What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-31 compared with 2020-03-30 · 829 added, 725 removed, 1044 unchanged (60% of the section changed)

2 unchanged sentences

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm s

Consolidated Balance Sheets as of December 31, 20 20 and December 31, 201 9

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To the Stockholders and Board of Directors of Priority Technology Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Priority Technology Holdings, Inc.

(“the Company”) as of December 31, 2020, the related consolidated statements of operations, stockholders' deficit and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2020.

Atlanta, Georgia

March 31, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Priority Technology Holdings, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Priority Technology Holdings, Inc.

and Subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, changes in stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, the financial statements as of December 31, 2018 and for the years ended December 31, 2018 and 2017 have been restated to correct a misstatement.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers for all periods presented due to the adoption of Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers .

We have audited the accompanying consolidated balance sheet of Priority Technology Holdings, Inc.

and Subsidiaries (the "Company") as of December 31, 2019, the related consolidated statements of operations, changes in stockholders' deficit and cash flows for each of the two years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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/s/ RSM US LLP

We have served as the Company's auditor since 2014.

We served as the Company's auditor from November 20, 2014 to June 5, 2020.

Atlanta, Georgia

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(in thousands, except share and per share amounts)

As restated - Note 2

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Current assets:

Cash $ 9,241 $ 3,234

Restricted cash 78,879 47,231

Accounts receivable, net of allowances of $ 574 and $ 803 , respectively

41,321 37,993

Prepaid expenses and other current assets 3,500 3,897

Current portion of notes receivable

Current portion of notes receivable, net of allowances of $ 467 and $ 0 , respectively

Settlement assets 753 533

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Property, equipment and software, net 22,875 23,518

Goodwill 106,832 109,515

Intangible assets, net 98,057 182,826

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Other non-current assets 1,957 380

Total assets $ 417,829 $ 464,505

LIABILITIES AND STOCKHOLDERS' DEFICIT

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Total current liabilities 148,848 93,004

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

Long-term debt, net of current portion, discounts and deferred financing costs 357,873 485,578

Other non-current liabilities 9,672 6,612

Total long-term liabilities

Total non-current liabilities 367,545 492,190

Total liabilities 516,393 585,194

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Preferred stock, par value $ 0.001 per share;

100,000,000 and zero shares authorized at December 31, 2019 and 2018, respectively;

and zero shares issued and outstanding at December 31, 2019 and 2018.

100,000,000 authorized;

zero shares issued and outstanding at December 31, 2020 and 2019.

Common stock, par value of $ 0.001 per share;

1.0 billion shares authorized;

67,512,167 shares issued and 67,060,943 outstanding at December 31, 2019;

and 67,038,304 shares issued and outstanding at December 31, 2018.

67,842,204 shares issued and 67,390,980 shares outstanding at December 31, 2020;

and 67,512,167 shares issued and 67,060,943 shares outstanding at December 31, 2019.

Additional paid-in capital 5,769 3,651

Treasury stock, at cost ( 451,224 shares)

( 2,388 ) ( 2,388 )

Accumulated deficit ( 102,013 ) ( 127,674 )

Total deficit attributable to stockholders of PRTH

Total deficit attributable to stockholders of Priority Technology Holdings, Inc.

( 98,564 ) ( 126,343 )

Non-controlling interest — 5,654

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For the Years Ended December 31, 2020, 2019, and 2018

(in thousands, except per share amounts)

As Recasted - Note 1

As restated- Note 2

As restated - Note 2

(in thousands, except per share amounts) Year Ended December 31,

2020 2019 2018

REVENUES $ 404,342 $ 371,854 $ 375,822

OPERATING EXPENSES:

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Income from operations 20,861 7,184 16,393

OTHER (EXPENSES) INCOME:

OTHER INCOME (EXPENSE):

Interest expense ( 44,839 ) ( 40,653 ) ( 29,935 )

Debt extinguishment and modification expenses ( 1,899 ) — ( 2,043 )

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

Other income (expense), net 596 710 ( 4,741 )

Total other expenses, net

(Loss) income before income taxes

Total other income (expenses), net 61,097 ( 39,943 ) ( 36,719 )

Income (loss) before income taxes 81,958 ( 32,759 ) ( 20,326 )

Income tax expense (benefit) 10,899 830 ( 2,490 )

Net (loss) income

(Loss) income per common share:

Basic and diluted

Net income (loss) 71,059 ( 33,589 ) ( 17,836 )

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

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

$ 25,661 $ ( 33,589 ) $ ( 17,836 )

Income (loss) per common share for stockholders of Priority Technology Holdings, Inc.:

Basic $ 0.38 $ ( 0.50 ) $ ( 0.29 )

Diluted $ 0.38 $ ( 0.50 ) $ ( 0.29 )

Weighted-average common shares outstanding:

Basic and diluted

Basic 67,158 67,086 61,607

Diluted 67,263 67,086 61,607

PRO FORMA (C-corporation basis):

Pro forma income tax (benefit) expense (unaudited)

Pro forma net (loss) income (unaudited)

(Loss) earnings per common share:

Pro forma income tax benefit (unaudited) $ ( 3,169 )

Pro forma net loss (unaudited) $ ( 17,157 )

Loss per common share:

basic and diluted (unaudited) $ ( 0.28 )

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For the Years Ended December 31, 2020, 2019, and 2018

(in thousands)

Year Ended December 31,

(in thousands) 2020 2019 2018

Preferred Stock shares — — —

Preferred Stock amounts

Common Stock shares:

Preferred Stock amount $ — $ — $ —

Common Stock shares outstanding:

Beginning balance 67,061 67,038 73,110

Member redemptions — — ( 12,565 )

Elimination of Class C Units

Elimination of Preferred Units

Pro-rata adjustments and forfeitures — — ( 724 )

Conversion of MI Acquisitions, Inc.

shares — — 6,667

Founders' Shares — — ( 175 )

Vesting of equity-based compensation

Vesting of share-based compensation 330 54 250

Common stock issued for business combinations — — 475

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Ending balance 67,391 67,061 67,038

Common Stock amounts:

Common Stock amounts outstanding:

Beginning balance $ 68 $ 67 $ 73

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Conversion of MI Acquisitions, Inc.

Vesting of equity-based compensation

Warrant redemptions

Vesting of share-based compensation (a) 1 (a)

Warrant redemptions — (a) —

Ending balance $ 68 $ 68 $ 67

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Member redemptions — — ( 36,548 )

Reclass for common shares repurchase obligation

Release of contingent consideration

Equity-based compensation

Vesting of equity-based compensation

Equity-classified share-based compensation 2,118 3,652 1,063

Vesting of share-based compensation (a) ( 1 ) —

Conversion of MI Acquisitions, Inc.

shares — — 49,382

Founders' Shares — — ( 2,118 )

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Priority Technology Holdings, Inc.

(in thousands)

Consolidated Statements of Changes in Stockholders' Deficit, continued

For the Years Ended December 31, 2020, 2019, and 2018

Year Ended December 31,

As restated - Note 2

Accumulated (Deficit) Earnings:

(in thousands) 2020 2019 2018

Accumulated Deficit:

Beginning balance $ ( 127,674 ) $ ( 94,085 ) $ ( 95,978 )

Cumulative corrections of errors for periods prior to 2017 (Note 2)

Restated accumulated earnings at January 1, 2017 (Note 2)

Member redemptions — — ( 28,342 )

Net deferred income tax asset related to loss of partnership status — — 47,485

Equity-based compensation

Net (loss) income prior to corrections of errors (Note 2)

Corrections of errors (Note 2)

Ending balance - restated (Note 2)

Non-controlling Interest:

Equity-classified shared-based compensation — — 586

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

25,661 ( 33,589 ) ( 17,836 )

Ending balance $ ( 102,013 ) $ ( 127,674 ) $ ( 94,085 )

Non-Controlling Interests (NCIs):

Beginning balance $ 5,654 $ — $ —

Issuance of non-controlling interest in subsidiary

Issuance of NCI in subsidiary — 5,654 —

Redemption of NCI in subsidiary ( 5,654 ) — —

Earnings attributable to redeemable and redeemed NCIs 45,398 — —

Earnings distributed to redeemable and redeemed NCIs ( 45,398 ) — —

Ending balance $ — $ 5,654 $ —

PRTH stockholders' ending deficit balance - restated (Note 2)

Non-controlling interest balance

Total stockholders' deficit balance - restated (Note 2)

Deficit attributable to stockholders of Priority Technology Holdings, Inc.

$ ( 98,564 ) $ ( 126,343 ) $ ( 94,018 )

NCIs — 5,654 —

Total stockholders' deficit balance $ ( 98,564 ) $ ( 120,689 ) $ ( 94,018 )

(a) Rounds to less than one thousand dollars.

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For the Years Ended December 31, 2020, 2019, and 2018

Year Ended December 31,

(in thousands) 2020 2019 2018

As restated - Note 2

Cash flows from operating activities:

Net (loss) income

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

Net income (loss) $ 71,059 $ ( 33,589 ) $ ( 17,836 )

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

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

Transaction costs for sale of business ( 5,383 ) — —

Depreciation and amortization of assets 40,775 39,092 19,740

Equity-based compensation

Amortization of debt issuance costs and discount

Equity-classified and liability-classified share-based compensation 2,430 3,652 1,649

Amortization of debt issuance costs and discounts 2,396 1,667 1,418

Equity in losses and impairment of unconsolidated entities 211 23 865

Provision for deferred income taxes

Provision (reduction) for allowance for deferred income tax assets

Change in fair value of warrant liability

Deferred income tax expense (benefit) 5,905 ( 8,537 ) ( 2,871 )

Change in allowance for deferred tax assets ( 2,945 ) 9,302 ( 66 )

Change in fair value of warrant liability, net — — 3,458

Change in fair value of contingent consideration ( 360 ) ( 620 ) —

Loss on debt extinguishment

Write-off of deferred loan costs and discount 1,523 — —

Payment-in-kind interest 8,573 5,126 4,897

Other non-cash items

Change in operating assets and liabilities (net of business combinations):

Impairment charges for intangible asset 1,753 — —

Other non-cash items, net 233 ( 831 ) 211

Change in operating assets and liabilities (net of business combinations and disposal):

Accounts receivable ( 5,160 ) ( 1,736 ) 8,180

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Customer deposits and advance payments ( 2,045 ) 1,646 ( 1,571 )

Accounts payable and other current liabilities

Other assets and liabilities

Accounts payable and other accrued liabilities 1,343 ( 1,061 ) 1,531

Other assets and liabilities, net 1,298 ( 434 ) 694

Net cash provided by operating activities 47,072 39,364 31,348

Cash flows from investing activities:

Sale of business 179,416 — —

Acquisitions of businesses — — ( 7,508 )

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Acquisitions of intangible assets ( 5,559 ) ( 82,945 ) ( 90,858 )

Net Cash Used In Investing Activities

Other investing activity — ( 184 ) —

Net cash provided by (used in) investing activities 166,396 ( 97,747 ) ( 108,928 )

Priority Technology Holdings, Inc.

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2020, 2019, and 2018

Year Ended December 31,

(in thousands) 2020 2019 2018

Cash flows from financing activities:

1 unchanged sentence

Repayments of long-term debt ( 110,507 ) ( 3,828 ) ( 2,834 )

Profit distributions to non-controlling interests of subsidiaries ( 45,398 ) — —

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

Borrowings under revolving line of credit 7,000 14,000 8,000

Repayments of borrowings under revolving line of credit ( 18,505 ) ( 2,500 ) ( 8,000 )

Debt issuance costs refunded (paid)

Debt issuance and modification costs (paid) refunded ( 2,749 ) 83 ( 425 )

Repurchases of common stock — ( 2,388 ) —

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Recapitalization costs — — ( 9,704 )

Priority Technology Holdings, Inc.

Net Provided By (Used In) Financing Activities

Net change in cash and restricted cash

Net cash (used in) provided by financing activities ( 175,813 ) 75,017 67,252

Net increase (decrease) in cash and restricted cash 37,655 16,634 ( 10,328 )

Cash and restricted cash at beginning of year 50,465 33,831 44,159

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Reconciliation of cash and restricted cash:

Cash $ 9,241 $ 3,234 $ 15,631

Restricted cash 78,879 47,231 18,200

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Cash paid for interest $ 33,433 $ 33,091 $ 23,350

Cash paid for income taxes, net of refunds $ 8,370 $ — $ —

Recognition of initial net deferred income tax asset $ — $ — $ 47,478

Non-cash investing and financing activities:

Payment-in-kind interest added to principal of debt obligations $ 8,573 $ 5,126 $ 4,897

Purchases of property, equipment and software through accounts payable $ — $ 23 $ 50

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

Intangible assets acquired by issuing non-controlling interest in a subsidiary $ — $ 5,654 $ —

Accruals for asset acquisition contingent consideration $ 8,332 $ 2,133 $ —

Notes receivable from sellers used as partial consideration for business acquisitions $ — $ — $ 560

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Cash consideration payable for business acquisition $ — $ — $ 184

Accrual for asset acquisition contingent consideration

Common share repurchase obligation

See Notes to Consolidated Financial Statements

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Corporate History and Recapitalization

M I Acquisitions, Inc.

MI Acquisitions, Inc.

("MI Acquisitions") was incorporated under the laws of the state of Delaware as a special purpose acquisition company ("SPAC") whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities.

MI Acquisitions completed an initial public offering ("IPO") in September 2016, and MI Acquisitions' common stock began trading on The Nasdaq Capital Market with the symbol MACQ.

In addition, MI Acquisitions completed a private placement to certain initial stockholders of MI Acquisitions.

In addition, MI Acquisitions completed a private placement to

certain initial stockholders of MI Acquisitions.

MI Acquisitions received gross proceeds of approximately $ 54.0 million from the IPO and private placement.

On July 25, 2018, MI Acquisitions acquired all of the outstanding member equity interests of Priority Holdings, LLC ("Priority") in exchange for the issuance of MI Acquisitions' common stock (the "Business Combination") from a private placement.

result, Priority, which was previously a privately-owned company, became a wholly-owned subsidiary of MI Acquisitions.

As a result, Priority, which was previously a privately-owned company, became a wholly-owned subsidiary of MI Acquisitions.

Simultaneously with the Business Combination, MI Acquisitions changed its name to Priority Technology Holdings, Inc.

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Costs of services primarily consist of residual payments to ISOs and other direct costs of providing payment services.

The residual payments represent commissions paid to ISOs is generally based upon a percentage of the net revenues generated from merchant transactions.

The residual payments represent commissions paid to ISOs and are generally based upon a percentage of the net revenues generated from merchant transactions.

Other costs of services consist of third-party costs related to the Company's commercial payment services, ACH processing services, salaries that are reimbursed under cost-plus business process outsourcing services, and the cost of equipment (point of sale terminals).

Selling, General and Administrative

SG&A expenses include mainly professional services, advertising, rent, office supplies, software licenses, utilities, state and local franchise and sales taxes, litigation settlements, executive travel, insurance, and expenses related to the Business Combination.

Selling, general and administrative expenses include mainly professional services, advertising, rent, office supplies, software licenses, utilities, state and local franchise and sales taxes, litigation settlements, executive travel, insurance, and expenses related to the Business Combination.

Interest Expense

Interest expense consists of interest on outstanding debt and amortization of deferred financing costs and original issue discounts.

Other, net is composed of interest income, debt modification and extinguishment expenses, changes in fair value of warrant liabilities, and equity in losses and impairment of unconsolidated entities.

Interest income consists mainly of interest received pursuant to notes receivable from independent sales agents and another entity (see Note 13, Related Party Matters ).

Debt modification and extinguishment expenses includes write-offs of unamortized deferred financing costs and original issue discount relating to the extinguished debt.

Other, net is composed of interest income, changes in fair value of warrant liabilities, and equity in losses and impairment of unconsolidated entities.

Interest income consists mainly of interest received pursuant to notes receivable from independent sales agents and another entity (see Note 6 , Notes Receivable ).

Equity in loss and impairment of unconsolidated entities consists of the Company's share of the income or loss of its equity method investment as well as any impairment charges related to such investments.

At December 31, 2020, the Company no longer has any investments that are accounted for under the equity method.

Changes in fair value of warrant liability relates to a warrant that was fully redeemed in 2018.

Debt Extinguishment and Modification Expenses

Debt extinguishment expenses represents the write-offs of unamortized deferred financing costs and original issue discount relating to the extinguishment, including partial extinguishment, of debt.

Debt modification expenses represents amounts paid to third parties to modify existing debt agreements when those amounts are not eligible for capitalization.

Earnings Attributable to Redeemable and Redeemed Non-Controlling Interests

Represents the earnings and gains that are attributable to the non-controlling equity interests of certain of the Company's consolidated subsidiaries based on the operating agreements of the subsidiaries.

