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

ALPHARETTA, Ga.–(BUSINESS WIRE)–Priority Technology Holdings, Inc. (NASDAQ: PRTH) (“Priority” or the
“Company”), a leading fintech enterprise with strong core payments
technology, today announced its first quarter 2019 financial results.

Highlights

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

  • Consolidated revenue of $100.0 million declined 13.5%. Adjusted
    consolidated revenue(1), a non-GAAP measure, which excludes
    the impact of subscription-billing e-commerce merchants, of $96.1
    million increased 14.5%.
  • Total merchant bankcard processing dollar value grew 8.8% to $9.9
    billion from $9.1 billion.
  • Gross profit margin increased 290 basis points from 24.6% to 27.5%.
    The Company’s non-GAAP gross profit metric represents consolidated
    revenue less costs of merchant card fees and other costs of services.
    Adjusted gross profit margin(1), excluding the impact of
    subscription-billing e-commerce merchants, increased 510 basis points
    from 21.9% to 27.0%.
  • Consolidated adjusted EBITDA of $12.5 million decreased $2.8 million.
    The Company’s non-GAAP Consolidated adjusted EBITDA measure is
    earnings before interest, taxes, depreciation and amortization
    (EBITDA), further adjusted for non-cash compensation and certain other
    expenses considered non-recurring. Consolidated adjusted EBITDA(1),
    excluding the impact of subscription-billing e-commerce merchants, of
    $10.8 million increased $5.6 million.
  • In March 2019, the Company entered into a real estate payments
    operating partnership with Yapstone, Inc. and acquired assets from
    them that enables Priority to provide a single platform to meet the
    needs of all landlord constituents – from integrated enterprise
    property managers, middle market partners and small/local landlords
    for rent, dues and storage.

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

Priority’s first quarter results continued to reflect positive
fundamentals and solid underlying growth, despite the previously
discussed suspension in the boarding of subscription-billing e-commerce
merchants. Core acquiring remains consistent, with strong merchant
boarding trends throughout the quarter, and market adoption of our
Commercial Payments platform is accelerating. Our Integrated Partners
business group is also gaining significant traction across all
verticals, including Hospitality, Healthcare and Real Estate – and most
recently fueled by our operating partnership with Yapstone. As we strive
to distinguish Priority from traditional merchant service providers by
extending our success into software-based transaction technology,” said
Tom Priore, Executive Chairman and CEO of Priority.

Discussion of First Quarter Results

The comparative revenue and gross profit for the first quarter 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 $3.9 million and
$31.7 million in the first quarters of 2019 and 2018, respectively. The
corresponding gross profit and income from operations associated with
this revenue was $1.6 million and $10.0 million in the first quarters of
2019 and 2018, respectively.

Income from operations includes certain expenses that the Company
considers non-recurring in nature, largely associated with conversion to
a public company, such as legal, accounting, advisory and consulting
expenses plus certain litigation costs. Non-recurring expenses, which
are contained within Corporate, were $1.2 million and $3.3 million in
the first quarters of 2019 and 2018, respectively.

Revenue:

Consolidated

Consolidated revenue in the first quarter of 2019 amounted to $100.0
million, a decline of $15.6 million compared with the 2018 first
quarter. This decline was driven by the previously discussed wind-down
of the subscription-billing e-commerce merchants. Adjusted consolidated
revenue of $96.1 million, which excludes the impact of
subscription-billing e-commerce merchants, increased $12.1 million, or
14.5%.

Total merchant bankcard volume processed in the first quarter of 2019 of
$9.9 billion grew by 8.8%, as compared with $9.1 billion in the first
quarter of 2018. Merchant bankcard transaction volume of 117.9 million
in the first quarter of 2019 grew by 6.7%, as compared with 110.4
million in the 2018 first quarter. Average ticket (calculated by
dividing bankcard volume processed by the associated number of
transactions processed) of $84.40 grew 2.0% in the first quarter of
2019, as compared with $82.76 in the comparable 2018 quarter.

