What changed in this filing

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Item 1. Financial Statements

2020-11-13 compared with 2020-08-14 · 352 added, 211 removed, 497 unchanged (53% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

(in thousands, except share data)

June 30, 2020

December 31, 2019

(in thousands, except share data) Unaudited

September 30, 2020 December 31, 2019

Current assets:

Cash $ 21,695 $ 3,234

Restricted cash 37,135 47,231

Accounts receivable, net of allowance for doubtful accounts of $ 544 and $ 803

40,122 37,993

Prepaid expenses and other current assets 3,968 3,897

4 unchanged sentences

Property, equipment, and software, net 23,490 23,518

Goodwill 106,832 109,515

Intangible assets, net 97,239 182,826

1 unchanged sentence

Other non-current assets 522 380

Total assets $ 380,411 $ 464,505

LIABILITIES AND STOCKHOLDERS' DEFICIT

3 unchanged sentences

Customer deposits and advance payments 3,449 4,928

Income taxes payable 5,950 —

Current portion of long-term debt 15,583 4,007

6 unchanged sentences

Stockholders' deficit:

Preferred stock - $0.001 par value per share;100,000,000 shares authorized;

Preferred stock - $ 0.001 par value per share;

100,000,000 shares authorized;

zero issued or outstanding

Common stock - $0.001 par value per share;1,000,000,000 shares authorized;

Common stock - $ 0.001 par value per share;

1,000,000,000 shares authorized;

67,617,561 and 67,512,167 shares issued, respectively;

2 unchanged sentences

Treasury stock, 451,224 common shares, at cost

( 2,388 ) ( 2,388 )

Accumulated deficit ( 101,009 ) ( 127,674 )

1 unchanged sentence

stockholders' deficit ( 98,261 ) ( 126,343 )

Non-controlling interest in a subsidiary

Non-controlling interest in subsidiary — 5,654

Total stockholders' deficit ( 98,261 ) ( 120,689 )

3 unchanged sentences

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

REVENUES $ 108,962 $ 93,883 $ 298,251 $ 273,671

OPERATING EXPENSES:

7 unchanged sentences

Interest expense ( 13,471 ) ( 10,463 ) ( 35,454 ) ( 30,602 )

Other income (expense), net

Total other expenses, net

Loss before income taxes

Debt extinguishment and modification costs ( 1,523 ) — ( 1,899 ) —

Gain on sale of business 107,239 — 107,239 —

Other income, net 190 158 414 523

Total other income (expenses), net 92,435 ( 10,305 ) 70,300 ( 30,079 )

Income (loss) before income taxes 99,477 ( 7,580 ) 84,932 ( 23,952 )

Income tax expense (benefit) 13,737 ( 1,736 ) 12,919 2,468

Loss per common share:

Basic and diluted

Weighted-average common shares outstanding:

Basic and diluted

Net income (loss) 85,740 ( 5,844 ) 72,013 ( 26,420 )

Less net income attributable to redeemable non-controlling interests and redeemed non-controlling interests ( 45,348 ) — ( 45,348 ) —

Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc.

$ 40,392 $ ( 5,844 ) $ 26,665 $ ( 26,420 )

Income (loss) per common share:

Basic $ 0.60 $ ( 0.09 ) $ 0.40 $ ( 0.39 )

Diluted $ 0.60 $ ( 0.09 ) $ 0.40 $ ( 0.39 )

Weighted-average common shares and equivalents:

Basic 67,167 67,007 67,114 67,109

Diluted 67,286 67,007 67,131 67,109

See Notes to Unaudited Condensed Consolidated Financial Statements

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

(in thousands)

Six Months Ended June 30,

(in thousands) Nine Months Ended September 30,

Cash flows from operating activities:

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

Net income (loss) $ 72,013 $ ( 26,420 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Gain recognized on sale of business ( 107,239 ) —

Transaction costs upon sale of business ( 4,372 ) —

Depreciation and amortization of assets 30,886 28,763

1 unchanged sentence

Amortization of debt issuance costs and discounts 1,798 1,250

Deferred income tax benefit

Deferred income tax expense (benefit) 10,442 ( 5,376 )

Change in allowance for deferred tax assets ( 3,747 ) 7,844

Payment-in-kind interest 6,643 3,807

Debt extinguishment and modification costs 1,523 —

Impairment charge for intangible asset 980 —

Other non-cash items, net 211 ( 157 )

Change in operating assets and liabilities:

Change in operating assets and liabilities, excluding business sale:

Accounts receivable ( 3,962 ) ( 1,840 )

1 unchanged sentence

Prepaid expenses and other current assets ( 296 ) ( 810 )

Income taxes payable 6,026 —

Notes receivable ( 398 ) ( 376 )

4 unchanged sentences

Cash flows from investing activities:

Sale of business 179,416 —

Additions to property, equipment and software ( 6,011 ) ( 8,662 )

2 unchanged sentences

Other investing activity — ( 184 )

Net cash used in investing activities

Net cash provided by (used in) investing activities 168,990 ( 93,623 )

Cash flows from financing activities:

1 unchanged sentence

Repayment of long-term debt ( 109,505 ) ( 2,827 )

Debt modification costs

Debt modification costs (paid) refunded ( 2,749 ) 83

Borrowings under revolving credit facility 7,000 14,000

Repayments under revolving credit facility ( 7,505 ) ( 2,500 )

Profit distributions to redeemable non-controlling interests of subsidiaries ( 45,348 ) —

Redemption of redeemable non-controlling interest of subsidiary ( 5,654 ) —

Repurchases of common stock — ( 2,388 )

7 unchanged sentences

Non-cash investing and financing activities:

PIK interest added to principal of debt obligations

Payment-in-kind interest added to principal of debt obligations $ 6,643 $ 3,807

Payment of accrued contingent consideration for asset acquisition from offset of account receivable $ 1,686 $ —

2 unchanged sentences

Reconciliation of cash and restricted cash:

Cash $ 21,695 $ 4,191

Restricted cash 37,135 22,652

28 unchanged sentences

Comprehensive Income (Loss)

For the three months and six months ended June 30, 2020 and June 30, 2019 , the Company had no activities to report as components of other comprehensive income (loss).

Therefore, no separate Statement of Comprehensive Income (Loss) was prepared for any reporting period as the Company's net loss from continuing operations comprises all of its comprehensive loss.

For the three months and nine months ended September 30, 2020 and September 30, 2019, the Company had no activities to report as components of other comprehensive income (loss).

Therefore, no separate Statement of Comprehensive Income (Loss) was prepared for any reporting period as the Company's net income (loss) from continuing operations comprises all of its comprehensive income (loss).

Comparability of Reporting Periods

Certain prior period amounts in these unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation, with no net effect on income from operations, loss before income taxes, net loss, stockholders' deficit, or cash flows from operations, investing, or financing activities for any period presented.

Certain prior period amounts in these unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation, with no net effect on income from operations, income (loss) before income taxes, net income (loss), stockholders' deficit, or cash flows from operations, investing, or financing activities for any period presented.

The Company adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers , for the 2019 annual reporting period included in its Annual Report on Form 10-K for the year ended December 31, 2019 using the full retrospective transition method.

Accordingly, the unaudited condensed consolidated statement of operations for the three months and six months ended June 30, 2019 presented herein has been recasted to retroactively reflect the provisions of ASC 606.

The adoption of ASC 606 had no net effect on the Company's income from operations, loss before income taxes, net loss, consolidated balance sheet, or cash flows from operations, investing, or financing activities.

Accordingly, the unaudited condensed consolidated statement of operations for the three months and nine months ended September 30, 2019 presented herein has been recasted to retroactively reflect the provisions of ASC 606.

The adoption of ASC 606 had no net effect on the Company's income from operations, income (loss) before income taxes, net income (loss), consolidated balance sheet, or cash flows from operations, investing, or financing activities.

Accounting Policies and New Accounting Standards Adopted

There have been no material changes to the Company's accounting policies as described in its most recent Annual Report on Form 10-K for the year ended December 31, 2019.

The Company did not adopt any new accounting standards during the three months and six months ended June 30, 2020 , except for ASU 2018-13, as described below.

