Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes for the years ended December 31, 2019 , 2018 and 2017 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2020 (the "Annual Report").
Cautionary Note Regarding Forward-Looking Statements
Some of the statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward- looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•
the impact of the COVID-19 pandemic;
•
competition in the payment processing industry;
•
the use of distribution partners;
•
any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise;
•
any breakdowns in our processing systems;
•
government regulation, including regulation of consumer information;
•
the use of third-party vendors;
•
any changes in card association and debit network fees or products;
•
any failure to comply with the rules established by payment networks or standards established by third-party processor;
•
any proposed acquisitions or any risks associated with completed acquisitions; and
•
other risks and uncertainties set forth in the "Item 1A - Risk Factors" included in this Quarterly Report or our Annual Report.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause our actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
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You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Terms Used in this Quarterly Report on Form 10-Q
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "we," "us" and "our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries.
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Results of Operations
This section includes a summary of our results of operations for the periods presented followed by a detailed discussion of our results of operations for the three months ended June 30, 2020 (or second quarter 2020) compared to the three months ended June 30, 2019 (or second quarter 2019), and the six months ended June 30, 2020 (or first half of 2020) compared to the six months ended June 30, 2019 (or first half of 2019). We have derived this data, except key indicators for merchant bankcard processing dollar values and transaction volumes, from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our latest Annual Report on Form 10-K.
Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019
(dollars in thousands)
Three Months Ended June 30,
2020
2019
Change
% Change
REVENUES
$
92,356
$
92,142
$
214
0.2
%
OPERATING EXPENSES:
Costs of services
62,398
62,003
395
0.6
%
Salary and employee benefits
9,556
10,356
(800
)
(7.7
)%
Depreciation and amortization
10,363
9,761
602
6.2
%
Selling, general and administrative
6,008
7,586
(1,578
)
(20.8
)%
Total operating expenses
88,325
89,706
(1,381
)
(1.5
)%
Income from operations
4,031
2,436
1,595
65.5
%
OTHER INCOME (EXPENSES):
Interest expense
(11,668
)
(10,776
)
(892
)
8.3
%
Other income, net
194
138
56
40.6
%
Total other expenses, net
(11,474
)
(10,638
)
(836
)
7.9
%
Loss before income taxes
(7,443
)
(8,202
)
759
(9.3
)%
Income tax expense
415
5,928
(5,513
)
(93.0
)%
Net loss
$
(7,858
)
$
(14,130
)
$
6,272
(44.4
)%
nm = not meaningful
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Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
(dollars in thousands)
Six Months Ended June 30,
2020
2019
Change
% Change
REVENUES
$
189,289
$
179,788
$
9,501
5.3
%
OPERATING EXPENSES:
Costs of services
128,762
122,109
6,653
5.4
%
Salary and employee benefits
19,685
21,255
(1,570
)
(7.4
)%
Depreciation and amortization
20,635
18,686
1,949
10.4
%
Selling, general and administrative
12,617
14,336
(1,719
)
(12.0
)%
Total operating expenses
181,699
176,386
5,313
3.0
%
Income from operations
7,590
3,402
4,188
123.1
%
OTHER INCOME (EXPENSES):
Interest expense
(21,983
)
(20,139
)
(1,844
)
9.2
%
Other (expense) income, net
(152
)
365
(517
)
(141.6
)%
Total other expenses, net
(22,135
)
(19,774
)
(2,361
)
11.9
%
Loss before income taxes
(14,545
)
(16,372
)
1,827
(11.2
)%
Income tax (benefit) expense
(818
)
4,204
(5,022
)
(119.5
)%
Net loss
$
(13,727
)
$
(20,576
)
$
6,849
(33.3
)%
nm = not meaningful
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The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 :
(in thousands)
Three Months Ended June 30,
2020
2019
Change
% Change
Consumer Payments:
Revenue
$
81,707
$
81,454
$
253
0.3
%
Operating expenses
74,437