Consumer Payments Reportable Segment

Consumer Payments revenue in the first quarter of 2019 was $89.8
million, a decline of $19.2 million compared with the 2018 first
quarter. Excluding the subscription-billing e-commerce business,
adjusted Consumer Payments reportable segment revenue increased $8.6
million, or 11.1%, from $77.3 million in the first quarter of 2018 to
$85.9 million in the first quarter of 2019.

Merchant bankcard volume processed in the first quarter of 2019 of $9.9
billion grew by 8.7%, as compared with $9.1 billion in the first quarter
of 2018. Merchant bankcard transaction volume of 117.8 million in the
first quarter of 2019 grew by 6.7%, as compared with 110.4 million in
the 2018 first quarter. Average ticket of $83.82 grew 1.9% in the first
quarter of 2019, as compared with $82.28 in the comparable 2018 quarter.

Commercial Payments and Managed Services Reportable Segment

Commercial Payments and Managed Services revenue in the first quarter of
2019 amounted to $10.2 million, a 53.5% increase over $6.6 million in
the 2018 first quarter. Revenue in the first quarter of 2019 included
$3.2 million from the recently established Integrated Partners business
group within this reportable segment. Commercial Payments revenue of
$1.5 million in the first quarter of 2019 increased 54.2% compared with
the 2018 first quarter. Managed Services revenue of $5.5 million in the
first quarter of 2019 was in line with the 2018 first quarter.

Income from Operations:

Consolidated

Consolidated income from operations was $1.0 million in the first
quarter of 2019, compared with $7.9 million in the 2018 first quarter.
This decline of $6.9 million was due to a decrease in gross profit of
$0.9 million, an increase in depreciation and amortization of $5.2
million and an increase in salaries and employee benefits of $1.9
million, partially offset by a $1.0 million decrease in selling, general
and administrative expenses. Included in selling, general and
administrative expenses in the first quarters of 2019 and 2018 were $1.2
million and $3.3 million, respectively, of certain expenses the Company
considers non-recurring in nature. Non-cash equity-based compensation of
$1.2 million, included in salaries and employee benefits, increased $1.0
million.

Consumer Payments Reportable Segment

Consumer Payments income from operations in the first quarter of 2019
was $7.7 million, a decline of $7.5 million compared with the 2018 first
quarter. Income from operations from the subscription-billing e-commerce
merchants declined $8.4 million. Depreciation and amortization of $7.8
million in the first quarter of 2019 increased $4.4 million compared
with $3.4 million in the first quarter of 2018, due largely to
amortization related to merchant portfolio acquisitions subsequent to
the first quarter of 2018. Adjusted Consumer Payments reportable segment
income from operations, which excludes the impact of
subscription-billing e-commerce merchants, grew 17.7% to $6.1 million.

Commercial Payments and Managed Services Reportable Segment

Commercial Payments and Managed Services reflected a loss from
operations of $0.7 million in the first quarter of 2019 due to $0.8
million of depreciation and amortization. This compares with a loss from
operations of $0.3 million in the first quarter of 2018, which included
depreciation and amortization of $0.1 million. The increased
depreciation and amortization is attributable to amortization of
intangible assets acquired within the Integrated Partners business group.

Corporate

Corporate expense in the first quarter of 2019 amounted to $6.1 million,
compared with $7.0 million in the first quarter of 2018. Non-recurring
expenses amounted to $1.2 million and $3.3 million in the first quarters
of 2019 and 2018, respectively.

Interest Expense:

Interest expense of $9.4 million in the first quarter of 2019 increased
by $2.4 million from $6.9 million in the 2018 first quarter. The
increase is due to higher outstanding borrowings driven by acquisition
financing.

Other Income (Expense), Net:

Other income, net of $0.2 million in the first quarter of 2019, compares
with other expense, net of $4.1 million in the first quarter of 2018.
The 2018 first quarter includes $3.5 million of expense related to the
change in fair value of the Goldman Sachs warrant and $0.8 million of
debt modification costs.

