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Priority Technology Holdings, Inc. Announces Third Quarter 2019 Financial Results

ALPHARETTA, Ga.--(BUSINESS WIRE)--

Priority Technology Holdings, Inc. (PRTH) (“Priority” or the “Company”), a leading provider of merchant acquiring, integrated payment software and commercial payment solutions, today announced its third quarter 2019 financial results.

Highlights

Highlights of the third quarter 2019 consolidated financial results as compared with the third quarter of 2018 include:

  • Revenue of $110.0 million increased 6.1% from $103.6 million.
  • Gross profit of $30.2 million increased 10.7% from $27.2 million. The Company’s non-GAAP gross profit metric represents consolidated revenue less costs of merchant card fees and other costs of services.
  • Gross profit margin of 27.4% increased 110 basis points from 26.3%.
  • Income from operations of $2.7 million declined $0.8 million from $3.6 million, driven by a $5.2 million increase in depreciation and amortization expense.
  • Interest expense of $10.5 million increased $3.1 million from $7.3 million.
  • Net loss of $5.8 million increased $3.3 million from $2.6 million.
  • Adjusted EBITDA (1) of $15.3 million increased 23.6% from $12.4 million. The Company’s non-GAAP adjusted EBITDA measure (1) is earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted for non-cash compensation and certain other expenses considered non-recurring.
  • Total merchant bankcard processing dollar volume of $10.8 billion increased 11.0% from $9.7 billion.

"Our third quarter results continued to reflect the strong underlying growth we’ve realized over the past several quarters, particularly when excluding the change in the subscription billing e-commerce business," said Tom Priore, Executive Chairman and CEO of Priority. "These strong results were driven by solid improvement in the Consumer Payments segment, exceptional growth in the Integrated Partners business and steady performance in Commercial Payments."

Non-GAAP Highlights

The comparative revenue and gross profit for the third quarter 2019 was negatively affected by the wind-down of high-margin accounts with certain subscription-billing e-commerce merchants. The wind-down of merchants in this channel was due to industry-wide changes for enhanced card association compliance. This revenue, which is included entirely within the Consumer Payments reportable segment, was $1.2 million and $11.7 million in the third quarters of 2019 and 2018, respectively. The corresponding gross profit and income from operations associated with this revenue was $0.5 million and $4.1 million in the third quarters of 2019 and 2018, respectively.

Income from operations included certain operating expenses that the Company considers non-recurring in nature ("non-recurring expenses"). In the third quarter of 2019, non-recurring expenses were associated with the allocation of purchase price to temporary free transition services from YapStone, Inc. related to the integration of the March 2019 asset acquisition, and certain litigation and advisory costs. In the third quarter of 2018, non-recurring expenses such as legal, accounting, advisory and consulting, were largely associated with the conversion to a public company, and certain litigation costs. These operating expenses were $1.2 million and $3.5 million in the third quarters of 2019 and 2018, respectively.

Non-GAAP highlights of the adjusted consolidated financial results, which exclude the impact of the high-margin accounts with certain subscription-billing e-commerce merchants and non-recurring expenses described above, for the third quarter of 2019 as compared with the third quarter of 2018 include:

  • Adjusted revenue of $108.7 million increased 18.4% from $91.9 million.
  • Adjusted gross profit of $29.7 million increased 28.2% from $23.2 million. The Company’s non-GAAP gross profit metric (1) represents consolidated revenue less costs of merchant card fees and other costs of services.
  • Adjusted gross profit margin of 27.3% increased 210 basis points from 25.2%.
  • Adjusted income from operations of $3.4 million increased $0.4 million from $3.0 million.
  • Adjusted EBITDA (1), excluding the impact of subscription-billing e-commerce merchants and non-recurring expenses, of $14.9 million increased 78.5% from $8.3 million. The Company’s non-GAAP adjusted EBITDA measure (1) is earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted for non-cash compensation and certain other expenses considered non-recurring.

(1) See “Reconciliations of Non-GAAP Financial Measures” at the end of this earnings release for details regarding these measures.

Discussion of Third Quarter Results

Revenue:

Consolidated

Consolidated revenue in the third quarter of 2019 was $110.0 million, an increase of $6.4 million, or 6.1% compared with the 2018 third quarter. Revenue growth rate was significantly restrained by the previously discussed wind-down of the subscription-billing e-commerce merchants. Consolidated adjusted revenue of $108.7 million increased $16.9 million, or 18.4%.

Total merchant bankcard volume processed in the third quarter of 2019 of $10.8 billion grew by 11.0%, as compared with $9.7 billion in the third quarter of 2018. Merchant bankcard transactions of 132.1 million in the third quarter of 2019 grew by 9.2%, as compared with 120.9 million in the third quarter of 2018. Average ticket (calculated by dividing bankcard volume processed by the associated number of transactions processed) of $81.60 grew 1.6% in the third quarter of 2019, as compared with $80.28 in the third quarter of 2018.

