What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-13 compared with 2020-08-14 · 297 added, 206 removed, 170 unchanged (75% of the section changed)

26 unchanged sentences

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.

available relevant information.

These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

7 unchanged sentences

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).

This section includes a discussion and analysis of our results of operations for the three months ended September 30, 2020 (or third quarter 2020) compared to the three months ended September 30, 2019 (or third quarter 2019), and the nine months ended September 30, 2020 (or 2020 period) compared to the nine months ended September 30, 2019 (or 2019 period).

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,

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

(dollars in thousands) Three Months Ended September 30,

2020 2019 Change % Change

REVENUES $ 108,962 $ 93,883 $ 15,079 16.1 %

OPERATING EXPENSES:

7 unchanged sentences

Interest expense (13,471) (10,463) (3,008) 28.7 %

Debt extinguishment costs (1,523) — (1,523) nm

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

Other income, net 190 158 32 20.3 %

Total other expenses, net

Loss before income taxes

Income tax expense

Total other income (expenses), net 92,435 (10,305) 102,740 nm

Income (loss) before income taxes 99,477 (7,580) 107,057 nm

Income tax expense (benefit) 13,737 (1,736) 15,473 nm

Net income (loss) 85,740 (5,844) 91,584 nm

Less net income attributable to non-controlling interests (45,348) — (45,348) nm

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

$ 40,392 $ (5,844) $ 46,236 nm

nm = not meaningful

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

(dollars in thousands)

Six Months Ended June 30,

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

(dollars in thousands) Nine Months Ended September 30,

2020 2019 Change % Change

REVENUES $ 298,251 $ 273,671 $ 24,580 9.0 %

OPERATING EXPENSES:

7 unchanged sentences

Interest expense (35,454) (30,602) (4,852) 15.9 %

Other (expense) income, net

Total other expenses, net

Loss before income taxes

Income tax (benefit) expense

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

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

Other income, net 414 523 (109) (20.8) %

Total other income (expenses), net 70,300 (30,079) 100,379 nm

Income (loss) before income taxes 84,932 (23,952) 108,884 nm

Income tax (benefit) expense 12,919 2,468 10,451 nm

Net income (loss) 72,013 (26,420) 98,433 nm

Less net income attributable to non-controlling interests (45,348) — (45,348) nm

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

$ 26,665 $ (26,420) $ 53,085 nm

nm = not meaningful

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,

The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended September 30, 2020 compared to the three months ended September 30, 2019:

(in thousands) Three Months Ended September 30,

2020 2019 Change % Change

Consumer Payments:

Revenue $ 99,301 $ 82,742 $ 16,559 20.0 %

Operating expenses 88,203 75,528 12,675 16.8 %

6 unchanged sentences

Commercial Payments:

Revenue $ 4,995 $ 6,338 $ (1,343) (21.2) %

Operating expenses 4,826 6,720 (1,894) (28.2) %

6 unchanged sentences

Integrated Partners:

Revenue $ 4,666 $ 4,803 $ (137) (2.9) %

Operating expenses 4,413 3,800 613 16.1 %

Income (loss) from operations

Income from operations $ 253 $ 1,003 $ (750) (74.8) %

Operating margin 5.4 % 20.9 %

10 unchanged sentences

Merchant bankcard transaction volume 123,018 132,093 (9,075) (6.9) %

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,

The following table shows our reportable segments' financial performance data and selected performance measures for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:

(in thousands) Nine Months Ended September 30,

2020 2019 Change % Change

Consumer Payments:

Revenue $ 267,039 $ 243,205 $ 23,834 9.8 %

Operating expenses 241,519 220,909 20,610 9.3 %

6 unchanged sentences

Commercial Payments:

Revenue $ 17,017 $ 19,492 $ (2,475) (12.7) %

Operating expenses 15,609 20,607 (4,998) (24.3) %

6 unchanged sentences

Integrated Partners:

Revenue $ 14,195 $ 10,974 $ 3,221 29.4 %

Operating expenses 12,729 9,632 3,097 32.2 %

Income (loss) from operations

Income from operations $ 1,466 $ 1,342 $ 124 9.2 %

Operating margin 10.3 % 12.2 %

11 unchanged sentences

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.

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

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

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.

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.

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 in 2020 compared to 2019.

Starting in mid-March 2020 through April 2020, COVID-19 had a significant negative affect on our results.