74,091
346
0.5
%
Income from operations
$
7,270
$
7,363
$
(93
)
(1.3
)%
Operating margin
8.9
%
9.0
%
Depreciation and amortization
$
8,657
$
8,105
$
552
6.8
%
Key Indicators:
Merchant bankcard processing dollar value
$
9,010,908
$
10,774,149
$
(1,763,241
)
(16.4
)%
Merchant bankcard transaction volume
92,842
130,146
(37,304
)
(28.7
)%
Commercial Payments:
Revenue
$
5,654
$
6,496
$
(842
)
(13.0
)%
Operating expenses
5,179
6,778
(1,599
)
(23.6
)%
Income (loss) from operations
$
475
$
(282
)
$
757
(268.4
)%
Operating margin
8.4
%
(4.3
)%
Depreciation and amortization
$
78
$
81
$
(3
)
(3.7
)%
Key Indicators:
Merchant bankcard processing dollar value
$
64,248
$
74,529
$
(10,281
)
(13.8
)%
Merchant bankcard transaction volume
21
28
(7
)
(25.0
)%
Integrated Partners:
Revenue
$
4,995
$
4,192
$
803
19.2
%
Operating expenses
4,150
3,620
530
14.6
%
Income (loss) from operations
$
845
$
572
$
273
47.7
%
Operating margin
16.9
%
13.6
%
Depreciation and amortization
$
1,334
$
1,096
$
238
21.7
%
Key Indicators:
Merchant bankcard processing dollar value
$
122,089
$
106,162
$
15,927
15.0
%
Merchant bankcard transaction volume
388
364
24
6.6
%
Income from operations of reportable segments
$
8,590
$
7,653
$
937
12.2
%
Less: Corporate expense
(4,559
)
(5,217
)
658
(12.6
)%
Consolidated income from operations
$
4,031
$
2,436
$
1,595
65.5
%
Corporate depreciation and amortization
$
294
$
479
$
(185
)
(38.6
)%
Key indicators:
Merchant bankcard processing dollar value
$
9,197,245
$
10,954,840
$
(1,757,595
)
(16.0
)%
Merchant bankcard transaction volume
93,251
130,538
(37,287
)
(28.6
)%
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The following table shows our reportable segments' financial performance data and selected performance measures for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 :
(in thousands)
Six Months Ended June 30,
2020
2019
Change
% Change
Consumer Payments:
Revenue
$
167,738
$
160,463
$
7,275
4.5
%
Operating expenses
153,316
145,381
7,935
5.5
%
Income from operations
$
14,422
$
15,082
$
(660
)
(4.4
)%
Operating margin
8.6
%
9.4
%
Depreciation and amortization
$
17,240
$
15,913
$
1,327
8.3
%
Key Indicators:
Merchant bankcard processing dollar value
$
19,397,656
$
20,984,904
$
(1,587,248
)
(7.6
)%
Merchant bankcard transaction volume
212,273
251,030
(38,757
)
(15.4
)%
Commercial Payments:
Revenue
$
12,022
$
13,154
$
(1,132
)
(8.6
)%
Operating expenses
10,783
13,887
(3,104
)
(22.4
)%
Income (loss) from operations
$
1,239
$
(733
)
$
1,972
(269.0
)%
Operating margin
10.3
%
(5.6
)%
Depreciation and amortization
$
154
$
179
$
(25
)
(14.0
)%
Key Indicators:
Merchant bankcard processing dollar value
$
136,925
$
144,426
$
(7,501
)
(5.2
)%
Merchant bankcard transaction volume
46
58
(12
)
(20.7
)%
Integrated Partners:
Revenue
$
9,529
$
6,171
$
3,358
54.4
%
Operating expenses
8,316
5,832
2,484
42.6
%
Income (loss) from operations
$
1,213
$
339
$
874
257.8
%
Operating margin
12.7
%
5.5
%
Depreciation and amortization
$
2,645
$
1,787
$
858
48.0
%
Key Indicators:
Merchant bankcard processing dollar value
$
246,607
$
140,147
$
106,460
76.0
%
Merchant bankcard transaction volume
836
492
344
69.9
%
Income from operations of reportable segments
$
16,874
$
14,688
$
2,186
14.9
%
Less: Corporate expense
(9,284
)
(11,286
)
2,002
(17.7
)%
Consolidated income from operations
$
7,590
$
3,402
$
4,188
123.1
%
Corporate depreciation and amortization
$
596
$
807
$
(211
)
(26.1
)%
Key indicators:
Merchant bankcard processing dollar value
$
19,781,188
$
21,269,477
$
(1,488,289
)
(7.0
)%
Merchant bankcard transaction volume
213,155
251,580
(38,425
)
(15.3
)%
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Impact of COVID-19 on Results and Trends