Acquisition / Partnership Updates

Priority’s acquisition strategy continues to identify and purchase
integrated product channels and existing reselling partners. The Company
continued purchases of merchant portfolios in the first quarter of 2019
with the execution of a handful of tuck-in acquisitions. In addition,
Priority Real Estate Technology (“PRET”), an operating subsidiary of the
Company, acquired assets from and entered into a real estate payments
operating partnership with Yapstone, Inc., a leading provider of online
and mobile payment solutions. Priority is the majority owner in the
partnership with a preferred equity position and has assumed
responsibility for the management and daily operation of the newly
combined assets. PRET will provide critical operating infrastructure,
marketing and sales support and real estate technology assets, including
products and services derived from the previous acquisitions of RadPad
and Landlord Station. Together, the Company believes that the new entity
will provide a single platform that meets the needs of all landlord
constituents – from integrated enterprise property managers, middle
market partners and small/local landlords for rent, dues and storage.

Priority funded these transactions through a $70.0 million delayed draw
under its December 24, 2018 amended Senior Secured Credit Facility,
$10.0 million borrowing from a revolving credit agreement and cash on
hand.

Liquidity

Working capital (defined as current assets less current liabilities) was
$11.7 million at March 31, 2019, compared with $21.1 million at December
31, 2018. Unrestricted cash amounted to $9.1 million at March 31, 2019,
compared with $15.6 million at December 31, 2018. These unrestricted
balances do not include cash of $20.1 million at March 31, 2019 and
$18.2 million at December 31, 2018 related to customer settlement funds.
At March 31, 2019, the Company had availability of $15.0 million under a
revolving credit facility.

Debt

As of March 31, 2019, total term debt amounted to $483.1 million,
compared to $412.7 million at December 31, 2018. The debt balance
consisted of outstanding term debt of $391.8 million under the Senior
Credit Facility and $91.2 million in term debt under the subordinated
Goldman Sachs Credit Agreement (including accrued payment-in-kind
(“PIK”) interest through March 31, 2019).

2019 Outlook

Priore concluded, “Priority’s future remains bright as we look to build
on strong underlying growth throughout our business. Our
industry-leading technology and service offering, combined with our
recent partnership with Yapstone and acquisition of Direct Connect’s
portfolio assets, have positioned the Company well for long-term growth
and profitability. We remain confident in our ability to deliver modest
revenue growth over 2018, despite a forecasted $50 million revenue
decline from the subscription e-commerce business year over year, while
continuing to target Earn-out Adjusted EBITDA (a non-GAAP measure) of
$75 million for the full year 2019.”

Conference Call

Priority Technology Holdings Inc.’s leadership will host a conference
call on Monday, May 13, 2019 at 8:30 a.m. ET to discuss its first
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/m6/p/myfikjd7
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 May 16, 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 9081924. 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 March 31, 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 also refer to adjusted gross
profit and adjusted gross profit margin, which excludes gross profit
from certain subscription-billing e-commerce merchants. We review these
non-GAAP measures to evaluate our underlying profit trends.

Adjusted Income from Operations

Income from operations for the quarter ended March 31, 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 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, EBITDA, Adjusted EBITDA and
Earnout Adjusted EBITDA to the most directly comparable financial
measure 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 fintech enterprise with a leading core payments
technology, 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

For the Quarters ended March 31, 2019 and 2018

Unaudited

 
(in thousands, except per share amounts) Quarter Ended March 31,
2019   2018
REVENUE:
Merchant card fees $ 91,829 $ 108,010
Outsourced services and other 8,148   7,586  
Total revenue 99,977   115,596  
 
OPERATING EXPENSES:
Costs of merchant card fees 67,871 82,813
Costs of outsourced services and other 4,566 4,376
Salary and employee benefits 10,899 8,972
Depreciation and amortization 8,925 3,767
Selling, general and administrative 6,750   7,790  
Total operating expenses 99,011   107,718  
 
Income from operations 966   7,878  
 
OTHER INCOME (EXPENSES):
Interest expense (9,363 ) (6,929 )
Other, net 227   (4,126 )
Total other expenses, net (9,136 ) (11,055 )
 
Loss before income taxes (8,170 ) (3,177 )
 
Income tax benefit (1,724 )  
 
Net loss $ (6,446 ) $ (3,177 )
 
Loss per common share:
Basic and diluted $ (0.10 ) $ (0.06 )
 
 
PRO FORMA (C-corporation basis):
Income tax benefit $ (665 )
Net loss $ (2,512 )
 
Loss per common share:
Basic and diluted $ (0.04 )
     

PRIORITY TECHNOLOGY HOLDINGS, INC.