This impact was evident in a significant decline in merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020.

In May, as shelter in place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return and revenue growth was supplemented by the acceleration of certain specialized product offerings and ecommerce payment transactions.

As a result, we experienced consolidated revenue growth of 10.6% and 0.2% in the first and second quarters of 2020, respectively.

Within the second quarter of 2020 we experienced a trough revenue decline of 11.7% in April with accelerating revenue performance of 1.7% growth in May and 10.8% revenue growth in June as compared with the comparable months in 2019.

This momentum continued to accelerate in the third quarter of 2020 where we experienced revenue growth of 16.1% over the third quarter of 2019.

Beginning in late summer and continuing into autumn, the level of new COVID-19 cases began to increase again in the United States, with certain states impacted more than others.

While there continues to be considerable uncertainty regarding the future economic impacts of this current surge of the pandemic, our October 2020 operating results remained consistent with the third quarter 2020 results.

The future impact on the overall economy and our results are beyond our ability to predict or control.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Consolidated revenue

Our consolidated revenue in third quarter 2020 of $109.0 million increased by $15.1 million, or 16.1%, from revenue in third quarter 2019 of $93.9 million.

Revenue growth of $16.6 million in our Consumer Payments segment was partially offset by revenue declines of $1.3 million and $0.1 million in our Commercial Payments and Integrated Partners segments, respectively.

Revenue in Consumer Payments segment

Consumer payments revenue in third quarter 2020 of $99.3 million increased $16.6 million, or 20.0%, compared to revenue in third quarter 2019 of $82.7 million.

This increase was driven by $8.1 million, or 806.8%, revenue growth from high-margin specialized ecommerce merchants, and higher overall average revenue per processing dollar value.

Merchant bankcard processing dollar value in the third quarter of 2020 of $11.2 billion increased by $668.6 million, or 6.3%, as compared with $10.6 billion in the third quarter of 2019.

Merchant bankcard transactions of 122.6 million in the third quarter of 2020 declined by 6.9%, as compared with 131.6 million in the third quarter of 2019.

However, our merchant volume mix drove a 14.2% higher average ticket of $91.62 in the third quarter of 2020, as compared with $80.26 in the third quarter of 2019.

Current economic factors have impacted the merchant volume mix, including shifts in payment transaction activity among certain vertical industries, spending trends related to the COVID-19 pandemic that appear to have resulted in consumers conducting fewer payment transactions at higher average transaction values, and an increase in card-not-present transactions.

Card-not-present volume generally offers more favorable pricing to us than other types of transactions.

The trend of new merchant boarding remains within our historical range of 4,500 to 5,000 new merchants per month.

During the third quarter of 2020, our monthly average of new merchants boarded was 4,638 compared with 4,774 in the third quarter of 2019.

Revenue in Commercial Payments segment

Commercial Payments revenue in third quarter 2020 of $5.0 million decreased by $1.3 million, or 21.2%, compared to revenue in third quarter 2019 of $6.3 million.

Revenue in this segment is derived primarily from our accounts payable automated solutions business and from our curated managed services business.

Revenue from our accounts payable automated solutions business in third quarter 2020 of $1.5 million increased $0.1 million, or 6.9%, from $1.4 million in third quarter 2019.

This increase was due to increased business from existing customers.

Revenue from our curated managed services business in third quarter 2020 of $3.5 million decreased by $1.4 million, or 29.3%, from revenue in third quarter 2019 of $4.9 million.

This decrease was driven by curtailment of a customer’s merchant financing program in response to the COVID related economic conditions.

Revenue in Integrated Partners segment

Integrated Partners revenue in third quarter 2020 of $4.7 million decreased by $0.1 million, or 2.9%, compared to revenue in third quarter 2019 of $4.8 million.

Priority Real Estate Technology, LLC ("PRET") comprised $4.1 million and $4.2 million of this segment's revenue in third quarter 2020 and third quarter 2019, respectively.

PRET is comprised of the RentPayment business, primarily assets acquired from YapStone, Inc.

in March 2019, and our RadPad/Landlord Station business.

The RentPayment business, which was sold in September 2020, generated revenue of $3.9 million in the third quarter of 2020 and $3.7 million in the third quarter of 2019.

Revenue from PRET’s RadPad/Landlord Station, Priority PayRight Health Solutions ("PayRight") and Priority Hospitality Technology ("PHOT") comprise the remainder of this segment's revenue.