The Company did not adopt any new accounting standards during the three months and nine months ended September 30, 2020, except for ASU 2018-13, as described below.

Disclosures for Fair Value Measurements (ASU 2018-13)

13 unchanged sentences

An entity that makes this election would not have to remeasure the contact at the modification date or reassess a previous accounting determination.

ASU 2020-04 can be adopted at any time before December 31, 2022 .

2020-04 can be adopted at any time before December 31, 2022.

The provisions of ASU 2020-04 may impact the Company if future debt modifications or refinancings utilize one or more of the reference rates covered by the provisions of this ASU.

1 unchanged sentence

In February 2016, the FASB issued new lease accounting guidance in ASU No.

2016-02, Leases-Topic 842 , which has been codified in ASC 842, Leases , and supplemented by subsequent ASUs.

2016-02, Leases-Topic 842 , which has been codified in ASC 842, Leases , and supplemented by subsequent ASUs ("ASC 842").

Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases):

29 unchanged sentences

In June 2018, the FASB issued ASU 2018-07, Share-based Payments to Non-Employees , to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions.

As an EGC, the ASU is effective for annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021.

As an EGC, the ASU is effective for annual reporting periods beginning in 2020 and interim periods within annual

periods beginning first quarter 2021.

The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such impact will be dependent on any share-based payments issued to non-employees.

22 unchanged sentences

The effects that the adoption of this ASU will have on the Company's results of operations, financial position, and cash flows will depend on specific events occurring for the Company after the adoption of ASU 2019-12.

SALE OF BUSINESS

On September 1, 2020, Priority Real Estate Technology LLC ("PRET"), a majority-owned and consolidated subsidiary of the Company, entered into an asset purchase agreement (the "Agreement") with MRI Payments LLC and MRI Software LLC (together, "MRI" or the buyer) to sell certain assets from PRET's real estate services business.

The buyer also agreed to assume certain obligations associated with the assets.

The transaction contemplated by the Agreement was completed on September 22, 2020 after receiving regulatory approval.

Prior to execution of the Agreement, the buyer was not a related party of PRET or the Company.

The assets covered by the Agreement were substantially the same assets that PRET acquired in March 2019 from YapStone, Inc.

and these assets constituted PRET's RentPayment component, which was part of the Integrated Partners reporting unit,

operating segment and reportable segment.

These assets consist of contracts with customers, an assembled workforce, technology-related assets, Internet domains, trade names and trademarks.

The buyer also assumed obligations under an in-place and off-balance-sheet operating lease for office space.

Since PRET's acquisition of these assets from YapStone, Inc.

in March 2019, PRET and the Company have made operational changes that resulted in these assets becoming a business as defined by the provisions of ASU 2017-01, Clarifying the Definition of a Business, before their sale to MRI .

Proceeds received by PRET were $ 179.4 million, net of $ 584,000 for a working capital adjustment.

The gain amounted to $ 107.2 million as follows:

(in thousands)

Gross cash consideration from buyer $ 180,000

Less working capital adjustment paid in cash ( 584 )

Net proceeds from buyer 179,416

Transaction costs incurred ( 5,383 )

Intangible assets ( 62,158 )

Other assets sold, net of obligations assumed ( 716 )

Goodwill assigned to business sale ( 2,683 )

Other intangible assets ( 1,237 )

Pre-tax gain on sale of business $ 107,239

PRET is a limited liability company and is a pass-through entity for income tax purposes.

Income tax expenses associated with the gain attributable to the stockholders of the Company were estimated to be approximately $ 12.4 million.

Allocation of net proceeds, after transaction costs, to the PRET members included return of each member's invested capital in PRET and excess proceeds were distributed in accordance with the distribution provisions of the PRET LLC governing agreement.

The Company's invested capital amounted to $ 71.8 million, which included the assets sold, goodwill and other intangible assets.

The non-controlling interest's invested capital was $ 5.7 million.

Approximately $ 51.4 million and $ 45.1 million of the excess proceeds were distributed to the Company and the non-controlling interests, respectively.

As disclosed in Note 9, Debt Obligations , $ 106.5 million of cash received by the Company was used on September 25, 2020 to reduce the outstanding balance of the term loan facility under the Company's Senior Credit Facility.

Operating Lease Obligation

The buyer assumed an in-place operating lease in Dallas, Texas which expires on November 1, 2024.

The Company has not adopted ASC 842;

therefore this lease obligation was not reflected in the Company's balance sheet prior to the assumption by the buyer.

The Company has been relieved of minimum lease payment obligations totaling $ 467,000 for the remainder of the current lease term.

Continuing Operations

Based on historical financial results, the Company does not believe the sale of the RentPayment component represents a strategic shift.

Therefore, in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations , the Company will not classify or report the business that was sold as discontinued operations in its consolidated financial statements for any reporting period.

The Company will continue to serve the rental property market through its ongoing PRET operations.

Pro Forma Information

The following pro forma information is provided for the business (the RentPayment component) that was sold under the Agreement, excluding the gain recognized on the sale transaction:

(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Revenues $ 3,883 $ 3,652 $ 12,118 $ 8,058

Income from operations (1)

$ 307 $ 1,117 $ 1,805 $ 2,586

Net income (2) (3)

$ 259 $ 861 $ 1,765 $ 2,320

Net income attributable to the stockholders of Priority Technology Holdings, Inc.

$ 259 $ 861 $ 1,765 $ 2,320

Income per common share for stockholders of Priority Technology Holdings, Inc.

- Basic and Diluted (4)

$ — $ 0.01 $ 0.03 $ 0.03

(1) Historical financial results are not being reported as discontinued operations.

(2) Does not reflect interest expense on the borrowings used to acquire the YapStone assets in March 2019.

(3) Pro forma income tax expense based on the following consolidated effective tax (benefit) rates of Priority Technology Holdings, Inc.:

15.5 % for third quarter 2020;

22.9 % for third quarter 2019;

2.2 % for the nine months ended September 30, 2020, and ( 10.3 )% for the nine months ended September 30, 2019.

These rates exclude the effect of the $ 107.2 million gain on the sale recognized during the quarter and nine months ended September 30, 2020.

(4) Prior to the September 2020 sale transaction that resulted in the gain on the sale, no earnings or losses of the PRET LLC were attributable to the NCIs of PRET.

For all periods presented, substantially all of the Company’s revenues from services were recognized over time.

Revenues and commissions earned from the sales of payment equipment were typically recognized at a point in time.

The following table presents a disaggregation of the Company's consolidated revenues by type, and the relationships to the Company's reportable segments, for the three months and six months ended June 30, 2020 and June 30, 2019 :

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Merchant card fees $ 102,481 $ 85,719 $ 277,253 $ 249,267

Outsourced services and other services 5,387 7,143 18,143 21,750

Equipment 1,094 1,021 2,855 2,654

Total revenues $ 108,962 $ 93,883 $ 298,251 $ 273,671

17 unchanged sentences

Since payments to ISOs are dependent substantially on variable merchant payment volumes generated after the merchant enters into a new or renewed contract, these payments to ISOs are not deemed to be a cost to acquire a new contract since the ISO payments are based on factors that will arise subsequent to the event of obtaining a new or renewed contract.

Also, payments to ISOs pertain

only to a specific month’s activity.

Also, payments to ISOs pertain only to a specific month’s activity.

For payments made, or due, to an ISO, the expenses are reported within income from operations on our statements of operations.

7 unchanged sentences

Material contract assets and liabilities are presented net at the individual contract level in the consolidated balance sheet and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.

Supplemental balance sheet information related to contracts from customers as of June 30, 2020 and December 31, 2019 was as follows:

(in thousands)

Consolidated Balance Sheet Location

June 30, 2020

December 31, 2019

Contract liabilities, net (current)

Customer deposits and advance payments

The balance for the contract liabilities was $ 1,738,000 , $ 1,738,000 , and $ 1,776,000 at June 30, March 31, and January 1, 2019, respectively.

The changes in the balances during the three months and six months ended June 30, 2020 and June 30, 2019 were due to the timing of advance payments received from the customer.