See the "Non-Controlling" section under the following header for "Significant Accounting Policies."

Net Income (Loss) Attributable to Stockholders of Priority Technology Holdings, Inc.

Represents the net income or loss attributable to the stockholders of Priority Technology Holdings, Inc.

after subtracting earnings, gains, or losses of consolidated subsidiaries that are attributable to the non-controlling equity interests of the subsidiaries.

Comprehensive Income (Loss)

Comprehensive income (loss) represents the sum of net income (loss) and other amounts that are not included in the audited consolidated statement of operations as the amounts have not been realized.

Comprehensive income (loss) represents the sum of net income (loss) and other amounts that are not included in the consolidated statement of operations as the amounts have not been realized.

For the years ended December 31, 2020, 2019, and 2018, there were no differences between the Company's net income (loss) and comprehensive income (loss).

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Under the portfolio practical expedient, collectability is still assessed at the individual contract level when determining if a contract exists.

Deferred revenues are not material.

Deferred revenues are not material for any reporting period.

The Company's reportable segments are organized by services the Company provides through distinct business units.

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The Company recognizes its revenue net of the amounts retained by these third parties.

The Company incurs internal costs and costs of other third parties related to processing services.

Company incurs internal costs and costs of other third parties related to processing services.

Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services.

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Amounts due from sponsor banks are typically paid within 30 days following the end of each month.

Allowance for Doubtful Accounts Receivable

The Company records an allowance for doubtful accounts when it is probable that the accounts receivable balance will not be collected, based upon loss trends and an analysis of individual accounts.

Accounts receivable are written off when deemed uncollectible.

Recoveries of accounts receivable previously written off are recognized when received.

Allowance for Doubtful Accounts Receivable and Notes Receivable

The Company records an allowance for doubtful accounts and/or notes receivable when it is probable that the account receivable balance or the note receivable balance will not be collected, based upon loss trends and an analysis of individual accounts.

Accounts receivable and notes receivable are written off when deemed uncollectible.

Recoveries of accounts receivable and notes receivable, if any, previously written off are recognized when received.

The allowance for doubtful accounts was $ 0.6 million and $ 0.8 million at December 31, 2020 and 2019, respectively.

The allowance for doubtful notes receivable was $ 0.5 million and zero at December 31, 2020 and 2019, respectively.

Customer Deposits and Advance Payments

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A vendor may make an upfront payment to the Company to offset costs that the Company incurs to integrate the vendor into the Company’s operations.

These upfront payments are deferred by the Company and are subsequently amortized against expense in its statement of operations as the related costs are incurred by the Company in accordance with the agreement with the vendor.

These upfront payments are deferred by the Company and are subsequently amortized against expense

in its statement of operations as the related costs are incurred by the Company in accordance with the agreement with the vendor.

Property and Equipment, Including Leases

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The Company may make various alterations (leasehold improvements) to the office space and capitalize these costs as part of property and equipment.

Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.

Leasehold improvements are generally amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.

Expenditures for repairs and maintenance which do not extend the useful life of the respective assets are charged to expense as incurred.

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Post-implementation costs related to the internal use computer software, are expensed as incurred.

Internal use software development costs are amortized using the straight-line method over its estimated useful life which ranges from three to five years .

Internal use software development costs are amortized using the straight-line method over its estimated useful life which generally ranges from three to five years .

Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product.

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As of December 31, 2020 and 2019, capitalized software development costs, net of accumulated amortization, totaled $ 16.4 million and $ 14.9 million, respectively, and is included in property, equipment, and software, net on the consolidated balance sheets.

Amortization expense for capitalized software development costs for the years ended December 31, 2019, 2018, and 2017 was $ 4.1 million, $ 2.6 million , and $ 1.6 million , respectively.

Amortization expense for capitalized software development costs for the years ended December 31, 2020, 2019, and 2018 was $ 5.3 million, $ 4.1 million, and $ 2.6 million, respectively, and are included in depreciation and amortization in the accompanying consolidated statements of operations.

Settlement Assets and Obligations

1 unchanged sentence

See Note 5 , Settlement Assets and Obligations .

Debt Issuance Costs

Debt Issuance and Modification Costs

Eligible debt issuance costs associated with the Company's credit facilities are deferred and amortized to interest expense over the term of the related debt using the effective interest method.

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The Company uses the acquisition method of accounting for business combinations which requires assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired.

Goodwill represents the excess of the purchase

price over the fair value of the net assets acquired.

The fair values of the assets acquired and liabilities assumed are determined based upon the valuation of the acquired business and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date.

2 unchanged sentences

Non-Controlling Interests

The Company has issued non-voting profit-sharing interests in three of its subsidiaries that were formed in 2018 or 2019 to acquire the operating assets of certain businesses (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions ).

The Company is still the majority owner of these subsidiaries and therefore the profit-sharing interests are deemed to be non-controlling interests ("NCI").

To estimate the initial fair value of a profit-sharing interest, the Company utilizes future cash flow scenarios with focus on those cash flow scenarios that could result in future distributions to the NCIs.

In subsequent periods, profits or losses are attributed to an NCI based on the hypothetical-liquidation-at-book-value method that utilizes the terms of the profit-sharing agreement between the Company and the NCIs.

The Company issued non-voting profit-sharing interests in three of its subsidiaries that were formed in 2018 or 2019 to acquire the operating assets of certain businesses (see Note 4 , Asset Acquisitions, Asset Contributions , and Business Combinations ).

The Company is the majority owner of these subsidiaries and therefore the profit-sharing interests are deemed to be non-controlling interests ("NCI").

To estimate the initial fair value of a profit-sharing interest, the Company utilized future cash flow scenarios with focus on those cash flow scenarios that could result in future distributions to the NCIs.

Profits or losses are attributed to an NCI based on the hypothetical-liquidation-at-book-value method that utilizes the terms of the profit-sharing agreement between the Company and the NCIs.

As the majority owner, the Company has call rights on the profit-sharing interests issued to the NCIs.

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The call rights do not meet the definition of a free-standing financial instrument or derivative, thus no separate accounting is required for these call rights.

Based on the LLC agreements for these three subsidiaries, in certain instances the NCIs are entitled to certain earnings of the respective subsidiary.

Prior to 2020, no earnings were attributable to any NCIs.

All material earnings attributable to the NCIs for the year ended December 31, 2020 were simultaneously distributed to the NCIs.

As disclosed in Note 2 , Disposal of Business , the NCIs of one of these subsidiaries, Priority Real Estate Technology, LLC, were fully redeemed during the year ended December 31, 2020.

At December 31, 2020, the NCIs of one of the other subsidiaries, Priority PayRight Health Solutions, LLC, have also been fully redeemed and only one of the subsidiaries, Priority Hospitality Technology, LLC, has NCIs at December 31, 2020.

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

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

If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value.

The Company performed its most recent annual goodwill impairment test as of November 30, 2019 using market data and discounted cash flow analysis.

Based on this analysis, it was determined that the fair value exceeded the carrying value of its two reporting units with goodwill, Consumer Payments and Integrated Partners.

Intangible Assets

Intangible assets are initially recorded at cost upon acquisition by the Company.

The carrying value of an intangible asset acquired in an asset acquisition may be subsequently increased for contingent consideration when due to the seller.

See N ote 7 , Goodwill and Other Intangible Assets .

Other Intangible Assets

Other Intangible assets are initially recorded at cost upon acquisition by the Company.

The carrying value of an intangible asset acquired in an asset acquisition may be subsequently increased for contingent consideration when due to the seller and such amounts can be estimated.

The portion of any unpaid purchase price that is contingent on future activities is not initially recorded by the Company on the date of acquisition.

Rather, the Company recognizes contingent consideration when it becomes probable and estimable.

All of the Company's intangible

assets, except Goodwill, have finite lives and are subject to amortization.

All of the Company's intangible assets, except Goodwill, have finite lives and are subject to amortization.

Intangible assets consist of acquired merchant portfolios, customer relationships, ISO relationships, residual buyouts, trade names, technology, and non-compete agreements.

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Merchant portfolios consist of the acquired rights to a portfolio of merchants such as those acquired from Direct Connect Merchant Services, LLC, and YapStone, Inc.

The Company amortizes the cost of its acquired merchant portfolios over their estimated useful lives, which range from five to fifteen years using a straight-line amortization method.

The Company amortizes the cost of its acquired merchant portfolios over their estimated useful lives, which generally range from five years to six years using a straight-line amortization method.

Customer Relationships

Customer relationships represent the cost of the acquired customer relationship, which typically consists of a portfolio of merchants or contracted business relationships.

The Company amortizes the cost of its acquired customer relationships over their estimated useful lives, which range from ten years to fifteen years , using either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

The Company amortizes the cost of its acquired customer relationships over their estimated useful lives, which generally range from 10 years to 15 years, using either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

ISO Relationships

ISO relationships represent the cost of acquired relationships with ISOs.

The Company amortizes the cost of its acquired ISO relationships over their estimated useful lives, which range from 11 years to 25 years, using an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

The Company amortizes the cost of its acquired ISO relationships over their estimated useful lives, which generally range from 11 years to 25 years, using an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

Residual Buyouts

Most of the Company's merchant customers in its Consumer Payments reportable segment are associated with independent ISOs, and these ISOs typically have a right to receive commissions from the Company based on the revenue earned by the associated merchants.

Although not obligated to do so, the Company may occasionally decide to pay an ISO an agreed-upon amount in exchange for the ISO's surrender of its right to receive future commissions from the Company, either temporarily or permanently.

The amount that the Company pays for these residual buyouts is capitalized and subsequently amortized over the term of the residual buyout agreement, or if the residual buyout is permanent, over the expected life of the underlying merchant relationships.

These amortization periods range between one year and nine years and the Company uses either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

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

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

These amortization periods generally range between 1 year and 9 years and the Company uses either a straight-line or an accelerated amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

Technology intangible assets represent acquired technology, such as proprietary software and website domains.

The Company amortizes the cost of acquired technology over their estimated useful lives, which range from 5 years to 7 years, using a straight-line amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

Other Intangible Assets

The Company's intangible assets also include acquired trade names and non-compete agreements.

These assets are amortized over their estimated useful lives ranging from five years to 25 years using a straight-line amortization method.

The Company amortizes the cost of acquired technology over their estimated useful lives, which generally range between 6 years and 7 years, using a straight-line amortization method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed.

Trade Names and Non-Compete Agreements

These intangible assets are amortized over their estimated useful lives, which generally ranging between 5 years and 12 years, using a straight-line amortization method.

All non-compete agreements were fully amortized at December 31, 2020 and 2019.

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The Company concluded there were no indications of impairment for the years ended December 31, 2019 and 2018.

For the year ended December 31, 2020, the Company recognized impairment charges of $ 1.8 million for a residual buyout intangible asset.

See Note 7 , Goodwill and Other Intangible Assets .

Accrued Residual Commissions

Accrued residual commissions consist of amounts due to independent sales organizations ("ISOs") and independent sales agents on the processing volume of the Company's merchant customers.

The commissions due are based on varying percentages of the volume processed by the Company on behalf of the merchants.

Accrued residual commissions consist of amounts due to independent sales organizations ("ISOs") and independent sales agents based on a percentage of the net revenues generated from the Company's merchant customers.

Percentages vary based on the program type and transaction volume of each merchant.

Residual commission expenses, adjusted for the Company's retrospective adoption of ASC 606 (see Note 1, Nature of Business and Accounting Policies ) were $ 213.8 million, $ 230.2 million, and $ 238.5 million, respectively, for the years ended December 31, 2019, 2018 and 2017, and are included in costs of services in the accompanying consolidated statements of operations.

Residual commission expenses were $ 240.2 million, $ 213.8 million, and $ 230.2 million, respectively, for the years ended December 31, 2020, 2019 and 2018, and are included in costs of services in the accompanying consolidated statements of operations.

ISO Deposit and Loss Reserve

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All amounts maintained by the Company are included in the accompanying consolidated balance sheets as other liabilities, which are directly offset by restricted cash accounts owned by the Company.

Equity-Based Compensation

The Company recognizes the cost resulting from all equity-based payment transactions in the financial statements at grant date fair value.

Equity-based compensation expense is recognized over the requisite service period and is reflected in Salary and employee benefits expense on the Company's consolidated statements of operations.

Share-Based Compensation

The Company recognizes the cost resulting from all share-based payment transactions in the financial statements at grant date fair value.

Share-based compensation expense is recognized over the requisite service period and is reflected in salary and employee benefits expense on the Company's consolidated statements of operations.

Awards generally vest over two or three years and may not vest evenly over the vesting period.

The effects of forfeitures are recognized as they occur.

The Company measures a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of settlement.

Compensation cost for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value of the instrument for each reporting period.

Stock options

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Performance-Based Restricted Stock Awards

The Company accounts for its performance-based restricted equity awards based on the quoted closing price of the Company's common stock on the date of grant, adjusted for any market-based vesting criteria, and records equity-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved.

The Company reassesses the probability of vesting at each reporting period and prospectively adjusts equity-based compensation expense based on its probability assessment.

The Company accounts for its performance-based restricted equity awards based on the quoted closing price of the Company's common stock on the date of grant, adjusted for any market-based vesting criteria, and records shared-based compensation expense over the vesting term of the awards based on the probability that the performance criteria will be achieved.

The performance goals may be work-related goals for the individual recipient and/or based on certain corporate performance goals.

The Company reassesses the probability of vesting at each reporting period and prospectively adjusts share-based compensation expense based on its probability assessment.

Additionally, if performance goals are set or reset on an annual basis, compensation cost is recognized in any reporting period only for performance-based RSU awards in which the performance goals have been established and communicated to the award recipient.

Repurchased Stock

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The equity accounts that were originally credited for the original share issuance, common stock and additional paid-in capital, remain intact.

See Note 14, Stockholders' Deficit Information .

See Note 14 , Stockholders' Deficit .

If the treasury shares are ever reissued in the future, proceeds in excess of repurchased cost will be credited to additional paid-in capital.

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As a limited liability company, Priority Holdings, LLC elected to be treated as a partnership for the purpose of filing income tax returns, and as such, the income and losses of Priority Holdings, LLC flowed through to its members.

Accordingly, no provisions for federal and most state income taxes was provided in the consolidated financial statements.

no provisions for federal and most state income taxes was provided in the consolidated financial statements.

However, periodic distributions were made to members to cover company-related tax liabilities.

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Accounting Standards Adopted in 2020

Disclosures for Fair Value Measurements (ASU 2018-13)

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") No.

2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13").

ASU 2018-13 eliminated, added, and modified certain disclosure requirements for fair value measurements as part of the Financial Accounting Standards Board's ("FASB") disclosure framework project.

Certain amendments must be applied prospectively while others are applied on a retrospective basis to all periods presented.

As disclosure guidance, the adoption of this ASU had no effect on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2020.

Note 1 7 , Fair Value , reflects the disclosure provisions of ASU 2018-13.

Share-Based Payments to Non-Employees (ASU 2018-07)

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

As an EGC, the ASU was effective for the Company's annual reporting period that began on January 1, 2020 and will be effective for interim periods beginning first quarter of 2021.

The adoption of ASU 2018-07 had no material effect on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2020.

Share-Based Payments to Customers (ASU 2019-08)

In November 2019, the FASB issued ASU 2019-08, Stock Compensation and Revenue from Contracts with Customers ("ASU 2019-08").

ASU 2019-08 applies to share-based payments granted in conjunction with the sale of goods and services to a customer that are not in exchange for a distinct good or service.

Entities apply ASC 718 to measure and classify share-based sales incentives, and reflect the measurement of such incentives, as a reduction of the transaction price and also recognize such incentives in accordance with the guidance in ASC 606 on consideration payable to a customer.

Entities that receive distinct goods or services from a customer account for the share-based payment in the same manner as they account for other purchases from suppliers (i.e., by applying the guidance in ASC 718).

Any excess of the fair-value-based measure of the share-based payment award over the fair value of the distinct goods or services received is reflected as a reduction to the transaction price and recognized in accordance with the guidance in ASC 606 on consideration payable to a customer.

ASU 2019-08 was effective for the Company at the same time it adopted ASU 2018-07, which was for its annual reporting period that began January 1, 2020 and will be effective for interim periods beginning first quarter 2021.

The adoption of ASU 2018-07 had no material effect on the Company's results of operations, financial position, or cash flows for the year ended December 31, 2020.