As disclosed in Note 2, Sale of Business , to the unaudited condensed consolidated financial statements, in September 2020 we sold the RentPayment business.

Simultaneously with this sale, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services to the sold business, and offer us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer.

The RentPayment business sale will impact the trend of future results of Integrated Partners.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Consolidated revenue

Our consolidated revenue in the first nine months of 2020 of $298.3 million increased by $24.6 million, or 9.0%, from revenue in the first nine months of 2019 of $273.7 million.

Revenue growth of $23.8 million in our Consumer Payments segment and $3.2 million in our Integrated Partners segments was partially offset by a decline of $2.5 million in our Commercial Payments segment.

Revenue in Consumer Payments segment

Consumer Payments revenue in the first nine months of 2020 of $267.0 million increased $23.8 million, or 9.8%, compared to revenue in the first nine months of 2019 of $243.2 million.

This increase was driven by $11.6 million, or 199.4%, revenue growth from high margin specialized ecommerce merchants, and higher overall average revenue per processing dollar value.

Merchant bankcard processing dollar value in the first nine months of 2020 of $30.6 billion decreased by $918.7 million, or 2.9%, as compared with $31.6 billion in the first nine months of 2019.

Merchant bankcard transactions of 334.9 million in the first nine months of 2020 declined 12.5%, as compared with 382.7 million in the first nine months of 2019.

However, our merchant volume mix drove a 10.9% higher average ticket of $91.47 in the first nine months of 2020, as compared with $82.45 in the first nine months of 2019.

Card-not-present volume generally offers more favorable pricing to us than other types of transactions.

The trend of new merchant boarding remains within our historical range of 4,500 to 5,000 new merchants per

During the first nine months of 2020, our monthly average of new merchants boarded was 4,722 compared with 4,595 in the first nine months of 2019.

Revenue in Commercial Payments segment

Commercial Payments revenue in the first nine months of 2020 of $17.0 million decreased by $2.5 million, or 12.7%, compared to revenue in the first nine months of 2019 of $19.5 million.

The increase in revenues from our accounts payable automated solutions services were offset by a decrease in revenues from our curated managed services programs.

Revenue from our accounts payable automated solutions business in the first nine months of 2020 of $4.5 million increased $0.6 million, or 14.8%, compared to revenue in the first nine months of 2019 of $3.9 million.

This increase was due to increased business from existing customers.

Revenue from our curated managed services business in the first nine months of 2019 of $12.5 million decreased by $3.1 million, or 19.6%, compared to revenue in the first nine months of 2019 of $15.6 million.

This decrease was driven by a decline and third quarter 2020 curtailment of a customer’s merchant financing program in response to the COVID related economic conditions.

Revenue in Integrated Partners segment

Integrated Partners revenue in the first nine months of 2020 of $14.2 million increased by $3.2 million, or 29.4%, compared to revenue in the first nine months of 2019 of $11.0 million.

PRET comprised $12.6 million and $9.5 million of this segment's revenue in the first nine months of 2020 and the first nine months of 2019, respectively.

The RentPayment business, which was formed upon the March 2019 asset acquisition from YapStone, Inc., generated revenue of $12.1 million in the first nine months of 2020 and $8.1 million in the first nine months of 2019.

Revenue from PRET’s RadPad/Landlord Station, Priority PayRight Health Solutions ("PayRight") and PHOT comprise the remainder of this segment's revenue.

As noted in the previous discussion for the third quarters of 2020 and 2019, the RentPayment business sale in September 2020 will impact the trend of future results of Integrated Partners.

Consolidated Operating expenses

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Our consolidated operating expenses in third quarter 2020 of $101.9 million increased $10.8 million, or 11.8%, from consolidated operating expenses in third quarter 2019 of $91.2 million.

This overall increase was driven by an increase in costs of services of $11.3 million, or 17.7%, resulting from higher revenues in third quarter 2020.

Depreciation and amortization expense of $10.3 million increased slightly by $0.2 million, or 1.7%, in third quarter 2020.

Salary and employee benefits expenses of $10.0 million decreased $0.7 million, or 6.2%, in third quarter 2020 driven by lower headcount in 2020.

Selling, general and administrative expenses ("SG&A") of $6.7 million in third quarter 2020 approximated $6.7 million in third quarter 2019.

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, was offset by a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Our consolidated operating expenses in first nine months of 2020 of $283.6 million increased $16.1 million, or 6.0%, from consolidated operating expenses in third quarter 2019 of $267.5 million.

This overall increase was driven by an increase in costs of services of $17.9 million, or 9.6%, resulting from higher revenues in first nine months of 2020.

Depreciation and amortization expense of $30.9 million increased by $2.1 million, or 7.4%, in the first nine months of 2020 due to higher intangible amortization in the Consumer Payments and Integrated Partners segments.

Salary and employee benefits expenses of $29.7 million decreased $2.2 million, or 7.0%, in first nine months of 2020 driven by lower headcount in 2020.

SG&A of $19.3

million decreased $1.7 million, or 8.2%, in first nine months of 2019 driven by 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.

These reductions were partially offset by a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment during the first nine months of 2020.

Income (loss) from operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Consolidated income from operations in third quarter 2020 of $7.0 million increased by $4.3 million, or 158.4%, from $2.7 million in third quarter 2019.

Our consolidated operating margin for third quarter 2020 was 6.5% compared to 2.9% for third quarter 2019.

This margin increase was the result of lower salary and employee benefits expenses of $0.7 million due to headcount reductions, and higher revenues less costs of services of $3.8 million.

These favorable changes for third quarter 2020 were partially offset by higher depreciation and amortization expense of $0.2 million and a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment.

Our Consumer Payments segment contributed $11.1 million in income from operations for third quarter 2020, an increase of $3.9 million, or 53.8%, from $7.2 million for third quarter 2019.

The main driver of this change was an improved operating margin of 11.2% for third quarter 2020 compared to 8.7% for the third quarter of 2019 which reflected higher revenue less costs of services of $4.2 million.

Growth in higher-margin specialty ecommerce transactions and the increase in the average ticket, both previously discussed, were the main drivers of the improved operating margin for third quarter 2020.

Income from operations also benefited from a $0.7 million decrease in salary and employee benefits expenses due to lower headcount.

Our Commercial Payments segment earned income from operations of $0.2 million for third quarter 2020 compared to a loss from operations of $0.4 million for third quarter 2019.

This improvement was largely driven by a $0.2 million decrease in salaries and employee benefits expenses due to lower headcount and a $0.5 million decrease in SG&A expenses.

Included in SG&A expenses for third quarter 2019 were certain one-time operational losses of $0.5 million which were substantially recovered in third quarter 2020.

Our Integrated Partners segment earned income from operations of $0.3 million for third quarter 2020, a decrease of $0.8 million compared to $1.0 million of income from operations for third quarter 2019.

The overall decrease was caused by a $0.2 million decrease in revenues less costs of services and a $0.6 million increase in SG&A expenses primarily related to transition services provided by YapStone, Inc.

in connection with the assets acquired in March 2019.

These transition services were $1.0 million in third quarter 2020 and $0.4 million in third quarter 2019.

Operating results for third quarter 2020 and third quarter 2019 included depreciation and amortization expense of $1.4 million and $1.3 million, respectively.

These factors were partially offset by a $0.2 million decrease in salary and employee benefit expenses.

Corporate expenses were $4.5 million for third quarter 2020, a decrease of $0.6 million, or 12.4%, from expenses of $5.1 million for third quarter 2019.

Salaries and employee benefits increased $0.4 million due to higher incentive compensation accruals, SG&A expenses declined $0.9 million, and depreciation and amortization expense decreased $0.1 million.

Included in SG&A in third quarter 2020 are expenses we deem to be non-recurring in nature of $0.6 million, offset by litigation settlement income of $0.8 million, and in the third quarter 2019 are non-recurring expenses of $0.9 million, slightly offset by litigation settlement income of $0.1 million.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Consolidated income from operations in the first nine months of 2020 of $14.6 million increased by $8.5 million, or 138.8%, from $6.1 million for the first nine months of 2019.

Our consolidated operating margin for the first nine months of 2020 was 4.9% compared to 2.2% for the first nine months of 2019.

This margin increase was the result of higher revenues less costs of services of $6.7 million, lower salary and employee benefits expenses of $2.2 million, and lower SG&A expenses of $1.7 million, partially offset by higher depreciation and amortization expense of $2.1 million.

Our Consumer Payments segment contributed $25.5 million of income from operations for the first nine months of 2020, an increase of $3.2 million, or 14.5%, from the $22.3 million for the first nine months of 2019.