Supplemental balance sheet information related to contracts from customers as of September 30, 2020 and December 31, 2019 was as follows:

(in thousands) Consolidated Balance Sheet Location September 30, 2020 December 31, 2019

Contract liabilities, net (current) Customer deposits and advance payments $ 1,634 $ 1,912

The balance for the contract liabilities was $ 1,315,000 , $ 1,738,000 , and $ 1,776,000 at September 30, June 30, and January 1, 2019, respectively.

The changes in the balances during the three months and nine months ended September 30, 2020 and September 30, 2019 were due to the timing of advance payments received from the customer.

Substantially all of these balances are recognized as revenue within twelve months.

Net contract assets were not material for any period presented.

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months and six months ended June 30, 2020 and June 30, 2019 .

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months and nine months ended September 30, 2020 and September 30, 2019.

NON-CONTROLLING INTERESTS

In March 2019, the Company, through one of its subsidiaries, Priority Real Estate Technology, LLC ("PRET"), acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone, Inc.

See Note 13, Reconciliation of Stockholders' Deficit and Non-Controlling Interests , for additional information on transactions with non-controlling interests during the three months and nine months ended September 30, 2020.

In March 2019, the Company, through one of its subsidiaries, PRET, acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone, Inc.

("YapStone") under an asset purchase and contribution agreement.

2 unchanged sentences

The total purchase price was assigned to customer relationships, except for $ 1.0 million and $ 1.2 million which were assigned to a software license agreement and a services agreement, respectively.

The $ 65.0 million of cash was funded from a draw down of the Senior Credit Facility on a delayed basis as provided for and pursuant to the third amendment thereto executed in December 2018.

During the three months and six months ended June 30, 2020 and June 30, 2019 , no earnings of PRET were attributable to the NCI pursuant to the profit-sharing agreement between the Company and the NCI.

See Note 10, Commitments and Contingencies , for information about merchant portfolios acquired in 2019 that included contingent purchase prices.

The $ 65.0 million of cash was funded from a drawdown of the Senior Credit Facility on a delayed basis as provided for and pursuant to the third amendment thereto executed in December 2018.

During the three months and nine months ended September 30, 2020 and September 30, 2019, no earnings from the operations of PRET were attributable to the NCIs pursuant to the PRET operating agreement.

However, as disclosed in Note 2, Sale of Business , during third quarter 2020, PRET sold assets to a third party that substantially represented the YapStone net assets acquired in March 2019.

Based on the PRET operating agreement, the NCIs were attributed with $ 45.1 million of the gain recognized by PRET for the sale transaction in September 2020.

This $ 45.1 million, along with the $ 5.7 million carrying value of the NCI issued to YapStone, Inc.

in March 2019, were distributed in cash to the PRET NCIs in September 2020.

Simultaneous with the cash distributions, all of the NCIs of PRET fully redeemed their interests.

Related Party Non-Controlling Interest

See Note 12, Related Party Transactions, for information about assets contributed to the Company during the first quarter of 2019 that involved a contingent purchase price.

8 unchanged sentences

Therefore, neither is recognized in the Company’s consolidated balance sheets.

Member banks held merchant funds of $ 85.5 million and $ 79.8 million at June 30, 2020 and December 31, 2019 , respectively.

Member banks held merchant funds of $ 97.9 million and $ 79.8 million at September 30, 2020 and December 31, 2019, respectively.

Exception items include items such as customer chargeback amounts received from merchants and other losses.

10 unchanged sentences

The Company recognizes these cash balances within restricted cash and settlement obligations in its consolidated balance sheets.

The Company's settlement assets and obligations at June 30, 2020 and December 31, 2019 were as follows:

(in thousands)

June 30, 2020

December 31, 2019

The Company's settlement assets and obligations at September 30, 2020 and December 31, 2019 were as follows:

(in thousands) As of

September 30, 2020 December 31, 2019

Settlement Assets:

Card settlements due from merchants, net of estimated losses $ 372 $ 446

Card settlements due from processors

Card settlements due (to) from processors ( 45 ) 87

Total settlement assets $ 327 $ 533

5 unchanged sentences

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying tangible and intangible assets acquired and the liabilities assumed.

The Company's goodwill was allocated to two of the Company's reportable segments as follows:

(in thousands)

June 30, 2020

December 31, 2019

As disclosed in Note 2, Sale of Business , in September 2020 PRET sold certain assets from PRET's real estate services business, which resulted in the reduction of certain goodwill and intangible assets in the Company's Integrated Partners reporting unit.

The Company's goodwill was as follows:

(in thousands) September 30, 2020 December 31, 2019

Consumer Payments $ 106,832 $ 106,832

Integrated Partners — 2,683

The Company considered the declining market conditions generated by the COVID-19 pandemic for the three months and six months ended June 30, 2020 and concluded that there were no changes in the carrying amount of goodwill.

The Company tests goodwill for impairment for each of its reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit may be below its carrying value.

$ 106,832 $ 109,515

The Company considered the market conditions generated by the COVID-19 pandemic and concluded that there were no indicators of impairment for the goodwill of the Consumer Payments reporting unit for the three months and nine months ended September 30, 2020.

The Company tests goodwill for impairment on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit may be below its carrying value.

The Company will continue to monitor the economic impact of COVID-19 on its ongoing assessment of goodwill.

The Company expects to perform its next annual goodwill impairment test as of November 30, 2020 using market data and discounted cash flow analysis.

The Company concluded there was no impairment as of June 30, 2020 or December 31, 2019 .

As such, there was no accumulated impairment loss as of June 30, 2020 and December 31, 2019 .

The Company expects to perform its next annual goodwill impairment test during the fourth quarter of 2020 using market data and discounted cash flow analysis.

The Company concluded there was no impairment as of September 30, 2020 or December 31, 2019.

As such, there was no accumulated impairment loss as of September 30, 2020 and December 31, 2019.

The Company's intangible assets include acquired merchant portfolios, customer relationships, ISO relationships, trade names, technology, non-compete agreements, and residual buyouts.

As of June 30, 2020 and December 31, 2019 , intangible assets consisted of the following:

(in thousands)

June 30, 2020

December 31, 2019

As of September 30, 2020 and December 31, 2019, intangible assets consisted of the following:

(in thousands) September 30, 2020 December 31, 2019

Other intangible assets:

3 unchanged sentences

Non-compete agreements 3,390 3,390

Trade names 2,700 2,870

Technology 13,880 15,390

ISO relationships 15,200 15,200

5 unchanged sentences

Non-compete agreements ( 3,390 ) ( 3,390 )

Trade names ( 1,421 ) ( 1,273 )

Technology ( 13,417 ) ( 12,758 )

ISO relationships ( 7,081 ) ( 6,341 )

Total accumulated amortization ( 139,172 ) ( 122,049 )

Accumulated allowance for impairment ( 980 ) —

Net carrying value $ 97,239 $ 182,826

See Note 10 , Commitments and Contingencies, for information about a merchant portfolio with a contingent purchase price.

Amortization expense for finite-lived intangible assets was $ 8.4 million and $ 16.9 million for the three months and six months ended June 30, 2020 , respectively, and $ 8.2 million and $ 15.6 million for the three months and six months ended June 30, 2019 , respectively.

See Note 11 , Commitments and Contingencies, for information about an acquired merchant portfolio with a contingent purchase price.

Amortization expense for finite-lived intangible assets was $ 8.3 million and $ 25.2 million for the three months and nine months ended September 30, 2020, respectively, and $ 8.4 million and $ 24.0 million for the three months and nine months ended September 30, 2019, respectively.

Amortization expense for future periods could differ due to new intangible asset acquisitions, changes in useful lives of existing intangible assets, and other relevant events or circumstances.

The Company tests intangible assets for impairment when events occur or circumstances indicate that the fair value of an intangible asset or group of intangible assets may be impaired.

The Company considered the declining market conditions generated by the COVID-19 pandemic and concluded that there was no change at June 30, 2020 from the conclusion at December 31, 2019 that no intangible assets were impaired.

As such, there was no accumulated impairment loss as of June 30, 2020 and December 31, 2019 .