Accounting Standards Adopted in 2019

Revenue Recognition (ASC 606) and Related Costs to Obtain or Fulfill a Contracts with Customers (ASC 340-40)

For the annual reporting period that began on January 1, 2019, the Company adopted ASU 2014-09 and the other clarifications and technical guidance issued by the Financial Accounting Standards Board ("FASB") related to this new revenue standard that have been collectively codified in Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, and the related ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, (together, "ASC 606").

have been collectively codified in ASC 606, Revenue from Contracts with Customers, and the related ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, (together, "ASC 606").

As an emerging growth company, the Company adopted ASC 606 under the extended transition provisions available to a non-public business entity.

Accordingly, the Company was not required to report under the new standards until the Company’s annual reporting period for the year ended December 31, 2019.

As such, amounts previously reported in the Company’s unaudited condensed consolidated financial statements and related disclosures for prior quarterly periods in 2019 on Forms 10-Q were under the legacy guidance of ASC 605, Revenue Recognition, and the SEC’s Topic 13, Revenue Recognition .

In reporting the effects of the adoption of ASC 606 in its consolidated financial statements and related disclosures, the Company elected the full retrospective transition method.

Under this method, all annual periods presented herein (2019, 2018, and 2017) in these consolidated financial statements and related disclosures have been retrospectively recasted to reflect the provisions of ASC 606.

In connection with the Company’s evaluation and adoption of ASC 606, the classification of certain transactions previously presented in revenue at their gross amounts were re-evaluated under the principal-agent guidance and have been retrospectively recasted within the Company’s statements of operations to a net presentation (see Note 2, Restatement of Previously Issued Consolidated Financial Statements ).

Under this method, all annual periods presented herein in these consolidated financial statements and related disclosures have been retrospectively recasted to reflect the provisions of ASC 606.

In connection with the Company’s evaluation and adoption of ASC 606, the classification of certain transactions previously presented in revenue at their gross amounts were re-evaluated under the principal-agent guidance were retrospectively recasted within the Company’s statements of operations to a net presentation.

There were no other adjustments as the result of the adoption of ASC 606 and, accordingly, no adjustment was required to the Company’s beginning retained earnings (deficit) at January 1, 2017 to reflect the cumulative effect of initially applying the new standards.

These reclassifications did not have any impact on income from operations, income (loss) before income taxes, net income (loss), assets, liabilities, stockholders’ deficit, or cash flows for any period.

Beginning first quarter 2020, all interim reporting periods, including comparative periods, will also reflect the provisions of ASC 606.

The effects on the Company's consolidated balance sheets and consolidated statements of cash flows related to the full retrospective adoption of ASC 606 were not material and therefore no adjustments have been made for the adoption of the new accounting standard.

For a summary of the effects of the adoption of ASC 606, along with the effects of certain error corrections, on line items in the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017, see Note 2, Restatement of Previously Issued Consolidated Financial Statements .

The following table summarizes the effects of the Company's full retrospective adoption of ASC 606 on line items in the Company's consolidated statements of operations for the year ended December 31, 2019:

(in thousands)

For the Year Ended December 31, 2019

Effects of Adoption of ASC 606

Balances Without Adoption of ASC 606

Consolidated:

Costs of Services

See Note 20, Selected Quarterly Financial Results (Unaudited) , for information about how the full retrospective adoption of ASC 606 effected the Company's consolidated revenues and costs of services for each interim quarterly reporting period in the years ended December 31, 2019 and 2018.

See Note 18, Segment Information , for information on the effects that the full retrospective adoption of ASC 606 had on the revenues of the Company's reportable segments for the years ended December 31, 2019, 2018, and 2017.

The adoption of ASC 606 resulted only in offsetting reclassifications between revenues and costs of services within the same reporting periods.

Accordingly, these reclassifications did not have any impact on income from operations, income (loss) before income taxes, net income (loss), assets, liabilities, stockholders’ deficit, or cash flows for any period.

Gains and Losses from Derecognition of Non-Financial Assets (ASU 2017-05)

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Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities.

As an EGC, this ASU was effective for the Company's annual reporting period beginning in 2019 and will be effective for interim periods beginning in 2020.

The Company made no payments in 2019 for contingent consideration related to business combinations.

As an EGC, this ASU was effective for the Company's annual reporting period beginning in 2019 and was effective for interim periods beginning in 2020.

The Company made no payments in 2020 or 2019 for contingent consideration related to business combinations.

Income Taxes for Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)

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GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property.

ASU 2016-16 was effective for the Company's annual reporting period ended December 31, 2019 and will be effective for interim periods beginning in 2020.

ASU 2016-16 was effective for the Company's annual reporting period ended December 31, 2019 and interim periods beginning in 2020.

The adoption of ASU 2016-16 did not have a material effect on the Company's results of operations, financial position, or cash flows.

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if so, the set of transferred assets and activities is not a business.

In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a business.

In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a

The Company's December 2018 acquisition of certain assets of Direct Connect Merchant Services, LLC was not deemed to be the acquisition of a business under ASU 2017-01 because substantially all of the fair value was concentrated in a single identifiable group of similar identifiable assets.

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For its annual reporting period beginning January 1, 2018, the Company adopted the provisions of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends ASC Topic 718, Compensation–Stock Compensation .

This adoption of this new ASU had the following effects:

This adoption had the following effects:

Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations.

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The Company made a policy election to recognize the impact of forfeitures when they occur.

This policy election primarily impacted the Company's new equity compensation plans originating in 2018 (see Note 15, Equity-Based Compensation) , thus not requiring a cumulative effect adjustment to opening retained earnings for these new plans.

For the Company's previously existing equity compensation plan (the Management Incentive Plan), see Note 15, Equity-Based Compensation.

This policy election primarily impacted the Company's new equity compensation plans originating in 2018 (see Note 15, Share -Based Compensation ) , thus not requiring a cumulative effect adjustment to opening retained earnings for these new plans.

For the Company's previously existing equity compensation plan (the Management Incentive Plan), see Note 15, Share -Based Compensation .

The amount of the cumulative effect upon adoption of ASU 2016-09 was not material and therefore has not been reflected in opening retained earnings on the Company's consolidated balance sheets or consolidated statements of changes in stockholders' deficit.

Recently Issued Accounting Standards Pending Adoption

The following standards are pending adoption and will likely apply to the Company in future periods based on the Company's current business activities.

Implementation Costs Incurred in Cloud Computing Arrangements (ASU 2018-15)

service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

As an EGC, this ASU will be effective for the Company's annual reporting period beginning January 1, 2021, and will be effective for interim periods beginning in 2022.

The amendments are applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and the Company has not yet made a determination to use the retrospective or prospective adoption method.

Based on current operations of the Company, the adoption of ASU 2018-15 is not expected to have a material effect on the Company's results of operations, financial position, or cash flows.

Reference Rate Reform (ASU 2020-04)

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This ASU provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financial Rate.

Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met.

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

ASU 2021-01 ASU 2020-04 can be adopted at any time before December 31, 2022.

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

Leases (ASC 842)

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1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term.

As an EGC, this standard is effective for the Company's annual reporting period beginning in 2021 and interim reporting periods beginning first quarter of 2022.

As an EGC, this standard is effective for the Company's annual and interim reporting periods beginning 2022.

The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but it is not expected to have a material effect on the Company's results of operations or cash flows.

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The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur.

ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , was issued in November 2018 and excludes operating leases from the new guidance.

The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective.

The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable.

As a Smaller Reporting Company (as defined by the SEC), the Company must adopt this new standard no later than the beginning of 2023.

The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable and notes receivable.

Since the Company was a smaller reporting company ("SRC") on November 15, 2019, the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods.

Goodwill Impairment Testing (ASU 2017-04)

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Upon adoption, the ASU will be applied prospectively.

As an EGC, this ASU will be effective for annual and interim impairment tests performed in periods beginning in 2022.

Since the Company was a SRC on November 15, 2019, the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods.

The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.

Share-Based Payments to Non-Employees (ASU 2018-07)

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

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

Share-Based Payments to Customers (ASU 2019-08)

In November 2019, the FASB issued ASU 2019-08, Stock Compensation and Revenue from Contracts with Customers ("ASU 2019-08").

ASU 2019-08 will apply to share-based payments granted in conjunction with the sale of goods and services to a customer that are not in exchange for a distinct good or service.

Entities will apply ASC 718 to measure and classify share-based sales incentives, and reflect the measurement of such incentives, as a reduction of the transaction price and also recognize such incentives in accordance with the guidance in ASC 606 on consideration payable to a customer.

Entities that receive distinct goods or services from a customer will account for the share-based payment in the same manner as they account for other purchases from suppliers (i.e., by applying the guidance in ASC 718).

Any excess of the fair-value-based measure of the share-based payment award over the fair value of the distinct goods or services received will be reflected as a reduction to the transaction price and recognized in accordance with the guidance in ASC 606 on consideration payable to a customer.

ASU 2019-08 is effective for the Company at the same time it adopts ASU 2018-07, which is annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021.

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

Disclosures for Fair Value Measurements (ASU 2018-13)

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement .

This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project.

For all entities, this ASU is effective for annual and interim reporting periods beginning in 2020.

Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented.

As disclosure guidance, the adoption of this ASU will not have an effect on the Company's financial position, results of operations or cash flows.

Implementation Costs Incurred in Cloud Computing Arrangements (ASU 2018-15)

In August 2018, the FASB issued ASU 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

As an EGC, this ASU is effective for the Company for annual

reporting periods beginning in 2021, and interim periods within annual periods beginning in 2022.

The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

The Company is evaluating the impact this ASU will have on its consolidated financial statements.

Simplifying the Accounting for Income Taxes (ASU 2019-12)

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This ASU is effective for the Company on January 1, 2022.

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

We are evaluating the effect of ASU 2019-12 on our consolidated financial statements.

Concentration of Risk

A substantial portion of the Company's revenues and receivables are attributable to merchants.

In 2019, 2018, and 2017, no one merchant customer accounted for 10% or more of the Company's consolidated revenues.

For the years ended December 31, 2020, 2019, and 2018, no one merchant customer accounted for 10% or more of the Company's consolidated revenues.

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

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

For the years ended December 31, 2019, 2018, and 2017, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 18 % , 14 % , and 10 % of the Company's consolidated revenues.

For the years ended December 31, 2020, 2019, and 2018, merchants referred by one ISO organization with merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 21 %, 18 %, and 14 %, respectively, of the Company's consolidated revenues.

A majority of the Company's cash and restricted cash is held in certain financial institutions, substantially all of which is in excess of federal deposit insurance corporation limits.

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Certain prior year amounts in these consolidated financial statements have been reclassified to conform to the current year presentation, with no net effect on the Company's income from operations, income (loss) before income tax expense (benefit), net income (loss), stockholders' deficit, or cash flows from operations, investing, or financing activities.

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

Corrections of Errors

On March 26, 2020, the Audit Committee of the Board of Directors (the “Audit Committee”) of the Company, after considering the recommendations of management, and discussing such recommendations with counsel, concluded that its 2018 and 2017 audited financial statements included in its Annual Report on Form 10-K as of and for the year ended December 31, 2018 (the “2018 Annual Report”) and its unaudited condensed consolidated financial statements as of and for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018 included in the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2019 and 2018, June 30, 2019 and 2018, and September 30, 2019 and 2018 (the “2019 Quarterly Reports”) should no longer be relied upon due to misstatements that are described in greater detail below, and that the Company would restate such financial statements to make the necessary accounting corrections.

During the preparation of its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”), the Company noted two errors within its Consumer Payments reportable segment.

First, the Company noted an understatement of losses related to certain settlement activities with the Company’s sponsor banks, merchants and ISOs.

The second error noted involved an out-of-period recognition of certain chargeback revenues and related costs of services between 2018 and 2017.

investigation was conducted with the assistance of outside accounting consultants.

As a result of the investigation, the Company concluded that the errors had resulted in misstatements in its consolidated financial statements for the periods identified above that were due to a failure to appropriately reconcile certain settlement accounts with the Company’s general ledger.

The Company evaluated these errors and their effects on the its consolidated financial statements and related disclosures using the guidance in ASC No.

250, Accounting Changes and Error Corrections, Staff Accounting Bulletin Topic 1.M, Materiality ("SAB 99"), and Topic 1.N, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements ("SAB108") .

The Company considered both quantitative and qualitative characteristics of the errors and as a result it has restated its consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in its 2018 Annual Report and the unaudited condensed consolidated financial statements as of and for the quarterly periods ended March 31, 2018, June 30, 2018, and September 30, 2018 included in its 2019 Quarterly Reports.

Based on the analysis noted above, the correction of errors resulting from the failure to appropriately reconcile the settlement ledger to the Company's general ledger were not material to the previously reported consolidated financial statements for the year ended December 31, 2016.

The restatement adjustments and error corrections and their impacts on previously reported consolidated financial statements are described below.

The cumulative effect to correct the errors for all periods prior to 2017 resulted in a $ 5.0 reduction on January 1, 2017 to the Company’s consolidated statement of stockholders’ equity (deficit) presented herein.

Restated Consolidated Statements of Operations

For the years ended December 31, 2018 and 2017, the following tables show the effects, by line item, on the Company’s consolidated statements of operations presented herein for:

1) the correction of the errors related to certain settlement activities and out-of-period chargeback revenue described above and 2) the full retrospective adoption of ASC 606, Revenue from Contracts with Customers, described in the section "Accounting Standards Adopted in 2019" in Note 1, Nature of business and Accounting Policies :

(in thousands)

For the Year Ended December 31, 2018

Retrospective

Costs of services

Income from operations

Loss before income taxes

Income tax benefit

Basic and diluted loss per share

Pro forma income tax benefit (unaudited)

Pro forma net loss (unaudited)

Pro forma loss per share (unaudited)

(in thousands)

For the Year Ended December 31, 2017

Retrospective

Costs of services

Income from operations

Basic and diluted income per share

Pro forma income tax expense (unaudited)

Pro forma net income (unaudited)

Pro forma income per share (unaudited)

For information on the effects that the full retrospective adoption of ASC 606 had on line items in the Company's consolidated statement of operations for the year ended December 31, 2019, see the section “Accounting Standards Adopted in 2019” in Note 1, Nature of Business and Accounting Policies .

For information about the effects on revenues and income (loss) from operations of the Company's reportable segments related to the full retrospective adoption of ASC 606 and the corrections of errors for the years ended December 31, 2019, 2018, and 2017, see Note 18, Segment Information .

See Note 20, Selected Quarterly Financial Results (Unaudited) , for information about how the full retrospective adoption of ASC 606 and the corrections of the errors affected the Company's consolidated revenues, income (loss) from operations, and earnings (loss) per share for each interim quarterly reporting period in the years ended December 31, 2019 and 2018.

Restated Consolidated Balance Sheet

As a result of the changes to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017 and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated balance sheet as of December 31, 2018 presented herein, as follows:

(in thousands)

As of December 31, 2018

Accounts receivable, net

Settlement assets

Total current assets

Deferred income tax asset, net

Settlement obligations

Total current liabilities

Total liabilities

Accumulated deficit

Total stockholders' deficit

Total liabilities and stockholders' deficit

Restated Consolidated Statements of Changes in Stockholder's Equity (Deficit)

For reporting periods prior to January 1, 2017, the cumulative effect of correcting the errors related to the settlement matters was approximately $ 5.0 million.

Opening cumulative earnings in the Company's consolidated statement of stockholders' equity (deficit) presented herein has been reduced as of January 1, 2017 by this amount.

As a result of the changes related to the error corrections to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017 and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated statements of stockholders' equity (deficit) at December 31, 2018, December 31, 2017, and January 1, 2017 presented herein, as follows:

(in thousands)

December 31, 2018

December 31, 2017

January 1, 2017

Accumulated (deficit) earnings prior to error corrections

Correction of accumulated earnings at January 1, 2017

Correction of net income for 2017

Correction of net loss for 2018, net of income taxes

Corrected accumulated (deficit) earnings

Total stockholders' (deficit) equity prior to error corrections

Correction of accumulated earnings at January 1, 2017

Correction of net income for 2017

Correction of net loss for 2018, net of income taxes

Corrected total stockholders' (deficit) equity

Restated Consolidated Statements of Cash Flows

As a result of the error corrections to the Company's consolidated statements of operations for the years ended December 31, 2018 and 2017, its consolidated balance sheet as of December 2018, and the adjustment to accumulated earnings at January 1, 2017 in the Company's consolidated statement of stockholders' equity (deficit), the following line items were affected on the Company's consolidated statements of cash flows for the years ended December 31, 2018 and 2017 presented herein, as noted in the following table.

The restatement did not change the Company's net cash flows from operations, investing, or financing activities for any reporting period.

DISPOSAL OF BUSINESS

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

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

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

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

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

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

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

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

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

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

Proceeds received by PRET were $ 179.4 million, net of $ 0.6 million for a working capital adjustment.

The gain amounted to $ 107.2 million as follows:

(in thousands)

Gross cash consideration from buyer $ 180,000

Less working capital adjustment paid in cash ( 584 )

Net proceeds from buyer 179,416

Transaction costs incurred ( 5,383 )

Intangible assets ( 62,158 )

Other assets sold, net of obligations assumed ( 716 )

Goodwill assigned to business sale ( 2,683 )

Other intangible assets ( 1,237 )

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

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

Income tax expenses associated with the gain attributable to the stockholders of the Company were estimated to be approximately $ 12.3 million.

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

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

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

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

The working capital adjustment of $ 584 thousand 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.

As disclosed in Note 10 , Long-T erm Debt and Warrant Liability , $ 106.5 million of cash received by the Company was used on September 25, 2020 to reduce the outstanding balance of the term loan facility under the Company's Senior Credit Facility.

Operating Lease Obligation

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

The Company has not adopted ASC 842;

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

The Company was relieved of minimum lease payment obligations totaling $ 0.5 million for the remainder of the current lease term.

Continuing Operations

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

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

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

Pro Forma Information

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

Year Ended December 31,

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

Provision for deferred income taxes

Change in operating assets and liabilities (net of business combinations):

Accounts receivable

Settlement assets and obligations, net

Accounts payable and other current liabilities

* Reflects certain reclassifications to conform to current year presentation.

(in thousands) 2020 2019

Year Ended December 31, 2017

Change in operating assets and liabilities:

Accounts receivable

Settlement assets and obligations, net

Accounts payable and other current liabilities

* Reflects certain reclassifications to conform to current year presentation.

Revenues $ 12,042 $ 11,694

Income from operations (1)

$ 1,825 $ 2,275

Net income (2) (3)

$ 1,725 $ 2,218

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

$ 1,725 $ 2,218

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

- Basic and Diluted (4)

$ 0.03 $ 0.03

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

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

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

5.5 % and 2.5 % for the years ended December 31, 2020 and 2019, respectively.

These rates exclude the effect of the $ 107.2 million net gain on the sale recognized during the year ended December 31, 2020.

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

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

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The Company’s consumer payment services enable the Company’s customers to accept card, electronic, and digital-based payments at the point of sale.

These services may include authorization services, settlement and funding services, customer support and help-desk functions, chargeback resolution, payment security services, consolidated billing and statements, and on-line reporting.

The Company also earns revenue and commissions from resale of electronic point-of-sale (“POS”) equipment.

The Company’s commercial payment services enable the Company’s customers to automate their accounts payable and other commercial payments functions with the Company’s payment services that utilize physical and virtual payment cards as well as ACH transactions.

ACH transactions.

In addition, the Company provides cost-plus-fee turnkey business process outsourcing and assists commercial customers with programs that are designed to increase acceptance of electronic payments.

More recently, the Company formed its Integrated Partners segment which uses payment-adjacent technologies to facilitate the acceptance of electronic payments from customers in the rental real estate, rental storage businesses, medical, and hospitality industries.

Applying the Revenue Recognition Accounting Standard

The Company's Integrated Partners segment uses payment-adjacent technologies to facilitate the acceptance of electronic payments from customers in the rental real estate, medical, and hospitality industries.

Revenue Recognition

At contract inception, the Company assesses the services and goods promised in its contracts with customers and identifies the performance obligation for each promise to transfer to the customer a service or good that is distinct.

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Under a stand-ready obligation, the evaluation of the nature of the Company’s performance obligation is focused on each time increment rather than the underlying activities.

Therefore, the Company has determined that its services comprise a series of distinct days of

service that are substantially the same and have the same pattern of transfer to the customer.

Therefore, the Company has determined that its services comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer.

Accordingly, the promise to stand ready is accounted for as a single-series performance obligation.

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When combined with the underlying payment services, the license and the payment services provided to the customer are a single stand-ready obligation and the Company’s performance obligation is defined by each time increment, rather than by the underlying activities, satisfied over time based on days elapsed.

Interest income is reported separately on the Company’s statement of operations within Other, net and was approximately $ 561,000 , $ 617,000 , and $ 637,000 for the years ended December 31, 2019, 2018, and 2017, respectively.

Interest income is reported separately on the Company’s statements of operations within Other, net and was approximately $ 0.8 million, $ 0.6 million, and $ 0.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Transaction Price Allocated to Future Performance Obligations

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

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

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

The Company from time-to-time may elect to buy out all or a portion of an ISO’s rights to receive future commission payments related to certain merchants.

Amounts paid to the ISO for these residual buyouts are capitalized by the Company under the accounting guidance for intangible assets.

Amounts paid to the ISO for these residual buyouts are capitalized by the Company under the accounting guidance for intangible assets and included in intangible assets, net on our consolidated balance sheets.

Contract Assets and Contract Liabilities

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Contract liabilities represent consideration received from customers in excess of revenues recognized.

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

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

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

(in thousands)

Consolidated Balance Sheet Location

December 31, 2019

December 31, 2018

Contract liabilities, net (current)

Customer deposits and advance payments

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

Contract liabilities, net (current) Customer deposits and advance payments $ 1,494 $ 1,912

The balance for the contract liabilities was approximately $ 1.8 million and $ 2.2 million at January 1, 2019 and January 1, 2018, respectively.

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

The changes in the balances during the years ended December 31, 2020, 2019, and 2018 were due to the timing of advance payments received from the customer.

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The following table presents a disaggregation of our consolidated revenues by type for the years ended December 31, 2020, 2019 and 2018:

(in thousands)

Year Ended December 31,

(in thousands) 2020 2019 2018

Revenue Type:

Merchant card fees $ 377,346 $ 339,450 $ 343,791

Outsourced services

Other services

Outsourced services and other services 23,103 28,712 29,099

Equipment 3,893 3,692 2,932

Total revenues $ 404,342 $ 371,854 $ 375,822

BUSINESS COMBINATIONS, ASSET ACQUISITIONS, AND ASSET CONTRIBUTIONS

Asset Acquisitions in 2019

See Note 12, Commitments and Contingencies , for information about a merchant portfolio acquired in 2019 for a contingent purchase price.

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

The purchase price for the YapStone net assets was $ 65.0 million in cash plus a non-controlling interest in PRET with a fair value that was estimated to be approximately $ 5.7 million .

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

ASSET ACQUISITIONS, ASSET CONTRIBUTIONS, AND BUSINESS COMBINATIONS

Asset Acquisitions

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

under an asset purchase and contribution agreement.

The purchase price for the YapStone net assets was $ 65.0 million in cash plus a non-controlling interest ("NCI") in PRET issued to YapStone, Inc.

with a fair value that was estimated to be approximately $ 5.7 million.

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

agreement, respectively.

The $ 65.0 million of cash was funded from the Company's Senior Credit Facility.

PRET is part of the Company's Integrated Partners reportable segment.

During the year ended December 31, 2019, no earnings of PRET were allocated to the non-controlling interest pursuant to the profit-sharing agreement between the Company and the non-controlling interest.

During the third quarter of 2020, substantially all of the YapStone net assets were sold to a third party.

See Note 2 , Disposal of Business , to the consolidated financial statements.

Approximately $ 45.1 million of PRET's 2020 earnings through the disposal date, which were composed mostly of gain recognized on the sale, were attributed and distributed in cash to the NCI during the third quarter 2020 pursuant to the profit-sharing agreement between the Company and the NCI.

At the time of the sale, the NCI was also redeemed in cash for its $ 5.7 million interest in PRET.

For the year ended December 31, 2019, no earnings of PRET were allocated to the NCI.

Residual Portfolio Rights Acquired

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Of the $ 15.2 million, $ 5.0 million was funded from the Senior Credit Facility, $ 10.0 million was funded from revolving credit facility under the Senior Credit Facility, and cash on hand was used to fund the remaining amount.

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

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

This acquisition became part of the Company's Consumer Payments reportable segment.

Asset Contributions in 2019

The purchase price was subject to a potential increase of up to $ 6.4 million in accordance with the terms of the agreement between the Company and the sellers over a three-year period.

Additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset and amortization expense is adjusted to reflect the new carrying value at the original purchase date.

The first period for determining contingent consideration ended in March 2020, and the Company paid the seller $ 2.1 million of additional cash consideration, partially offset by an amount owed to the Company by the seller.

At December 31, 2020, it became apparent that the Company would owe the seller an additional $ 2.1 million for the second period for determining contingent consideration ending March 2021, and the Company recorded this estimated amount in its consolidated financial statements as of December 31, 2020.

Direct Connect

In December 2018, the Company acquired a merchant portfolio for $ 44.8 million from Direct Connect Merchant Services, LLC.

The purchase price included cash contingent consideration of up to approximately $ 7.3 million, determinable over a period that ended on December 31, 2019.

At December 31, 2019, the Company determined that it did no t owe the contingent consideration.

Asset Assignments and Contributions

Merchant Portfolio Rights and Reseller Agreement

In October 2019, the Company simultaneously entered into two agreements with another entity.

These two related agreements 1) assign to the Company certain perpetual rights to a merchant portfolio and 2) form a 5 -year reseller arrangement whereby the Company will offer and sell to its customer base certain online services to be fulfilled by the other entity.

No cash consideration was paid to, or received from, the other entity at execution of either agreement.

It was not initially determinable if the Company would have to pay any amount as consideration for the merchant portfolio rights due to the provisions of the related reseller agreement.

The Company does not anticipate any net losses under the two contracts.

Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both:

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

Prior to December 31, 2020, amounts paid to the other entity were accounted for as either 1) standard costs of the services sold by the Company under the 5 -year reseller agreement or 2) consideration for the merchant portfolio rights.

At December 31, 2020, the Company believes it has accumulated the additional data and historical experience that it deems necessary in order to reasonably estimate an amount of cash that the Company believes it will ultimately have to transfer as remaining consideration for the merchant portfolio rights.

Accordingly, at December 31, 2020 the Company accrued

approximately $ 6.2 million of estimated remaining cash consideration and additional accumulated costs for the merchant portfolio.

At December 31, 2020, the Company has recorded aggregate costs, including both actual costs and estimated remaining consideration, totaling $ 11.1 million.

As of December 31, 2019, the Company had recorded aggregate actual costs of approximately $ 1.1 million.

A mortization expense was adjusted to reflect the new carrying value at the original purchase date.

As of December 31, 2020 and 2019, accumulated amortization was $ 2.8 million and $ 0.1 million, respectively.

The merchant portfolio has an estimated remaining life of 3.5 years at December 31, 2020.

The Company will continue to review its estimate of the remaining consideration to be funded and adjust the value of the intangible asset and accrual for its obligation accordingly.

eTab and Cumulus (Related Party)

In February 2019, a subsidiary of the Company, Priority Hospitality Technology, LLC ("PHOT"), received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements.

In February 2019, a subsidiary of the Company, PHOT, received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements.

No material liabilities were assumed by PHOT.

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

Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through December 31, 2019, and therefore no recognition of the NCI has been reflected in the Company's unaudited condensed consolidated financial statements.

For the year ended December 31, 2020, a total of $ 250,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this same amount was also distributed in cash to the NCIs during the same reporting period.

Accordingly, there is no material amount to classify as mezzanine equity on the Company's consolidated balance sheet at December 31, 2020.

Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through December 31, 2019, and therefore no recognition of the NCI was reflected in the Company's consolidated financial statements for reporting periods prior to 2020 .

Business Combinations in 2018

In April 2018, Priority PayRight Health Solutions, LLC ("PPRHS"), a subsidiary of the Company, purchased the majority of the operating assets and certain operating liabilities of PayRight Health Solutions LLC ("PayRight").

This asset purchase was deemed to be a business under ASC 805.

This purchase allowed PPRHS to gain control over the PayRight business and therefore the Company's consolidated financial statements include the financial position, results of operations, and cash flows of PayRight from the date of acquisition.

PayRight utilizes technology assets to

deliver customized payment solutions to the health care industry.

The results of the acquired business and goodwill of $ 0.3 million from the transaction are being reported by the Company as part of the Commercial Payments and Managed Services reportable segment.

Additionally, the acquisition resulted in the recognition of intangible and net tangible assets with a fair value of $ 0.6 million.

PayRight utilizes technology assets to deliver customized payment solutions to the health care industry.

The results of the acquired business and goodwill of $ 0.3 million from the transaction are being reported by the

Company as part of its Integrated Partners reportable segment.

The acquisition resulted in the recognition of intangible and net tangible assets with a fair value of $ 0.6 million.

The Company transferred total consideration with a fair value of $ 0.9 million consisting of:

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and $ 0.1 million of other consideration.

Certain PayRight sellers were provided profit-sharing rights in PayRight as non-controlling interests, however, based on this arrangement no losses or earnings were allocated to the non-controlling interests for the years ended December 31, 2019 and 2018.

PayRight is part of the Company's Integrated Partners reportable segment.

Certain PayRight sellers were provided profit-sharing rights in PayRight as non-controlling interests "NCIs"), however, based on this arrangement no losses or earnings were allocated to the NCIs for the years ended December 31, 2020, 2019 and 2018.

At December 31, 2020, all of the NCIs' interest have been redeemed for amounts that were not material.

Previously, in October 2015, the Company purchased a non-controlling interest in the equity of PayRight, and prior to April 2018 the Company accounted for this investment using the equity method of accounting.

At December 31, 2017, the Company's carrying value of this investment was $ 1.1 million .

At January 1, 2018, the Company's carrying value of this investment was $ 1.1 million.

Immediately prior to PPRHS' April 2018 purchase of substantially all of PayRight's business assets, the Company's existing non-controlling investment in PayRight had a carrying value of approximately $ 1.1 million with an estimated fair value on the acquisition date of approximately $ 0.3 million.

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RadPad and Landlord Station

In July 2018, the Company acquired substantially all of the net operating assets of RadPad Holdings, Inc.

In July 2018, the Company's subsidiary PRET, acquired substantially all of the operating assets of RadPad Holdings, Inc.

("RadPad") and Landlord Station, LLC ("Landlord Station").

RadPad is a marketplace for the rental real estate market.

Landlord Station offers a complementary toolset that focuses on facilitation of tenant screening and other services to the fast-growing independent landlord market.

Landlord Station offers a complementary tool set that focuses on facilitation of tenant screening and other services to the fast-growing independent landlord market.

These asset purchases were deemed to be a business under ASC 805.

The Company formed a new entity, Priority Real Estate Technology, LLC ("PRET"), to acquire and operate these businesses.

Due to the related nature of the two sets of business assets, same acquisition dates, and how the Company intends to operate them under the "RadPad" name and operating platform within PRET, the Company deemed them to be one business for accounting and reporting purposes.

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Total consideration paid for RadPad and Landlord Station was $ 4.3 million consisting of $ 3.9 million in cash plus forgiveness of pre-existing debt owed by the sellers to the Company of $ 0.4 million.

Additionally, the Company paid and expensed $ 0.1 million for transaction costs.

Net tangible and separately-identifiable intangible assets with an initial fair value of $ 2.1 million were acquired along with goodwill with an initial value of $ 2.2 million.

Non-controlling equity interests in PRET were issued to certain sellers in the form of residual profit interests and distribution rights, however the fair value of these non-controlling interests was deemed to be immaterial at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the operating agreement for PRET.

Under the terms of the profit-sharing arrangement between the controlling and non-controlling interests, no losses or earnings were allocated to the non-controlling interests for the years ended December 31, 2019 and 2018.

During the fourth quarter of 2018, the Company received additional information about the fair values of assets acquired and liabilities assumed.

Accordingly, measurement period adjustments were made to the opening balance sheet to decrease net assets acquired and increase goodwill by $ 0.2 million.

NCIs in PRET were issued to certain sellers of the RadPad and Landlord Station assets in the form of residual profit interests and distribution rights.

However the fair value of these NCIs was deemed to not be material at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the operating agreement for PRET.

Under the terms of PRET's operating agreement, no material earnings or losses related to RadPad or Landlord Station were attributable to the NCIs for the years ended December 31, 2019 or 2018.

As disclosed in Note 2 , Disposal of Business , to the consolidated financial statements, in third quarter 2020 PRET sold substantially all of its assets, composed mostly of the assets acquired from YapStone, Inc.

in March 2019, to a third party.

This disposal by PRET resulted in the redemptions of PRET's NCIs, including the NCIs that originated from PRET's July 2018 acquisition of the RadPad and Landlord Station assets.

Priority Payment Systems Northeast

In July 2018, the Company acquired substantially all of the net operating assets of Priority Payment Systems Northeast, Inc.

In July 2018, the Company acquired substantially all of the operating assets of Priority Payment Systems Northeast, Inc.

("PPS Northeast").

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In addition, contingent consideration in an amount up to $ 0.5 million was deemed to have a fair value of $ 0.4 million at acquisition date.

If earned, the seller can receive this contingent consideration in either cash or additional shares of the Company's common stock, as mutually agreed by the Company and seller.

If earned, the seller can receive this contingent consideration in either cash or additional shares of the Company's common stock, as mutually agreed by the Company and seller, over a two-year period from the date of the acquisition.

Net tangible and separately-identifiable intangible assets with an initial fair value of $ 2.0 million were acquired along with goodwill with an initial value of $ 1.9 million, including the $ 0.4 million estimated fair value of the contingent consideration due to the seller.

Transaction costs were not material and were expensed.

At December 31, 2019, the fair value of the contingent consideration was estimated to be approximately $ 0.2 million, which resulted in a $ 0.2 million reduction in the carrying value.

No amount has been paid to the seller.

As of December 31, 2020, the Company has determined that it will owe no contingent consideration to the seller, and accrued contingent consideration of approximately $ 0.2 million was credited to the Company's statements of operations for both years ended December 31, 2020 and 2019.

Priority Payment Systems Tech Partners

In August 2018, the Company acquired substantially all of the net operating assets of M.Y.

In August 2018, the Company acquired substantially all of the operating assets of M.Y.

Capital, Inc.

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In addition, contingent consideration in an amount up to $ 1.0 million was deemed to have a fair value of $ 0.6 million at acquisition date.

If earned, the seller will receive half of any contingent consideration in cash and the other half in a number of shares of common stock of the Company equal to the portion of the earned contingent consideration payable in shares of common stock of the Company.

If earned, the seller would have received half of any contingent consideration in cash and the other half in a number of shares of common stock of the Company equal to the portion of the earned contingent consideration payable in shares of common stock of the Company, over a two-year period from the date of acquisition.

Net tangible and separately-identifiable intangible assets with an initial fair value of $ 2.2 million were acquired along with goodwill with an initial value of $ 3.4 million, including the $ 0.6 million estimated fair value of the contingent consideration due to the seller.

Transaction costs were not material and were expensed.

At December 31, 2019, the fair value of the contingent consideration was estimated to be approximately $ 0.2 million, which resulted in a $ 0.4 million reduction in the carrying value.

No amount has been paid to the seller.

As of December 31, 2020, the Company has determined that it will owe no contingent consideration to the seller, and accrued contingent consideration of approximately $ 0.2 million and $ 0.4 million was credited to the Company's statement of operations for the years ended December 31, 2020 and 2019, respectively.

Other Information

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Goodwill for all 2018 business combinations is deductible by the Company for income tax purposes.

Asset Acquisitions in 2018

In December 2018, the Company acquired a merchant portfolio for $ 44.8 million from Direct Connect Merchant Services, LLC.

The purchase price included cash contingent consideration of up to approximately $ 7.3 million , determinable over a period that ended on December 31, 2019.

At December 31, 2019, the Company has determined that it will owe no contingent consideration.

SETTLEMENT ASSETS AND OBLIGATIONS

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The Company has agreements with member banks which allow the Company to route transactions under the member bank's control to clear transactions through the card networks.

Timing differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants.

Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations are not liabilities of the Company.

differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants.

Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company.

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

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Unused merchant reserves are returned to the merchant after termination of the merchant agreement or in certain instances upon a reassessment of risks during the term of the merchant agreement.

Exception items that the Company is attempting to collect from the merchants through the funds settlement process, merchant reserves or from the ISO partners are recognized as settlement assets in the Company’s consolidated balance sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover.

Provisions for merchant losses are included as a component of costs of services in the Company’s consolidated statements of operations.

Exception items that become the liability of the Company are recorded as merchant losses, a component of costs of services in the consolidated statements of operations.

Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves are recognized as settlement assets in the Company’s consolidated balance sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover.

Expenses for actual and estimated merchant losses for the years ended December 31, 2020, 2019, and 2018 were $ 4.1 million, $ 3.1 million, and $ 3.1 million, respectively.

Commercial Payments Segment

3 unchanged sentences

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

As restated - Note 2

(in thousands)

December 31, 2019

December 31, 2018

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

Settlement Assets:

9 unchanged sentences

The Company has notes receivable from ISOs and another entity (see Note 13 , Related Party Matters ) totaling approximately $ 7.7 million and $ 5.7 million as of December 31, 2020 and 2019, respectively.

These notes receivable are reported as current and non-current on the Company's consolidated balance sheet.

The notes bear an average interest rate of 12.4 % and 12.8 % as of December 31, 2019 and 2018, respectively.

Under the terms of the agreements with ISOs, the Company preserves the right to holdback residual payments due to the ISOs and to apply such residuals against future payments due to the Company.

The term note due to the other party is secured by business assets and a personal guarantee.

Based on the terms of these agreements and historical experience, no reserves have been recorded for notes receivable as of December 31, 2019 and 2018.

Principal contractual maturities on the notes receivable at December 31, 2019 were as follows:

These notes receivable are reported as current

and non-current on the Company's consolidated balance sheet.

The notes bear a weighted-average interest rate of 13.1 % and 12.4 % as of December 31, 2020 and 2019, respectively.

Under the terms of the agreements with ISOs, the Company preserves the right to hold back residual payments due to the ISOs and to apply such residuals against future payments due to the Company.

The note receivable due from another entity is secured by business assets and a personal guarantee.

The allowance for doubtful note receivable is shown net of the current outstanding principal balances for notes receivable on the consolidated balance sheet and the $ 0.5 million provision for doubtful note receivable is included within selling, general and administrative expense on the consolidated statement of operations and within other noncash items, net on the consolidated statement of cash flows.

Principal contractual maturities on the notes receivable, including payment-in-kind interest, at December 31, 2020 were as follows:

(in thousands)

Year Ended December 31,

Year Ended December 31, Maturities

Total principal due 8,222

Carrying amount of loans

GOODWILL AND INTANGIBLE ASSETS

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

The Company's goodwill is allocated to reporting units as follows:

(in thousands)

December 31, 2019

December 31, 2018

Discount (long-term) ( 38 )

Allowance for doubtful note receivable (current) ( 467 )

Notes receivable, net $ 7,717

GOODWILL AND OTHER INTANGIBLE ASSETS

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

The Company's goodwill was allocated to reporting units as follows:

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

Consumer Payments $ 106,832 $ 106,832

Integrated Partners — 2,683

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

For the year ended December 31, 2019, the Company acquired $ 69.8 million of merchant portfolios (including $ 68.7 million related to the asset acquisition from YapStone, Inc.), $ 19.9 million in residual buyouts, and $ 1.0 million of technology intangibles.

For the year ended December 31, 2018, the Company acquired a $ 44.8 merchant portfolio from Direct Connect Merchant Services, LLC, $ 46.1 million in residual buyouts, $ 4.9 million in customer relationships, and $ 0.3 million for a trade name.

There were no business combinations consummated or changes in the carrying amount of goodwill for the year ended December 31, 2019.

The following table summarizes goodwill as of December 31, 2019 and 2018:

(in thousands)

Balance at January 1, 2018

Addition for the year ended December 31, 2018:

RadPad/Landlord Station

PPS Northeast

$ 106,832 $ 109,515

The following table summarizes the changes in the carrying value of goodwill for the years ended December 31, 2020, 2019 and 2018:

(in thousands) Amount

Balance at January 1, 2018 (all Consumer Payments) $ 101,532

Additions for the year ended December 31, 2018:

PayRight (Integrated Partners) 298

RadPad/Landlord Station (Integrated Partners) 2,385

PPS Northeast (Consumer Payments) 1,920

PPS Tech (Consumer Payments) 3,380

Balance at December 31, 2019 and 2018 109,515

Disposal of goodwill in Integrated Partners reporting unit (Note 2 , Disposal of Business )

Balance at December 31, 2020 $ 106,832

For business combinations consummated during the year ended December 31, 2018, goodwill is deductible for income tax purposes.

At December 31, 2019 and December 31, 2018, intangible assets consisted of the following:

There were no impairment losses for the years ended December 31, 2020, 2019, or 2018.

The Company performed its most recent annual goodwill impairment test as of October 1, 2020, as noted below, using the optional qualitative method.

On October 1, 2020 and December 31, 2020, only one of the Company's reporting units, Consumer Payments, had goodwill assigned to it due to the 2020 events described in Note 2 , Disposal of Business .

Effective for the annual reporting period ended December 31, 2020, the Company voluntarily changed the date for its annual goodwill impairment assessment from November 30 to October 1.

Both dates occur in the Company’s fourth quarter.

The Company believes 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 the Company’s consolidated financial statements.

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

By using the October 1 annual assessment date, the Company believes that it 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 its year-end consolidated financial statements and disclosures.

Based on the last quantitative assessment performed as of November 30, 2019, the estimated fair value of the Consumer Payments reporting unit exceeded the carrying value of the reporting unit.

The Consumer Payments reporting unit passed the qualitative assessment as of October 1, 2020 and the Company believes that it is not more likely than not that the fair value of the Consumer Payments reporting unit is less than its carrying amount on October 1, 2020.

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

As of December 31, 2020, the Company is not aware of any triggering events that have occurred since October 1, 2020.

Other Intangible Assets

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

For the year ended December 31, 2020, the Company recognized costs, including accrued contingent consideration, of $ 10.0 million and $ 3.5 million for merchant portfolios and residual buyouts, respectively.

For the year ended December 31, 2019, the Company recognized costs, including accrued contingent consideration, of $ 69.8 million for merchant portfolios (including $ 68.7 million related to the asset acquisition from YapStone, Inc.), $ 19.9 million for residual buyouts, and $ 1.0 million for technology intangibles.

See Note 4 , Asset Acquisitions, Asset Contributions , and Business Combinations , for information about contingent consideration related to acquisitions consummated in 2019 and 2018.

See Note 2 , Disposal of Business , for information about intangible assets that were disposed during the year ended December 31, 2020.

At December 31, 2020 and December 31, 2019, other intangible assets consisted of the following:

As of December 31,

(in thousands) 2020 2019

December 31, 2019

December 31, 2018

Merchant portfolios $ 55,816 $ 114,554

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Non-compete agreements 3,390 3,390

Trade names 2,870 2,870

Technology 14,390 15,390

ISO relationships 15,200 15,200

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

Trade names ( 1,651 ) ( 1,273 )

Technology ( 13,951 ) ( 12,758 )

ISO relationships ( 7,319 ) ( 6,341 )

Total accumulated amortization $ ( 148,708 ) $ ( 122,049 )

Accumulated allowance for impairment $ ( 1,753 ) $ —

Net carrying value $ 98,057 $ 182,826

The weighted-average amortization periods for intangible assets held at December 31, 2020 are as follows:

Amortization Method

Weighted-Average Life

Merchant portfolios

Straight-line

Residual buyouts

Straight-line and double declining

Non-compete agreements

Straight-line

ISO relationships

11 - 25 years

Sum-of-years digits

Customer relationships

10 - 15 years

Straight-line and sum-of-years digits

Useful Life Amortization Method Weighted-Average Life

Merchant portfolios 5 - 6 years

Straight-line 5.5 years

Residual buyouts 1 - 9 years

Straight-line and double declining 6.8 years

Non-compete agreements 3 years Straight-line 3.0 years

Trade names 5 - 12 years

Straight-line 11.6 years

Technology 6 - 7 years

Straight-line 6.1 years

ISO relationships 11 - 25 years

Sum-of-years digits 23.7 years

Customer relationships 10 - 15 years

Straight-line and sum-of-years digits 11.0 years

Amortization expense for intangible assets was $ 33.1 million, $ 32.4 million, and $ 14.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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(in thousands)

Year Ending December 31,

Amortization Expense

Year Ending December 31, Amortization Expense

2021 $ 28,216

Thereafter 7,698

Total $ 98,057

Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives, and other relevant events or circumstances.

See Note 12, Commitments and Contingencies , for information about a merchant portfolio acquisition with a contingent purchase price.

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

The Company performed its most recent annual goodwill impairment test as of November 30, 2019 using market data and discounted cash flow analysis.

The Company concluded there were no indicators of impairment as of December 31, 2019 and December 31, 2018 .

As such, there was no impairment loss for the years ended December 31, 2019, 2018, and 2017.

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

In the Company's Consumer Payments segment, a residual buyout intangible asset with a net carrying value of $ 2.2 million was deemed to be impaired at December 31, 2020.

The fair value of this intangible asset was estimated to be approximately $ 0.5 million, resulting in the recognition of an impairment charge of $ 1.8 million and this amount is included in selling, general and administrative expenses on the Company' consolidated statement of operations for the year ended December 31, 2020.

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

The Company also considered the market conditions generated by the COVID-19 pandemic and concluded that there were no additional impairment indicators present at December 31, 2020.

PROPERTY, EQUIPMENT AND SOFTWARE

The Company's property, equipment, and software balance primarily consists of furniture, fixtures, and equipment used in the normal course of business, computer software developed for internal use, and leasehold improvements.

Computer software

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

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

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

(in thousands)

December 31, 2019

December 31, 2018

Furniture and fixtures

Computer software

Leasehold improvements

As of December 31,

(in thousands) 2020 2019 Estimated Useful Life

Furniture and fixtures $ 2,795 $ 2,787 2 - 7 years

Equipment 10,216 10,101 3 - 7 years

Computer software 44,320 37,440 3 - 5 years

Leasehold improvements 6,250 6,367 5 - 10 years

63,581 56,695

Less accumulated depreciation ( 40,706 ) ( 33,177 )

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

The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities consisted of the following at December 31, 2019 and December 31, 2018 consisted of the following:

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

As of December 31,

(in thousands) 2020 2019

December 31, 2019

December 31, 2018

Accounts payable

Accrued compensation

Accrued network fees

Accounts payable - trade $ 4,308 $ 6,968

Accrued card network fees $ 8,041 $ 6,950

LONG-TERM DEBT AND WARRANT LIABILITY

Long-term debt owed by certain subsidiaries (the "Borrowers") of the Company consisted of the following as of December 31, 2012 and December 31, 2019:

As of December 31, 2020

(dollar amounts in thousands) 2020 2019

December 31, 2019

December 31, 2018

Term Loan - Senior, matures January 3, 2023 and bears interest at LIBOR plus 5.0% at December 31, 2019 and December 31, 2018 (actual rate of approximately 6.71% at December 31, 2019 and 7.5% at December 31, 2018)

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus payment-in-kind interest (actual rate of 10.5% at December 31, 2019 and December 31, 2018)

Revolving Credit Facility, matures January 22, 2022

Senior Credit Agreement:

Term Loan - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00 % beginning March 8, 2020) plus 6.50 % and 5.0 % at December 31, 2020 and 2019, respectively (actual rate of 7.50 % and 6.71 % at December 31, 2020 and 2019, respectively)

$ 279,417 $ 388,837

Revolving credit facility - $ 25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50 % and 5.0 % at December 31, 2020 and 2019, respectively (actual rate of 6.65 % and 6.71 % at December 31, 2020 and 2019, respectively).

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0 % plus an applicable margin at December 31, 2020 and 2019 (actual rate of 12.50 % and 10.50 % at December 31, 2020 and 2019, respectively)

102,623 95,142

Total debt obligations 382,040 495,479

current portion of long-term debt ( 19,442 ) ( 4,007 )

unamortized debt discounts

deferred financing costs

unamortized debt discounts and deferred financing costs ( 4,725 ) ( 5,894 )

Total long-term debt, net $ 357,873 $ 485,578

Substantially all of the Company's assets are pledged as collateral under the long-term debt agreements, which are described in more detail in the following sections of this footnote.

The Company's parent entity, Priority Technology Holdings, Inc., is neither a borrower nor a guarantor of the long-term debt.

Substantially all of the Company's assets are pledged as collateral under the credit agreements.

The Company is neither a borrower nor a guarantor of the credit agreements.

The Company's subsidiaries that are borrowers or guarantors under the credit agreements are referred to as the "Borrowers."

Long-Term Debt

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("Goldman Sachs" or "GS") for an $ 80.0 million term loan, the proceeds of which were used to refinance the amounts previously outstanding with Goldman Sachs.

This refinancing was deemed to be a debt modification for GAAP purposes.

The term loans under the Senior Credit Agreement and the GS Credit Agreement were issued at a discount of $ 3.7 million.

The Company determined that the 2017 debt refinancing should be accounted for as a debt extinguishment.

The Company recorded an extinguishment loss of approximately $ 1.8 million, which consisted primarily of lender fees incurred in connection with the refinancing and the write-off of unamortized deferred financing fees and original issue discount.

The extinguishment loss is reported within "Other, net" on the Company's consolidated statements of operations.

The following table summarizes key changes made as the results of amendments to the Senior Credit Agreement and the GS Credit Agreements through December 31, 2019:

(in millions)

Senior Credit Agreement

Discounts and Costs

Established (a)

Extinguishment

December 2018

(a) The GS Credit Agreement allows for payment-in-kind interest which will subsequently increase the amount outstanding.

(b) Reported within "Other, net" on the Company's consolidated statements of operations.

The following table summarizes changes made as the results of key amendments to the 2017 credit agreements through December 31, 2020:

(in millions) GS Credit

Senior Credit Agreement Agreement Discounts and Costs

Additional Revolving

Principal Line Amendment Principal Issue Costs Costs

Amendment Established Established Type Established (a) Discount Expensed (b) Capitalized

January 2017 $ 200.0 $ 25.0 Extinguishment $ 80.0 $ 3.7 $ 1.8 $ 3.3

January 2018 67.5 — Modification — $ 0.4 $ 0.8 $ 0.7

December 2018 130.0 — Modification — $ 0.3 $ 1.2 $ 0.1

March 2020 — — Modification — $ — $ 0.4 $ 2.7

$ 397.5 $ 25.0 $ 80.0

(a) The GS Credit Agreement allows for payment-in-kind interest which subsequently increases the amount outstanding.

Beginning with the Sixth Amendment, the Senior Credit Agreement began to allow certain amounts of interest to be treated as payment-in-kind interest and added to the outstanding borrowings balance, as discussed below under the header "Changes to Applicable Interest Rate Margins."

(b) Reported within "Debt extinguishment and modification expenses" on the Company's consolidated statements of operations.

The Senior Credit Agreement and the GS Credit Agreement were also amended on November 14, 2017.

The First Amendment allows for loan advances of less than $ 5.0 million and for certain liens on cash securing the Company's funding obligations under a new product involving a virtual credit card program.

This amendment allows for loan advances of less than $ 5.0 million and for certain liens on cash securing the Company's funding obligations under a new product involving a virtual credit card program.

This amendment did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.

Additionally, two amendments were executed in 2019 that concerned procedural changes to the quarterly and annual reporting for lenders and did not affect any of the material terms, conditions, or covenants of the Senior Credit Agreement or the GS Credit Agreement.

Amendments in March 2020

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

Under the Sixth Amendment, calculation of the permitted Total Net Leverage Ratio was modified to include certain expenses of the Company's parent entity and the permitted maximum ratio for each test period was adjusted to the ratios described in the subsequent disclosures for covenants.

Neither the existing applicable margins or interest rates changed as a result of the Sixth Amendment.

The terms of the GS Credit Agreement were amended to allow for amendments under the Senior Credit Agreement, but otherwise the terms of the GS Credit Agreement were not substantively changed by the Sixth Amendment.

Additional Information

Beginning with the January 2018 amendment, borrowings under the Senior Credit Agreement are subject to an applicable margin, or percentage per annum, equal to:

(i) with respect to initial term loans, (a) for LIBOR rate loans, 5.00 % per annum, and (b) for base rate loans, 4.00 % per annum;

and (ii) with respect to revolving loans (a) for LIBOR rate loans and letter of credit fees, 5.00 % , (b) for base rate loans, 4.00 % , and (c) for unused commitment fees, 0.50 % .

At December 31, 2019, there was $ 11.5 million outstanding on the revolving credit facility.

The revolving credit facility bears interest at LIBOR plus 5.0 % at December 31, 2019, which resulted in an interest rate of 6.71 % .

No amounts were outstanding on the revolving credit facility at December 31, 2018.

The Senior Credit Agreement matures on January 3, 2023, with the exception of the revolving credit facility which expires on January 2, 2022.

Any amounts outstanding under the revolving credit facility must be paid in full before the maturity date of January 2, 2022.

The GS Credit Agreement matures on July 3, 2023.

Under the Senior Credit Agreement, the Company is required to make quarterly principal payments of approximately $ 1.0 million.

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

Senior Credit Agreement

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

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

Accrued interest is payable quarterly.

The revolving credit facility incurs a commitment fee on any undrawn amount of the $ 25.0 million credit line, which equates to 0.5 % per annum for the unused portion.

GS Credit Agreement

Outstanding borrowings under the GS Credit Agreement accrue interest at 5.0 %, plus an applicable margin, or percentage per annum, as indicated in the amended credit agreement.

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

Senior Credit Agreement - Partial Pay Down of Term Debt and Changes to Applicable Interest Rate Margins in 2020

Under the Sixth Amendment, the interest rate margins for the Senior Credit Agreement and the GS Credit Agreement increased incrementally by 1.0 % on June 16, 2020, and then increased incrementally by 0.5 % on each of the dates July 16, August 15, and September 14, 2020 because the Borrowers did not make a permitted accelerated principal payment of at least $ 100.0 million under the term loan facility of the Senior Credit Agreement on or before those dates as described in the Sixth Amendment (the "$ 100.0 million principal prepayment").

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

On September 25, 2020, the Borrowers made the $ 100.0 million principal prepayment plus an additional $ 6.5 million principal prepayment to reduce the outstanding indebtedness under the term loan facility of the Senior Credit Agreement.

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

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

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

Contractual Maturities

Principal outstanding at December 31, 2020 for term debt under the Senior Credit Agreement and the GS Credit Agreement are scheduled to be paid as follows:

(in thousands) Principal Due

Senior Credit Agreement GS Credit Agreement Total

Year Ending December 31, Term Revolver Term

2021 ( current )

$ 19,442 $ — $ — $ 19,442

2022 38,884 — — 38,884

2023 221,091 — 102,623 323,714

Total $ 279,417 $ — $ 102,623 $ 382,040

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

No such prepayments were due for the years ended December 31, 2020 and 2019.

contractual maturities on long-term debt, including amount outstanding on the revolving line of credit, at December 31, 2019 are as follows:

(in thousands)

Year Ending December 31,

For the years ended December 31, 2019 and 2018, the payment-in-kind (PIK) interest under the GS Credit Agreement added $ 5.1 million and $ 4.9 million, respectively, to the principal amount of the subordinated debt, which totaled $ 95.1 million and $ 90.0 million as of December 31, 2019 and 2018, respectively.

For the years ended December 31, 2019, 2018, and 2017, the Company recorded interest expense, including amortization of deferred financing costs and debt discounts, of $ 40.7 million, $ 29.9 million, and $ 25.1 million, respectively.

The Senior Credit Agreement and the GS Credit Agreement, as amended, contain representations and warranties, financial and collateral requirements, mandatory payment events, events of default, and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Company's subsidiaries to Priority Technology Holdings, Inc., merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates), and to enter into certain leases.

Substantially all of the borrowers' assets are pledged as collateral under the Senior Credit Agreement and GS Credit Agreement.

The borrowers are also required to comply with certain restrictions for the Total Net Leverage Ratio, which is defined in the Senior Credit Agreement and GS Credit Agreement as:

the consolidated total debt of the Borrowers, less unrestricted cash subject to certain restrictions, divided by the Consolidated Adjusted EBITDA (a non-GAAP measure) of the Borrowers for the prior four quarters.

Under the Senior Credit Agreement, prepayments of outstanding principal may be made in permitted increments with a 1.0 % penalty for certain prepayments.

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

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

On March 5, 2021, the Company 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 (the “Equity 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 entirely repay our Subordinated Debt Facility.

See Note 21, Subsequent Events, for additional information.

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

Included in the outstanding principal balance at December 31, 2020 and December 31, 2019 was accumulated PIK interest of $ 22.6 million and $ 15.1 million, respectively.

For the years ended December 31, 2020 and 2019, the payment-in-kind (PIK) interest under the GS Credit Agreement added $ 7.5 million and $ 5.1 million, respectively, to the principal amount outstanding under the GS Credit Agreement.

Interest Expense and Amortization of Deferred Loan Costs and Discounts

Deferred financing costs and debt discount are being amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense.

Unamortized deferred financing costs and debt discount are included in net long-term debt in the Company's consolidated balance sheets.

Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was $ 44.8 million, $ 40.7 million, and $ 29.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Interest expense increased due to the amortization of deferred financing costs and debt discounts by $ 2.4 million, $ 1.7 million, and $ 1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Interest expense for the year ended December 31, 2019 also included a $ 0.4 million fee for the $ 70.0 million delayed principal draw under December 2018 amendment to the Senior Credit Agreement, which occurred during the first quarter of 2019.

Debt Extinguishment and Debt Modification Expenses

In addition to the $ 0.4 million of expenses associated with amounts paid to third parties related to the debt modification that occurred in March 2020, debt modification and extinguishment expenses for the year ended December 2020 also included the write off of certain previously deferred loan costs.

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

As a result, a proportional amount of unamortized loan costs and discount in the amount of $ 1.5 million were removed and expensed during the year ended December 31, 2020.

The Senior Credit Agreement and the GS Credit Agreement, as amended, contain representations and warranties, financial and collateral requirements, mandatory payment events, events of default, and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Company's subsidiaries to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates), and to enter into certain leases.

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

The maximum permitted Total Net Leverage Ratio was 7.75 :1.00 at December 31, 2020.

As of December 31, 2020, the Company remained in compliance with the covenants.

The table below sets forth the maximum permitted Total Net Leverage Ratio for the indicated test periods:

Test Period Ending

Total Net Leverage Ratio Maximum Permitted

December 31, 2019 to March 31, 2020

June 30, 2020 to December 31, 2020

Test Period Ending Total Net Leverage Ratio Maximum Permitted

December 31, 2020 7.75 :

March 31, 2021 7.71 :

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Each test period thereafter 5.50 :

As of December 31, 2019, the Borrowers were in compliance with the covenants, as amended in the Sixth Amendment.

Deferred Financing Costs and Debt Discount

Unamortized capitalized deferred financing costs related to the Company's credit facilities totaled $ 3.0 million and $ 4.0 million at December 31, 2019 and December 31, 2018, respectively.

Unamortized debt discount related to the Company's credit facilities totaled $ 2.9 million and $ 3.3 million at December 31, 2019 and 2018, respectively.

Deferred financing costs and debt discount are being amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense.

Interest expense related to amortization of deferred financing costs and debt discount, including accelerated amortization due to debt modification or extinguishment, was $ 1.7 million, $ 1.4 million , and $ 3.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Unamortized deferred financing costs and debt discount are included in net long-term debt in the Company's consolidated balance sheets.

Redeemed Goldman Sachs Warrant ("GS Warrant")

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The initial net deferred tax asset from the Business Combination is the result of the difference between initial tax basis, generally substituted tax basis, and the reflective carrying amounts of the assets and liabilities for financial statement purposes.

The net deferred tax asset as of July 25, 2018 was approximately $ 47.5 million, which was recorded and classified on the Company's consolidated balance sheet in accordance with ASU 2015-17 and as an adjustment to Additional Paid-In Capital in the Company's consolidated statement of changes in stockholders' deficit.

In addition, the Company's consolidated financial statements for the years ended December 31, 2018 and 2017 reflect unaudited pro-forma income tax disclosure amounts to illustrate the income tax effects had the Company been subject to federal and state income taxes for both full years.

Components of income tax (benefit) expense for the years ended December 31, 2019 and 2018 were as follows:

the Company's consolidated statement of changes in stockholders' deficit.

In addition, the Company's consolidated financial statement for the year ended December 31, 2018 presented herein reflects unaudited pro-forma income tax disclosure amounts to illustrate the income tax effects had the Company been subject to federal and state income taxes for the full year 2018.

Components of consolidated income tax expense (benefit) for the years ended December 31, 2020, 2019, and 2018 was as follows:

For the Year Ended December 31,

(in thousands) 2020 2019 2018

For the Year Ended

As restated - Note 2

December 31, 2019

December 31, 2018

current income tax expense

current income tax expense (benefit)

Federal $ 4,766 $ ( 11 ) $ 29

State and local 3,173 75 418

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deferred income tax expense (benefit)

Federal $ 3,875 $ 1,920 $ ( 2,541 )

State and local ( 915 ) ( 1,154 ) ( 396 )

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Total income tax expense (benefit) $ 10,899 $ 830 $ ( 2,490 )

The Company's effective income tax benefit rate was 2.5 % for the year ended December 31, 2019.

For the year ended December 31, 2018, the Company's effective income tax rate was 12.5 % .

For 2019, this rate differed from the statutory federal rate of 21% primarily due to valuation allowance changes against certain business interest carryover deferred tax assets.

For 2018, this rate differed from the statutory federal rate of 21% primarily due to the partnership status of Priority Holdings, LLC.

The Company's consolidated effective income tax rate was 13.3 % for the year ended December 31, 2020, compared to an consolidated effective income tax benefit rate of 2.5 % for the year ended December 31, 2019.

For the year ended December 31, 2018, the Company's consolidated effective income tax rate was 12.5 %.

The effective rate for 2020 differed from the statutory rate of 21% primarily due to earnings attributable to noncontrolling interests and valuation allowance changes against certain business interest carryover deferred tax assets.

The effective rate for 2019 differed from the statutory federal rate of 21% primarily due to valuation allowance changes against certain business interest carryover deferred tax assets.

The effective rate for 2018 differed from the statutory federal rate of 21% primarily due to the partnership status of Priority Holdings, LLC.

for periods prior to July 25, 2018.

The following table provides a reconciliation of the income tax benefit at the statutory U.S.

federal tax rate to actual income tax benefit for the years ended December 31, 2019 and 2018:

The following table provides a reconciliation of the consolidated income tax expense (benefit) at the statutory U.S.

federal tax rate to actual consolidated income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018:

For the Year Ended December 31,

(in thousands) 2020 2019 2018

For the Year Ended

As restated - Note 2

December 31, 2019

December 31, 2018

federal statutory (benefit) $ 17,211 $ ( 6,879 ) $ ( 4,268 )

Non-controlling interests ( 5,626 ) — —

Earnings as dual-member LLC — — 1,643

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Valuation allowance changes ( 2,945 ) 9,302 ( 66 )

Intangible assets 1,056 — —

Nondeductible items 233 125 86

Tax credits ( 283 ) ( 323 ) ( 123 )

Other, net 150 ( 140 ) 100

Income tax expense (benefit) $ 10,899 $ 830 $ ( 2,490 )

Deferred income taxes reflect the expected future tax consequences of temporary differences between the financial statement carrying amount of the Company's assets and liabilities, tax credits and their respective tax bases, and loss carry forwards.

The significant components of deferred income taxes were as follows:

The significant components of consolidated deferred income taxes were as follows:

As of December 31,

(in thousands) 2020 2019

As restated - Note 2

December 31, 2019

December 31, 2018

Deferred Tax Assets:

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Interest limitation carryforwards 6,295 9,266

Other 2,115 1,877

Gross deferred tax assets 59,903 70,423

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The assessment considers all available positive and negative evidence and is measured quarterly.

As of December 31, 2019 and 2018, the Company has recorded a valuation allowance of approximately $ 10.1 million and $ 0.8 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and Business Combination costs that the Company believes are not more likely than not to be realized.

As of December 31, 2020 and 2019, the Company had a consolidated valuation allowance of approximately $ 7.2 million and $ 10.1 million, respectively, against certain deferred income tax assets related to business interest deduction carryovers and Business Combination costs that the Company believes are not more likely than not to be realized.

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

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Tax periods for 2017 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2016 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.

A change in MI Acquisitions' beneficial ownership occurred concurrent with the Business Combination and Recapitalization on July 25, 2018, which likely caused a stock ownership change for purposes of Section 382 of the Internal Revenue Code.

However, this ownership change should have no material impact to the net operating losses ("NOLs") available as of this date.

At December 31, 2019, the Company had federal NOL carryforwards of approximately $ 14.5 million which can offset future taxable income as follows:

1) approximately $ 14.3 million can offset 80% of future taxable income for an indefinite period of time and 2) approximately $ 0.2 million can offset 100% of future taxable income through expiration dates ranging from 2036 to 2038.

At December 31, 2018, the Company had federal NOL carryforwards of approximately $ 5.1 million which can offset future taxable income as follows:

1) approximately $ 4.9 million can offset 80% of future taxable income for an indefinite period of time and 2) approximately $ 0.2 million can offset 100% of future taxable income through expiration dates ranging from 2036 to 2038.

At December 31, 2020, the Company has utilized all of its federal NOL carryforwards of approximately $ 26.5 million.

Also, at December 31, 2020 and 2019, the Company had state NOL carryforwards of approximately $ 6.2 million and $ 19.5 million, respectively, with expirations dates ranging from 2023 to 2044.

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corporate income tax rate from 35% to 21% and the limitations on interest deductibility, both effective January 1, 2018, as well as immediate expensing for certain assets placed into service after September 27, 2017.

The Company did not experience any material impacts of the provisions of the Tax Act for the year ended December 31, 2018 other than the impact of the reduction of the U.S.