This increase was the result of higher revenue less costs of services of $3.6 million and an improved operating margin of 9.6% in the 2020 period from 9.2% in the 2019 period.

The overall improvement in the 2020 period was also the result of a $1.7 million decrease in salary and employee benefit expenses due to lower headcount.

The improvement was partially offset by a $1.5 million increase in depreciation and amortization expense and a $1.0 million write-down in SG&A for the carrying value of an intangible asset.

Our Commercial Payments segment earned income from operations of $1.4 million for the first nine months of 2020 compared to a loss from operations of $1.1 million for the first nine months of 2019.

This improvement was driven by a $0.5 million improvement in revenues less costs of services, a $0.5 million decrease in salaries and employee benefits expenses due to lower headcount, and a $1.5 million decrease in SG&A expenses.

The decrease in SG&A expenses was driven by reduced travel and trade show expenses due to the COVID-19 pandemic.

Also included in SG&A expenses for the 2019 period were certain one-time operational losses of $0.5 million which were substantially recovered in the 2020 period.

Our Integrated Partners segment contributed $1.5 million of income from operations for the first nine months of 2020, an increase of $0.1 million compared to $1.3 million in the first nine months of 2019.

The increase was due to a $2.5 million increase in revenues less costs of services and a $0.3 million decrease in salary and employee benefit expenses, largely offset by $1.7 million increase in SG&A expenses and a $1.0 million increase in depreciation and amortization expense.

The increase in SG&A expenses primarily related to transition services provided by YapStone, Inc.

in connection with the assets acquired in March 2019.

These transition services were $2.8 million in first nine months of 2020 and $1.2 million in first nine months of 2019.

The increase in depreciation and amortization expense was due to amortization of the intangible assets acquired in March 2019 from YapStone, Inc.

Corporate expenses were $13.8 million for the first nine months of 2020, a decrease of $2.6 million, or 16.1%, from expenses of $16.4 million for the first nine months of 2019.

Salaries and employee benefits increased $0.2 million, SG&A expenses declined $2.5 million, and depreciation and amortization expense decreased $0.3 million.

Included in SG&A in the first nine months of 2020 are expenses we deem to be non-recurring in nature of $1.5 million, offset by litigation settlement income of $0.8 million, and in the third quarter 2019 are non-recurring expenses of $2.8 million.

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 .

The amortization of deferred financing costs and debt discounts increases our reported interest expense and the effective interest rates under our Senior Credit Agreement and GS Credit Agreement.

For third quarter 2020, interest expense increased by $3.0 million, or 28.7%, to $13.5 million from $10.5 million in third quarter 2019.

The additional expense was due to increases in the applicable margins on the Senior Credit Agreement and the GS Credit Agreement that resulted from the Sixth Amendment in March 2020.

For third quarter 2020, the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit agreement were 9.87% and 14.62%, respectively, compared to 7.92% and 10.90%, respectively, for third quarter 2019.

For the first nine months of 2020, interest expense increased $4.9 million, or 15.9%, to $35.5 million from $30.6 million in the first nine months of 2019.

The additional expense was due to the increases in the applicable margins noted above, along with higher outstanding borrowings driven by draws on the Senior Credit Agreement in March 2019 and draws on the revolving credit facility.

For the first nine months of 2020, the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit Agreement were 8.57% and 12.99%, respectively, compared to 7.50% and 10.80% for the first nine months of 2019.

As a result of the $106.5 million principal pay down that we made in late September 2020 to reduce our outstanding indebtedness under the term facility of our Senior Credit Agreement and the related partial write off of unamortized deferred loans costs and discounts associated with the principal pay down, the applicable margins on the Senior Credit Agreement and the GS Credit Agreement are expected to decrease.

Based on applicable margins and LIBOR rate in effect on September 30, 2020, we expect the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit Agreement to be 8.2% and 12.8%, respectively, for the foreseeable future.

Debt extinguishment and modification costs

As noted above, during September 2020 we wrote off unamortized deferred debt costs and discount of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Agreement.

In first quarter 2020, we expensed $0.4 million of third-party costs related to the Sixth Amendment to the Senior Credit Agreement and the GS Credit Agreement.

Gain on sale of business

As disclosed in Note 2, Sale of Business , to the unaudited condensed consolidated financial statements, during late September 2020 our consolidated PRET subsidiary sold the RentPayment business, which is substantially all of the assets acquired from YapStone, Inc.

in March 2019.