The Company will continue to monitor the economic impact of COVID-19 on its ongoing assessment of intangible assets.

In the Company's Consumer Payments segment, a residual buyout intangible asset with a net carrying value of $ 2.4 million was deemed to be partially impaired.

The fair value of this intangible asset was estimated to be $ 1.4 million, thus resulting in the recognition of an impairment charge of $ 1.0 million during the third quarter of 2020 and this amount is included in SG&A expenses on the Company's unaudited condensed consolidated statement of operations for the three months and nine months ended September 30, 2020.

This impairment was the result of diminished cash flows generated by the merchant portfolio.

Many of the Company's merchant customers in its Consumer Payments reportable segment are associated with ISOs, and these ISOs typically have a right to receive commissions (residuals) from the Company based upon a percentage of the net revenue generated from merchant transactions.

The Company may decide to pay an ISO an agreed-upon amount in exchange for the ISO's surrender of its right to receive future commissions on the merchant portfolio.

The amount that the Company pays for these residual buyouts is capitalized and subsequently amortized over the expected life of the underlying merchant relationship.

The Company also considered the market conditions generated by the COVID-19 pandemic and concluded that there were no additional impairment indicators present at September 30, 2020 and that no other intangible assets were likely impaired.

PROPERTY, EQUIPMENT AND SOFTWARE

1 unchanged sentence

Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist the reporting of merchant processing transactions and other related information.

A summary of property, equipment, and software as of June 30, 2020 and December 31, 2019 follows:

(in thousands)

June 30, 2020

December 31, 2019

A summary of property, equipment, and software as of September 30, 2020 and December 31, 2019 follows:

(in thousands) September 30, 2020 December 31, 2019

Furniture and fixtures $ 2,795 $ 2,787

Equipment 10,216 10,101

Computer software 42,871 37,440

Leasehold improvements 6,250 6,367

62,132 56,695

Less accumulated depreciation ( 38,642 ) ( 33,177 )

Property, equipment, and software, net $ 23,490 $ 23,518

Depreciation expense for property, equipment, and software totaled $ 1.9 million and $ 3.7 million for the three months and six months ended June 30, 2020 , respectively, and $ 1.6 million and $ 3.0 million for the three months and six months ended June 30, 2019 , respectively.

Depreciation expense for property, equipment, and software totaled $ 2.0 million and $ 5.7 million for the three months and nine months ended September 30, 2020, respectively, and $ 1.7 million and $ 4.7 million for the three months and nine months ended September 30, 2019, respectively.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The Company accrues for certain expenses that have been incurred and not paid, which are classified within accounts payable and accrued expenses in the accompanying consolidated balance sheets.

The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at either June 30, 2020 or December 31, 2019 consisted of the following:

(in thousands)

June 30, 2020

December 31, 2019

The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at either September 30, 2020 or December 31, 2019 consisted of the following:

(in thousands) September 30, 2020 December 31, 2019

Accounts payable $ 4,794 $ 6,968

1 unchanged sentence

DEBT OBLIGATIONS

Outstanding debt obligations as of June 30, 2020 and December 31, 2019 consisted of the following:

(in thousands)

June 30, 2020

December 31, 2019

Outstanding debt obligations as of September 30, 2020 and December 31, 2019 consisted of the following:

(in thousands) September 30, 2020 December 31, 2019

Senior Credit Agreement:

Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.0% at June 30, 2020) plus 7.5% and 5.0% at June 30, 2020 and December 31, 2019, respectively (rate of 8.5% at June 30, 2020 and 6.71% at December 31, 2019, respectively)

Revolving credit facility - $25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 7.5% and 5.0% at June 30, 2020 and December 31, 2019, respectively (rate of 7.68% at June 30, 2020 and 6.71% at December 31, 2019, respectively)

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus an applicable margin (rate of 13.5% and 10.5% at June 30, 2020 and December 31, 2019, respectively)

Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00 % beginning March 18, 2020) plus 6.50 % and 5.00 % at September 30, 2020 and December 31, 2019, respectively (actual rate of 7.50 % and 6.71 % at September 30, 2020 and December 31, 2019, respectively)

$ 280,419 $ 388,837

Revolving credit facility - $ 25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50 % and 5.00 % at September 30, 2020 and December 31, 2019, respectively (actual rate of 6.65 % and 6.71 % at September 30, 2020 and December 31, 2019, respectively)

11,000 11,500

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.00 % plus an applicable margin (actual rate of 12.50 % and 10.50 % at September 30, 2020 and December 31, 2019, respectively)

100,693 95,142

Total debt obligations 392,112 495,479

11 unchanged sentences

Additionally, the Senior Credit Agreement continues to provide a $ 25.0 million revolving credit facility, which includes accommodation for any outstanding letters of credit and a $ 5.0 million swing line facility.

At June 30, 2020 and December 31, 2019 , approximately $ 10.5 million and $ 13.5 million, respectively, was available under the revolving credit facility.

Undrawn commitments for letters of credit under the revolving credit facility were not material at June 30, 2020 and December 31, 2019 .

At September 30, 2020 and December 31, 2019, approximately $ 14.0 million and $ 13.5 million, respectively, was available under the revolving credit facility.

Undrawn commitments for letters of credit under the revolving credit facility were not material at September 30, 2020 and December 31, 2019.

Senior Credit Agreement

Outstanding borrowings under the Senior Credit Agreement accrue interest using either a base rate (as defined) or a LIBOR rate plus an applicable margin, or percentage per annum, as provided in the amended credit agreement.

For the term loan portion of the Senior Credit Facility, the Sixth Amendment provides for a LIBOR "floor" of 1.0 % per annum.

For the term loan facility of the Senior Credit Facility, the Sixth Amendment provides for a LIBOR "floor" of 1.0 % per annum.

Accrued interest is payable quarterly.

3 unchanged sentences

Accrued interest is payable quarterly at 5.0 % per annum, and the accrued interest attributable to the applicable margin is capitalized as payment-in-kind ("PIK") interest each quarter.

Changes and Potential Future Changes in Applicable Interest Rate Margins

Changes in Applicable Interest Rate Margins

The interest rate margins for the Senior Credit Agreement and the GS Credit Agreement increased incrementally by 1.0 % on June 16, 2020, and then increased incrementally by 0.5 % on each of the dates July 16, August 15, and September 14, 2020 because the Borrowers did not make a permitted accelerated principal payment of at least $ 100 million under the term loan facility of the Senior Credit Agreement on or before those dates as described in the Sixth Amendment (the "$ 100 million principal prepayment").

The additional interest expense incurred by the Borrowers due to the increases in the applicable margin for the revolving credit facility under the Senior Credit Agreement was paid in cash and such increases for the term facility of the Senior Credit Facility and the GS Credit Agreement were accounted for as PIK interest at the election of the Borrowers.

On September 25, 2020, the Borrowers made the $ 100 million principal prepayment plus an additional $ 6.5 million principal prepayment to reduce the outstanding indebtedness under the term loan facility of the Senior Credit Agreement.

This $ 106.5 million prepayment resulted in simultaneous reductions in the applicable interest rate margins under the Senior Credit Agreement and the GS Credit Agreement, which prospectively eliminates and reverses the applicable margin increases described in the preceding paragraph.

Under the terms of the Senior Credit Agreement and the GS Credit Agreement, the future applicable interest rate margins may vary based on the Borrowers' future Total Net Leverage Ratio (as defined) in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings.

On June 16, 2020, the interest rate margins for the Senior Credit Agreement and the GS Credit Agreement increased 1.0 % because the Borrowers did not make a permitted accelerated principal payment of at least $ 100 million under the term loan facility of the Senior Credit Agreement on or before that date as described in the Sixth Amendment (the " $ 100 million principal prepayment").

Additionally, on July 18, 2020 the interest rate margins increased an additional 50 basis points on the Senior Credit Agreement and the GS Credit Agreement from the interest rate margins applicable at June 30, 2020 because the Borrowers did not make the $ 100 million principal prepayment by that date.