Consumer Payments Reportable Segment

Consumer Payments revenue in the third quarter of 2019 was $94.1 million, a decline of $1.7 million compared with the 2018 third quarter. Revenue from the subscription-billing e-commerce merchants declined $10.5 million quarter over quarter. Consumer Payments adjusted revenue of $92.8 million increased $8.8 million, or 10.4%.

Merchant bankcard volume processed in the third quarter of 2019 of $10.6 billion grew by 9.6%, as compared with $9.6 billion in the third quarter of 2018. Merchant bankcard transactions of 131.6 million in the third quarter of 2019 grew by 8.9%, compared with $120.9 million in the third quarter of 2018. Average ticket of $80.26 grew 0.6% in the third quarter of 2019, as compared with $79.78 in the third quarter of 2018.

Commercial Payments Reportable Segment

Commercial Payments revenue in the third quarter of 2019 amounted to $7.0 million, which was consistent with the 2018 third quarter. Revenue from CPX accounts payable automated solutions of $2.0 million in the third quarter of 2019 increased 82.9% compared with the 2018 third quarter. Revenue from curated managed services programs of $5.0 million in the third quarter of 2019 declined by $0.9 million compared with the 2018 third quarter. The managed services decline was largely driven by lower incentive revenue in the third quarter of 2019.

Integrated Partners Reportable Segment

Integrated Partners revenue in the third quarter of 2019 amounted to $8.9 million compared with $0.8 million in the third quarter of 2018. Priority Real Estate Technology ("PRET") comprised $8.4 million of this reportable segment’s revenue in the third quarter of 2019. PRET is comprised of the assets acquired from YapStone, Inc. in March 2019 and the net assets acquired from RadPad Holdings, Inc. in July 2018. These acquisitions formed our real estate services business, which provides a single platform for rent, dues and storage that meets the needs of all landlord constituents, spanning from integrated enterprise property managers to middle market partners and small/local landlords. Revenue from Priority PayRight Health Solutions and Priority Hospitality Technology, which commenced operations in April 2018 and February 2019, respectively, comprised the remainder of this reportable segment’s revenue.

Income from Operations:

Consolidated

Consolidated income from operations in the third quarter of 2019 was $2.7 million, compared with $3.6 million in the third quarter of 2018. Gross profit of $30.2 million increased $2.9 million, or 10.7%. Depreciation and amortization of $10.1 million increased $5.2 million, and other operating expenses of $17.4 million decreased $1.4 million. Other operating expenses included non-cash equity-based compensation of $1.2 million, an increase of $0.9 million, and included non-recurring operating expenses of $1.2 million, a decrease of $2.3 million. Consolidated adjusted income from operations of $3.4 million increased $0.4 million, or 14.8%.

Consumer Payments Reportable Segment

Consumer Payments income from operations in the third quarter of 2019 was $7.2 million, compared with $11.9 million in the third quarter of 2018. Gross profit of $23.2 million decreased $0.3 million. Depreciation and amortization of $8.3 million increased $3.9 million, and other operating expenses of $7.7 million increased $0.5 million. Higher depreciation and amortization are related to acquisitions of affiliate assets and Direct Connect subsequent to the third quarter of 2018.

Commercial Payments Reportable Segment

Commercial Payments loss from operations in the third quarter of 2019 was $0.4 million, compared with $0.1 million in the third quarter of 2018. Gross profit of $2.9 million decreased $0.2 million, primarily due to the decline in managed services that was largely driven by lower incentive revenue in the third quarter of 2019. Operating expenses of $3.3 million, including depreciation and amortization, increased $0.2 million.

Integrated Partners Reportable Segment

Integrated Partners income from operations in the third quarter of 2019 was $1.0 million, compared with a loss from operations of $0.4 million in the third quarter of 2018. Gross profit of $4.1 million increased $3.4 million. Depreciation and amortization of $1.3 million increased $1.2 million, and other operating expenses of $1.8 million increased $0.8 million. Depreciation and amortization are related to assets acquired in forming these business operations. Other operating expenses included $0.4 million of purchase price allocated to temporary free transition services from YapStone, Inc. related to integration of the March 2019 asset acquisition. Integrated Partners adjusted income from operations in the third quarter of 2019, excluding these non-recurring transition services, was $1.4 million.

Corporate

Corporate expense in the third quarter of 2019 was $5.1 million, compared with $7.9 million in the third quarter of 2018. Non-recurring operating expenses were $0.8 million in the third quarter of 2019 and $3.5 million in the third quarter 2018. Excluding non-recurring operating expenses, Corporate expense was consistent with the third quarter of 2018.

Interest Expense:

Interest expense of $10.5 million in the third quarter of 2019 increased by $3.1 million from $7.3 million in the 2018 third quarter. The increase was due to higher outstanding borrowings driven by debt financing of acquisitions subsequent to the third quarter of 2018.

