Priority Technology Holdings, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 30, 2020. It reports annual results, not a standalone “2019 Q4” filing; fourth-quarter figures are included below. The company provides consumer and commercial payment processing and related technology services, primarily in the United States.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $371.9 million | $375.8 million |
| Income from operations | $7.2 million | $16.4 million |
| Operating margin | 1.9% | 4.4% |
| Net loss | $33.6 million | $17.8 million |
| Adjusted EBITDA (non-GAAP) | $58.9 million | $49.4 million |
| Cash provided by operating activities | $39.4 million | $31.3 million |
| Cash used in investing activities | $97.7 million | $108.9 million |
- Bankcard processing volume rose 12.7% to $43.0 billion; transactions increased 10.2% to 513.3 million.
- Interest expense increased 35.8% to $40.7 million, mainly reflecting acquisition-related borrowings. Cash interest paid was $33.1 million.
- Year-end cash was $3.2 million; restricted cash was $47.2 million, primarily for customer settlements and reserves. Working capital was $1.2 million, down from $11.8 million.
- Outstanding debt totaled $495.5 million, versus $412.7 million a year earlier. This comprised $388.8 million of senior term debt, $95.1 million of subordinated debt (including accrued PIK interest), and $11.5 million drawn on the $25 million revolver. Debt is substantially floating-rate and secured by substantially all borrower assets. The company reported covenant compliance at year-end; $13.5 million of revolver availability remained.
- Total assets were $464.5 million, total liabilities $585.2 million, and stockholders’ deficit $120.7 million.
Fourth quarter: Revenue was $98.2 million, operating income $1.1 million, and net loss $7.2 million, compared with revenue of $88.7 million, operating income of $2.7 million, and net loss of $5.7 million in Q4 2018. Q4 2019 loss per share was $0.11.
Material changes and unusual items
- Revenue declined 1.1% for the year despite higher processing volumes. Consumer Payments revenue fell 4.7%, largely because of closures of high-margin subscription-billing e-commerce merchants following industry compliance changes; related revenue was $7.8 million in 2019 versus $59.3 million in 2018. Commercial Payments revenue fell 4.0%. Integrated Partners revenue increased to $15.3 million from $1.8 million, largely following the YapStone customer-portfolio acquisition.
- The YapStone assets, acquired in March 2019, cost $65 million in cash plus non-controlling interests valued at approximately $5.7 million. The transaction contributed to higher depreciation and amortization; consolidated depreciation and amortization nearly doubled to $39.1 million.
- Net loss widened as operating income fell and interest expense rose. Lower service costs and corporate expenses partly offset higher depreciation and employee costs.
- The company adopted ASC 606 retrospectively, reducing reported 2019 revenue and costs of services by $60.7 million each, with no effect on operating income or net income. It also restated 2018 and 2017 financial statements for errors involving settlement-account reconciliations and chargeback revenue and costs. The audit committee said prior-period statements should no longer be relied upon; the restatement did not change reported cash flows from operating, investing, or financing activities.
- Adjusted EBITDA is a non-GAAP measure; the company cautions that its calculation involves judgment and may not be comparable with similarly named measures at other companies.
Outlook, risks and contingencies
- Management stated that cash on hand, operating cash flow, and available revolver borrowings were expected to meet working-capital needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The filing warns that COVID-19 could disrupt customers, partners, and operations and materially affect results and cash flows; the impact could not be reasonably estimated at the filing date.
- Material weaknesses in financial reporting controls remained unremediated at year-end, including inadequate resources, review and close-process deficiencies, system limitations, and inadequate settlement reconciliations. Management concluded disclosure controls and internal control over financial reporting were ineffective. Remediation work was underway, but timing was uncertain.
- Key risks include substantial debt and floating-rate exposure, restrictive covenants, merchant and reseller attrition, payment-network and regulatory compliance, cybersecurity and service outages, third-party processor dependence, and acquisition integration. One ISO with merchant portability rights referred merchants generating approximately 18% of 2019 consolidated revenue.
- On March 18, 2020, the company amended its credit agreements, including changes to leverage-covenant calculations and permitted ratios. Ordinary-course legal proceedings were not expected by management to have a material effect, but a future accrual could be material.
- The company reported a related-party contribution of eTab/Cumulus assets; the CEO owned 83.3% of the preferred interests eligible for up to $4.5 million plus a 6% preferred yield from profits. The company also reported a $3.5 million loan to another entity and a commitment to lend up to $10 million subject to conditions.
Most important facts for investors to verify
- Review the restated 2018–2017 statements, settlement-account corrections, and the company’s progress in remediating material weaknesses.
- Assess the sustainability and cash conversion of Adjusted EBITDA alongside GAAP losses, acquisition spending, and rising debt service.
- Confirm covenant headroom, borrowing availability, floating-rate sensitivity, and the effects of the March 2020 credit amendments.
- Track consumer-payment revenue and margins after subscription-billing merchant closures, and test whether processing-volume growth offsets lost high-margin business.
- Evaluate COVID-19 effects, merchant/reseller concentration and portability, and performance and integration costs of acquired businesses.