After July 18, 2020, additional 50 basis-point increases in the applicable margins will occur every successive 30 days through October 14, 2020 if the $ 100 million principal prepayment does not occur, up to a total interest rate margin increase of an additional 2.0 % subsequent to June 30, 2020 .

Any increase in the interest rate margin will not be applicable at any time after the Borrowers have made a principal prepayment of at least $ 100 million , other than with proceeds of indebtedness.

When any increases in the applicable interest rate margins occur, all or a portion of such additional interest rates, at the option of the Borrowers, may be payable in kind.

For the additional interest expense of $ 0.2 million incurred during the second quarter of 2020 that resulted from the interest rate margin increases on June 16, 2020 for the Senior Credit Agreement and the GS Credit Agreement, the Borrowers elected to treat this additional interest as PIK interest.

The Company is pursuing the ability to make the accelerated principal prepayment by raising cash through various means.

The Senior Credit Agreement and the GS Credit Agreement also have incremental margins that would apply to the future applicable interest rates if the Borrowers are deemed to be in violation of the terms of the credit agreement.

Contractual Maturities

Based on terms and conditions existing at June 30, 2020 , future minimum principal payments for long-term debt are as follows:

(in thousands)

Principal Due

Senior Credit Agreement

GS Credit Agreement

Twelve-month period ending June 30,

Based on terms and conditions existing at September 30, 2020, future minimum principal payments for long-term debt are as follows:

(in thousands) Principal Due

Senior Credit Agreement GS Credit Agreement Total

Twelve-month period ending September 30, Term Revolver Term

2021 (current)

$ 15,583 $ — $ — $ 15,583

2022 34,023 11,000 — 45,023

2023 230,813 — — 230,813

2024 — — 100,693 100,693

Total $ 280,419 $ 11,000 $ 100,693 $ 392,112

Additionally, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as defined in the Senior Credit Agreement.

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Under the Senior Credit Agreement, prepayments of outstanding principal may be made in permitted increments with a 1 % penalty for certain prepayments.

Under the GS Credit Agreement, prepayment of outstanding principal is subject to a 4.0 % penalty for certain prepayments occurring prior to March 18, 2021 and 2.0 % for certain prepayments occurring between March 18, 2021 and March 18, 2022.

18, 2021 and March 18, 2022.

Such penalties will be based on the principal amount that is prepaid, subject to the terms of the credit agreements.

Interest Expense, Deferred Financing Costs, and Debt Discounts

The principal amount borrowed and still outstanding under the GS Credit Agreement was $ 80.0 million .

Included in the outstanding principal balance at June 30, 2020 and December 31, 2019 was accumulated PIK interest of $ 18.4 million and $ 15.1 million , respectively.

The principal amount of the GS Credit Agreement increased for PIK interest by $ 1.9 million and $ 3.3 million for the three months and six months ended June 30, 2020 , respectively.

For the three months and six months ended June 30, 2019 , PIK interest added $ 1.3 million and $ 2.5 million , respectively, to the principal of the GS Credit Agreement.

Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was $ 11.7 million and $ 22.0 million for the three months and six months ended June 30, 2020 , respectively, and $ 10.8 million and $ 20.1 million for the three months and six months ended June 30, 2019 , respectively.

Interest expense for the six months ended June 30, 2019 also included a $ 0.4 million fee for the $ 70.0 million delayed principal draw under December 2018 amendment to the Senior Credit Agreement, which occurred during the first quarter of 2019.

For the Sixth Amendment, $ 2.7 million of lender fees were capitalized in first quarter of 2020 and, along with existing unamortized loan costs and discount of $ 5.6 million, continue to be amortized as a component of interest expense on the Company's statements of operations.

Interest expense related to amortization of deferred financing costs and debt discounts was $ 0.7 million and $ 1.1 million for the three months and six months ended June 30, 2020 , respectively, and $ 0.4 million and $ 0.8 million for the three months and six months ended June 30, 2019 , respectively.

The principal amount borrowed and outstanding under the GS Credit Agreement was $ 80.0 million at September 30, 2020 and December 31, 2019.

Included in the outstanding principal balance at September 30, 2020 and December 31, 2019 was accumulated PIK interest of $ 20.7 million and $ 15.1 million, respectively.

The principal amount of the GS Credit Agreement increased for PIK interest by $ 2.3 million and $ 5.6 million for the three months and nine months ended September 30, 2020, respectively.

For the three months and nine months ended September 30, 2019, PIK interest added $ 1.3 million and $ 3.8 million, respectively, to the principal of the GS Credit Agreement.

During the three months and nine months ended September 30, 2020, PIK interest of approximately $ 0.9 million and $ 1.1 million, respectively, was added to the principal of the term facility of the Senior Credit Agreement.

These amounts were composed entirely of the additional interest expense that resulted from the increases in the applicable margins that were previously described.

Interest Expense and Amortization of Deferred Loan Costs and Discounts

Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was $ 13.5 million and $ 35.5 million for the three months and nine months ended September 30, 2020, respectively, and $ 10.5 million and $ 30.6 million for the three months and nine months ended September 30, 2019, respectively.

Interest expense for the nine months ended September 30, 2019 also included a $ 0.4 million fee for the $ 70.0 million delayed principal draw under December 2018 amendment to the Senior Credit Agreement, which occurred during the first quarter of 2019.

For the Sixth Amendment, $ 2.7 million of lender fees were capitalized in first quarter of 2020 and this amount was added to then-existing unamortized loan costs and discount of $ 5.6 million.

Interest expense increased due to the amortization of deferred financing costs and debt discounts by $ 0.7 million and $ 1.8 million for the three months and nine months ended September 30, 2020, respectively, and by $ 0.4 million and $ 1.2 million for the three months and nine months ended September 30, 2019, respectively.

The effective interest rates, which includes PIK interest and amortization of deferred financing costs and debt discounts, for the term debt under the Senior Credit Agreement and the GS Credit Agreement were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Term Debt 2020 2019 2020 2019

Senior Credit Agreement 9.87 % 7.92 % 8.57 % 7.50 %

GS Credit Agreement 14.62 % 10.90 % 12.99 % 10.80 %

Debt modification costs that are not eligible for deferral and subsequent amortization as interest expense are reported on the Company's consolidated statement of operations as a component of other income (expense), net.

Debt Extinguishment Costs and Debt Modification Costs

The $ 106.5 million principal repayment made in September 2020 for the term facility of the Senior Credit Agreement was deemed to be a partial extinguishment of debt that was permitted and contemplated by the existing debt agreement, as previously amended.

As a result, a proportional amount of unamortized loan costs and discount in the amount of $ 1.5 million was removed and expensed during the three months and nine months ended September 30, 2020.

Costs that the Company incurs for debt modification that are not eligible for deferral and subsequent amortization as interest expense are reported as debt modification costs on the Company's consolidated statement of operations.

Approximately $ 0.4 million of such costs were expensed in connection with the Sixth Amendment during the first quarter of 2020.

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The Company is also required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the credit agreements as the ratio of consolidated total debt of the Borrowers to the Company's consolidated adjusted EBITDA (as defined in the Senior Credit Agreement and GS Credit Agreement).

The maximum permitted Total Net Leverage Ratio was 7.75 :1.00 at June 30, 2020 .

As of June 30, 2020 , the Company remained in compliance with the covenants.

Income Tax Benefit

The maximum permitted Total Net Leverage Ratio was 7.75 :1.00 at September 30, 2020.

As of September 30, 2020, the Company remained in compliance with the covenants.

Income Tax Expense (Benefit)

The Company's expense (benefit) for federal and state income taxes was as follows:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Current income tax expense (benefit)

Deferred income tax benefit

Provision for DTA valuation allowance

Adjustment for DTA valuation allowance - discrete item

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Current income tax expense $ 6,115 $ 18 $ 6,224 $ —

Deferred income tax expense (benefit) 14,011 ( 1,655 ) 10,442 ( 5,376 )

Increase (decrease) in DTA valuation allowance 1,171 ( 108 ) 5,353 5,197

(Decrease) increase in DTA valuation allowance - discrete item ( 7,560 ) 9 ( 9,100 ) 2,647

Total income tax expense (benefit) $ 13,737 $ ( 1,736 ) $ 12,919 $ 2,468

DTA = Deferred income tax asset

The Company's effective income tax rate (benefit) for the three months and six months ended June 30, 2020 was ( 5.6 )% and 5.6 % , respectively, and was ( 72.3 )% and ( 25.7 )% for the three months and six months ended June 30, 2019 , respectively.