Income Tax Expense:

The provision for income taxes of $2.5 million for the nine months ended September 30, 2019 is primarily driven by the impact of recognizing a valuation allowance on the deferred tax asset related to Internal Revenue Code Section 163(j) limitation on the deduction of business interest. Section 163(j) limits the business interest deduction to 30% of adjusted taxable income (ATI). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization (EBITDA). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes (EBIT), without adjusting for depreciation and amortization. Any business interest in excess of the annual limitation is carried forward indefinitely.

With respect to recording a deferred tax benefit for the carryforward of business interest, GAAP applies a "more likely than not" threshold for assessing recoverability. Based on our assessment, we recorded a valuation allowance in the first nine months of 2019 for our business interest carryover of $7.8 million, including a discrete provision of $2.6 million associated with our 2018 business interest deferred tax asset.

Liquidity

Working capital (defined as current assets less current liabilities) was $4.3 million at September 30, 2019, compared with $21.1 million at December 31, 2018. Unrestricted cash amounted to $4.2 million at September 30, 2019, compared with $15.6 million at December 31, 2018. The use of short-term borrowings under a revolving credit facility and cash in connection with investing activities and repurchases of common stock during the nine months ended September 30, 2019 drove the reduction in unrestricted cash balance and working capital. The Company currently has availability of approximately $13.5 million under a revolving credit facility.

Debt

As of September 30, 2019, total term debt amounted to $483.7 million, reflecting a drawdown of the syndicated debt facility related to YapStone and other tuck-in acquisitions, compared to $412.7 million at December 31, 2018. The debt balance consisted of outstanding term debt of $389.8 million under the Senior Credit Facility and $93.8 million in term debt under the subordinated Goldman Sachs Credit Agreement (including accrued payment-in-kind interest through September 30, 2019).

2019 Outlook

Priore concluded, "Last quarter we reiterated our initial 2019 financial guidance. This guidance considered second half 2019 revenue growth from our newly established specialized merchant acquiring program, which was expected to generate approximately $8 million of EBITDA. We have encountered delays in establishing BIN sponsorships for this program caused by the acquisition of our processing provider; therefore, we will realize only minimal revenue growth from this program in the second half of 2019, while expecting to begin achieving growth targets in 2020. As a result, we now anticipate 2019 consolidated revenue to only slightly exceed 2018, and we have revised the 2019 earnout adjusted EBITDA expectation to be approximately $70 million. It should be noted that these results may be positively impacted by acquisitions executed in the fourth quarter of 2019."

Conference Call

Priority Technology Holdings, Inc.’s leadership will host a conference call on Thursday, November 14, 2019 at 8:30 a.m. ET to discuss its third quarter 2019 financial results. Participants can access the call by Phone: US/Canada: (877) 501-3161 or International: (786) 815-8443.

Internet webcast link and accompanying slide presentation can be accessed at https://edge.media-server.com/mmc/p/4czs7byb, and will also be posted in the “Investor Relations” section of the Company’s website at www.PRTH.com.

An audio replay of the call will be available shortly after the conference call until November 17, 2019 at 11:30 am Eastern Time. To listen to the audio replay, dial (855) 859-2056 or (404) 537-3406 and enter conference ID number 6379726. Alternatively, you may access the webcast replay in the “Investor Relations” section of the Company’s website at www.PRTH.com.

Non-GAAP Financial Measures

We regularly review the following key non-GAAP measures to evaluate our business and trends, measure our performance, prepare financial projections, allocate resources, and make strategic decisions. We believe these non-GAAP measures help illustrate the underlying financial and business trends relating to our results of operations and comparability between current and prior periods. We also use these non-GAAP measures to establish and monitor operational goals. However, these non-GAAP measures are not superior to or a substitute for prominent measurements calculated in accordance with GAAP. Rather, the non-GAAP measures are meant to be a complement to understanding measures prepared in accordance with GAAP.

Adjusted Revenue

Revenue for the quarter ended September 30, 2019 has been negatively affected by the closure of high-margin accounts with certain subscription-billing e-commerce merchants. The closure of merchants in this channel was due to industry-wide changes for enhanced card association compliance. We refer to adjusted revenue, which excludes these revenue amounts from the periods presented. We review this non-GAAP measure to evaluate our underlying revenue and trends.

Gross Profit and Adjusted Gross Profit

The Company’s non-GAAP gross profit metric represents revenue less costs of merchant card fees and other costs of services. Gross profit margin is gross profit divided by revenue. We review these non-GAAP measures to evaluate our underlying profit trends.