Based on efforts and changes made by us since the March 2019 acquisition of these assets, the assets constituted a business, as defined by GAAP, when sold in September 2020 for $179.4 million, net of a working capital adjustment.

The sale price does not contain any contingent components.

After removing the carrying values of the disposed business and incurring costs related to the transaction, PRET recognized a pre-tax gain of $107.2 million.

PRET had non-controlling interests ("NCIs"), and based on the cash waterfall provisions in PRET's operating agreement, the NCIs were entitled to $45.1 million of the $107.2 million pre-tax gain, which is included in Net Income Attributable to Non-Controlling Interests on our consolidated statement of operations for the three months and nine months ended September 30, 2020.

The $45.1 million was distributed in cash to the NCIs, and the $45.1 million of payments along with the $5.7 million redemption payment made to one of the NCIs, resulted in the full redemption of all NCIs of PRET.

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.

7 unchanged sentences

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.

Adjustments to the valuation allowance are a component of income tax expense (benefit) in our 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).

On the basis of our assessment, during third quarter 2020, the nine months ended September 30, 2020, and the nine months ended September 30, 2019, we increased the valuation allowance for deferred income taxes by $1.2 million, $5.4 million, and $5.2 million, respectively, associated with excess business interest for the then-current reporting periods.

In first quarter 2020, we recorded a discrete decrease to the valuation allowance of $1.5 million for business interest related to 2019 as a result of the CARES Act, and in third quarter 2020 we recorded another discrete decrease to the valuation allowance of $7.6 million for business interest related to the expected utilization of the prior year carryforward during 2020.

During the nine months ended September 30, 2019, we recorded a discrete increase to the valuation allowance of $2.6 million for excess business interest related to a prior years.

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.

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:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Consolidated Net Loss (GAAP)

Interest expense (1)

Depreciation and amortization

Income tax expense (benefit)

EBITDA (non-GAAP)

Further adjusted by:

Non-cash stock-based compensation

Non-recurring expenses:

Debt modification expenses

Write-off of an equity-method investment

Certain legal services (2)

Professional, accounting and consulting fees (3)

YapStone transition services

Adjusted EBITDA (non-GAAP)

Further adjusted by:

Pro-forma impact of acquisitions

Other professional and consulting fees

Other adjustments and tax expenses

Consolidated Adjusted EBITDA (non-GAAP) (4)

(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.

The EAETR for 2020 is 25.0% and includes the income tax provision on pre-tax income, a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by the 2020 debt refinancing, and a reduction of the tax provision related to income attributable to non-controlling interests of a consolidated subsidiary.

In addition, a discrete income tax benefit was recorded related to the release of a portion of our valuation allowance on our 2018 and 2019 Section 163(j) limitation as a result of the CARES Act and forecasted utilization of our 163(j) interest limitation carryforward during 2020.

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

Earnings attributable to non-controlling interests

In addition to the $45.1 million discussed above for the NCIs of PRET, we attributed and paid $0.2 million to the NCIs of PHOT for the three months ended September 30, 2020.

See Note 4, Non-Controlling Interests , to the unaudited condensed consolidated financial statements.

Financial Condition

Compared to our consolidated balance sheet as of December 31, 2019, the following key changes have occurred at June 30, 2020 .

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 .

Compared to our consolidated balance sheet as of December 31, 2019, the following key changes have occurred at September 30, 2020.

Total cash and unrestricted cash increased by $8.4 million during the first nine months of 2020.

Excluding restricted cash, the increase in cash was $18.5 million.

The increase in unrestricted cash was largely attributable to the sale of the real estate business by our PRET subsidiary in September 2020, net of a large debt repayment and payments to the non-controlling interests of PRET.

Restricted cash decreased by $10.1 million, in line with the decrease in settlement obligations reflected on our balance sheet.

For an explanation of the key drivers of this change, see the subsequent section, Liquidity and Capital Resources , and our unaudited consolidated statement of cash flows included in this Form 10-Q.

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.

Intangible assets, net of accumulated amortization, decreased a net of $85.6 million during the first nine months of 2020.

As disclosed in Note 2, Sale of Business , intangible assets were reduced by a net of $63.4 million in September 2020.

An impairment charge and resulting impairment reserve for a residual buyout reduced the net carrying value of an intangible asset by $1.0 million in third quarter 2020.