The Company's effective income tax rate (benefit) for the three months and nine months ended September 30, 2020 was 13.8 % and 15.2 %, respectively, and was 22.9 % and ( 10.3 )% for the three months and nine months ended September 30, 2019, respectively.

Approximately $ 12.4 million of income tax expense for the three months and nine months ended September 30, 2020 was attributable to the gain on the business sale (see Note 2, Sale of Business ).

Valuation Allowance for Deferred Income Tax Assets

The Company considers all available positive and negative evidence to determine whether sufficient taxable income will be generated in the future to permit realization of the existing deferred tax assets.

In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), the Company is required to provide a valuation allowance against deferred tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.

In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.

Among other provisions, the Tax Cuts and Jobs Act of 2017 amended Internal Revenue Code Section 163(j) to create limitations on the deductibility of business interest expense.

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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, the Company is required to apply the "more likely than not" threshold for assessing recoverability.

Based on management’s assessment, the Company recorded an increase in the valuation allowance in the three months and six months ended June 30, 2020 of $ 2.2 million and $ 2.6 million , respectively, for the business interest expense carryover comprised of (i) a discrete benefit of $ 1.5 million for the six months ended June 30, 2020 , which was recognized during the first quarter of 2020, associated with the 2019 business interest deferred tax asset as a result of the CARES Act and (ii) a provision of $ 2.2 million and $ 4.1 million for the three months and six months ended June 30, 2020 , respectively, associated with the 2020 excess business interest.

For the three months and six months ended June 30, 2019 , the Company recorded a valuation allowance of $ 7.9 million for the business interest carryover comprised of (i) a discrete provision of $ 2.7 million associated with the 2018 business interest deferred tax asset and (ii) a provision of $ 5.2 million associated with the 2019 excess business interest.

This $ 7.9 million provision was

included in income tax expense in the Company’s unaudited condensed consolidated statements of operations for the three months and six months ended June 30, 2019 .

The provisions for and adjustments to the valuation allowance are a component of income tax expense (benefit) in the Company's unaudited condensed consolidated statements of operations.

Adjustments to the valuation allowance are a component of income tax expense (benefit) in the Company's unaudited condensed consolidated statements of operations.

An increase in the valuation allowance for deferred income taxes will increase income tax expense (or reduce an otherwise income tax benefit), and a decrease in the valuation allowance will decrease income tax expense (or increase an otherwise income tax benefit).

Based on management’s assessment, the Company decreased the valuation allowance in the three months and nine months ended September 30, 2020 by $ 6.4 million and $ 3.7 million, respectively, for the business interest expense carryover comprised of (i) discrete decreases of $ 7.6 million and $ 9.1 million for the three months and nine months ended September 30, 2020, respectively, associated with the 2018 and 2019 business interest deferred income tax assets as a result of the CARES Act and expected utilization of these assets in 2020 and (ii) increases of $ 1.2 million and $ 5.4 million for the three months and nine months ended September 30, 2020, respectively, associated with the 2020 debt refinancing that results in excess business interest in future years.

For the three months and nine months ended September 30, 2019, the Company recorded a decrease of $ 0.1 million and an increase of $ 7.8 million, respectively, in the valuation allowance for the business interest carryover comprised of (i) a discrete increase of $ 2.6 million for the nine months ended September 30, 2019 associated with the 2018 business interest deferred tax asset and (ii) a decrease of $ 0.1 million and an increase of $ 5.2 million for the three months and nine months ended September 30, 2019, respectively, associated with the 2019 excess business interest.

The Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis and, as a result, the valuation allowance may change in future periods.

1 unchanged sentence

The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date.

The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." As of June 30, 2020 , the net amount of our unrecognized tax benefits was not material.

The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." As of September 30, 2020, the net amount of our unrecognized tax benefits was not material.

The Company is subject to U.S.

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Some of these agreements have minimum annual requirements for processing volumes.

As of June 30, 2020 and December 31, 2019 , the Company is committed to pay minimum processing fees under these agreements of $ 14.0 million through the end of 2021.

As of September 30, 2020 and December 31, 2019, the Company is committed to pay minimum processing fees under these agreements of $ 14.0 million through the end of 2021.

Commitment to Lend

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1) the actual financial performance of the acquired merchant portfolio rights and 2) actual sales and variable wholesale costs for the on-line services sold by the Company under the reseller arrangement.

Amounts subsequently paid to the other entity are accounted for as either 1) standard costs of the services sold by the Company under the 5 -year reseller agreement or 2) consideration

for the merchant portfolio rights.

Amounts subsequently paid to the other entity are accounted for as either 1) standard costs of the services sold by the Company under the 5 -year reseller agreement or 2) consideration for the merchant portfolio rights.

Amounts paid that are accounted for as consideration for the merchant portfolio rights are capitalized and amortized over the estimated useful life of the merchant portfolio rights.

As of June 30, 2020 and December 31, 2019, $ 2.9 million and $ 1.1 million , respectively, was capitalized as cost for the merchant portfolio.

As of September 30, 2020 and December 31, 2019, $ 3.8 million and $ 1.1 million, respectively, was capitalized as cost for the merchant portfolio.

The capitalized cost, which is in our Consumer Payments reportable segment, is being amortized using an accelerated method.

6 unchanged sentences

The initial purchase price is subject to an increase of up to $ 6.4 million in accordance with the terms of the agreement between the Company and the sellers.

As of June 30, 2020 , an additional $ 2.1 million of the $ 6.4 million total contingent consideration has been paid to the seller.

As of September 30, 2020, an additional $ 2.1 million of the $ 6.4 million total contingent consideration has been paid to the seller.

Additional purchase price is accounted for when payment to the seller becomes probable and is added to the amortizable carrying value of the asset.

During the three months ended June 30, 2020 , the Company and the seller amended the agreement to provide the Company with additional guaranteed returns from the acquired residual portfolio rights, and the additional consideration from the Company to the seller of $ 0.8 million was added to the amortizable carrying value of the asset.

During the second quarter 2020, the Company and the seller amended the agreement to provide the Company with additional guaranteed returns from the acquired residual portfolio rights, and the additional consideration from the Company to the seller of $ 0.8 million was added to the amortizable carrying value of the asset.

Contingent Consideration for Business Combinations

13 unchanged sentences

On May 22, 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity.

The Company has loaned the entity a total of $ 3.5 million at June 30, 2020 and December 31, 2019 , with a commitment to loan up to a total of $ 10.0 million based on certain growth metrics of the entity and continued compliance by the entity with the terms and covenants of the agreement.

The Company's commitment to make additional advances under the loan agreement is dependent upon such advances not conflicting with covenants or restrictions under any of the Company's

debt or other applicable agreements.

The Company has loaned the entity a total of $ 3.5 million at September 30, 2020 and December 31, 2019, with a commitment to loan up to a total of $ 10.0 million based on certain growth metrics of the entity and continued compliance by the entity with the terms and covenants of the agreement.

The Company's commitment to make additional advances under the loan agreement is dependent upon such advances not conflicting with covenants or restrictions under any of the Company's debt or other applicable agreements.

Amounts loaned to this entity by the Company are secured by substantially all of the assets of the entity and by a personal guarantee.

The note receivable has an interest rate of 12.0 % per annum and is repayable in full in May 2024.

The Company recognized interest income of $ 56,000 and $ 110,000 during the three months and six months ended June 30, 2020 , respectively.

Interest income for the comparable periods in 2019 was not material.

The Company recognized interest income of $ 56,000 and $ 166,000 during the three months and nine months ended September 30, 2020, respectively.

Interest income for the comparable periods in 2019 was $ 46,000 and $ 66,000 , respectively.

The Company also received a warrant to purchase a NCI in this entity's equity at a fixed amount.