Adjusted Income from Operations

Income from operations for the quarter ended September 30, 2019 has also been negatively affected by the closure of the high-margin accounts with certain subscription-billing e-commerce merchants, as well as the incurrence of non-recurring operating expenses largely associated with our July 2018 Business Combination and conversion to a public company, such as legal, accounting, advisory and consulting expenses plus certain litigation costs. We refer to adjusted income from operations, which excludes this income from operations and non-recurring operating expenses for the periods presented. We review this non-GAAP measure to evaluate our underlying profitability performance and trends.

EBITDA, Adjusted EBITDA and Earnout Adjusted EBITDA

EBITDA is earnings before interest, income tax, depreciation and amortization expenses (“EBITDA”). Adjusted EBITDA begins with EBITDA but further excludes certain non-cash expenses such as equity-based compensation and fair value adjustments, debt modification costs and non-recurring expenses such as Business Combination costs, litigation settlement costs, certain legal services costs, and professional, accounting and consulting fees. The calculation of Earnout Adjusted EBITDA includes adjustments for the pro-forma impact of acquisitions, as well as adjustments to exclude other professional and consulting fees and certain tax expenses and other adjustments. We review these non-GAAP EBITDA measures to evaluate our business and trends, measure our performance, prepare financial projections, allocate resources, and make strategic decisions.

The reconciliations of Adjusted Revenue, Gross Profit, Adjusted Gross Profit, Adjusted Income from Operations, Adjusted Consumer Payments Revenue, Adjusted Consumer Payments Income from Operations, EBITDA, Adjusted EBITDA and Earnout Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP, are shown in the attached schedules to this press release.

Priority does not provide a reconciliation of forward-looking non-GAAP financial measures to their comparable GAAP financial measures because it could not do so without unreasonable effort due to the unavailability of the information needed to calculate reconciling items and due to the variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in future periods. When planning, forecasting and analyzing future periods, the Company does so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for various cash and non-cash reconciling items that would be difficult to predict with reasonable accuracy. For example, equity compensation expense would be difficult to estimate because it depends on the Company’s future hiring and retention needs, as well as the future fair market value of the Company’s common stock, all of which are difficult to predict and subject to constant change. As a result, the Company does not believe that a GAAP reconciliation would provide meaningful supplemental information about the Company’s outlook.

About Priority Technology Holdings, Inc.

Priority is a leading provider of merchant acquiring, integrated payment software and commercial payment solutions, offering unique product and service capabilities to its merchant network and distribution partners. Priority’s enterprise operates from a purpose- built business platform that includes tailored customer service offerings and bespoke technology development, allowing the Company to provide end-to-end solutions for payment and payment-adjacent opportunities. Additional information can be found at www.PRTH.com.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by use of words such as “may,” “will,” “should,” “anticipates,” “believes,” “expects,” “plans,” “future,” “intends,” “could,” “estimate,” “predict,” “projects,” “targeting,” “potential” or “contingent,” the negative of these terms or other similar expressions. Our actual results could differ materially from those discussed or implied herein.

We caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this press release in the context of the risks and uncertainties disclosed in our SEC filings, including our most recent Annual Report on Form 10-K for 2018 filed with the SEC on March 29, 2019. These filings are available online at www.sec.gov or www.PRTH.com.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect. The forward-looking statements included in this press release are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

PRIORITY TECHNOLOGY HOLDINGS, INC.

Condensed Consolidated Statements of Operations

Unaudited

 

(in thousands, except per share amounts)

Quarter Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

REVENUE:

 

 

 

 

 

 

 

Merchant card fees

$

101,720

 

 

$

94,915

 

 

$

292,694

 

 

$

299,661

 

Outsourced services and other

8,234

 

 

8,676

 

 

24,662

 

 

24,288

 

Total revenue

109,954

 

 

103,591

 

 

317,356

 

 

323,949

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Costs of merchant card fees

74,953

 

 

71,876

 

 

215,433

 

 

230,276

 

Costs of outsourced services and other

4,836

 

 

4,475

 

 

14,079

 

 

13,518

 

Salary and employee benefits

10,668

 

 

9,992

 

 

31,923

 

 

28,406

 

Depreciation and amortization

10,077

 

 

4,899

 

 

28,763

 

 

12,679

 

Selling, general and administrative

6,695

 

8,789

 

 

21,031

 

 

24,427

 

Total operating expenses

107,229

 

 

100,031

 

 

311,229

 

 

309,306

 

 

 

 

 

 

 

 

 

Income from operations

2,725

 

 

3,560

 

 

6,127

 

 

14,643

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

Interest expense

(10,463

)

 

(7,334

)

 

(30,602

)

 

(21,893

)

Other, net

158

 

 

221

 

 

523

 

 

(5,108

)

Total other expenses, net

(10,305

)

 

(7,113

)

 

(30,079

)

 

(27,001

)

 

 

 

 

 

 

 

 

Loss before income taxes

(7,580

)

 

(3,553

)

 

(23,952

)

 

(12,358

)

 

 

 