Segment Results

Quarter Ended March 31, 2019 Compared to Quarter Ended March
31, 2018

Unaudited

 
(dollars and volume amounts in thousands) Quarter Ended March 31,
2019   2018 Change % Change
 
Consumer Payments:
Revenue $ 89,822 $ 108,981 $ (19,159 ) (17.6 )%
Operating expenses 82,103   93,766   (11,663 ) (12.4 )%
Income from operations $ 7,719   $ 15,215   $ (7,496 )
Operating margin 8.6 % 14.0 %
Depreciation and amortization $ 7,808 $ 3,436 $ 4,372
 
Key indicators:
Merchant bankcard processing dollar value $ 9,872,377 $ 9,084,227 788,150 8.7 %
Merchant bankcard transaction volume 117,781 110,405 7,376 6.7 %
 
 
Commercial Payments and Managed Services:
Revenue $ 10,155 $ 6,615 $ 3,540 53.5 %
Operating expenses 10,839   6,942   3,897   56.1 %
Loss from operations $ (684 ) $ (327 ) $ (357 )
Operating margin (6.7 )% (4.9 )%
Depreciation and amortization $ 789 $ 140 649
 
Key indicators:
Merchant bankcard processing dollar value $ 73,854 $ 55,536 $ 18,318 33.0 %
Merchant bankcard transaction volume 70 26 44 169.2 %
 
Income from operations of segments $ 7,035 $ 14,888 $ (7,853 ) (52.7 )%
Less: Corporate expenses (6,069 ) (7,010 ) 941   (13.4 )%
Consolidated income from operations $ 966   $ 7,878   $ (6,912 )
Corporate depreciation and amortization $ 328 $ 191 $ 137
 
Key indicators:
Merchant bankcard processing dollar value $ 9,946,231 $ 9,139,763 $ 806,468 8.8 %
Merchant bankcard transaction volume 117,851 110,431 7,420 6.7 %
 
   

PRIORITY TECHNOLOGY HOLDINGS, INC.

Condensed Consolidated Balance Sheets

As of March 31, 2019 and December 31, 2018

Unaudited

 
(in thousands) March 31, 2019 December 31, 2018
ASSETS
Current Assets:
Cash $ 9,091 $ 15,631
Restricted cash 20,149 18,200
Accounts receivable, net of allowance for doubtful accounts 47,902 45,651
Prepaid expenses and other current assets 4,394 3,642
Current portion of notes receivable 1,438 979
Settlement assets 1,006   1,042  
Total current assets 83,980 85,145
 
Notes receivable, less current portion 717 852
Property, equipment, and software, net 18,381 17,482
Goodwill 109,515 109,515
Intangible assets, net 206,921 124,637
Deferred income taxes, net 51,313 49,692
Other non-current assets 1,288   1,295  
Total assets $ 472,115   $ 388,618  
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 23,568 $ 27,638
Accrued residual commissions 18,293 18,715
Customer deposits and advance payments 3,737 3,282
Borrowings outstanding on revolving credit facility 10,000
Current portion of long-term debt 3,293 3,293
Settlement obligations 13,381   11,132  
Total current liabilities 72,272   64,060  
 
Long-term debt, net of discounts and deferred financing costs 472,537 402,095
Other non-current liabilities 12,411   7,936  
Total long-term liabilities 484,948   410,031  
 
Total liabilities 557,220   474,091  
 
Stockholders’ deficit:
Common stock issued and outstanding 67 67
Additional paid-in capital 1,160
Accumulated deficit (91,986 ) (85,540 )
(90,759 ) (85,473 )
Non-controlling interest in a subsidiary 5,654    
Total stockholders’ deficit (85,105 ) (85,473 )
 
Total liabilities and stockholders’ deficit $ 472,115   $ 388,618  
 

Contacts

Investor and Media Inquiries:
Chris Kettmann
773-497-7575
ckettmann@lincolnchurchilladvisors.com

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