The Company did not experience any material impacts of the provisions of the Tax Act for the year ended December 31, 2018 other than the impact of the reduction

corporate rate from 35% to 21% and the limitation on interest deductibility.

As of December 31, 2018, the Company has completed the accounting for the income tax effects of all elements of the Tax Act in accordance with the SEC's Staff Accounting Bulletin No.

The Company was affected by the new interest deductibility rule under the Tax Act.

This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income, as defined.

For the years ended December 31, 2019 and 2018, the Company's interest deduction was limited to $ 29.3 million and $ 12.6 million , respectively.

The excess interest not deducted for the year ended December 31, 2019 and 2018 can be carried forward indefinitely for use in future years.

As of December 31, 2018, the Company had completed the accounting for the income tax effects of all elements of the Tax Act in accordance with the SEC's Staff Accounting Bulletin No.

The Company has historically been impacted by the new interest deductibility rule under the Tax Act.

This rule disallows interest expense to the extent it exceeds 30% of adjusted taxable income “ATI”, as defined.

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.

As a result of its earnings and the enactment of the CARES Act during 2020, the Company has fully utilized its federal, and the majority of its state, interest deduction limitation carryforwards of $ 21.2 million and $ 11.0 million for the years ended December 31, 2019 and 2018, respectively.

COMMITMENTS AND CONTINGENCIES

The Company has various operating leases for office space and equipment.

These leases range in terms from one to 16 years .

These leases range in terms from 2 years to 16 years.

Most of these leases are renewable at expiration, subject to terms acceptable to the lessors and the Company.

Future minimum lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows:

Future minimum lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows at December 31, 2020:

(in thousands)

Total rent expenses for the years ended December 31, 2019, 2018, and 2017 was $ 2.0 million , $ 1.9 million , and $ 1.5 million , respectively, which is included in SG&A expenses in the Company's consolidated statements of operations.

Due In Amount Due

Thereafter 2,388

Total $ 9,168

Total rent expenses for the years ended December 31, 2020, 2019, and 2018 was $ 2.5 million, $ 2.0 million, and $ 1.9 million, respectively, which is included in selling, general and administrative expenses in the Company's consolidated statements of operations.

Minimum Annual Commitments with Third-Party Processors

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

As of December 31, 2019, the Company is committed to pay minimum processing fees under these agreements of approximately $ 14.0 million over the next two years.

As of December 31, 2020, the Company is committed to pay minimum processing fees under these agreements of approximately $ 7.0 million over the next year.

Merchant Reserves

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Commitment to Lend

See Note 13, Related Party and Other Transactions , for information on a loan commitment extended by the Company to another entity.

See Note 13 , Related Party Matters , for information on a loan commitment extended by the Company to another entity.

Contingent Consideration

See Note 4, Business Combination, Asset Acquisitions, and Asset Contributions , for information about contingent consideration related to acquisitions consummated in 2019 and 2018.

Merchant Portfolio Rights and Reseller Agreement

During the year ended December 31, 2019, the Company simultaneously entered into two agreements with another entity.

These two related agreements 1) transfer to the Company certain perpetual rights to a merchant portfolio and 2) form a 5 -year reseller arrangement whereby the Company will offer and sell to its customer base certain on-line services to be fulfilled by the other entity.

No cash consideration was paid to, or received from, the other entity at execution of either agreement.

Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both:

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

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

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

For the year ended December 31, 2019, approximately $ 1.1 million was capitalized as contingent cost for the merchant portfolio.

The capitalized cost is being amortized using an accelerated method.

At this time, the Company cannot reasonably estimate the allocation of future cash payments.

However, under the two contracts the Company does not anticipate any net losses.

See Note 4 , Asset Acquisitions, Asset Contributions , and Business Combinations , for information about contingent consideration related to acquisitions consummated in 2019 and 2018.

Legal Proceedings

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Contributed Assets of eTab and Cumulus

See Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions , for information about the contributions from related parties of certain assets and liabilities of eTab and Cumulus.

See Note 4 , Asset Acquisitions, Asset Contributions , and Business Combinations , for information about the contributions from related parties of certain assets and liabilities of eTab and Cumulus.

Loan with Warrant

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Prior Management Services Agreement

During the years ended December 31, 2018 and 2017, Priority Holdings, LLC had a management services agreement with PSD Partners LP, which is owned by Mr.

During the year ended December 31, 2018, Priority Holdings, LLC had a management services agreement with PSD Partners LP, which is owned by Mr.

Thomas Priore, the Company's President, Chief Executive Officer and Chairman.

The Company incurred total expenses of $ 1.1 million and $ 0.8 million for the years ended December 31, 2018 and 2017 related to management service fees, annual bonus payout, and occupancy fees, which are recorded in SG&A expenses in the Company's consolidated statements of operations.

The Company incurred total expenses of $ 1.1 million for the year ended December 31, 2018 related to management service fees, annual bonus

payout, and occupancy fees, which are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations.

Due from Members of Priority Holdings, LLC

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During the year ended December 31, 2018, the Company paid and capitalized in additional paid-in capital underwriting commissions of $ 8.0 million related to the recapitalization.

See Note 14, Stockholders' Deficit Information .

See Note 14 , Stockholders' Deficit .

The Company's President, Chief Executive Officer and Chairman was given the right to require any of the founders of MI Acquisitions to sell all or a portion of their Company securities at a call-right purchase price, payable in cash.

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For the Company, the call right does not constitute a financial instrument or derivative under GAAP since it does not represent an asset or obligation of the Company, however the Company discloses it as a related party matter.

STOCKHOLDERS' DEFICIT INFORMATION

STOCKHOLDERS' DEFICIT

As disclosed in Note 1, Nature of Business and Accounting Policies , on July 25, 2018, the Company executed the Business Combination which was accounted for as a "reverse merger" between Priority Holdings, LLC and MI Acquisitions, resulting in the Recapitalization of the Company's equity.

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For periods prior to July 25, 2018, equity has been retroactively revised to reflect the number of shares received as a result of the Recapitalization.

The equity structure of the Company was as follows on December 31, 2019 and 2018:

(in thousands)

December 31, 2019

December 31, 2018

Issued and Outstanding

The equity structure of the Company was as follows as of December 31, 2020 and 2019:

(shares in thousands) December 31, 2020 December 31, 2019

Authorized Issued Outstanding Authorized Issued Outstanding

Common stock, par value $ 0.001

1,000,000 67,842 67,391 1,000,000 67,512 67,061

Preferred stock, par value $ 0.001

100,000 — — 100,000 — —

The difference between the issued and outstanding common stock at December 31, 2020 and 2019 is due to 451,224 shares of treasury stock held by the Company.

In connection with the Business Combination and Recapitalization, the following occurred in 2018:

• In exchange for the 4.6 million common units of Priority Holdings, LLC, 60.1 million shares of common stock were issued in a private placement that resulted in the Company receiving approximately $ 49.4 million.

The 60.1 million shares exclude 0.5 million shares issued as partial consideration in two business acquisitions (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions ) and includes 3.0 million shares issued in connection with the 2014 Management Incentive Plan (see Note 15, Equity-Based Compensation ).

The 60.1 million shares exclude 0.5 million shares issued as partial consideration in two business acquisitions (see N ote 4, Asset Acquisitions, Asset Contributions , and Business Combinations ) and includes 3.0 million shares issued in connection with the 2014 Management Incentive Plan (see Note 15 , Share -Based Compensation ).

• Approximately 4.9 million shares of common stock were deemed to have been issued through share conversion in exchange for the publicly-traded shares of MI Acquisitions that originated from MI Acquisitions' 2016 IPO.

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Since the Business Combination and Recapitalization, the Company has neither declared nor paid dividends.

The holders of the Company's common

stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the common stock.

The holders of the Company's common stock have no conversion, preemptive or other subscription rights and there is no sinking fund or redemption provisions applicable to the common stock.

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

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Warrants issued by MI Acquisitions

Prior to July 25, 2018, MI Acquisitions issued warrants that allow the holders to purchase up to 5,731,216 shares of the Company's common stock at an exercise price of $ 11.50 per share, subject to certain adjustments ( 5,310,109 of these warrants are designated as "public warrants" and 421,107 are designated as "private warrants").

The warrants may only be exercised during the period commencing on the later to occur of (i) 30 days following the completion of the MI Acquisitions' initial business combination and (ii) 12 months following the closing of MI Acquisitions' IPO, and terminating on the earlier to occur of (i) five years following the date the warrants became exercisable, and (ii) the date fixed for redemption upon the Company electing to redeem the warrants.

Prior to July 25, 2018, MI Acquisitions issued warrants that allow the holders to purchase up to 5,731,216 shares of the Company's common stock at an exercise price of $ 11.50 per share, subject to certain adjustments ( 5,310,109 of these warrants were designated as "public warrants" and 421,107 were designated as "private warrants").

The warrants, which survived the Business Combination, may be exercised before August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018.

The Company has the option to redeem all (and not less than all) of the outstanding public warrants at any time from and after the warrants become exercisable, and prior to their expiration, at the price of $ 0.01 per warrant;

provided that the last sales price of the Company's common stock has been equal to or greater than $ 16.00 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events), for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given and provided further that (i) there is a current registration statement in effect with respect to the shares of common stock underlying the public warrants for each day in the 30-day trading period and continuing each day thereafter until the redemption date or (ii) the cashless exercise is exempt from the registration requirements under the Securities Act of 1933, as amended.

The warrants are classified as equity.

The outstanding purchase option that was sold to the underwriters (in addition to the warrants discussed above) for an aggregate purchase price of $ 100 , allows the holders to purchase up to a total of 300,000 units (each consisting of a share of common stock and a public warrant) exercisable at $ 12.00 per unit commencing on the later of the consummation of a business combination and six months from September 13, 2016 (the "Purchase Option").

The Purchase Option expires on August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018.

The units issuable upon exercise of the Purchase Option are identical to the units offered in MI Acquisitions' IPO.

The Purchase Option is classified as equity.

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

provided further that (i) there is a current registration statement in effect with respect to the shares of common stock underlying the public warrants for each day in the 30-day trading period and continuing each day thereafter until the redemption date or (ii) the cashless exercise is exempt from the registration requirements under the Securities Act of 1933, as amended.

The warrants are classified as equity for accounting purposes.

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

The Company subsequently filed a Registration Statement on Form S-4 with the SEC for the purpose of offering holders of the Company's outstanding 5,310,109 public warrants and 421,107 private warrants the opportunity to exchange each warrant for 0.192 shares of the Company's common stock.

The exchange offer expired in February 2019 resulting in a total of 2,174,746 warrants being tendered in exchange for 417,538 shares of the Company's common stock plus cash in lieu of fractional shares.

The exchange offer expired in February 2019 resulting in approximately 2.2 million warrants being tendered during 2019 in exchange for approximately 0.4 million shares of the Company's common stock plus cash in lieu of fractional shares.

Nasdaq proceeded to delist the remaining outstanding warrants and units, which were comprised of one share of common stock and one warrant, from The Nasdaq Global Market at the open of business on March 6, 2019.

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

Purchase option issued by MI Acquisitions

Prior to July 25, 2018, a purchase option was sold to an underwriter by MI Acquisitions for consideration of $ 100 .

The purchase option, which survived the Business Combination, allows the holder to purchase up to a total of 300,000 units (each consisting of a share of common stock and a public warrant) exercisable at $ 12.00 per unit.

The purchase option expires on August 24, 2023, which is the end of the five-year period that commenced 30 days after the Business Combination of July 25, 2018.

The purchase option is classified as equity for accounting purposes.

No exercises have occurred through December 31, 2020.

2018 Business Combination and Recapitalization Costs

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These costs are presented as Recapitalization costs in the accompanying consolidated statements of changes in stockholders' deficit.

The remaining $ 3.6 million of expenses were related to the Business Combination and are presented in SG&A expenses in the accompanying consolidated statements of operations.

The remaining $ 3.6 million of expenses were related to the Business Combination and are presented in selling, general and administrative expenses in the accompanying consolidated statements of operations.

2018 Equity Events for Priority Holdings, LLC that Occurred Prior to July 25, 2018 (date of Business Combination)

On January 3, 2017, Priority used the proceeds from the 2017 debt refinancing (see Note 10, Long-Term Debt and Warrant Liability ) to redeem 4,681,590 Class A common units for $ 200.0 million (the "Redemption").

Concurrent with the Redemption, (i) Priority and its members entered into an amended and restated operating agreement that eliminated the Class A preferred units and the Class C common units and (ii) the Plan of Merger, dated as of May 21, 2014 between Priority Payment Systems Holdings, LLC and Pipeline Cynergy Holdings, LLC was terminated which resulted in the cancellation of related contingent consideration due to holders of Class A preferred units.

On January 31, 2017, Priority entered into a redemption agreement with one of its minority unit holders to redeem their former Class A common membership units for a total redemption price of $ 12.2 million.

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Under this agreement, Priority redeemed $ 3.0 million of 69,450 former Class A common units in April 2017.

As of December 31, 2018 , the Common Unit Repurchase Obligation had a redemption value of $ 9.2 million.

The remaining $ 9.2 million was redeemed through the January 17, 2018 redemption of 115,751 former Class A common units for $ 5.0 million and the February 23, 2018 redemption of 96,999 former Class A common units for $ 4.2 million.

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These changes in the equity structure of Priority were recorded as capital transactions.

At December 31, 2017, Priority had 5,249 voting former Class A common stock authorized and issued, and 335 and 302 non-voting former Class B common stock authorized and issued, respectively.

Prior to the Business Combination, Priority recorded distributions of $ 7.1 million, $ 3.4 million , and $ 10.0 million to its members during the years ended December 31, 2018, 2017 and 2016, respectively.

EQUITY-BASED COMPENSATION PLANS

During 2019 and 2018, the Company had three equity-based compensation plans:

For the year ended December 31, 2018, Priority recorded distributions to its members of $ 7.1 million prior to the Business Combination.

SHARE-BASED COMPENSATION

During 2020, 2019 and 2018, the Company had three share-based compensation plans:

2018 Equity Incentive Plan;

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and 2014 Management Incentive Plan.

Total equity-based compensation expense was approximately $ 3.7 million, $ 1.6 million , and $ 1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively, which is included in Salary and employee benefits in the accompanying consolidated statements of operations.

For the years ended December 31, 2019 and 2018, the Company recognized an income tax benefit of approximately $ 0.5 million and $ 0.1 million , respectively, for equity-based compensation expense.

No tax benefit was recognized for the year ended December 31, 2017 due to the Company's tax status.

For the years ended December 31, 2019, 2018, and 2017, equity-based compensation was recognized as follows:

(in thousands)

Total share-based compensation expense, for both equity-classified and liability-classified awards, was approximately $ 2.4 million, $ 3.7 million, $ 1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively, which is included in salary and employee benefits in the accompanying consolidated statements of operations.

For the years ended December 31, 2020, 2019 and 2018, the Company recognized an income tax benefit of approximately $ 0.4 million, $ 0.5 million and $ 0.1 million, respectively, for share-based compensation expense.

For the years ended December 31, 2020, 2019, and 2018, share-based compensation was recognized by plan as follows:

Year Ended December 31,

(in thousands) 2020 2019 2018

2018 Equity Incentive Plan $ 2,430 $ 2,385 $ 187

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2014 Management Incentive Plan — 1,267 1,462

No equity-based compensation has been capitalized.

Total $ 2,430 $ 3,652 $ 1,649

No share-based compensation has been capitalized.

Beginning in 2018, the Company elected to recognize the effects of forfeitures on compensation expense as the forfeitures occur for all plans.

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The 2018 Equity Incentive Plan ("2018 Plan") was approved by the Company's board of directors and shareholders in July 2018.

The 2018 Plan provides for the issuance of up to 6,685,696 of the Company's common stock.

Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights ("SARs"), restricted stock awards ("RSU"), restricted stock units, other stock-based awards (including cash bonus awards) or any combination of the foregoing.

The 2018 Plan provides for the issuance of up to 6,685,696 of the Company's common stock, and these shares were registered on a Form S-8 during 2018.

Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights ("SARs"), restricted stock awards, restricted stock units RSU), other share-based awards (including cash bonus awards) or any combination of the foregoing.

Any current or prospective employees, officers, consultants or advisors that the Company's compensation committee (or, in the case of non-employee directors, the Company's board of directors) selects, from time to time, are eligible to receive awards under the 2018 Plan.

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In addition, if any shares are surrendered or tendered to pay the exercise price of an award or to satisfy withholding taxes owed, such shares will again be available for grants under the 2018 Plan.