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Pursuant to the limited liability company agreement of PHOT, any material undistributed earnings generated by the eTab and Cumulus assets that are attributable to the holders of the preferred equity interests are reported by the Company as a form of NCI classified as mezzanine equity on the Company's consolidated balance sheet until $ 4.5 million and the preferred yield have been distributed to the holders of the preferred equity interests.

Subsequent changes in the value of the NCI will be reported as an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the NCI in mezzanine equity.

Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through June 30, 2020 , and therefore no recognition of the NCI has been reflected in the Company's consolidated financial statements.

Subsequent changes in the value of the NCI will be reported as

an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the NCI in mezzanine equity.

Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through June 30 2020, and therefore no recognition of the NCI was reflected in the Company's consolidated financial statements.

For the nine months ended September 30, 2020, $ 200,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this amount was also distributed in cash to the NCIs during the same period.

Equity-Method Investment

2 unchanged sentences

The Company's share of this entity's income or loss was not material for any reporting period presented.

RECONCILIATION OF STOCKHOLDERS' DEFICIT AND NON-CONTROLLING INTEREST

RECONCILIATION OF STOCKHOLDERS' DEFICIT AND NON-CONTROLLING INTERESTS

The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors.

As of June 30, 2020 and December 31, 2019 , the Company has not issued any shares of preferred stock.

As of September 30, 2020 and December 31, 2019, the Company has not issued any shares of preferred stock.

The following tables provide a reconciliation of the beginning and ending carrying amounts for the periods presented for the components of the deficit attributable to stockholders of the Company and equity attributable to NCI:

(in thousands)

Additional Paid-In Capital

Accumulated (Deficit)

Total Priority Technology Holdings, Inc.

Stockholders' (Deficit)

Preferred Stock

Treasury Stock (a)

(in thousands) Additional Paid-In Capital Accumulated (Deficit) Total Priority Technology Holdings, Inc.

Stockholders' (Deficit) NCI (c)

Preferred Stock Common Stock Treasury Stock (a)

Shares Amount Shares Amount Shares Amount

January 1, 2020 — $ — 67,061 $ 68 451 $ ( 2,388 ) $ 3,651 $ ( 127,674 ) $ ( 126,343 ) $ 5,654

Equity-classified stock compensation — — — — — — 338 — 338 —

Net loss — — — — — — — ( 5,869 ) ( 5,869 ) —

March 31, 2020 — — 67,061 68 451 ( 2,388 ) 3,989 ( 133,543 ) ( 131,874 ) 5,654

Equity-classified stock compensation — — — — — — 580 — 580 —

Issue shares of common stock — — 53 — — — — — — —

Net loss — — — — — — — ( 7,858 ) ( 7,858 ) —

Distributions to non-controlling interests — — — — — — — — — —

June 30, 2020 — — 67,114 68 451 ( 2,388 ) 4,569 ( 141,401 ) ( 139,152 ) 5,654

Equity-based stock compensation — — — — — — 499 — 499 —

Issue shares of common stock — — 53 — — — — — — —

Net income — — — — — — — 40,392 40,392 45,348

Redemption of non-controlling interest — — — — — — — — — ( 5,654 )

Distributions to non-controlling interests — — — — — — — — — ( 45,348 )

September 30, 2020 — $ — 67,167 $ 68 451 $ ( 2,388 ) $ 5,068 $ ( 101,009 ) $ ( 98,261 ) $ —

(in thousands) Additional Paid-In Capital Accumulated (Deficit) Total Priority Technology Holdings, Inc.

Stockholders' (Deficit) NCI (c)

Preferred Stock Common Stock Treasury Stock (a)

Shares Amount Shares Amount Shares Amount

January 1, 2019 — $ — 67,038 $ 67 — $ — $ — $ ( 94,085 ) $ ( 94,018 ) $ —

Equity-classified stock compensation — — — — — — 1,160 — 1,160 —

Warrant redemptions (b)

Warrant redemptions (b) — — 420 (b) — — (b) — — —

Net loss — — — — — — — ( 6,446 ) ( 6,446 ) —

Issuance of NCI (c) — — — — — — — — — 5,654

2 unchanged sentences

Repurchases of common stock — — ( 451 ) — 451 ( 2,388 ) — — ( 2,388 ) —

Net loss — — — — — — — ( 14,130 ) ( 14,130 ) —

June 30, 2019 — — 67,007 67 451 ( 2,388 ) 2,183 ( 114,661 ) ( 114,799 ) 5,654

(b) Par value of the common shares issued in connection with the warrant exchange rounds to less than one thousand dollars.

Equity-classified stock compensation — — — — — — 1,171 — 1,171 —

Net loss — — — — — — — ( 5,844 ) ( 5,844 ) —

September 30, 2019 — $ — 67,007 $ 67 451 $ ( 2,388 ) $ 3,354 $ ( 120,505 ) $ ( 119,472 ) $ 5,654

(b) Par value of the common shares issued in connection with the warrant exchange rounds to less than one dollar.

In August 2018, the Company was informed by Nasdaq that it intended to delist the Company's outstanding warrants and units due to an insufficient number of round lot holders for the public warrants.

3 unchanged sentences

The delisting of the remaining outstanding warrants and units had no impact on the Company's financial statements.

by the Company's subsidiary PRET during 2019.

by the Company's PRET subsidiary during 2019.

As part of the consideration for the assets acquired from YapStone, Inc.

2 unchanged sentences

See Note 4, Non-Controlling Interests .

For all reporting periods since PRET's inception, including the three months and six months ended June 30, 2020 and June 30, 2019 , no earnings or losses were attributable to the NCI of PRET based on the terms of the LLC agreement of PRET, as amended.

For all reporting periods since PRET's inception through June 30, 2020, no earnings or losses were attributable to the NCIs of PRET.

During the three months ended September 30, 2020, a gain on a sale of assets from PRET (see Note 2, Sale of Business ) resulted in the attribution of a total of $ 45.1 million to the NCIs of PRET.

This amount was also distributed in a final redemption of the NCIs' interests in PRET during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, a total of $200,000 of PHOT's earnings were attributable to the NCIs of PHOT.

See Note 12, Related Party Transactions .

This amount was also distributed in cash to the NCIs of PHOT during the same period.

STOCK-BASED COMPENSATION

2 unchanged sentences

Expense recognized for equity-classified stock compensation by plan was as follows:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

2018 Equity Incentive Plan $ 499 $ 322 $ 1,417 $ 2,087

2014 Management Incentive Plan — 849 — 1,267

In addition, the Company recognized compensation expense of $ 108,000 during the three months and six months ended June 30, 2020 related to liability-classified stock compensation under the 2018 Equity Incentive Plan whereby the service inception date preceded the future grant-date.

Income tax benefit for stock-based compensation was not material for the three months and six months ended June 30, 2020 and June 30, 2019 .

Total $ 499 $ 1,171 $ 1,417 $ 3,354

In addition, the Company recognized compensation expense of $ 102,000 and $ 210,000 during the three months and nine months ended September 30, 2020, respectively, related to liability-classified stock compensation under the 2018 Equity Incentive Plan whereby the service inception date preceded the future grant-date.

Income tax benefit for stock-based compensation was not material for the three months and nine months ended September 30, 2020 and September 30, 2019.

Fair Value Measurements

1 unchanged sentence

The probabilities used to estimate the payout probability of the contingent consideration for the two business combinations ranged between 15 % and 35 % for one and between 5 % and 80 % for the other.

The estimated weighted-average probability for payment of the contingent consideration was 21 % for one and 70 % for the other at June 30, 2020 and December 31, 2019, and 26 % and 70 % , respectively, at June 30, 2019 .

The estimated weighted-average probability for payment of the contingent consideration was 21 % for one and 70 % for the other at September 30, 2020 and December 31, 2019, and 26 % and 70 %, respectively, at September 30, 2019.

These weighted average probabilities are based on present value of estimated projections for financial metrics for the remaining earnout periods.

At June 30, 2020 , the remaining maximum amounts of contingent consideration for these two business combinations were $ 500,000 for one and $ 250,000 for the other, and the measured fair values were $ 170,000 and $ 190,000 , respectively.