The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020 , continues to adversely affect commercial activity and has contributed to a significant decline in economic activity. Starting in mid-March 2020, COVID-19 began to significantly affect our results. The deterioration accelerated toward the end of March and continued at that level through most of April due to restrictive shelter in place requirements instituted across the United States. In April, we experienced a significant decline in merchant bankcard volume of 31.8% as compared with the comparable period in 2019, which resulted in a decrease in our April revenues of 11.7% and revenues less costs of services of 9.3% . In May, as shelter in place restrictions began to be lifted and regional economies were reopening, our processing volumes began to return and growth was supplemented by the acceleration of certain specialized product offerings including ecommerce. This resulted in increasingly strong results in May and June. Merchant bankcard volumes in May and June were down from the comparable prior year periods by just 15.8% and 1.9% , respectively, while revenues grew 1.7% and 10.8% , respectively. Revenues less costs of services increased 3.5% and 4.5% in May and June, respectively, as compared to the prior year periods. In the second quarter of 2020:
•
Merchant bankcard volume processed in April, May and June was $2.4 billion , $3.2 billion , and $3.6 billion , respectively.
•
Consolidated revenue in April, May and June was $26.7 million , $31.9 million , and $33.8 million , respectively.
•
Consolidated revenue less costs of services in April, May and June was $9.1 million , $10.0 million , and $10.8 million , respectively.
Revenue
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Our consolidated revenue in second quarter 2020 increased by $0.2 million , or 0.2% , to $92.4 million from $92.1 million in second quarter 2019. Revenue growth of $0.3 million in our Consumer Payments segment and $0.8 million in our Integrated Partners segment were partially offset by a revenue decline of $0.8 million in our Commercial Payments segment. Consolidated bankcard processing dollar value and consolidated bankcard transaction volume decreased 16.0% and 28.6% , respectively, in second quarter 2020 while the average consolidated ticket price (calculated by dividing bankcard processing volume by the associated number of transactions processed) grew 17.5% to $98.63 from $83.92 compared to second quarter 2019.
Consumer Payments segment revenue for the second quarter 2020 increased by $0.3 million, or 0.3% , compared to second quarter 2019. Despite a 16.4% decline in merchant bankcard processing dollar volume in the quarter, the revenue increase was driven by strong ecommerce growth. Ecommerce volume offers more favorable pricing to the Company than other merchant categories. The overall merchant mix also resulted in a higher average ticket.
Commercial Payments segment revenue for second quarter 2020 decreased by $0.8 million , or 13.0% , compared to second quarter 2019. This decrease was due to lower revenue from our curated managed services program, partially offset by increases in our commercial payments exchange ("CPX") accounts payable automated solutions services, which grew by 7.9% from $1.3 million in second quarter 2019 to $1.4 million in second quarter 2020. Revenue from our curated managed services programs declined by 18.2% from $5.2 million in second quarter 2019 to $4.2 million in second quarter 2020, driven by lower program activity and incentive revenue.
Revenue in our Integrated Partners segment was $5.0 million for second quarter 2020 compared to $4.2 million for second quarter 2019. Priority Real Estate Technology ("PRET") comprised $4.5 million and $3.7 million of this segment's revenue in second quarter 2020 and second quarter 2019, respectively. PRET is comprised primarily of the assets acquired from YapStone, Inc. in March 2019 and the net assets acquired from RadPad Holdings, Inc. Revenue from Priority PayRight Health Solutions and Priority Hospitality Technology, whose assets we acquired in April 2018 and February 2019, respectively, comprise the remainder of this segment's revenue.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Our consolidated revenue in the first half of 2020 increased by $9.5 million , or 5.3% , to $189.3 million from $179.8 million in first half of 2019. Revenue growth of $7.3 million in our Consumer Payments segment and $3.4 million in our Integrated Partners segments were partially offset by a decline of $1.1 million in our Commercial Payments segment. Consolidated bankcard processing
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dollar value and consolidated bankcard transaction volume decreased by 7.0% and 15.3% , respectively in the first half of 2020 while the average consolidated ticket price grew 9.8% to $92.80 from $84.54 compared to first half of 2019.