 

 

 

 

 

Income tax (benefit) expense

(1,736

)

 

(991

)

 

2,468

 

 

(991

)

 

 

 

 

 

 

 

 

Net loss

$

(5,844

)

 

$

(2,562

)

 

$

(26,420

)

 

$

(11,367

)

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

Basic and diluted

$

(0.09

)

 

$

(0.04

)

 

$

(0.39

)

 

$

(0.19

)

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

67,007

 

 

64,152

 

 

67,109

 

 

60,339

 

Diluted

67,007

 

 

64,544

 

 

67,109

 

 

60,339

 

 

 

 

 

 

 

 

 

PRO FORMA (C-corporation basis):

 

 

 

 

 

 

 

Pro forma income tax expense (benefit)

 

 

$

2,350

 

 

 

 

$

(1,618

)

Pro forma net loss

 

 

$

(5,903

)

 

 

 

$

(10,740

)

 

 

 

 

 

 

 

 

Pro forma loss per common share:

 

 

 

 

 

 

 

Basic and diluted

 

 

$

(0.09

)

 

 

 

$

(0.18

)

PRIORITY TECHNOLOGY HOLDINGS, INC.

Condensed Consolidated Balance Sheets

Unaudited

 

(in thousands, except number of outstanding common shares)

September 30, 2019

 

December 31, 2018

ASSETS

 

 

 

Current Assets:

 

 

 

Cash

$

4,191

 

 

$

15,631

 

Restricted cash

22,652

 

 

18,200

 

Accounts receivable, net of allowance for doubtful accounts

47,491

 

 

45,651

 

Prepaid expenses and other current assets

4,317

 

 

3,642

 

Current portion of notes receivable

1,362

 

 

979

 

Settlement assets

756

 

 

1,042

 

Total current assets

80,769

 

 

85,145

 

 

 

 

 

Notes receivable, less current portion

3,795

 

 

852

 

Property, equipment, and software, net

21,396

 

 

17,482

 

Goodwill

109,515

 

 

109,515

 

Intangible assets, net

188,056

 

 

124,637

 

Deferred income taxes, net

47,206

 

 

49,692

 

Other non-current assets

1,540

 

 

1,295

 

Total assets

$

452,277

 

 

$

388,618

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

$

22,033

 

 

$

27,638

 

Accrued residual commissions

17,852

 

 

18,715

 

Customer deposits and advance payments

3,532

 

 

3,282

 

Borrowings outstanding on revolving credit facility

11,500

 

 

 

Current portion of long-term debt

4,007

 

 

3,293

 

Settlement obligations

17,542

 

 

11,132

 

Total current liabilities

76,466

 

 

64,060

 

 

 

 

 

Long-term debt, net of current portion, discounts and debt issuance costs

473,344

 

 

402,095

 

Other non-current liabilities

7,740

 

 

7,936

 

Total long-term liabilities

481,084

 

 

410,031

 

 

 

 

 

Total liabilities

557,550

 

 

474,091

 

 

 

 

 

Stockholders' deficit:

 

 

 

Common stock (67,007,172 and 67,038,304 shares outstanding, respectively)

67

 

 

67

 

Additional paid-in capital

3,354

 

 

 

Treasury stock, at cost

(2,388

)

 

 

Accumulated deficit

(111,960

)

 

(85,540

)

Total Priority Technology Holdings, Inc. stockholders' deficit

(110,927

)

 

(85,473

)

Non-controlling interest in a subsidiary

5,654

 

 

 

Total stockholders' deficit

(105,273

)

 

(85,473

)

 

 

 

 

Total liabilities and stockholders' deficit

$

452,277

 

 

$

388,618

 

PRIORITY TECHNOLOGY HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited

 

(in thousands)

Nine Months Ended September 30,

 

2019

 

2018

Cash flows from operating activities:

 

 

 

Net loss

$

(26,420

)

 

$

(11,367

)

Adjustment to reconcile net loss to net cash provided by operating activities:

 

 

 

Depreciation and amortization of assets

28,763

 

 

12,679

 

Equity-based compensation

3,354

 

 

1,063

 

Amortization of debt issuance costs and discounts

1,250

 

 

1,052

 

Equity in loss and impairment of unconsolidated entities

17

 

 

857

 

Provision for deferred income tax

(5,376

)

 

(991

)

Change in fair value of warrant liability

 

 

3,458

 

Provisions for allowance for deferred tax assets

7,844

 

 

 

Loss on debt extinguishment

 

 

541

 

Payment-in-kind interest

3,807

 

 

3,623

 

Other non-cash

(174

)

 

 

Change in operating assets and liabilities, net of business combinations:

 

 

 

Accounts receivable

(1,840

)

 

7,357

 

Settlement assets and obligations, net

6,696

 

 

5,764

 

Prepaid expenses and other current assets

(810

)

 

412

 

Notes receivable

(376

)

 

3,661

 

Accounts payable and other accrued liabilities

(6,091

)

 

434

 

Customer deposits and advance payments

250

 

 

(3,055

)

Other assets and liabilities

(277

)

 

(652

)

Net cash provided by operating activities

10,617

 

 

24,836

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Payments for business acquisitions

(184

)

 

(7,508

)

Additions to property, equipment and software

(8,662

)

 

(8,406

)

Acquisitions of merchant portfolios and assets

(81,777

)

 

(26,431

)

Note receivable loan funding

(3,000

)

 

 

Net cash used in investing activities

(93,623

)

 

(42,345

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Proceeds from issuance of long-term debt, net of issue discount

69,650

 

 

67,113

 

Repayment of long-term debt

(2,827

)

 

(2,011

)

Debt issuance costs refunded (paid)

83

 

 

(322

)

Borrowings under revolving credit facility

14,000

 

 

 

Repayments under revolving credit facility

(2,500

)

 

 

Repurchases of common stock

(2,388

)

 

 

Distributions to members prior to July 25, 2018 recapitalization

 

 

(7,075

)

Redemptions of membership interests prior to July 25, 2018 recapitalization

 

 

(74,093

)

Recapitalization proceeds

 

 

49,389

 

Founders shares redemptions

 

 

(2,118

)

Redemption of warrants

 

 

(12,701

)

Recapitalization costs

 

 

(9,355

)

Net cash provided by financing activities

76,018

 

 

8,827

 

 

 

 

 

Net change in cash and restricted cash:

 

 

 

Net change in cash and restricted cash

(6,988

)

 

(8,682

)

Cash and restricted cash at beginning of year

33,831

 

 

44,159

 

Cash and restricted cash at September 30

$

26,843

 

 

$

35,477

 

 

 

 

 

Supplemental cash flow information:

 

 

 

Cash paid for interest, net of payment-in-kind interest

$

25,527

 

 

$

16,537

 

Recognition of initial net deferred income tax asset

$

 

 

$

47,478

 

PRIORITY TECHNOLOGY HOLDINGS, INC.

Reportable Segments' Results

Unaudited

 

(in thousands)

 

Quarter Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

Consumer Payments:

 

 

 

 

 

 

 

 

Revenue

 

$

94,058

 

 

$

95,801

 

 

$

276,129

 

 

$

302,514

 

Operating expenses

 

86,837

 

 

83,896

 

 

253,826

 

 

265,048

 

Income from operations

 

$

7,221

 

 

$

11,905

 

 

$

22,303

 

 

$

37,466

 

Operating margin

 

7.7

%

 

12.4

%

 

8.1

%

 

12.4

%

Depreciation and amortization

 

$

8,302

 

 

$

4,415

 

 

$

24,215

 

 

$

11,497

 

 

 

 

 

 

 

 

 

 

Key indicators:

 

 

 

 

 

 

 

 

Merchant bankcard processing dollar value

 

$

10,566,500

 

 

$

9,643,512

 

 

$

31,551,404

 

 

$

28,548,235

 

Merchant bankcard transaction volume

 

131,646

 

 

120,879

 

 

382,676

 

 

351,304

 

 

 

 

 

 

 

 

 

 

Commercial Payments:

 

 

 

 

 

 

 

 

Revenue

 

$

6,957

 

 

$

6,975

 

 

$

21,032

 

 

$

20,473

 

Operating expenses

 

7,340

 

 

7,016

 

 

22,148

 

 

21,218

 

Loss from operations

 

$

(383

)

 

$

(41

)

 

$

(1,116

)

 

$

(745

)

Operating margin

 

(5.5

)%

 

(0.6

)%

 

(5.3

)%

 

(3.6

)%

Depreciation and amortization

 

$

70

 

 

$

109

 

 

$

249

 

 

$

393

 

 

 

 

 

 

 

 

 

 

Key indicators:

 

 

 

 

 

 

 

 

Merchant bankcard processing dollar value

 

$

92,290

 

 

$

63,361

 

 

$

236,716

 

 

$

180,764

 

Merchant bankcard transaction volume

 

25

 

 

29

 

 

83

 

 

85

 

 

 

 

 

 

 

 

 

 

Integrated Partners:

 

 

 

 

 

 

 

 

Revenue

 

$

8,939

 

 

$

815

 

 

$

20,195

 

 

$

962

 

Operating expenses

 

7,936

 

 

1,241

 

 

18,853

 

 

1,590

 

Income (loss) from operations

 

$

1,003

 

 

$

(426

)

 

$

1,342

 

 

$

(628

)

Operating margin

 

11.2

%

 

(52.3

)%

 

6.6

%

 

(65.3

)%

Depreciation and amortization

 

$

1,299

 

 

$

91

 

 

$

3,086

 

 

$

91

 

 

 

 