These fair value estimates did not change during the three months and six months ended June 30, 2020 and June 30, 2019 .

There were no transfers among the fair value levels during the three months and six months ended June 30, 2020 and June 30, 2019 .

At September 30, 2020, the remaining maximum amounts of contingent consideration for these two business combinations were $ 500,000 for one and $ 250,000 for the other, and the measured fair values were $ 170,000 and $ 190,000 , respectively.

These fair value estimates did not change during the three months and nine months ended September 30, 2020 and September 30, 2019.

There were no transfers among the fair value levels during the three months and nine months ended September 30, 2020 and September 30, 2019.

There were no unrealized gains or losses included in other comprehensive income for any reporting period, therefore there were no changes in unrealized gains and losses for any reporting period included in other comprehensive income for recurring Level 3 fair value measurements.

3 unchanged sentences

Substantially all of the Company's notes receivable are secured, and the Company believes that all of its notes receivable are collectible.

The fair value of the Company's notes receivable at June 30, 2020 and December 31, 2019 was approximately $ 6.6 million and $ 5.7 million , respectively.

The fair value of the Company's notes receivable at September 30, 2020 and December 31, 2019 was approximately $ 6.1 million and $ 5.7 million, respectively.

On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.

1 unchanged sentence

The Borrower's outstanding debt obligations (see Note 9, Debt Obligations ) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at June 30, 2020 and December 31, 2019 was estimated to be approximately $ 341 million and $ 381 million , respectively.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at September 30, 2020 and December 31, 2019 was estimated to be approximately $ 273 million and $ 381 million, respectively.

The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of $ 280.4 million and $ 388.8 million, respectively, was estimated using binding and non-binding quoted prices in an active secondary market, which considers the Borrowers' credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.

1 unchanged sentence

SEGMENT INFORMATION

At June 30, 2020 , the Company has three reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's Chief Executive Officer and Chairman.

At September 30, 2020, the Company has three reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's Chief Executive Officer and Chairman.

The Consumer Payments operating segment and the Integrated Partners operating segments are each reported as separate reportable segments.

4 unchanged sentences

• Commercial Payments – represents services provided to certain enterprise customers, including outsourced sales force to those customers and accounts payable automation services to commercial customers.

Integrated Partners – represents payment adjacent services that are provided primarily to the health care and residential real estate industries.

• Integrated Partners – represents payment adjacent services that are provided primarily to the health care, real estate, and hospitality industries.

In September 2020, the Company sold a substantial portion of the assets of this segment.

See Note 2, Sale of Business , and Note 6, Goodwill and Other Intangible Assets .

Corporate includes costs of corporate functions and shared services not allocated to our reportable segments.

3 unchanged sentences

Information on reportable segments and reconciliations to consolidated revenue, consolidated income from operations, and consolidated depreciation and amortization are as follows for the periods presented:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands) Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Consumer Payments $ 99,301 $ 82,742 $ 267,039 $ 243,205

6 unchanged sentences

Integrated Partners 253 1,003 1,466 1,342

Corporate ( 4,478 ) ( 5,110 ) ( 13,762 ) ( 16,396 )

Consolidated income from operations $ 7,042 $ 2,725 $ 14,632 $ 6,127

3 unchanged sentences

Integrated Partners 1,403 1,299 4,048 3,086

Corporate 290 407 886 1,214

Consolidated depreciation and amortization $ 10,251 $ 10,077 $ 30,886 $ 28,763

A reconciliation of total income (loss) from operations of reportable segments to the net loss is provided in the following table:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

A reconciliation of total income (loss) from operations of reportable segments to the net income (loss) is provided in the following table:

(in thousands) Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Total income from operations of reportable segments $ 11,520 $ 7,835 $ 28,394 $ 22,523

Corporate ( 4,478 ) ( 5,110 ) ( 13,762 ) ( 16,396 )

Interest expense ( 13,471 ) ( 10,463 ) ( 35,454 ) ( 30,602 )

Plus (less) other, net

Debt modification and extinguishment costs ( 1,523 ) — ( 1,899 ) —

Gain on sale of business 107,239 — 107,239 —

Other income, net 190 158 414 523

Income tax (expense) benefit ( 13,737 ) 1,736 ( 12,919 ) ( 2,468 )

Net income (loss) 85,740 ( 5,844 ) 72,013 ( 26,420 )

Net income attributable to non-controlling interests ( 45,348 ) — ( 45,348 ) —

Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc.

$ 40,392 $ ( 5,844 ) $ 26,665 $ ( 26,420 )

Substantially all revenue is generated in the United States.

For the three months and six months ended June 30, 2020 and June 30, 2019 , no one merchant customer accounted for 10% or more of the Company's consolidated revenues.

For the three months and nine months ended September 30, 2020 and September 30, 2019 , no one merchant customer accounted for 10% or more of the Company's consolidated revenues.

Most of the Company's merchant customers were referred to the Company by an ISO or other referral partners.

If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can potentially move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period.

of the Company's consolidated revenues for the three months and six months ended June 30, 2020 , respectively, and 17.6 % and 17.6 % for the three months and six months ended June 30, 2019 , respectively.

LOSS PER COMMON SHARE

The following tables set forth the computation of the Company's basic and diluted loss per common share:

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands except per share amounts)

Basic and Diluted Loss Per Common Share:

Earnings attributable to NCI

Net loss attributable to common stockholders of Priority Technology Holdings, Inc.

Weighted-average shares outstanding

Basic and Diluted Loss Per Common Share

Potentially anti-dilutive securities that were excluded from earnings per share for the three months and six months ended June 30, 2020 and June 30, 2019 that could be dilutive in future periods were as follows:

(in thousands)

Common Stock Equivalents at

June 30, 2020

June 30, 2019

Merchants referred by one ISO organization with potential merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 21 % and 20.8 % of the Company's consolidated revenues for the three months and nine months ended September 30, 2020, respectively, and 18.4 % and 17.9 % for the three months and nine months ended September 30, 2019, respectively.

INCOME ( LOSS) PER COMMON SHARE

The following tables set forth the computation of the Company's basic and diluted income (loss) per common share:

(in thousands except per share amounts) Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

Net income (loss) $ 85,740 $ ( 5,844 ) $ 72,013 $ ( 26,420 )

Earnings attributable to non-controlling interests ( 45,348 ) — ( 45,348 ) —

Net income (loss) attributable to common stock holders of Priority Technology Holdings, Inc.

$ 40,392 $ ( 5,844 ) $ 26,665 $ ( 26,420 )

Weighted-average common stock shares outstanding 67,167 67,007 67,114 67,109

Basic earnings (loss) per common share:

$ 0.60 $ ( 0.09 ) $ 0.40 $ ( 0.39 )

Fully Diluted:

Weighted-average common stock shares outstanding 67,167 67,007 67,114 67,109

Weighted-average dilutive common stock equivalents 119 — 17 —

Weighted-average common shares for fully-diluted earnings (loss) per share 67,286 67,007 67,131 67,109

Fully-diluted earnings (loss) per share $ 0.60 $ ( 0.09 ) $ 0.40 $ ( 0.39 )

Potentially anti-dilutive securities that were excluded from earnings per share for the three months and nine months ended September 30, 2020 and September 30, 2019 that could be dilutive in future periods were as follows:

(in thousands) Common Stock Equivalents at

September 30, 2020 September 30, 2019

Outstanding warrants on common stock (1) 3,557 3,557

Restricted stock unit awards granted under the 2018 Equity Incentive Plan

Outstanding stock option awards granted under the 2018 Equity Incentive Plan

Outstanding options and warrants issued to adviser (1) 600 600

Restricted stock unit awards (2) 127 202

Outstanding stock option awards (2) 1,593 1,794

Liability-based restricted stock units (2) 238 —

Restricted stock units granted under the Earnout Incentive Plan (3) — 95

Earnout incentive awards under the Earnout Incentive Plan (3) — 9,705

Total 6,115 15,953

(1) Issued by M.I.

Acquisitions, Inc.

prior to July 25, 2018

(2) Granted under the 2018 Equity Incentive Plan

(3) Plan expired December 31, 2019 with no shares issued

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements