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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-30 · 330 added, 207 removed, 194 unchanged (73% of the section changed)

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Our future results and financial condition may differ materially from those currently anticipated by us as a result of the factors described in the sections entitled " Item 1A - Risk Factors" and "Cautionary Note Regarding Forward - Looking Statements ."

Certain amounts in this section may not foot due to rounding.

Certain amounts in this section may not add mathematically due to rounding.

For a description and additional information about our three reportable segments, see Note 18 , Segment Information , contained in " Item 8 - Financial Statements and Supplementary Data " of this Annual Report on Form 10-K.

Full Retrospective Adoption of ASC 606, Revenues from Contracts with Customers, and Error Corrections in Prior Periods

As disclosed in Notes 1 and 2 to our consolidated financial statements presented in Item 8 of the Annual Report on Form 10-K, we have:

1) recasted our consolidated statements of operations for the years ended December 31, 2019, 2018, and 2017 for the full retrospective adoption of ASC 606, Revenue from Contracts with Customers ;

2) restated our consolidated statements of operations and our consolidated statements of cash flows for the years ended December 31, 2018 and 2017, our consolidated balance sheet as of December 31, 2018, and our consolidated statements of stockholders' equity (deficit) for the years ended December 31, 2018 and 2017 including beginning stockholders equity as of January 1, 2017 for the cumulative effects for reporting periods prior to 2017.

The revisions were the result of certain error corrections that occurred in reporting periods prior to 2019.

All results of operations, financial condition, cash flows, and other matters disclosed and discussed in this Item 7 reflect the results of the above revisions.

Additional information about the restatement can be found in the following notes to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K:

Note 18, Segment Information

Note 20, Selected Quarterly Financial Results (Unaudited)

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 for (i) the year ended December 31, 2019 compared to the year ended December 31, 2018 and (ii) the year ended December 31, 2018 compared to the year ended December 31, 2017.

This section includes a summary of our results of operations for the periods presented followed by a discussion of our results of operations for (i) the year ended December 31, 2020 (or "2020") compared to the year ended December 31, 2019 (or "2019") and (ii) the year ended December 31, 2019 (or "2019") compared to the year ended December 31, 2018 (or "2018").

We have derived this data, except key indicators for merchant bankcard processing dollar values and transaction volumes, from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our revenue for the years ended December 31, 2019 and 2018 was negatively affected by the closure of high-margin accounts with certain subscription-billing e-commerce merchants.

The closure of merchants in this channel was due to industry-wide changes for enhanced card association compliance.

This revenue, which is entirely within our Consumer Payments reportable segment, was $7.8 million , $59.3 million , and $98.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Our income from operations associated with these merchants was $3.5 million , $21.3 million , and $32.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.

In addition to the impact of the closures of certain merchants described above, our income from operations for the years ended December 31, 2018 and 2017 were negatively affected by expenses associated with our Business Combination, conversion to a public company, and certain legal matters.

These expenses were $8.9 million , $12.4 million , and $5.6 million , for the years ended December 31, 2019, 2018, and 2017 respectively.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

(dollars in thousands)

The following table shows our consolidated income statement data for the years indicated:

Year Ended December 31,

(dollars in thousands) 2020 2019 $ Change % Change

REVENUES $ 404,342 $ 371,854 $ 32,488 8.7 %

OPERATING EXPENSES:

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Operating margin 5.2 % 1.9 %

OTHER (EXPENSES) INCOME:

OTHER INCOME (EXPENSES):

Interest expense (44,839) (40,653) (4,186) 10.3 %

Total other expenses, net

Loss income before taxes

Income tax expense (benefit)

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

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

Other income, net 596 710 (114) (16.1) %

Total other income (expenses), net 61,097 (39,943) 101,040 253.0 %

Income (loss) before income taxes 81,958 (32,759) 114,717 350.2 %

Income tax expense 10,899 830 10,069 nm

Net income (loss) 71,059 (33,589) 104,648 311.6 %

Less income attributable to redeemable and redeemed non-controlling interests (45,398) — (45,398) nm

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

$ 25,661 $ (33,589) $ 59,250 176.4 %

nm = not meaningful

The following table shows our segment income statement data and selected performance measures for the periods indicated:

(dollars and volume amounts in thousands)

The following table shows our segment income statement data and selected performance measures for the years indicated:

Year Ended December 31,

(dollars and volume amounts in thousands) 2020 2019 $ Change % Change

Consumer Payments:

Revenue $ 367,816 $ 330,599 $ 37,217 11.3 %

Operating expenses 329,424 298,362 31,062 10.4 %

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Commercial Payments:

Revenue $ 20,922 $ 25,980 $ (5,058) (19.5) %

Operating expenses 19,999 26,871 (6,872) (25.6) %

Loss from operations

Income (loss) from operations $ 923 $ (891) $ 1,814 203.6 %

Operating margin 4.4 % (3.4) %

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Integrated Partners:

Revenue $ 15,604 $ 15,275 $ 329 2.2 %

Operating expenses 14,200 14,550 (350) (2.4) %

Income (loss) from operations

Income from operations $ 1,404 $ 725 $ 679 93.7 %

Operating margin 9.0 % 4.7 %

Depreciation and amortization $ 4,299 $ 4,398 $ (99) (2.3) %

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Merchant bankcard transaction volume 456,655 513,341 (56,686) (11.0) %

nm = not meaningful

For the year ended December 31, 2019, our consolidated revenue decreased by $4.0 million, or 1.1% , from the year ended December 31, 2018 to $371.9 million.

This decrease was driven by a $16.4 million, or 4.7% , decrease in revenue from our Consumer Payments segment and a $1.1 million, or 4.0% , decrease in revenue from our Commercial Payments segment, partially offset by a $13.5 million increase in revenue from our Integrated Partners segment.

Consolidated bankcard processing dollar value and merchant bankcard transactions increased 12.7% and 10.2% , respectively.

For the year ended December 31, 2019, the decrease in Consumer Payments revenue was primarily attributable to a decrease in revenue of $51.5 million from certain subscription-billing e-commerce merchants, largely offset by revenue resulting from the overall increases in bankcard processing dollar value and merchant bankcard transactions of 11.6% and 9.9% , respectively, compared to the year ended December 31, 2018.

The higher merchant bankcard processing dollar value and transaction volume in 2019 were mainly due to the continuation of higher consumer spending trends in 2019 and positive net onboarding of new merchants.

Additionally, the average dollar amount per bankcard transaction increased to $ 82.65 , or 1.5% , in 2019 from $ 81.39 in 2018.

For the year ended December 31, 2019, the decrease in Commercial Payments revenue was attributable to a $2.3 million decrease in revenue from our curated managed services program, partially offset by a $1.2 million increase in revenue from our CPX accounts payable solutions.

The managed services decline was largely driven by lower incentive revenue and the CPX increase was driven by customer additions and higher merchant bankcard processing dollar value.

For the year ended December 31, 2019, the increase in our Integrated Partners revenue was due primarily to a $12.3 million increase in revenue from Priority Real Estate Technology ("PRET").

PRET's revenue growth included $11.7 million from our March 2019 acquisition of a portfolio of customers from YapStone, Inc.

Revenue from Priority PayRight Health Solutions and Priority Hospitality Technology, which commenced operations in April 2018 and February 2019, respectively, comprised the remainder of this reportable segment’s $1.2 million revenue growth.

Operating expenses

Our consolidated operating expenses increased by $5.2 million, or 1.5% , from $359.4 million for the year ended December 31, 2018 to $364.7 million for the year ended December 31, 2019, driven primarily by a $19.4 million, or 98.0% , increase in amortization and depreciation expense related to asset acquisitions that occurred in late 2018 and 2019.

Salary and employee benefits increased $3.9 million, or 10.2% , related to increases in corporate and operations headcount and higher headcount from business and asset acquisitions in 2019 and 2018.

These increases were partially offset by a $16.7 million, or 6.2% , decrease in costs of services in correlation with lower revenues in 2019 and due to lower residual expenses in 2019 resulting from buyouts of residual commission rights in 2019 and 2018.

Costs of merchant card fees as a percentage of merchant card fee revenue dropped by 190 basis points in 2019 from 2018.

Selling, General, and Administrative ("SG&A") expenses decreased by $1.3 million, or 4.0% , due primarily to a $0.6 million reduction in the fair value of contingent consideration and to lower corporate expenses related to transaction costs associated with the Business Combination and conversion to a public company, such as legal, accounting and other advisory and consulting expenses.

Income from operations

Consolidated income from operations decreased $9.2 million, or 56.2% , for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Our consolidated operating margin for year ended December 31, 2019 was 1.9% compared to 4.4% for the year ended December 31, 2018.

The margin decrease was primarily due to the loss of certain subscription-billing e-commerce merchants.

Our Consumer Payments reportable segment earned $32.2 million in income from operations for the year ended December 31, 2019, a decrease of $14.8 million , or 31.4% , from $47.0 million for the year ended December 31, 2018.

This decrease largely reflected the loss of certain subscription-billing e-commerce merchants, which contributed $3.5 million and $21.3 million of income from operations in the years ended December 31, 2019 and 2018, respectively, partially offset by income resulting from the growth in merchant bankcard processing dollar value and transaction volume.

Our Commercial Payments reportable segment incurred a $0.9 million loss from operations for the year ended December 31, 2019, compared to a $1.0 million loss from operations for the year ended December 31, 2018.

Our Integrated Partners segment earned income from operations of $0.7 million for the year ended December 31, 2019 compared to a loss from operations of $ 2.0 million for the year ended December 31, 2018.

This increase in income from operations in 2019 was due primarily to the 2019 acquisition of certain portfolio assets from YapStone, Inc., which included $4.0 million of increased depreciation expense and $2.9 million of transitional acquisition integration costs.

Corporate expenses were $24.9 million for the year ended December 31, 2019, a decrease of $2.8 million , or 10.1% , over expenses of $27.7 million for the year ended December 31, 2018.

This decrease was driven primarily by a $6.4 million decrease in expenses associated with our Business Combination, conversion to a public company, and certain legal matters.

These expenses were $6.0 million and $12.4 million for the years ended December 31, 2019 and 2018, respectively.

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 consumer activity and has contributed to a decline in many aspects of macroeconomic activity in 2020 compared to 2019.

The largest impact we experienced was within our Consumer Payments reportable segment (“Consumer Payments”), which is described below.

Our results of operations for 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, the pandemic began to negatively impact our daily merchant bankcard processing dollar values (“processing dollars”) as the pandemic spread across the United States and restrictive shelter in place requirements were instituted.

From mid-March 2020 through the end of April 2020, we experienced a significant decline of approximately 35% in processing dollars as compared with the comparable weeks in 2019.

As a result, our processing dollars grew only 1.7% in the first quarter of 2020 compared with the first quarter of 2019.

In the second quarter of 2020 we experienced a 16.4% decline in processing dollars compared with the second quarter of 2019.

However, within the second quarter of 2020, the decline in processing dollars was greatest in April.

In May and June of 2020, as shelter in place restrictions began to be lifted, we experienced a rebound in processing dollars that continued through the third quarter.

With increased economic activity in the third quarter of 2020, we experienced growth in processing dollars of 6.3% as compared with the third quarter of 2019.

The level of new COVID-19 cases began to increase significantly throughout the United States during the fourth quarter of 2020, with certain states impacted more than others, and pandemic related economic factors impacted the growth rate of our processing dollars.

In the fourth quarter of 2020, we experienced growth in processing dollars of 3.0% as compared with the fourth quarter of 2019.

For the year ended December 31, 2020, processing dollars in Consumer Payments of $41.7 billion declined 1.4% from $42.3 billion in the year ended December 31, 2019.

Revenue growth in Consumer Payments was 11.3% for the year ended December 31, 2020 compared with the year ended December 31, 2019.

In the first, second, third and fourth quarters of 2020, revenue growth was 8.9%, 0.3%, 20.0% and 15.3%, respectively, compared with the comparable quarters in 2019.

During 2020, we benefited from our specialized merchant acquiring program.

This program, which complies with the recently issued card association rules, helped mitigate the negative effects of the pandemic on overall revenue growth by adding $28.8 million to the Consumer Payments revenue in 2020, compared with $7.4 million in 2019.

In the first quarter of 2021, the distribution of COVID-19 vaccines in the United States began to accelerate.

While this may be a positive development, the future impact of the pandemic on the overall economy and our results are beyond our ability to predict or control.

Consolidated revenue

For the year ended December 31, 2020, our consolidated revenue increased by $32.5 million, or 8.7%, from the year ended December 31, 2019 to $404.3 million.

This overall increase was driven by a $37.2 million, or 11.3%, increase in revenue from our Consumer Payments segment and a $0.3 million, or 2.2%, increase in revenue from our Integrated Partners segment, partially offset by a $5.1 million, or 19.5%, decrease in revenue in our Commercial Payments segment.

Revenue in Consumer Payments segment

Consumer Payments revenue for the year ended December 31, 2020 increased by $37.2 million, or 11.3%, compared to revenue for the year ended December 31, 2019 of $330.6 million.

This increase was driven by $21.4 million, or 290.0%, revenue growth from our specialized merchant acquiring program.

Merchant bankcard processing dollar value for the year ended December 31, 2020 of $41.7 billion decreased by $0.6 billion, or 1.4%, compared to $42.3 billion for the year ended December 31, 2019.

However, our merchant volume mix drove a 10.8% higher average ticket of $91.61 in 2020 compared to $82.65 in 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 2020, our monthly average of new merchants boarded was 4,669 compared with 4,612 in 2019.

Revenue in Commercial Payments segment

Commercial Payments revenue for the year ended December 31, 2020 of $20.9 million decreased by $5.1 million, or 19.5%, compared to revenue for the year ended December 31, 2019 of $26.0 million.

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

Revenue from our accounts payable automated solutions business in 2020 of $6.0 million increased $0.5 million, or 8.8%, compared to revenue in 2019 of $5.5 million.

This increase was driven by increased business from existing customers.

Revenue from our curated managed services business in 2020 of $14.9 million decreased by $5.5 million, or 27.1%, compared to revenue in 2019 of $20.5 million.

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

Revenue in Integrated Partners segment

Integrated Partners revenue for the year ended December 31, 2020 of $15.6 million increased by $0.3 million, or 2.2%, compared to revenue for the year ended December 31, 2019 of $15.3 million.

Priority Real Estate Technology, LLC (" PRET") comprised $13.4 million and $13.2 million of this segment's revenue in 2020 and 2019, respectively.

PRET's RentPayment business, which was formed with a March 2019 asset acquisition, generated revenue of $12.0 million in 2020 and $11.7 million in 2019, respectively.

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

The sale of the RentPayment business in September 2020 as disclosed in Note 2, Disposal of Business, to the consolidated financial statements impacted our results after the third quarter of 2020 and will also impact the trend of future results of the Integrated Partners segment.

Consolidated Operating Expenses

Our consolidated operating expenses for the year ended December 31, 2020 of $383.5 million increased by $18.8, or 5.2%, compared to consolidated operating expenses for the year ended December 31, 2019 of $364.7 million.

This overall increase was driven by higher costs of services and depreciation and amortization expense in 2020 compared to 2019.

Costs of services of $277.4 million grew $24.8 million, or 9.8%, in 2020 resulting from higher revenues in the Consumer Payments segment.

Consolidated depreciation and amortization expense of $40.8 million increased by $1.7 million, or 4.3%, in 2020, which was driven by additions to property, equipment and software, as well as intangible assets.

While costs of services and depreciation and amortization expense increased in 2020, we experienced decreases in salary and employee benefits and selling, general and administrative expenses compared to 2019.

Consolidated salary and employee benefits expenses of $39.5 million decreased $2.7 million, or 6.4%, in 2020, which was driven by lower headcount and a $1.2 million decline in non-cash stock-based compensation.

Consolidated selling, general and administrative expenses of $25.8 million decreased $5.0 million, or 16.1%, in 2020 driven by decreases in certain expenses management considers to be non-recurring in nature, lower office and travel-related costs due to the COVID-19 pandemic, decreased use of outside professionals due to in-sourcing of certain services, and an overall focus on cost containment.

Income (Loss) from Operations

Consolidated income from operations

For the year ended December 31, 2020, our consolidated income from operations increased by $13.7 million, or 190.4%, from the year ended December 31, 2019 to $20.9 million.

This overall increase was driven by a $6.2 million, or 19.1%, increase income from operations in our Consumer Payments segment, a $1.8 million, or 203.6%, increase in income from operations in our Commercial Payments segment, and a $0.7 million, or 93.7%, increase in income from operations in our Integrated Partners segment.

Corporate expense of $19.9 million in 2020 decreased by $5.0 million, or 20.2%, as compared to the year ended December 31, 2019.

Income from operations in Consumer Payments segment

Our Consumer Payments segment contributed $38.4 million of income from operations for the year ended December 31, 2020, an increase of $6.2 million, or 19.1%, from the $32.2 million for the year ended December 31, 2019.

This increase was the result of higher revenue, net of costs of services, of $9.0 million, and lower salary and employee benefit expenses of $1.8 million driven by lower headcount and a $1.1 million decline in non-cash stock-based compensation.

While these factors drove growth in income from operations, they were partially offset by a $2.2 million increase in depreciation and amortization expense and a $2.5 million increase in selling, general and administrative expenses.

The increase in depreciation and amortization expense was attributable to additions to intangible assets and property, equipment and software, while the growth in selling, general and administrative expenses was due to a $2.5 million increase in certain expenses management considers to be non-recurring in nature.

Such expenses in 2020 totaled $1.9 million and are comprised of:

$1.8 million for an impairment charge for an intangible asset and a $0.5 million allowance provision for a note receivable, partially offset by a non-cash reduction in expense of $0.4 million for a change in the fair value of accrued contingent consideration related to two 2018 business acquisitions.

Selling, general and administrative expenses in 2019 included a non-cash reduction in expense of $0.6 million for a change in the fair value of accrued contingent consideration related to the same two 2018 business combinations.

Income (loss) from operations in Commercial Payments segment

Our Commercial Payments segment contributed $0.9 million of income from operations for the year ended December 31, 2020 compared to a loss from operations of $0.9 million for the year ended December 31, 2019.

This improvement was driven by a $1.9 million decrease in selling, general and administrative expenses and a $0.8 million decrease in salaries and employee benefits expenses due to lower headcount and a $0.5 million decline in non-cash stock-based compensation.

The decrease in selling, general and administrative expenses was driven by reduced travel and trade show expenses due to the COVID-19 pandemic.

Also, selling, general and administrative expenses for 2019 included a $0.5 million allowance for uncollectible receivables which were substantially recovered in 2020.

While these factors drove growth in income from operations, they were partially offset by the decline in revenue attributable to our curated managed services programs.

Income from operations in Integrated Partners segment

Our Integrated Partners segment contributed $1.4 million of income from operations for the year ended December 31, 2020, an increase of $0.7 million compared to $0.7 million of income from operations for the year ended December 31, 2019.

This increase was driven by lower operating expenses attributable to a $0.8 million decrease in salary and employee benefit expenses, a $0.3 million decrease in selling, general and administrative expenses, and a $0.1 million decrease in depreciation and amortization expense.

Included in selling, general and administrative expenses for 2020 and 2019 are expenses related to transition services provided by YapStone, Inc.

in connection with the assets acquired in March 2019 and sold in September 2020.

These transition services were approximately $2.6 million in 2020 and $2.9 million in 2019.

These operating expense decreases more than offset the increase in costs of services experienced in 2020, due in part to our new payment infrastructure as a service arrangement with the buyer of the RentPayment business.

Corporate Expense

Corporate expenses were $19.9 million for the year ended December 31, 2020, a decrease of $5.0 million, or 20.2%, from expenses of $24.9 million for the year ended December 31, 2019.

This decrease in 2020 was driven by a $5.3 million decrease in selling, general and administrative expenses and a $0.4 million decrease in depreciation and amortization expense, partially

offset by a $0.6 million increase in salary and employee benefits expense largely attributable to a $0.4 million increase in non-cash stock-based compensation.

Included in selling, general and administrative expenses in 2020 are certain legal and professional expenses management considers to be non-recurring in nature of $1.9 million, offset by litigation settlement income of $0.7 million.

Such expenses in 2019 totaled of $6.4 million, offset by litigation settlement income of $0.4 million.

Interest Expense

Interest expense, including amortization of deferred debt issuance costs and discount, increased by $10.7 million , or 35.8% , to $40.7 million in 2019 from $29.9 million in 2018.

This increase was primarily due to higher outstanding borrowings in 2019 driven by acquisition related borrowings.

Other, net increased $7.5 million from a net expense of $6.8 million in the year ended December 31, 2018 to net income of $0.7 million in the year ended December 31, 2019.

The 2018 amount included $3.5 million expense from the change in fair value of a prior warrant liability and also included $3.3 million of debt modification and other net costs.

Income tax expense (benefit)

The amortization of deferred financing costs and debt discounts, as well as certain administrative fees, increased our reported consolidated interest expense and the effective interest rates under our Senior and Subordinated Credit Agreements.

For the year ended December 31, 2020, consolidated interest expense increased by $4.2 million, or 10.3%, to $44.8 million from $40.7 million for the year ended December 31, 2019.

The additional expense in 2020 was due to increases in the applicable margins on the Senior and Subordinated Credit Agreements that resulted from the Sixth Amendment in March 2020 and increased borrowings under the revolving credit portion of our Senior Credit Agreement, partially offset by a $106.5 million principal prepayment in late September 2020 of the term portion of our Senior Credit Agreement.

For 2020, the effective interest rates on the term facility of our Senior and Subordinated Credit Agreements averaged 8.5% and 13.0%, respectively, compared to 7.2% and 10.8%, respectively, for 2019.