 

 

 

 

 

 

Key indicators:

 

 

 

 

 

 

 

 

Merchant bankcard processing dollar value

 

$

119,747

 

 

$

2,351

 

 

$

259,894

 

 

$

2,351

 

Merchant bankcard transaction volume

 

421

 

 

27

 

 

913

 

 

27

 

 

 

 

 

 

 

 

 

 

Income from operations of segments

 

$

7,841

 

 

$

11,438

 

 

$

22,529

 

 

$

36,093

 

Less: Corporate expenses

 

(5,116

)

 

(7,878

)

 

(16,402

)

 

(21,450

)

Consolidated income from operations

 

$

2,725

 

 

$

3,560

 

 

$

6,127

 

 

$

14,643

 

Corporate depreciation and amortization

 

$

406

 

 

$

284

 

 

$

1,213

 

 

$

698

 

 

 

 

 

 

 

 

 

 

Key indicators:

 

 

 

 

 

 

 

 

Merchant bankcard processing dollar value

 

$

10,778,537

 

 

$

9,709,224

 

 

$

32,048,014

 

 

$

28,731,350

 

Merchant bankcard transaction volume

 

132,092

 

120,935

 

383,672

 

351,416

PRIORITY TECHNOLOGY HOLDINGS, INC.
Reconciliations of Non-GAAP Financial Measures
Unaudited

The non-GAAP reconciliations of Adjusted Consolidated Revenue, Consolidated Gross Profit and Gross Profit Margin, Adjusted Consolidated Gross Profit and Gross Profit Margin, Adjusted Consolidated Income from Operations, Adjusted Consumer Payments Revenue, and Adjusted Consumer Payments Income from Operations to the most directly comparable financial measures calculated and presented in accordance with GAAP, are shown in the following tables:

(in thousands)

 

Quarter Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Consolidated revenue (GAAP)

 

$

109,954

 

 

$

103,591

 

 

$

317,356

 

 

$

323,949

 

Less: revenue from certain e-commerce merchants

 

 

(1,211

)

 

 

(11,720

)

 

 

(6,786

)

 

 

(57,759

)

Adjusted consolidated revenue (non-GAAP)

 

$

108,743

 

 

$

91,871

 

 

$

310,570

 

 

$

266,190

 

 

 

 

 

 

 

 

 

 

Consolidated costs of services

 

 

 

 

 

 

 

 

Consolidated costs of merchant card fees

 

$

74,953

 

 

$

71,876

 

 

$

215,433

 

 

$

230,276

 

Consolidated costs of outsourced services and other

 

 

4,836

 

 

 

4,475

 

 

 

14,079

 

 

 

13,518

 

 

 

$

79,789

 

 

$

76,351

 

 

$

229,512

 

 

$

243,794

 

 

 

 

 

 

 

 

 

 

Consolidated gross profit (non-GAAP)

 

$

30,165

 

 

$

27,240

 

 

$

87,844

 

 

$

80,155

 

Less: gross profit of certain e-commerce merchants

 

 

(474

)

 

 

(4,077

)

 

 

(2,757

)

 

 

(18,308

)

Adjusted consolidated gross profit (non-GAAP)

 

$

29,691

 

 

$

23,163

 

 

$

85,087

 

 

$

61,847

 

 

 

 

 

 

 

 

 

 

Consolidated gross profit margin (non-GAAP)

 

 

27.4

%

 

 

26.3

%

 

 

27.7

%

 

 

24.7

%

Adjusted consolidated gross profit margin (non-GAAP)

 

 

27.3

%

 

 

25.2

%

 

 

27.4

%

 

 

23.2

%

 

 

 

 

 

 

 

 

 

Consolidated income from operations (GAAP)

 

$

2,725

 

 

$

3,560

 

 

$

6,127

 

 

$

14,643

 

Less: revenue from certain e-commerce merchants

 

 

(1,211

)

 

 

(11,720

)

 

 

(6,786

)

 

 

(57,759

)

Add: operating expenses of certain e-commerce merchants

 

 

737

 

 

 

7,643

 

 

 

4,029

 

 

 

39,451

 

Add: non-recurring operating expenses

 

 

1,194

 

 

 

3,518

 

 

 

3,955

 

 

 

10,281

 

Adjusted consolidated income from operations (non-GAAP)

 

$

3,445

 

 

$

3,001

 

 

$

7,325

 

 

$

6,616

 

 

 

 

 

 

 

 

 

 

Consumer Payments revenue (GAAP)

 

$

94,058

 

 

$

95,801

 

 

$

276,129

 

 

$

302,514

 

Less: revenue from certain e-commerce merchants

 

 

(1,211

)

 

 

(11,720

)

 

 

(6,786

)

 

 

(57,759

)

Adjusted Consumer Payments revenue (non-GAAP)

 

$

92,847

 

 

$

84,081

 

 