Amortization expense during the 2020 period was $25.2 million.

The carrying value increased by $4.4 million for acquisitions.

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

Outstanding amounts for our debt obligations under our Senior Credit Agreement and our GS Credit Agreement decreased by a net of $103.4 million during the first nine months of 2020.

This decrease was attributable to principal repayments of $109.5 million for term debt, including an unscheduled payment of $106.5 million made in September 2020.

PIK interest of $6.6 million added to the outstanding balances.

All new advances made in the 2020 period on the revolving credit facility were repaid by September 2020.

See the additional discussion about our debt obligations in the subsequent section for Liquidity and Capital Resources.

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.

Stockholders' deficit attributable to the stockholders of the Company changed by $28.1 million, from a deficit of $126.3 million at December 31, 2019 to a deficit of $98.3 million at September 30, 2020.

The primary driver of this change was the net income attributable to stockholders of the Company of $26.7 million for the first nine months of 2020 million and $1.4 million of increases to additional paid-in capital for equity-based stock compensation.

Liquidity and Capital Resources

5 unchanged sentences

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.

Our working capital, defined as current assets less current liabilities, was $3.6 million and $1.2 million at September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, we had unrestricted cash totaling $21.7 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 $37.1 million at September 30, 2020 and $47.2 million at December 31, 2019.

At September 30, 2020, approximately $14.0 million was available under the revolving credit facility of our Senior Credit Agreement.

The following tables and narrative reflect our changes in cash flows for the comparative periods:

(dollars in thousands)

Six Months Ended June 30,

Net cash (used in) provided by:

(dollars in thousands) Nine Months Ended September 30,

Net cash provided by (used in):

Operating activities $ 3,136 $ 10,617

3 unchanged sentences

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.

Net cash provided by operating activities, which includes changes in restricted cash, in the first nine months of 2020 was $3.1 million compared to net cash provided by operating activities of $10.6 million for the first nine months of 2019.

This $7.5 million decrease for the 2020 period was largely the result of changes in settlement obligations and restricted cash as well as payments for transactions costs related to the business sale.

Cash Provided By (Used In) Investing Activities

Net cash provided by (used in) investing activities was $169.0 million and $(93.6) million for the first nine months of 2020 and the first nine months of 2019, respectively.

During the 2020 period, we received gross cash of $179.4 million from the sale of a business.

Cash used in investing activities for the first nine months of 2019 included $18.0 million used for residual buyouts and $63.8 million used to acquire assets from YapStone, Inc.

Cash of $4.4 million was used during the 2020 period to partially fund a portfolio acquisition and to fund the contingent portion of a residual buyout.

Cash used to acquire property, equipment, and software amounted to $6.0 million and $8.7 million for the 2020 period and the 2019 period, 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.

Net cash used in financing activities was $163.8 million for the first nine months of 2020 compared to cash provided of $76.0 million in the first nine months of 2019.

The amount for the 2020 period included $109.5 million in principal repayments on the term facility for our Senior Credit Agreement and $51.0 million of cash payments to the non-controlling interests of PRET and PHOT.

The amount for the 2019 period included net borrowings under our Senior Credit Agreement consisting of $11.5 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.

in March 2019.

Long-Term Debt

As of September 30, 2020, we had outstanding long-term debt of $392.1 million compared to $495.5 million at December 31, 2019, a decrease of $103.4 million.

The debt balance at September 30, 2020 consisted of outstanding term debt of $280.4 million under the Senior Credit Facility and $100.7 million in term debt under the subordinated Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Group, L.P.

(the "GS Credit Facility") (including accrued payment-in-kind ("PIK") interest through September 30, 2020).

Additionally, under the Senior Credit Facility, we have a $25 million revolving credit facility, which had $11.0 million drawn and outstanding as of September 30, 2020.

The outstanding principal amounts under the Senior Credit Facility and the subordinated GS Credit Facility mature in January 2023 and July 2023, respectively.

The $25 million revolving credit facility expires in January 2022.

The Senior Credit Facility and the subordinated GS Credit Facility are secured by substantially all of our assets, however, the parent entity, Priority Technology Holdings, Inc., is neither a borrower nor guarantor to the Senior Credit Facility or the GS Credit Facility.

On March 18, 2020, we modified the Senior Credit Agreement and the GS Credit Amendment (collectively, the "Sixth Amendment").

