Consumer Payments: Q3 revenue increased 20.0% to $99.3 million and segment operating margin rose to 11.2% from 8.7%. Processing dollar volume increased 6.3%, while transaction count fell 6.9%; higher average ticket and growth in specialized ecommerce contributed to revenue growth.
- Commercial Payments: Q3 revenue declined 21.2% to $5.0 million, principally because a customer curtailed its merchant financing program. The segment returned to modest operating income.
- Integrated Partners: Q3 revenue was $4.7 million, down 2.9%; operating income declined to $0.3 million. The segment sold RentPayment in September, which changes the future business mix.
- In September, the company sold RentPayment assets for net proceeds of $179.4 million, recognizing a $107.2 million pretax gain. $45.1 million of the gain was attributed and distributed to the PRET non-controlling interests, which were fully redeemed. The company retained other real-estate-market operations and entered into agreements to provide technology support and payment processing to the buyer.
- Intangible assets declined to $97.2 million from $182.8 million at year-end, reflecting the sale, amortization, and a $1.0 million impairment charge on a merchant portfolio asset.
Outlook, risks, and unusual items
- Management gave no formal financial guidance. It said October 2020 operating results remained consistent with Q3, while emphasizing that the future economic and business effects of COVID-19 were difficult to predict.
- Management expects cash, operating cash generation, and revolver availability to cover working-capital needs for at least 12 months and expects covenant compliance based on current projections; these assessments are subject to pandemic-related uncertainty.
- COVID-19 disrupted merchant activity in March and April, followed by recovery as restrictions eased. The company cited transaction-mix changes, including fewer transactions at higher average values and more card-not-present activity. It also warned that future effects could impair assets or affect liquidity and covenant compliance.
- Debt costs remain significant: effective Q3 rates were 9.87% on Senior Credit Agreement term debt and 14.62% on GS term debt. Management expected respective rates of approximately 8.2% and 12.8% after the September paydown, based on then-current margins and LIBOR.
- The company reported disclosure controls were not effective at September 30 due to previously disclosed material weaknesses in internal control over financial reporting. Remediation efforts included additional finance staff, consultants, and enhanced reconciliation procedures.
- Other exposures include dependence on card networks and sponsor banks, referral relationships, minimum third-party processing commitments of $14.0 million through 2021, and ordinary-course legal matters that management did not expect to be material.
Investor verification priorities
- Separate recurring operating performance and cash generation from the RentPayment sale gain, related tax effects, and non-controlling-interest distributions.
- Track post-sale revenue, margins, and processing volumes, especially the continuing relationship with the buyer and the effect of losing RentPayment revenue.
- Monitor debt balances, cash interest and PIK accumulation, covenant headroom, and availability under the revolver.
- Assess COVID-19 effects on merchant activity, customer financing programs, asset recoverability, and liquidity.
- Review progress remediating the material weaknesses in financial reporting controls.