$

269,343

 

 

$

244,755

 

 

 

 

 

 

 

 

 

 

Consumer Payments income from operations (GAAP)

 

$

7,221

 

 

$

11,905

 

 

$

22,303

 

 

$

37,466

 

Less: revenue from certain e-commerce merchants

 

 

(1,211

)

 

 

(11,720

)

 

 

(6,786

)

 

 

(57,759

)

Add: operating expenses of certain e-commerce merchants

 

 

737

 

 

 

7,643

 

 

 

4,029

 

 

 

39,451

 

Adjusted Consumer Payments income from operations (non-GAAP)

$

6,747

 

 

$

7,828

 

 

$

19,546

 

 

$

19,158

 

PRIORITY TECHNOLOGY HOLDINGS, INC.
Reconciliations of Non-GAAP EBITDA Measures
Unaudited

The non-GAAP reconciliations of Consolidated EBITDA, Consolidated Adjusted EBITDA, Consolidated Earnout Adjusted EBITDA, and Consolidated Adjusted EBITDA excluding certain subscription-billing e-commerce merchants to consolidated net loss, the most directly comparable financial measures calculated and presented in accordance with GAAP, are shown in the tables below:

(in thousands)

Quarter Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2019

 

2018

 

2019

 

2018

 

 

Consolidated net loss (GAAP)

$

(5,844

)

 

$

(2,562

)

 

$

(26,420

)

 

$

(11,367

)

Add: Interest expense (1)

10,463

 

 

7,334

 

 

30,602

 

 

21,893

 

Add: Depreciation and amortization

10,077

 

 

4,899

 

 

28,763

 

 

12,679

 

Add: Income tax (benefit) expense

(1,736

)

 

(991

)

 

2,468

 

 

(991

)

Consolidated EBITDA (non-GAAP)

12,960

 

 

8,680

 

 

35,413

 

 

22,214

 

Further adjusted by:

 

 

 

 

 

 

 

Add: Non-cash equity-based compensation

1,171

 

 

268

 

 

3,354

 

 

1,063

 

Add: Debt modification/extinguishment costs and warrant fair value changes

 

 

(71

)

 

 

 

4,782

 

Add: Certain legal expenses (2)

379

 

 

2,314

 

 

1,264

 

 

5,496

 

Add: Professional, accounting and consulting fees (3)

374

 

 

1,204

 

 

1,504

 

 

4,785

 

Add: Transition services for acquisition (4)

441

 

 

 

 

1,188

 

 

 

Consolidated Adjusted EBITDA (non-GAAP)

15,325

 

 

12,395

 

 

42,723

 

 

38,340

 

Further adjusted by:

 

 

 

 

 

 

 

Add: Pro-forma impact of acquisitions (5)

1,112

 

 

820

 

 

6,801

 

 

7,633

 

Add: Contracted revenue and savings

275

 

 

273

 

 

823

 

 

2,924

 

Add: Other professional and consulting fees

360

 

 

249

 

 

1,112

 

 

872

 

Add: Other tax expenses and other adjustments

245

 

 

81

 

 

301

 

 

1,310

 

Consolidated Earnout Adjusted EBITDA (non-GAAP) (6)

$

17,317

 

 

$

13,818

 

 

$

51,760

 

 

$

51,079

 

 

 

 

 

 

 

 

 

Consolidated Adjusted EBITDA (non-GAAP)

$

15,325

 

 

$

12,395

 

 

$

42,723

 

 

$

38,340

 

Less: Gross profit from certain e-commerce merchants

(474

)

 

(4,077

)

 

(2,757

)

 

(18,308

)

Consolidated Adjusted EBITDA excluding certain subscription-billing e-commerce merchants (non-GAAP)

$

14,851

 

 

$

8,318

 

 

$

39,966

 

 

$

20,032

 

(1) Interest expense includes amortization of debt issuance costs and issue discounts.
(2) Legal expenses related to business and asset acquisition activity and settlement negotiation and other litigation expenses, as well as legal settlements.
(3) Primarily transaction-related, capital markets and accounting advisory services.
(4) Temporary transition services from YapStone related to integration of the March 2019 asset acquisition.
(5) Each reporting period's year-to-date amounts are updated to reflect the pro forma impact of acquisitions as though they had taken place on January 1 of the year in which the acquisition occurred.
(6) Reflects definition in debt agreements entered into in connection with the January 2017 debt financing. Subsequent to the Business Combination, the Earnout Adjusted EBITDA of the Borrowers under the credit agreements excludes expenses of the Company's consolidated parent entity, which is neither a borrower nor a guarantor under the credit agreements. Earnout Adjusted EBITDA of the Borrowers was approximately $20.7 million and $62.4 million for the quarter and nine months ended September 30, 2019, respectively.

View source version on businesswire.com: https://www.businesswire.com/news/home/20191113005940/en/