As of September 30, 2020, financial covenants, as amended, under the Senior Credit Facility required the Total Net Leverage Ratio, as defined in the agreement, not to exceed 7.75:1.00 at September 30, 2020 through December 31, 2020.

The Total Net Leverage Ratio steps down thereafter.

The Total Net Leverage Ratio covenant is a material term within the Sixth Amendment.

As of September 30, 2020, we were in compliance with our financial covenants.

Noncompliance in the future could have materially adverse impacts on our financial condition, including giving the lenders the right to accelerate the debt repayment schedule and restricting access to the revolving credit facility.

Based upon current projections, the Company expects to be in compliance with its debt covenants for at least the foreseeable future.

For additional information about the risks associated with our debt agreements and related covenants, refer to the "Risk Factors Related to Our Indebtedness" in Item 1A, Risk Factors, in our most recent Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission on March 30, 2020.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment (Exhibit 10.2 and Exhibit 10.3 to this Quarterly Report on Form 10-Q) and summarized below:

• The Total Net Leverage Ratio means, at any date of determination, the ratio of Consolidated Total Debt for such date, to Consolidated Adjusted EBITDA.

• Consolidated Total Debt is the aggregate principal amount of indebtedness minus the aggregate amount of unrestricted cash at the balance sheet date.

• Consolidated Adjusted EBITDA is consolidated net income plus any applicable items determined in accordance with clauses (i)(b) through (i)(v) of the Consolidated Adjusted EBITDA definition, minus any applicable items determined in accordance with clauses (ii)(a) through (ii)(g) of the Consolidated Adjusted EBITDA definition in Section 1.01 of the Sixth Amendment ("Applicable Adjustments").

Under the provisions of the Sixth Amendment, calculation of Consolidated Adjusted EBITDA at each interim quarterly measurement period in 2020 is determined as the current year-to-date Consolidated Adjusted EBITDA annualized.

For interim quarterly and full year measurement periods commencing in January 2021, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.

Consolidated Adjusted EBITDA is a non-GAAP liquidity measure.

For determining the Total Net Leverage Ratio at September 30, 2020, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from Section 1.01 of the Sixth Amendment:

(in thousands) Ended

September 30, 2020

Consolidated Net Income Attributable to Stockholders of Priority Technology Holdings, Inc.(GAAP) $ 26,665

Applicable Adjustments:

Gain on sale of business, less amounts attributable and paid to NCIs (clause (ii)(c)) (62,091)

Interest expense (clause (i)(b)) 35,454

Depreciation and amortization (clause (i)(d) and (i)(e)) 30,886

Income tax expense (clause (i)(c)) 12,919

Non-cash stock-based compensation (clause (i)(j)) 1,627

Acquisition transition services (clause (i)(k)) 2,747

Debt extinguishment and modification costs (clause (i)(h)) 1,899

Impairment of intangible asset (clause (i)(f)) 980

Write off of an equity-method investment (clause (i)(f)) 211

Certain legal fees and expenses (clause (i)(m)) 1,380

Litigation settlement (clause (i)(k)) (722)

Professional, accounting and consulting fees (clause (i)(k)) 145

Other professional and consulting fees (clause(i) (h)) 1,125

Other adjustments and tax expenses (clause (i)(q)) 162

Pro forma impact of disposal (8,320)

Consolidated Adjusted EBITDA (non-GAAP) 45,067

Factor to annualize year-to-date 12/9

Annualized $ 60,089

At September 30, 2020, the Total Net Leverage Ratio was 6:16:1.00, calculated as follows:

(in thousands, except ratio) September 30, 2020

Consolidated Total Debt:

Current portion of long-term debt $ 15,583

Long-term debt, net of discounts and deferred financing costs 371,206

Unamortized debt discounts and deferred financing costs 5,323

Less unrestricted cash (21,695)

Consolidated Net Debt $ 370,417

Annualized Consolidated Adjusted EBITDA (non-GAAP) $ 60,089

Total Net Leverage Ratio 6.16

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.

3 unchanged sentences

Commitments and Contractual Obligations

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 .

See Note 11, 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 September 30, 2020 or December 31, 2019.

Contractual Obligations

7 unchanged sentences

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 .

There have been no material changes to these critical accounting policies and estimates as of September 30, 2020.

Effect of New Accounting Pronouncements and Recently Issued Accounting Pronouncements Not Yet Adopted

5 unchanged sentences

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 2. Management’s Discussion and Analysis