Consumer Payments segment revenue in the first half of 2020 increased by $7.3 million, or 4.5% , compared to the first half of 2019. Despite a 7.6% decline in merchant bankcard processing dollar volume in the first half of 2020, the revenue increase was driven by strong ecommerce growth, particularly in the second quarter of 2020. Ecommerce volume offers more favorable pricing to the Company than other merchant categories. The overall merchant mix also resulted in a higher average ticket.
Commercial Payments segment revenue for the first half of 2020 decreased by $1.1 million , or 8.6% , compared to the first half of 2019. This decrease was due to lower revenues from our curated managed services program, partially offset by increases in our CPX accounts payable automated solutions services, which grew by $0.5 million from $2.5 million in the first half of 2019 to $3.0 million in the first half of 2020. Revenue from our curated managed services program declined by $1.6 million from $10.6 million in the first half of 2019 to $9.0 million in the first half of 2020, driven by lower program activity and incentive revenue in 2020.
Integrated Partners segment revenue for the first half of 2020 increased by $3.4 million, or 54.4% , compared to the first half of 2019. PRET comprised $8.5 million and $5.3 million of this segment's revenue in the first half of 2020 and the first half of 2019, respectively. PRET's revenues in the first half of 2019 began to reflect revenue from the YapStone assets which were acquired in March 2019.
Operating expenses
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Our consolidated operating expenses decreased $1.4 million , or 1.5% , from $89.7 million in second quarter 2019 to $88.3 million in second quarter 2020. This overall decrease was driven by a $0.8 million reduction in salary and employee benefit expenses due primarily to reduced headcount. At June 30, 2020 we had 537 full-time equivalent employees compared to 575 at June 30, 2019 . Selling, general and administrative ("SG&A") expenses decreased by $1.6 million attributable mainly to decreases in office and travel-related costs due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment. Partially offsetting these decreases was an increase in depreciation and amortization expense of $0.6 million , or 6.2% , caused by higher amortization expense in 2020 from acquired intangible assets and internally-developed software. Consolidated operating expenses in the second quarter 2020 and the second quarter 2019 included non-recurring expenses of $1.4 million and $1.6 million, respectively.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Our consolidated operating expenses increased by $5.3 million , or 3.0% , from $176.4 million in the first half of 2019 to $181.7 million in the first half of 2020. This overall increase was driven by higher revenues of 5.3% , which was reflected in the corresponding increase of $6.7 million , or 5.4% , for costs of services. Depreciation and amortization expense also increased $1.9 million , or 10.4% , due to higher amortization expense in 2020 from acquired intangible assets and internally-developed software. Partially offsetting these increases in the first half of 2020 were decreases in salary and employee benefits and in SG&A expenses. Salary and employee benefits decreased by $1.6 million , or 7.4% , in the first half of 2020 due to lower headcount. SG&A expenses decreased by $1.7 million attributable mainly to decreases in office and travel-related costs beginning in mid-March 2020 due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment. Consolidated operating expenses in the first half of 2020 and the first half of 2019 included non-recurring expenses of $2.8 million for both periods.
Income from operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
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Consolidated income from operations increased by $1.6 million , or 65.5% , from $2.4 million for second quarter 2019 to $4.0 million for second quarter 2020. Our consolidated operating margin for second quarter 2020 was 4.4% compared to 2.6% for second quarter 2019. This margin increase was the result of lower salary and employee benefits of $0.8 million and lower SG&A expense of $1.6 million, partially offset by higher depreciation and amortization expense of $0.6 million and lower revenue less costs of services of $0.2 million.
Our Consumer Payments segment contributed $7.3 million in income from operations for second quarter 2020, a slight decrease of $0.1 million , or 1.3% , from $7.4 million for second quarter 2019. A $0.6 million increase in depreciation and amortization expense primarily related to residual rights of acquired merchant portfolios and internally-developed software was offset by a $0.7 million decrease in salaries and employee benefits and a $0.6 million decrease in SG&A expenses.
Our Commercial Payments segment earned income from operations of $0.5 million for second quarter 2020 compared to a loss from operations of $0.3 million for second quarter 2019. This improvement was largely driven by a $0.2 million decrease in salaries and employee benefits and a $0.6 million decrease in SG&A expenses.
Our Integrated Partners segment contributed $0.8 million in income from operations for second quarter 2020 compared to $0.6 million for second quarter 2019. This improvement was largely attributable to growth in electronic rent payments revenue within PRET. Operating results for second quarter 2020 and second quarter 2019 included depreciation and amortization expense of $1.3 million and $1.1 million , respectively, primarily related to the acquired YapStone assets. Other operating expenses in second quarter 2020 and second quarter 2019 also included expenses for transition services related to the acquired YapStone assets of $0.8 million and $0.7 million , respectively.
Corporate expenses were $4.6 million for second quarter 2020, a decrease of $0.7 million , or 12.6% , from expenses of $5.2 million for second quarter 2019. This decline in Corporate expenses was due primarily to a $0.6 million decrease in SG&A expenses. Corporate expenses that we deem to be non-recurring in nature were $0.5 million and $0.8 million for second quarter 2020 and second quarter 2019, respectively.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Consolidated income from operations increased by $4.2 million , or 123.1% , from $3.4 million for the first half of 2019 to $7.6 million for the first half of 2020. Our consolidated operating margin for the first half of 2020 was 4.0% compared to 1.9% for the first half of 2019. This margin increase was the result of higher revenues less costs of services of $2.8 million, lower salary and employee benefits of $1.6 million, and lower SG&A expenses of $1.7 million, partially offset by higher depreciation and amortization expense of $1.9 million.
Our Consumer Payments segment contributed $14.4 million in income from operations for the first half of 2020, a decrease of $0.7 million , or 4.4% , from the $15.1 million for the first half of 2019. This decrease was the result of lower revenue less costs of services of $0.5 million and a $1.3 million increase in depreciation and amortization expenses primarily related to residual rights of acquired merchant portfolios and internally-developed software, which were partially offset by a $1.0 million decrease in salaries and employee benefits expenses and a $0.1 million decrease in SG&A expenses.
Our Commercial Payments segment earned income from operations of $1.2 million for the first half of 2020 compared to a loss from operations of $0.7 million for the first half of 2019. This improvement was driven by a $0.6 million improvement in revenues less costs of services, a $0.3 million decrease in salaries and employee benefits expenses, and a $1.0 million decrease in SG&A expenses.
Our Integrated Partners segment contributed $1.2 million in income from operations for the first half of 2020 compared to $0.3 million in the first half of 2019. The growth in 2020 was largely attributable to the YapStone assets acquired in late first quarter of 2019. Operating results for the first half of 2020 and the first half of 2019 included depreciation and amortization expense of $2.6 million and $1.8 million , respectively, primarily related to the acquired YapStone assets. Other operating expenses in the first half of 2020 and the first half of 2019 also included $1.7 million and $0.7 million , respectively, for transition services related to the assets acquired from YapStone, Inc.
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Corporate expenses were $9.3 million for the first half of 2020, a decrease of $2.0 million , or 17.7% , from expenses of $11.3 million for the first half of 2019. The decline in Corporate expenses was due primarily to a $1.6 million decrease in SG&A expenses. Corporate expenses that we deem to be non-recurring in nature were $1.0 million and $2.0 million in the first half of 2020 and the first half of 2019, respectively.
Interest expense
For second quarter 2020, interest expense increased by $0.9 million , or 8.3% , to $11.7 million from $10.8 million in second quarter 2019. For the first half of 2020, interest expense increased $1.8 million , or 9.2% , to $22.0 million from $20.1 million in the first half of 2019. These increases in 2020 were primarily due to higher outstanding borrowings driven by draws on the revolving credit facility and increases in the applicable margins on the Senior Credit Agreement and the GS Credit Agreement that resulted from the Sixth Amendment in March 2020. The amortization of deferred financing costs and debt discounts increased our reported interest expense and the effective interest rates under our Senior Credit Agreement and GS Credit Agreement, as disclosed in Note 8, Debt Obligations .
Income taxes
We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets. ASC 740, Income Taxes ("ASC 740"), requires that all sources of future taxable income be considered in making this determination. The Tax Cuts and Jobs Act of 2017 amended section 163(j) of the Internal Revenue Code. Section 163(j), as amended, 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. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020.
With respect to recording a deferred tax benefit for the carryforward of business interest expense, GAAP applies a "more likely than not" threshold for assessing recoverability. On the basis of our assessment, during second quarter 2020, second quarter 2019, the first half of 2020, and the first half of 2019, we recorded increases in the deferred income tax valuation allowance of $2.2 million , $5.3 million , $4.2 million , and $5.3 million , respectively, associated with excess business interest for the then-current reporting periods. During second quarter 2019 and in the first half of 2019, we recorded discrete increases to the valuation allowance of $2.6 million for excess business interest related to a prior year(s). In the first half of 2020 we recorded a decrease to the valuation allowance of $1.5 million for business interest related to 2019 as a result of the CARES Act. These provisions and adjustments are a component of our income tax benefit reported on our consolidated statements of operations.
We will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may change in future periods.
We compute our interim period income tax expense or benefit by using a forecasted estimated annual effective tax rate ("EAETR") and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income. The EAETR for 2020 is a tax benefit of 5.0% and includes the income tax benefit on pre-tax losses, offset by a tax provision related to establishment of a valuation allowance for deferred income tax on the 2020 portion of the Section 163(j) limitation, and a tax provision adjustment related to the release of a portion of our valuation allowance on our 2019 Section 163(j) limitation as a result of the CARES Act.
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Certain Non-GAAP Financial Measures
We periodically review the following key non-GAAP measures to evaluate our business and trends, measure our performance, prepare financial projections and make strategic decisions.
EBITDA, which represents net loss before interest, income tax, and depreciation and amortization, is reconciled to net loss calculated under GAAP.
Adjusted EBITDA starts with EBITDA and further adjusts for certain non-cash, non-recurring or non-core expenses including: 1) stock-based compensation; 2) debt modification expenses; 2) write-off of an equity-method investment; 3) certain legal expenses; 4) certain professional, accounting and consulting fees; and 5) temporary transition services related to the YapStone asset acquisition.
In addition, the financial covenants under the debt agreements of the Company's subsidiaries (the "Borrowers") are based on a non-GAAP measure referred to as Consolidated Adjusted EBITDA. The calculation of Consolidated Adjusted EBITDA starts with Adjusted EBITDA and further adjusts for the pro-forma impact of acquisitions and residual streams and run rate adjustments for certain contracted savings on an annualized basis, other consulting and professional fees, and other tax expenses and other adjustments, which are not included as adjustments to Adjusted EBITDA.
We believe these non-GAAP measures 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.
These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures, particularly Adjusted EBITDA and Consolidated Adjusted EBITDA, to analyze our performance would have material limitations because their calculations are based on subjective determination regarding the nature and classification of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of our operating results. Although other companies may report measures entitled "Adjusted EBITDA" or similar in nature, numerous methods may exist for calculating a company's Adjusted EBITDA or similar measures. As a result, the methods we use to calculate Adjusted EBITDA may differ from the methods used by other companies to calculate their non-GAAP measures.
Our income from operations for all reporting periods presented herein included certain SG&A expenses that we consider to be non-recurring in nature, including transition services from YapStone, Inc. related to integration of the March 2019 asset acquisition and certain legal and professional expenses related to non-recurring matters. These expenses totaled $1.4 million and $2.8 million for the three months and six months ended June 30, 2020 , respectively, and $1.6 million $2.8 million for the three months and six months ended June 30, 2019 , respectively, as disclosed in the reconciliation table presented below.
The non-GAAP reconciliations of EBITDA, Adjusted EBITDA, and Consolidated Adjusted EBITDA to consolidated net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, include adjustments for these and certain other items, are shown in the table below:
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(in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Consolidated Net Loss (GAAP)
$
(7,858
)
$
(14,130
)
$
(13,727
)
$
(20,576
)
Add: Interest expense (1)
11,668
10,776
21,983
20,139
Add: Depreciation and amortization
10,363
9,761
20,635
18,686
Add: Income tax expense (benefit)
415
5,928
(818
)
4,204
EBITDA (non-GAAP)
14,588
12,335
28,073
22,453
Further adjusted by:
Add: Non-cash stock-based compensation
688
1,023
$
1,026
2,183
Add: Non-recurring expenses:
Debt modification expenses
—
—
376
—
Write-off of an equity-method investment
—
—
211
—
Certain legal services (2)
425
371
899
885
Professional, accounting and consulting fees (3)
121
459
145
1,130
YapStone transition services
839
747
1,735
747
Adjusted EBITDA (non-GAAP)
16,661
14,935
$
32,465
$
27,398
Further adjusted by:
Add: Pro-forma impact of acquisitions
—
45
—
3,175
Add: Other professional and consulting fees
375
357
750
752
Less: Other adjustments and tax expenses
(100
)
5
(100
)
(164
)
Consolidated Adjusted EBITDA (non-GAAP) (4)
$
16,936
$
15,342
$
33,115
$
31,161
(1) Interest expense includes amortization of debt issuance costs and discount.
(2) Legal expenses related to business and asset acquisition activity, settlement negotiation and other litigation expenses.
(3) Primarily transaction-related, capital markets and accounting advisory services.
( 4) Presented to reflect the definition in the Company's credit agreements, as amended. Until December 31, 2019, the Consolidated Adjusted EBITDA of the borrowers under the credit agreements excluded expenses of Priority Technology Holdings, Inc., which is neither a borrower nor a guarantor under the credit agreements, subsequent to its acquisition of Priority Holdings, LLC on July 25, 2018. Effective December 31, 2019, in accordance with the Sixth Amendment, the Consolidated Adjusted EBITDA of the borrowers under the credit agreements includes expenses of Priority Technology Holdings, Inc. Consolidated Adjusted EBITDA of the borrowers was approximately $18.9 million and $38.4 million for the three months and six months ended June 30, 2019, respectively. The amounts for the three months and six months ended June 30, 2019 excluded $3.6 million and $7.2 million, respectively, of expenses of Priority Technology Holdings, Inc.
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Financial Condition
Compared to our consolidated balance sheet as of December 31, 2019, the following key changes have occurred at June 30, 2020 .
Cash
Cash increased by $0.5 million during the first half of 2020. Excluding restricted cash, the increase was $2.6 million. For an explanation of the key drivers of this change, see the subsequent section, Liquidity and Capital Resources .
Intangible Assets
Intangible assets, net of accumulated amortization, decreased during the first half of 2020 by $14.1 million due to amortization expense of $16.9 million, partially offset by $3.3 million payment for additions to intangible assets during the first half of 2020.
Debt Obligations
Outstanding amounts for our debt obligations under our Senior Credit Agreement and our GS Credit Agreement increased by a net of $4.4 million during the first half of 2020. This increase was driven by additional net borrowings of $3.0 million on the revolving facility under our Senior Credit Agreement and PIK interest of $3.3 million and $0.2 million added to the amount outstanding under our GS Credit Agreement and Senior Credit Agreement, respectively. This overall increase was partially offset by $2.0 million of principal repayment on the term facility of our Senior Credit Agreement
Stockholders' Deficit
Stockholders' deficit attributable to the stockholders of the Company changed by $12.8 million, from a deficit of $126.3 million at December 31, 2019 to a deficit of $139.2 million at June 30, 2020 . The primary driver of this change was the net loss of $13.7 million for the first half of 2020 million, partially offset by a $0.9 million increase to additional paid-in capital for equity-based stock compensation.
Liquidity and Capital Resources
Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, technology solutions, and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs, including for our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next twelve months. This is based upon management’s estimates and assumptions utilizing the most currently available information regarding the effects of the COVID-19 pandemic on our financial results. Actual future results could differ materially, as the magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and ultimately could negatively impact our liquidity, capital resources, and debt covenant compliance.