Based on applicable margins and the LIBOR rate in effect on December 31, 2020, we expect the effective interest rates on the term facility of our Senior and Subordinated Credit Agreements to be approximately 8.2% and 12.8%, respectively, in 2021.

Debt Extinguishment and Modification Expenses

During September 2020, we wrote off unamortized deferred debt costs and discounts of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Agreements.

In the first quarter of 2020, we expensed $0.4 million of third-party costs incurred in connection with the Sixth Amendment to the Senior and Subordinated Credit Agreements.

Gain on Sale of Business

As disclosed in Note 2 , Disposal of Business , to the 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.

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 governing 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 year ended December 31, 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 redemption of all NCIs of PRET.

The working capital adjustment and the allocation of net proceeds described above remain subject to final adjustment with the buyer and PRET members, respectively.

Any remaining payments made or received by the Company will be recorded in the period in which such amounts are finalized.

For the years ended December 31, 2020 and 2019, Other, net was composed primarily of interest income earned on notes receivable from certain independent sales organizations and another entity.

Income Tax Expense

We became part of a C-Corporation reporting tax group on July 25, 2018 in connection with the Business Combination.

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The net deferred tax asset is the result of the difference between the initial tax bases in the assets and liabilities and their respective carrying amounts for financial statement purposes.

For the year ended December 31, 2019, our income tax expense was $0.8 million , resulting in an effective income tax benefit rate of 2.5% .

See note 11, Income Taxes , to our consolidated financial statements in Item 8 of the Annual Report on Form 10-K.

For the year ended December 31, 2018, our income tax benefit was $2.5 million, resulting in an effective income tax rate of 12.5% .

This income tax benefit was based on the pre-tax loss incurred after July 25, 2018.

On a pro-forma basis assuming C-Corporation status for the full year 2018, our income tax benefit would have been $3.2 million , resulting in a pro-forma effective income tax rate of 15.6% .

Our annualized pro-forma effective income tax rate for 2018 was less than the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the tax code.

The effective income tax rate for 2019 may not be indicative of our effective tax rate for future periods.

Our consolidated net loss for the year ended December 31, 2019 was $33.6 million compared to a net loss of $17.8 million for the year ended December 31, 2018 for the aforementioned reasons.

We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets.

ASC 740, Income Taxes ("ASC 740"), requires that all sources of future taxable income be considered in making this determination.

The Tax Cuts and Jobs Act of 2017 amended section 163(j) of the Internal Revenue Code.

Section 163(j), as amended, limits the business interest deduction to 30% of adjusted taxable income ("ATI").

For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization ("EBITDA").

Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes ("EBIT"), without adjusting for depreciation and amortization.

Any business interest in excess of the annual limitation is carried forward indefinitely.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020.

With respect to recording a deferred tax benefit for the carryforward of business interest expense, GAAP applies a "more likely than not" threshold for assessing recoverability.

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, for the years ended December 31, 2020 and 2019, we decreased and increased the valuation allowance for deferred income taxes by $2.9 million and $9.3 million, respectively, associated with excess business interest for the then-current reporting periods.

Changes to the valuation allowance for 2018 were not material.

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.

For the year ended December 31, 2020, our consolidated income tax expense was $10.9 million, resulting in a consolidated effective income tax rate of 13.3%.

Approximately $12.3 million of consolidated income tax expense for the year ended December 31, 2020 was attributable to the gain on the business sale (see Note 2 , Disposal of Business ).

For the year ended December 31, 2019, our consolidated income tax expense was $0.8 million, resulting in an effective consolidated income tax benefit rate of 2.5%.

See Note 11 , Income Taxes , to our consolidated financial statements in Part II, Item 8 of the Annual Report on Form 10-K.

Our consolidated effective income tax rates differ from the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the tax code.

The consolidated effective income tax rate for 2020 may not be indicative of our effective tax rate for future periods.

Earnings Attributable to Non-Controlling Interests (NCIs)

In addition to the $45.1 million discussed above for the NCIs of PRET, we attributed and paid $250 thousand to the NCIs of PHOT for the year ended December 31, 2020.

No amounts were attributable or paid to any NCIs in prior years.

See Note 4 , Asset Acquisitions , Asset Contributions , and Business Combinations , to the consolidated financial statements.

Net Income (Loss)

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

for the year ended December 31, 2020 was $25.7 million compared to a net loss of $33.6 million for the year ended December 31, 2019 for the aforementioned reasons.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table shows our consolidated income statement data for the periods indicated:

(dollars in thousands)

The following table shows our consolidated income statement data for the years indicated:

Year Ended December 31,

(dollars in thousands) 2019 2018 $ Change % Change

REVENUES $ 371,854 $ 375,822 $ (3,968) (1.1) %

OPERATING EXPENSES:

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Interest expense (40,653) (29,935) (10,718) 35.8 %

Other, net 710 (6,784) 7,494 110.5 %

Total other expenses, net (39,943) (36,719) (3,224) 8.8 %

(Loss) income before taxes

Income tax expense (benefit)

Net (loss) income

Loss before income taxes (32,759) (20,326) (12,433) 61.2 %

Income tax expense (benefit) 830 (2,490) 3,320 nm

Net loss $ (33,589) $ (17,836) $ (15,753) 88.3 %

nm = not meaningful

The following table shows our segment income statement data and selected performance measures for the periods indicated:

(dollars and volume amounts in thousands)

The following table shows our segment income statement data and selected performance measures for the years indicated:

Years Ended December 31,

(dollars and volume amounts in thousands) 2019 2018 $ Change % Change

Consumer Payments:

Revenue $ 330,599 $ 347,013 $ (16,414) (4.7) %

Operating expenses 298,362 300,011 (1,649) (0.5) %

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Commercial Payments:

Revenue $ 25,980 $ 27,056 $ (1,076) (4.0) %

Operating expenses 26,871 28,008 (1,137) (4.1) %

(Loss) income from operations

Loss from operations $ (891) $ (952) $ 61 (6.4) %

Operating margin (3.4) % (3.5) %

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Integrated Partners:

Operating expenses

Loss from operations

Depreciation and amortization

Revenue $ 15,275 $ 1,753 $ 13,522 nm

Operating expenses 14,550 3,722 10,828 nm

Income (loss) from operations $ 725 $ (1,969) $ 2,694 nm

Operating margin 4.7 % (112.3) %

Depreciation and amortization $ 4,398 $ 145 $ 4,253 nm

Key Indicators:

Merchant bankcard processing dollar value

Merchant bankcard transaction volume

Merchant bankcard processing dollar value $ 386,101 $ 5,516 $ 380,585 nm

Merchant bankcard transaction volume 1,380 55 1,325 nm

Income from operations of reportable segments $ 32,071 $ 44,081 $ (12,010) (27.2) %

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nm = not meaningful

Consolidated revenue

For the year ended December 31, 2019, our consolidated revenue decreased by $4.0 million, or 1.1%, from the year ended December 31, 2018 to $371.9 million.

This decrease was driven by a $10.2 million , or 2.8% , decrease in revenue from our Consumer Payments segment, partially offset by a $2.1 million , or 8.2% , increase in revenue from our Commercial Payments segment and revenue of $1.8 million in our new Integrated Partners segment.

Consolidated bankcard processing dollar value and merchant bankcard transactions increased 10.1% and 6.1% , respectively.

For the year ended December 31, 2018, the decrease in Consumer Payments revenue was primarily attributable to a decrease in revenue of $39.6 million from certain subscription-billing e-commerce merchants, largely offset by revenue resulting from the overall increases in bankcard processing dollar value and merchant bankcard transactions of 9.9% and 6.0% , respectively, compared to the year ended December 31, 2017.

This decrease was driven by a $16.4 million, or 4.7%, decrease in revenue from our Consumer Payments segment and a $1.1 million, or 4.0%, decrease in revenue from our Commercial Payments segment, partially offset by a $13.5 million increase in revenue from our Integrated Partners segment.

Consolidated merchant bankcard processing dollar value and merchant bankcard transactions increased 12.7% and 10.2%, respectively.

Revenue in Consumer Payments segment

For the year ended December 31, 2019, the $16.4 million decrease in Consumer Payments revenue was primarily attributable to a decrease in revenue of $51.9 million from certain subscription-billing e-commerce merchants, largely offset by revenue resulting from the overall increases in merchant bankcard processing dollar value and merchant bankcard transactions of 11.6% and 9.9%, respectively, compared to the year ended December 31, 2018.

Additionally, the average dollar amount per bankcard transaction increased to $82.65, or 1.5%, in 2019 from $81.39 in 2018.

The increase in Commercial Payments revenue for the year ended December 31, 2018 was attributable in part by increases in CPX merchant bankcard processing dollar value and the number of merchant bankcard transaction volume of 35.2% and 24.2% , respectively.

Revenues from our managed services customers grew in 2018 due to an increase in headcount of our in-house sales force dedicated to selling merchant financing products on behalf of our financial institution partners, for which we record revenue on a cost-plus basis.

Integrated Partners revenue increased in 2018 due to the acquisitions of RadPad and PayRight.

Operating expenses

Our consolidated operating expenses increased $11.8 million , or 3.4% , from $347.7 million for the year ended December 31, 2017 to $359.4 million for the year ended December 31, 2018, driven primarily by a $9.9 million , or 44.9% , increase in SG&A expenses.

The increase in SG&A expenses was due primarily to in-house sales force expansion and corporate expenses related to transaction costs associated with the Business Combination and conversion to a public company, such as legal, accounting and other advisory and consulting expenses.

Higher consolidated operating expenses were partially offset by lower costs of merchant card fees attributable to 2018 acquisitions of residual portfolio commission rights, partially offset by growth in processing volume.

Costs of merchant card fees as a percentage of merchant card fee revenue dropped by 10 basis points in 2018 from 2017.

Salary and employee benefits increased $6.0 million , or 18.4% , related to increases in corporate and operations headcount and increases in headcount from business acquisition in 2018.

Depreciation and amortization increased $5.1 million , or 34.5% attributable mainly to the internally developed software for the MX Connect and CPX platforms and amortization of intangible assets.

Income from operations

Our revenue in the Consumer Payments segment for the year ended December 31, 2019 was negatively affected by the closure of high-margin accounts with certain subscription-billing e-commerce merchants.

The closure of merchants in this channel was due to industry-wide changes for enhanced card association compliance.

This revenue was $7.4 million and $59.3 million for the years ended December 31, 2019 and 2018, respectively.

Revenue in Commercial Payments segment

For the year ended December 31, 2019, the $1.1 million decrease in Commercial Payments revenue was attributable to a $2.3 million decrease in revenue from our curated managed services program, partially offset by a $1.2 million increase in revenue from our accounts payable automated solutions.

The managed services decline was largely driven by lower incentive revenue and the accounts payable automated solutions increase was driven by customer additions and higher merchant bankcard processing dollar value.

Revenue in Integrated Partners segment

For the year ended December 31, 2019, the $13.5 million increase in our Integrated Partners revenue was due primarily to a $12.3 million increase in revenue from PRET.

PRET's revenue growth included $11.7 million from a March 2019 asset acquisition.

Revenue from PayRight and PHOT, which commenced operations in April 2018 and February 2019, respectively, comprised the remainder of this reportable segment’s $1.2 million revenue growth.

Consolidated Operating Expenses

Our consolidated operating expenses for the year ended December 31, 2019 of $364.7 million increased by $5.2 million, or 1.5%, from consolidated operating expenses for the year ended December 31, 2018 of $359.4 million.

This overall increase was driven primarily by a $19.4 million, or 98.0%, increase in amortization and depreciation expense related to asset acquisitions that occurred in late 2018 and 2019.

Consolidated salary and employee benefits increased $3.9 million, or 10.2%, related to increases in corporate and operations headcount and higher headcount from business and asset acquisitions in 2019 and 2018, as well as a $2.0 million increase in non-cash stock-based compensation in 2019 compared to 2018.

These increases were partially offset by a $16.7 million, or 6.2%, decrease in consolidated costs of services in correlation with lower revenues in 2019 and due to lower residual expenses in 2019 resulting from buyouts of residual commission rights in 2019 and 2018.

Consolidated selling, general, and administrative expenses decreased by $1.3 million, or 4.0%, driven by a decrease in certain

expenses management considers to be non-recurring in nature related to transaction costs associated with the Business Combination and conversion to a public company, such as legal, accounting and other advisory and consulting expenses.

These expenses were $8.3 million and $12.4 million for the years ended December 31, 2019 and 2018, respectively.

Income (Loss) from Operations

Consolidated income from operations

Consolidated income from operations decreased $9.2 million, or 56.2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Our consolidated operating margin for the year ended December 31, 2018 was 4.4% compared to 9.0% for the year ended December 31, 2017.

The margin decrease was primarily due to the loss of certain subscription-billing e-commerce merchants and increases in expenses related to the Business Combination, conversion to a public company, and certain legal matters.

Our Consumer Payments segment earned $47.0 million in segment income from operations for the year ended December 31, 2018, a decrease of $7.7 million , or 14.1% , from $54.7 million for the year ended December 31, 2017.

This decrease largely reflected the loss of certain subscription-billing e-commerce merchants, which contributed $21.3 million and $32.7 million of income from operations in the years ended December 31, 2018 and 2017, respectively, partially offset by income resulting from the growth in merchant bankcard processing dollar value and transaction volume.

Our Commercial Payments segment earned $1.0 million in income from operations for the year ended December 31, 2018, compared to a $1.0 million loss from operations for the year ended December 31, 2017.

Our Integrated Partners segment incurred a loss from operations of $2.0 million for the year ended December 31, 2018.

This loss was due to the startup of this new segment.

Corporate expenses were $27.7 million for year ended December 31, 2018, an increase of $6.5 million over expenses of $21.2 million in the year ended December 31, 2017.

This increase was driven primarily by a $6.8 million increase in expenses associated with our Business Combination, conversion to a public company, and certain legal matters.

Our consolidated operating margin for year ended December 31, 2019 was 1.9% compared to 4.4% for the year ended December 31, 2018.

The consolidated margin decrease was the result of higher depreciation and amortization expense of $19.4 million and a $3.9 million increase in salaries and employee benefits, partially offset by lower costs of services of $16.7 million and a $1.3 million decrease in selling, general and administrative expenses.

Income from operations in Consumer Payments segment

Our Consumer Payments reportable segment earned $32.2 million in income from operations for the year ended December 31, 2019, a decrease of $14.8 million, or 31.4%, from $47.0 million for the year ended December 31, 2018.

This decrease largely reflected the increase in depreciation and amortization expense of $14.9 million in 2019 related to asset acquisitions that occurred in late 2018 and 2019.

The loss of certain subscription-billing e-commerce merchants in 2019 due to industry-wide changes for enhanced card association compliance, which contributed $3.5 million and $21.3 million of income from operations in the years ended December 31, 2019 and 2018, respectively, was largely offset by income resulting from the growth in merchant bankcard processing dollar value and transaction volume.

Loss from operations in Commercial Payments segment

This improvement was driven by a $0.6 million increase in revenue, net of costs of services, partially offset by increases in salaries and employee benefits and selling, general and administrative expenses, which included a $0.5 million allowance for uncollectible receivables in 2019 which were substantially recovered in 2020.

Income (loss) from operations in Integrated Partners segment

This increase in income from operations in 2019 was due primarily to a 2019 asset acquisition, which included $4.0 million of increased depreciation expense and $2.9 million of transitional acquisition integration costs.

Corporate Expense

Corporate expenses were $24.9 million for the year ended December 31, 2019, a decrease of $2.8 million, or 10.1%, over expenses of $27.7 million for the year ended December 31, 2018.

This decrease was driven primarily by a $6.4 million decrease in certain expenses management considers to be non-recurring in nature that were associated with our Business Combination, conversion to a public company, and certain legal matters.

These expenses were $6.0 million and $12.4 million for the years ended December 31, 2019 and 2018, respectively.

Interest Expense

Interest expense, including amortization of deferred debt issuance costs and discount, increased by $4.9 million , or 19.5% , to $29.9 million in 2018 from $25.1 million in 2017.

This increase was due to higher outstanding borrowings in 2018, partially offset by lower applicable interest rates as a result of the debt modification in January 2018.

Other, net decreased $1.2 million from a net expense of $5.6 million in the year ended December 31, 2017 to a net expense of $6.8 million in the year ended December 31, 2018.

This change was primarily due to debt modification costs of $2.0 million in the year ended December 31, 2018.

Consolidated interest expense, including amortization of deferred debt issuance costs and discounts, increased by $10.7 million, or 35.8%, to $40.7 million in 2019 from $29.9 million in 2018.

This increase was primarily due to higher debt obligations in 2019 driven by acquisition-related borrowings.

Other, net increased $7.5 million from a net expense of $6.8 million in the year ended December 31, 2018 to net income of $0.7 million in the year ended December 31, 2019.

The 2018 amount included $3.5 million expense from the change in fair value of a prior warrant liability and $3.3 million of debt modification and other net costs.

Income Tax Expense (Benefit)

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The net deferred tax asset is the result of the difference between the initial tax bases in the assets and liabilities and their respective carrying amounts for financial statement purposes.

For the year ended December 31, 2018, our income tax benefit was $2.5 , resulting in an effective income tax rate of 12.5% .

For the year ended December 31, 2019, our consolidated income tax expense was $0.8 million, resulting in an effective consolidated income tax benefit rate of 2.5%.

See N ote 11 , Income Taxes , to our consolidated financial statements in Part II, Item 8 of the Annual Report on Form 10-K.

For the year ended December 31, 2018, our consolidated income tax benefit was $2.5 million, resulting in an effective consolidated income tax rate of 12.5%.

This income tax benefit was based on the pre-tax loss incurred after July 25, 2018.

On a pro-forma basis assuming C-corp status for the full year 2018, our income tax benefit would have been $3.2 million , resulting in a pro-forma effective income tax rate of 15.6%.

On a pro-forma basis assuming C-Corporation status for the full year 2018, our income tax benefit would have been $3.2 million, resulting in a pro-forma effective income tax rate of 15.6%.

Our annualized pro-forma effective income tax rate for 2018 was less than the statutory rate due to timing and permanent differences between amounts calculated under GAAP and the tax code.

Net income (loss)

Our consolidated net loss for the year ended December 31, 2018 was $17.8 million compared to net income $3.8 million for the year ended December 31, 2017 for the aforementioned reasons.

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 income (loss) before interest, income tax, and depreciation and amortization, is reconciled to net income (loss) calculated under GAAP.

Adjusted EBITDA starts with EBITDA and further adjusts for certain non-cash, non-recurring or non-core expenses including:

1) non-cash equity-based compensation;

2) debt modification and extinguishment costs and fair value changes;

3) certain legal expenses;

4) certain professional, accounting and consulting fees;

and 5) temporary transition services related to acquisitions.

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.

The non-GAAP reconciliations of EBITDA, Adjusted EBITDA, and Consolidated Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, are shown in the table below:

(in thousands)

For the Year ended December 31,

Net (Loss) Income (GAAP)

Interest expense (1)

Depreciation and amortization

Income tax expense (benefit)

EBITDA (non-GAAP)

Further adjusted by:

Non-cash equity-based compensation

Debt modification costs and warrant fair value changes

Changes in fair value of contingent consideration

Litigation settlement (recoveries) costs

Certain legal services (2)

Professional, accounting and consulting fees (3)

YapStone transition services

Adjusted EBITDA (non-GAAP)

Further adjusted by:

Pro-forma impacts for acquisitions

Contracted revenue and savings

Other professional and consulting fees

Other tax expenses and other adjustments

Consolidated Adjusted EBITDA (non-GAAP) (4)

Interest expense includes amortization of debt issuance costs and discount.

Legal expenses related to business and asset acquisition activity and settlement negotiation and other litigation expenses.

Primarily transaction-related, capital markets and accounting advisory services.

Presented to reflect the definition in the Company's credit agreements, as amended (See Note 10, Long-Term Debt and Warrant Liability ).

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 the Business Combination until December 31, 2019.

Effective December 31, 2019, in accordance with the Sixth Amendment to the Company's Credit and Guaranty Agreement, 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 $72.1 million and $75.0 million for the years ended December 31, 2019 and 2018, respectively.

The 2018 amount excludes $5.8 million of expenses of Priority Technology Holdings, Inc.

Our consolidated net loss for the year ended December 31, 2019 was $33.6 million compared to a net loss of $17.8 million for the year ended December 31, 2018 for the aforementioned reasons.

Liquidity and Capital Resources

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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 $1.2 million at December 31, 2019 and $11.8 million at December 31, 2018.

Our working capital, defined as current assets less current liabilities, was a negative $13.0 million at December 31, 2020 and a positive $1.2 million at December 31, 2019.

As of December 31, 2020, we had cash totaling $9.2 million compared to $3.2 million at December 31, 2019.

These cash balances do not include restricted cash of $78.9 million and $47.2 million at December 31, 2020 and 2019, respectively, which reflects cash accounts holding customer settlement funds and cash reserves for potential losses at December 31, 2020 and December 31, 2019.

At December 31, 2019, we had availability of $13.5 million under our revolving credit arrangement.

The current portion of long-term debt included in current liabilities was $19.4 million at December 31, 2020 compared with $4.0 million at December 31, 2019.

At December 31, 2020, we had availability of approximately $25.0 million under our revolving credit arrangement.

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

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Financing activities (175,813) 75,017

Net increase (decrease) increase in cash and restricted cash

Net increase in cash and restricted cash $ 37,655 $ 16,634

Cash Provided by Operating Activities

Net cash provided by operating activities was $ 39.4 million and $31.3 million for the years ended December 31, 2019 and 2018, respectively.

The $8.0 million , or 25.6% , increase in 2019 was principally the result of changes in working capital, settlement funds, and restricted cash, partially offset by the increase in the net loss in 2019.

Cash Used In Investing Activities

Net cash used in investing activities was $97.7 million and $108.9 million for the years ended December 31, 2019 and 2018, respectively.

Cash flow used in investing activities includes the acquisitions of merchant portfolios, residual buyouts, purchases of property, equipment and software, and acquisitions of businesses.

Net cash provided by operating activities, which includes restricted cash, was $47.1 million and $39.4 million for the years ended December 31, 2020 and 2019, respectively.

The $7.7 million, or 19.6%, increase in 2020 was principally the result of an increase in restricted cash balances, as well as an increase in cash generated from operations, partially offset by changes in assets and liabilities and the payment of $5.4 million of transaction costs related to the sale of the RentPayment business in 2020.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $166.4 million compared to cash used of $97.7 million for the years ended December 31, 2020 and 2019, respectively.

Cash used in investing activities includes cash for the acquisitions of merchant portfolios, residual buyouts, and purchases of property, equipment and software.

For the years ended December 31, 2020 and 2019, we invested $5.6 million and $82.9 million, respectively, in merchant portfolios and residual buyouts.

We used $0.2 million for business acquisitions for the year ended December 31, 2019, compared to $7.5 million in the prior year.

Cash used for purchases of property, equipment, and software for the year ended December 31, 2019 was $11.1 million, an increase of $0.6 million from the year ended December 31, 2018.

The increase in purchases was driven primarily by capitalization of internally developed software.

Cash Provided By Financing Activities

Net cash provided by financing activities was $75.0 million in the year ended December 31, 2019 compared to $67.3 million in the prior year.

Cash flows from financing activities for the years ended December 31, 2019 and 2018 resulted primarily from proceeds received from additional borrowings under our term debt in and revolving credit facility.

Proceeds received in 2018 also included cash received from the Business Combination and equity recapitalization.

Cash used for purchases of property, equipment, and software for the year ended December 31, 2020 was $7.5 million compared to $11.1 million for the year ended December 31, 2019.

For 2020, cash used for investing activities was offset by cash received of $179.4 million from the sale of the RentPayment business.

See Note 2, Disposal of Business , in Item 8 of the Annual report on Form 10-K.

Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $175.8 million for the year ended December 31, 2020, compared to cash provided of $75.0 million in the year ended December 31, 2019.

The amount for 2020 included $110.5 million in principal repayments on the term facility for our Senior Credit Agreement, $51.1 million of cash payments to the non-controlling interests of PRET and PHOT, and repayment of the revolving facility under our Senior Credit Agreement.

The amount for 2019 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.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

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Financing activities 75,017 67,252

Net (decrease) increase in cash and restricted cash

Net increase (decrease) in cash and restricted cash $ 16,634 $ (10,328)

Cash Provided by Operating Activities

Net cash provided by operating activities was $31.3 million and $36.9 million for the year ended December 31, 2018 and 2017, respectively.

The $5.5 million , or 15.0% , decrease was principally the result of reduced income from operations of $18.1 million, partially offset by changes in operating working capital.

Changes in operating working capital increased by $11.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017.

Net cash provided by operating activities was $39.4 million and $31.3 million for the years ended December 31, 2019 and 2018, respectively.

The $8.0 million, or 25.6%, increase in 2019 was principally the result of increases in restricted cash balances and cash generated from operations, partially offset by changes in assets and liabilities in 2019.

Cash Used in Investing Activities

Net cash used in investing activities was $108.9 million and $9.0 million for the year ended December 31, 2018 and 2017, respectively.

Cash flows used in investing includes the acquisitions of merchant portfolios, purchases of property, equipment and software, and acquisitions of businesses.

For the year ended December 31, 2018, we invested $90.9 million in merchant portfolio acquisitions and residual buyouts, an $88.4 million increase from the year ended December 31, 2017.

We used $7.5 million for business acquisitions for the year ended December 31, 2018, compared to zero in the prior year.

Cash used for purchases of property, plant and equipment for the year ended December 31, 2018 was $10.6 million , an increase of $4.0 million from the year ended December 31, 2017.

The increase in purchases was driven primarily by equipment purchases for MX Connect and CPX, capitalization of internally developed software, and improvements to the legal and CPX office space.

Cash Provided By (Used In) Financing Activities

Net cash provided by financing activities was $67.3 million in the year ended December 31, 2018 compared to net cash used in financing activities of $25.4 million in the prior year.

Cash flows from financing activities for the year ended December 31, 2018 resulted primarily from the proceeds received in the January 2018 and December 2018 debt upsizing and the equity recapitalization in connection with the Business Combination, offset in part by cash used for equity redemptions, the redemption of the Goldman Sachs warrant, and equity distributions prior to July 25, 2018.

Cash flows used in financing activities for the year ended December 31, 2017 primarily reflected equity redemptions, partially offset by a net increase in long-term debt.

Net cash used in investing activities was $97.7 million and $108.9 million for the years ended December 31, 2019 and 2018, respectively.

Cash flow used in investing activities includes the acquisitions of merchant portfolios, residual buyouts, purchases of property, equipment and software, and acquisitions of businesses.

For the years ended December 31, 2019 and 2018, we invested $82.9 million and $90.9 million, respectively, in merchant portfolios and residual buyouts.

We used $0.2 million for business acquisitions for the year ended December 31, 2019, compared to $7.5 million in 2018.

Cash used for purchases of property, equipment, and software for the year ended December 31, 2019 was $11.1 million, an increase of $0.6 million from the year ended December 31, 2018.

The increase in purchases was driven primarily by capitalization of internally developed software.

Cash Provided by Financing Activities

Net cash provided by financing activities was $75.0 million in the year ended December 31, 2019 compared to $67.3 million in 2018.

Proceeds received in 2018 also included cash received from the Business Combination and equity recapitalization.

Long-Term Debt

As of December 31, 2019, we had outstanding long-term debt of $495.5 million compared to $412.7 million at December 31, 2018, an increase of $82.8 million.

As of December 31, 2020, we had outstanding long-term debt, excluding amounts outstanding under the revolving credit facility, of $382.0 million compared to $484.0 million at December 31, 2019, a decrease of $101.9 million.

The debt balance consisted of outstanding term debt of $279.4 million under the Senior Credit Facility and $102.6 million in term debt under the Subordinated Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Group, L.P.

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Additionally, under the Senior Credit Facility, we have a $25.0 million revolving credit facility, which had $11.5 million drawn and outstanding as of December 31, 2019.

No amount was outstanding on the revolving credit facility at December 31, 2018.

There were no such amounts outstanding as of December 31, 2020.

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

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

As of December 31, 2019, financial covenants, as amended, under the Senior Credit Facility required the Total Net Leverage Ratio, as defined in the agreement, not to exceed 8.00:1.00 at December 31, 2019 and March 31, 2020 and 7.75:1.00 at June 30, 2020 through December 31, 2020.

As of December 31, 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 December 31, 2020.

The Total Net Leverage Ratio steps down thereafter.

As of December 31, 2020, we were in compliance with our financial covenants.

Contractual Obligations

The following table sets forth our contractual obligations and commitments for the periods indicated as of December 31, 2019.

Noncompliance in the future could have a material adverse impact 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 Part I of this Annual Report on Form 10-K.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment (incorporated Exhibits 10.3.4 and 10.4.4 to this Annual Report on Form 10-K) 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 December 31, 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)

Payments Due by Period

Year Ended December 31, 2020

Consolidated Net Income Attributable to Stockholders of Priority Technology Holdings, Inc.

(GAAP) $ 25,661

Applicable Adjustments:

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

Interest expense (clause (i)(b)) 44,839

Depreciation and amortization (clause (i)(d) and (i)(e)) 40,775

Income tax expense (clause (i)(c)) 10,899

Non-cash share-based compensation (clause (i)(j)) 2,430

Acquisition transition services (clause (i)(k)) 2,628

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

Impairment of intangible asset (clause (i)(f)) 1,753

Provision for allowance for note receivable (clause (i)(f))

Change in fair value of contingent consideration for business combinations (clause (ii)(a))

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

Certain legal fees and expenses (clause (i)(m)) 1,796

Litigation recoveries (clause (i)(k)) (719)

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

Other professional and consulting fees (clause (i)(h)) 1,500

Other adjustments (clause (i)(k)) 161

Pro forma impact of disposal (8,221)

Consolidated Adjusted EBITDA (non-GAAP) $ 63,773

At December 31, 2020, the Total Net Leverage Ratio was 5.85:1.00, calculated as follows:

(in thousands, except ratio)

December 31, 2020

Consolidated Total Debt:

Current portion of long-term debt $ 19,442

Long-term debt, net of discounts and deferred financing costs 357,873

Unamortized debt discounts and deferred financing costs 4,725

Less unrestricted cash (9,241)

Consolidated Net Debt $ 372,799

Total Net Leverage Ratio

Contractual Obligations

The following table sets forth our contractual obligations and commitments for the periods indicated as of December 31, 2020.

(in thousands) Payments Due by Period

Contractual Obligations Total Less than

1 year 1 to 3 years 3 to 5 Years More than

Operating leases $ 9,168 $ 1,356 $ 2,663 $ 2,761 $ 2,388

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Processing minimums (d) 7,000 7,000 — — —

(a) Reflects contractual principal payments on term debt outstanding at December 31, 2019 on the revolving credit facility.

$ 474,367 $ 55,614 $ 413,604 $ 2,761 $ 2,388

(a) Reflects contractual principal payments on term debt outstanding at December 31, 2020 and excludes any amount for the revolving credit facility which had no outstanding balance at December 31, 2020.

Does not include future "payment-in-kind" ("PIK") interest that will be added to the principal outstanding for the GS Credit Facility as this interest is included in Interest on debt in (b).

See No te 10 , Long-Term Debt and Warrant Liability .

(b) Reflects interest payable and future PIK interest on term debt under the Senior Credit Facility and the subordinated GS Credit Facility.

Amounts based on outstanding balances and interest rates as of December 31, 2020.

(c) Reflects estimated fair value of amounts accrued for business combinations and amounts payable for asset acquisitions.

Does not include any interest that may be payable in the future for the revolving credit facility which had no outstanding borrowings at December 31, 2020.

See Note 10 , Long-Term Debt and Warrant Liability .

See Note 4 , Asset Acquisitions, Asset Contributions, and Business Combinations .

(d) Reflects minimum annual spend commitments with third-party processor partners.

In the event we fail to meet the minimum annual spend commitment, we are required to pay the difference between the minimum and the actual dollar amount spent in the year.

See Note 12 , Commitments and Contingencies .

Based on outstanding principal balances, including PIK interest, at December 31, 2020 approximately 73% of the Borrowers' $382 million of term debt matures in January 2023 and approximately 27% matures in July 2023.

Based on current market conditions and the financial conditions and forecasts of the entities and guarantors that compose the Borrowers, we currently believe the term debt can be refinanced on or before the maturity dates at amounts and terms that are similar or favorable to those existing at December 31, 2020.

On March 5, 2021, we entered into a debt commitment letter with Truist Bank and Truist Securities, Inc., pursuant to which Truist has committed to provide Priority with a new Term Loan Facility and Revolving Credit Facility, which will replace existing Senior Loan facilities.

Also, on March 5, 2021, the Company entered into a preferred stock commitment letter with Ares Capital Management LLC and Ares Alternative Credit Management LLC to issue preferred stock, the proceeds of which will be partially used to repay our Subordinated Debt Facility.

See Note 21, Subsequent Events, to the consolidated financial statements , for additional information.

Off-Balance Sheet Arrangements

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We adopted the provisions of ASC 606, Revenue from Contracts with Customers , effective for the annual reporting period ended December 31, 2019.

We used the full retrospective adoption and transition method, and accordingly, all periods presented in this Form 10-K have been recasted to reflect the provisions of ASC 606.

We used the full retrospective adoption and transition method, and accordingly, all periods presented in this Form 10-K reflect the provisions of ASC 606.

Under the provisions of ASC 606, we recognize revenue when we satisfy a performance obligation by transferring a service or good to the customer in an amount to which we expect to be entitled (i.e., transaction price) allocated to the distinct or services or goods.

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Only after a tax position passes the first step of recognition will measurement be required.

Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement.

Under the measurement step, the tax benefit is measured as the largest amount of

benefit that is more likely than not to be realized upon effective settlement.

This is determined on a cumulative probability basis.

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Goodwill and Long-Lived Assets

We test goodwill for impairment for each of our reporting units on an annual basis or when events occur, or circumstances indicate the fair value of a reporting unit is below our carrying value.

We perform the impairment tests by using market data and discounted cash flow analysis, which involve estimates of future revenues and operating cash flows.

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

We may perform a quantitative assessment that uses market data and discounted cash flow analysis, which involve estimates of future revenues and operating cash flows.

Where deemed appropriate, we may perform the annual assessment using the optional qualitative method.

Effective for the annual reporting period ending December 31, 2020, we voluntarily changed the date for our annual goodwill impairment assessment from November 30 to October 1.

Both dates occur in our fourth quarter.

We believe this prospective change does not represent a material change to a method of applying an accounting principle, even though the carrying value of goodwill is material to our consolidated financial statements.

This change had no effect on our results of operations, financial condition, or cash flows for any reporting period.

By using the October 1 annual assessment date, we believe that we will be able to utilize more readily available data from both internal and external sources and have additional time to evaluate the data prior to finalizing our year-end consolidated financial statements and disclosures.

This change in the date for the annual impairment assessment for goodwill does not change our requirements to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

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Interest rate risk

Our Senior Credit Facility bears interest at a rate based on LIBOR plus a fixed margin.

Our Senior Credit Facility bears interest at a variable rate based on LIBOR (with a LIBOR "floor" of 1.0% beginning March 8, 2020) plus a fixed margin.

As of December 31, 2020, we had $279.4 million in outstanding borrowings under our Senior Credit Facility.

A hypothetical 1% increase or decrease in the applicable LIBOR rate on our outstanding indebtedness under the Senior Credit Facility would have increased or decreased cash interest expense on our indebtedness by approximately $4.0 million per annum.

The discrepancy between the hypothetical increase and decrease is attributable to the 1.0% LIBOR floor under the Senior Credit Facility.

The applicable LIBOR rate stood at approximately 1.71 % at December 31, 2019 .

Ignoring the 1.0% LIBOR floor, a hypothetical 1% increase or decrease in the applicable LIBOR rate on our outstanding indebtedness under the Senior Credit Facility would have increased or decreased cash interest expense on our indebtedness by approximately $2.8 million per annum.

We do not currently hedge against interest rate risk.

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-K

Item 7. Management’s Discussion and Analysis