Our principal uses of cash are to fund business operations, administrative costs, and debt service.
Our working capital, defined as current assets less current liabilities, was $(4.8) million and $1.2 million at June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020 , we had cash totaling $5.9 million compared to $3.2 million at December 31, 2019. These balances do not include restricted cash, which reflects cash accounts holding customer settlement funds of $45.1 million at June 30, 2020 and $47.2 million at December 31, 2019 .
At June 30, 2020 , approximately $10.5 million was available under the revolving credit facility of our Senior Credit Agreement.
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The following tables and narrative reflect our changes in cash flows for the comparative periods:
(dollars in thousands)
Six Months Ended June 30,
2020
2019
Net cash (used in) provided by:
Operating activities
$
9,822
$
3,720
Investing activities
(7,535
)
(89,776
)
Financing activities
(1,752
)
79,437
Net increase (decrease) in cash and restricted cash
$
535
$
(6,619
)
Cash Provided By Operating Activities
Net cash provided by operating activities, which includes changes in restricted cash, in the first half of 2020 was $9.8 million compared to net cash provided by operating activities of $3.7 million for the first half of 2019. This $6.1 million increase for the first half of 2020 was principally the result of higher cash flows from operations and changes in assets and liabilities, partially offset by a decrease in restricted cash flows.
Cash Used In Investing Activities
Net cash used in investing activities was $7.5 million and $89.8 million for the first half of 2020 and the first half of 2019, respectively. Cash used in investing activities for the first half of 2019 included $15.8 million used for residual buyouts and $63.8 million used to acquire certain intangible assets from YapStone. Cash used to acquire property, equipment, and software amounted to $4.2 million and $5.4 million for the first half of 2020 and first half of 2019, respectively.
Cash (Used In) Provided By Financing Activities
Net cash used in financing activities was $1.8 million for the first half of 2020 compared to cash provided of $79.4 million in the first half of 2019. The amount for the first half of 2019 included new borrowings under our Senior Credit Agreement consisting of $14.0 million under the revolving facility and a $69.7 million delayed draw under the term facility that was used to acquire certain assets from YapStone, Inc.
COVID-19 Pandemic
Our results of operations for the most of the first quarter of 2020 were not significantly impacted by the COVID-19 pandemic since the economic consequences of the pandemic did not begin to materially impact consumer payment transactions in the United States until the last half of March 2020. Beginning in mid-March, however, the pandemic began to negatively impact our daily consumer payment processing volumes as the pandemic spread across the United States and restrictive shelter in place requirements were instituted.
In mid-April 2020, we implemented several actions to reduce expenses and preserve cash in order to mitigate the financial impact of COVID-19. We continue to closely monitor the effects of the pandemic on our financial results, and will take additional cost-saving actions, if necessary, to further mitigate its impact.
Our current assessment is that we anticipate cash on hand, funds generated from operations and available borrowings under our revolving credit facility to be sufficient to meet our working capital requirements, and that we will remain in compliance with our debt covenants. However, the ongoing magnitude, duration and effects of the COVID-19 pandemic on our future results of operation, cash flows, and financial condition are difficult to predict at this time, and our current assessment is subject to material revision.
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Off-Balance Sheet Arrangements
We have not entered into any other transactions with third parties or unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or other obligations.
Commitments and Contractual Obligations
Commitments
See Note 10, Commitments and Contingencies , to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of June 30, 2020 or December 31, 2019 .
Contractual Obligations
There have been no significant changes to our contractual obligations and commitments compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2019 , except for changes in minimum principal repayments under our Senior Credit Agreement. For an updated schedule of debt repayments, see Note 8, Debt Obligations , to the unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Related Party Transactions
See Note 11, Related Party Transactions , to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods. Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. There have been no material changes to these critical accounting policies and estimates as of June 30, 2020 .
Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements. See Note 1, Basis of Presentation and Significant Accounting Policies , to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2019 . Our exposures to market risk have not changed materially since December 31, 2019 .
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.