A summary of the activity for the 2018 Plan that occurred during the years ended December 31, 2019 and 2018 is as follows:

A summary of the activity in stock units for the 2018 Plan that occurred during the years ended December 31, 2020, 2019 and 2018 is as follows:

6,685,696 Common stock authorized for the 2018 Plan

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4,796,176 Common stock available for issuance under the 2018 Plan at December 31, 2019

( 15,000 ) Stock options granted in 2020

220,045 Stock option grants forfeited in 2020

( 1,031,740 ) RSUs granted in 2020

( 128,624 ) RSU granted in 2020 with performance goals that have not been determined

21,277 RSUs forfeited in 2020

3,862,134 Common stock available for issuance under the 2018 Plan at December 31, 2020

The above table does not reflect a liability-classified award with an estimated fair value of $ 0.8 million included in accounts payable and accrued expenses in the consolidated balance sheet at December 31, 2020.

Stock Options

In December 2018, the Company issued stock option grants to substantially all of the Company's employees excluding the Company's executive officers.

The stock options vest as follows:

Substantially all stock options grants were granted in December 2018 when the Company issued stock option grants to substantially all of the Company's employees at the time, excluding the Company's executive officers.

The stock options issued in December 2018 vest as follows:

50 % on July 27, 2019;

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However, in any event, a stock option will expire ten years from date of grant.

Details about the time-based stock options issued under the plan are as follows:

Weighted-average

intrinsic value

contractual terms

(in thousands)

Details about the time-based equity-classified stock options granted under the plan are as follows:

Options for average Weighted-average Aggregate

number of exercise remaining intrinsic value

shares price contractual terms (in thousands)

Outstanding, January 1, 2018 — —

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Expired in 2018 — —

Outstanding, December 31, 2018

Outstanding, December 31, 2018 2,037,257 $ 6.95 9.6 years $ 2,139

Granted in 2019 — —

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Forfeited or expired in 2019 ( 326,173 ) $ 6.95

Outstanding, December 31, 2019

Vested and Expected to Vest

Exercisable at December 31, 2019

Outstanding, December 31, 2019 1,711,084 $ 6.95 8.6 years $ —

Granted in 2020 15,000 $ 2.47

Exercised in 2020 — —

Forfeited or expired in 2020 ( 220,045 ) $ 6.95

Outstanding, December 31, 2020 1,506,039 $ 6.91 7.8 years $ 203

Vested and Expected to Vest 1,506,039 $ 6.91 7.8 years $ 203

Exercisable at December 31, 2020 1,125,755 $ 6.95 7.8 years $ 101

No stock options have been exercised as of December 31, 2020.

For the years ended December 31, 2019 and 2018, compensation expense of $ 2.0 million and $ 0.2 million was recognized for these stock option grants.

For the years ended December 31, 2020, 2019 and 2018, compensation expense of $ 0.8 million, $ 2.0 million and $ 0.2 million was recognized for stock option grants.

As of December 31, 2020, there was approximately $ 0.4 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a remaining weighted-average period of 0.7 years.

No stock options were issued during the year ended December 31, 2019.

The table below presents the assumptions used to calculate the fair value of the stock options issued during the year ended December 31, 2018:

The table below presents the assumptions used to calculate the fair value of the stock options issued in 2020 and 2018:

Expected volatility 94 % 30 %

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Exercise price $ 2.47 $ 6.95

Restricted Stock Units - Service Based

During December 2018, the Company issued 107,143 RSUs with a grant-date fair value of $ 7.00 each and a total grant-date fair value of approximately $ 0.8 million .

These RSUs have service-based vesting with 50 % vesting in each of the years 2019 and 2020.

In December 2019, 53,571.5 of these RSUs vested as scheduled and resulted in the issuance of 53,571 shares of the Company's common stock with a value of $ 3.20 per share and an aggregate value of $ 0.2 million.

At December 31, 2019, all remaining unrecognized compensation of approximately $ 0.4 million is expected to be recognized at the end of 2020.

Compensation expense for the year ended December 31, 2019 was approximately $ 0.4 million.

Compensation expense for the year ended December 31, 2018 was not material.

During 2019, the Company issued 36,657 service-vesting RSUs with a grant-date fair value of $ 6.82 each.

All of these RSUs subsequently were forfeited in 2019 before any had vested, resulting in no net compensation expense for the year ended December 31, 2019.

Restricted Stock Units - Performance Based

During the third quarter of 2018, the Company issued 95,057 RSUs with a fair value of $ 10.52 each.

In addition to the service vesting requirements, these RSUs vest only if certain performance metrics are achieved for various periods of time the four-year period subsequent to grant date.

At December 31, 2019, none of the performance metrics have been achieved, which resulted in the forfeiture of 23,764 of these RSUs.

At December 31, 2019, it is not probable that any of the remaining performance metrics will be be achieved subsequent to 2019.

No compensation expense has ever been recognized for these RSU grants.

At the end of each subsequent reporting period, the Company will evaluate the probability of achievement for the performance metrics and adjust cumulative recognized compensation expense accordingly if the service requirements are also expected to be achieved.

No stock options were granted in 2019.

Equity-Classified Restricted Stock Units

Underlying Weighted-average (in thousands)

Common Grant-date Aggregate

Shares Fair Value Fair Value

Service-based vesting:

Unvested at January 1, 2018 —

Granted in 2018 107,142 $ 7.00 $ 750

Unvested at December 31, 2018 107,142

Granted in 2019 36,657 $ 6.82 $ 250

Vested in 2019 ( 53,571 ) $ 171

Forfeited in 2019 ( 36,657 ) $ 6.82

Unvested at December 31, 2019 53,571

Granted in 2020 892,142 $ 2.93 $ 2,617

Forfeited in 2020 ( 21,277 ) $ 2.35

Vested in 2020 ( 328,035 ) $ 1,150

Unvested at December 31, 2020 596,401

Performance-based vesting:

Unvested at January 1, 2018 —

Granted in 2018 95,057 $ 10.52 $ 1,000

Unvested at December 31, 2018 95,057

Forfeited in 2019 ( 23,674 ) $ 10.52

Unvested at December 31, 2019 71,383

Granted in 2020 (a) (b) 139,598 $ 2.56 $ 358

Forfeited in 2020 ( 71,383 ) $ 10.52

Unvested at December 31, 2020 139,598

(a) Includes only the portions of grants for which the performance goals have been determined and communicated to the grant recipient.

For the portions of any grants for which the required performance goals have not been determined and communicated to the grant recipient, a grant has not yet occurred for accounting purposes.

(b) Does not include a liability-classified performance-based RSU award with an estimated fair value of $ 0.8 million.

As of December 31, 2020, there was approximately $ 1.6 million and $ 0.2 million of unrecognized compensation cost for equity-classified service-based RSUs and performance-based RSUs, respectively, and these costs are expected to be recognized over a weighted-average period of 2.2 years and 2.6 years, respectively.

Liability-Classified Share-Based Arrangement

In March 2020, the compensation committee of the Company's board of directors provided performance goals and achievement criteria to its CEO and Chairman.

If these performance goals are met, the Company has committed to issue an RSU grant with a target fair value of $ 0.8 million on the future grant date, which occurred in the first quarter of 2021.

The Company began accruing compensation expense in 2020 and through December 31, 2020 has accrued an aggregate of $ 0.3 million for this liability-classified award.

Earnout Incentive Plan

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2014 Management Incentive Plan

The Priority Holdings Management Incentive Plan (the "MIP") was established in 2014 to issue equity-based compensation awards to selected employees.

Simultaneously with the Business Combination and Recapitalization (see Note 14, Stockholders' Deficit Information ), the fair value of the outstanding equity awards under the MIP were exchanged for approximately 3 .0 million shares of common stock of Priority Technology Holdings, Inc.

The Priority Holdings Management Incentive Plan (the "MIP") was established in 2014 to issue share-based compensation awards to selected employees.

Simultaneously with the Business Combination and Recapitalization (see Note 14 , Stockholders' Deficit ), the fair value of the outstanding equity awards under the MIP were exchanged for approximately 3 .0 million shares of common stock of Priority Technology Holdings, Inc.

having approximately the same fair value.

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During the year ended December 31, 2019, the Company elected to accelerate vesting for all remaining unvested awards under the MIP, resulting in accelerated compensation expense.

Compensation expense under the MIP was approximately $ 1.3 million, $ 1.5 million , and $ 1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.

At December 31, 2019, there is no unrecognized compensation cost for the MIP.

Compensation expense under the MIP was approximately $ 1.3 million and $ 1.5 million for the years ended December 31, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, there was no unrecognized compensation cost for the MIP and no grants remain outstanding under this plan.

EMPLOYEE BENEFIT PLANS

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The Company may also contribute additional discretionary amounts to plan participants.

Company contributions to the plan were $ 1.3 million , $ 0.9 million , and $ 1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The Company's contributions to the plan were $ 1.3 million, $ 1.3 million, and $ 0.9 million for the years ended December 31, 2020, 2019, and 2018, respectively.

The Company offers a comprehensive medical benefit plan to eligible employees.

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Fair Value Measurements

The following is a description of the valuation methodologies used for contingent consideration and for the Goldman Sachs warrant prior to its July 2018 redemption (see Note 10, Long-Term Debt and Warrant Liability ), both of which were initially recorded and remeasured at fair value at the end of each reporting period.

The following is a description of the valuation methodologies used for contingent consideration for business combinations and for the Goldman Sachs warrant prior to its July 2018 redemption (see Note 10 , Long-Term Debt and Warrant Liability ), both of which were initially recorded and remeasured at fair value at the end of each reporting period.

The contingent consideration for business combinations are related to acquisitions made in 2018 and the contingency periods have expired at December 31, 2020.

The Goldman Sachs warrant was fully redeemed in July 2018.

Accordingly, at December 31, 2020, the Company no longer has any fair value estimates that are remeasured at the end of each reporting period.

Redeemed Goldman Sachs Warrant

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On July 25, 2018, the Goldman Sachs warrant was fully redeemed in exchange for $ 12.7 million cash, which resulted in a gain of $ 0.1 million, as the value of the Goldman Sachs warrant immediately prior to the cancellation was $ 12.8 million.

The warrant is no longer outstanding as of December 31, 2019 or 2018.

Contingent Consideration for Business Combinations

The initial estimated fair value of approximately $ 1.0 million for the contingent consideration related to the 2018 business combinations for PPS Tech and PPS Northeast (see Note 4, Business Combinations, Asset Acquisitions, and Asset Contributions ) were based on a weighted payout probability at the measurement date, which falls within Level 3 on the fair value hierarchy.

The initial estimated fair value of approximately $ 1.0 million for the contingent consideration related to the 2018 business combinations for PPS Tech and PPS Northeast (see Note 4 , Asset Acquisitions, Asset Contributions , and Business Combinations ) were based on a weighted payout probability at the measurement date, which falls within Level 3 on the fair value hierarchy since these recurring fair value measurements are based on significant unobservable inputs.

The probabilities used to estimate the payout probability of the contingent consideration for the two business combinations ranged between 15 % and 35 % for one and between 5.0 % and 80 % for the other.

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

At December 31, 2019 and 2018, the fair value of this contingent consideration was estimated to be an aggregate of approximately $ 0.4 million and $ 1.0 million, respectively.

During the year ended December 31, 2019, the carrying values of these contingent consideration arrangements were reduced by approximately $ 0.6 million, and this amount is reported within SG&A expense on the Company's consolidated statement of operations.

As of December 31, 2019, the Company has paid no amounts under either of these earnout arrangements.

During the years ended December 31, 2020 and 2019, the carrying values of these contingent consideration arrangements were reduced by approximately $ 0.4 million and $ 0.6 million, respectively, and these amounts are reported within selling, general and administrative expense on the Company's consolidated statements of operations.

The Company paid no amounts under either of these earnout arrangements which expired during the year ended December 31, 2020.

The following table shows a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 in the fair value hierarchy for the years ended December 31, 2020, 2019, and 2018:

(in thousands)

Warrant Liability

Contingent Consideration

(in thousands) Warrant Liability Contingent Consideration

Balance at January 1, 2018 $ 8,701 $ —

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Balance at December 31, 2019 — 360

There were no transfers among the fair value levels during the years ended December 31, 2019, 2018, and 2017.

Fair Value of Debt

The Company's outstanding debt obligations (see Note 10, Long-term Debt and Warrant Liability ) are reflected in the consolidated balance sheets at carrying value since the Company did not elect to remeasure its debt obligations to fair value at the end of each reporting period.

The carrying values of the Company's long-term debt approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates.

Adjustment to fair value included in earnings — ( 360 )

Balance at December 31, 2020 $ — $ —

There were no transfers among the fair value levels during the years ended December 31, 2020, 2019, or 2018.

Fair Value Disclosures

Notes Receivable

Notes receivable are carried at amortized cost.

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

The fair value of the Company's notes receivable at December 31, 2020 and December 31, 2019 was approximately $ 7.7 million and $ 5.7 million, respectively.

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

Debt Obligations

The Borrower's outstanding debt obligations (see Note 10 , Long-Term Debt and Warrant Liability ) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at December 31, 2020 and 2019 was estimated to be approximately $ 278.0 million and $ 381.0 million, respectively.

The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of $ 279.4 million and $ 388.8 million, respectively, was estimated using binding and non-binding quoted prices in an active secondary market, which considers the Borrowers' credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.

The carrying values of the Borrowers' other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of a market for these debt obligations.

SEGMENT INFORMATION

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

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

Integrated Partners had no material operations prior to 2018.

• Integrated Partners - represents payment adjacent services that are provided primarily to the rental real estate and rental storage, medical and hospitality industries.

Integrated Partners had no material operations prior to 2018 and sold a significant portion of its business in September 2020.

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

For the year ended December 31, 2018, the Company adjusted its methodology of allocating certain corporate overhead costs to its reportable segments.

The current and all prior periods presented herein have been adjusted to reflect the current allocation methodology.

Information on segments and reconciliations to consolidated revenues, consolidated income (loss) from operations, and consolidated depreciation and amortization are as follows for the years presented:

(in thousands)

Year Ended December 31,

Consumer Payments (a) (b)

Commercial Payments (a)

Integrated Partners (a)

Consolidated revenues (a)

Income (loss) from operations:

Consumer Payments (b)

Commercial Payments

Integrated Partners

Consolidated income from operations (b)

Depreciation and amortization:

Consumer Payments

Commercial Payments

Integrated Partners

Consolidated depreciation and amortization

(a) Revenue for the years ended December 2019, 2018, and 2017 have been adjusted to reflect the full retrospective adoption of ASC 606, Revenues from Contracts with Customers , as presented in following table.

See the section "Accounting Standards Adopted in 2019" in Note 1, Nature of Business and Accounting Policies , for additional information.

However, the Integrated Partners reportable segment was not affected in 2018 by the retrospective adoption of ASC 606 and this reportable segment had no material operations prior to 2018.

(b) In addition to certain adjustments made to revenues noted above for the years ended December 31, 2019, 2018, and 2017 related to the full retrospective adoption of ASC 606, the results of operations for the Consumer Payments reportable segment and consolidated results of operations for the years ended December 31, 2018 and 2017 have been restated to correct certain errors, as presented in the following table.

See Note 2, Restatement of Previously Issued Consolidated Financial Statements , for additional information.

(in thousands) 2020 2019 2018

For the Year Ended December 31, 2019

Effects of Adoption of ASC 606 - Note 1

Balances Before Adoption of ASC 606

Revenues by reportable segment:

Consumer Payments $ 367,816 $ 330,599 $ 347,013

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Consolidated revenues $ 404,342 $ 371,854 $ 375,822

(in thousands)

Year Ended December 31, 2018

Effect of Adoption of ASC 606 - Note 1

Corrections of Errors - Note 2

Balances Before Adoption of ASC 606 and Error Corrections

Revenues by reportable segment:

Income (loss) from operations:

Consumer Payments $ 38,392 $ 32,237 $ 47,002

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Integrated Partners 1,404 725 ( 1,969 )

Consolidated revenues

Income from operations:

Consumer Payments

(in thousands)

Year Ended December 31, 2017

Effect of Adoption of ASC 606 - Note 1

Corrections of Errors - Note 2

Balances Before Adoption of ASC 606 and Error Corrections

Revenues by reportable segment:

Corporate ( 19,858 ) ( 24,887 ) ( 27,688 )

Consolidated income from operations $ 20,861 $ 7,184 $ 16,393

Depreciation and amortization:

Consumer Payments $ 35,002 $ 32,842 $ 17,945

Commercial Payments 306 323 557

Consolidated revenues

Income from operations:

Consumer Payments

The Integrated Partners reportable segment had no material operations prior to 2018.

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

(in thousands)

Integrated Partners 4,299 4,398 145

Corporate 1,168 1,529 1,093

Consolidated depreciation and amortization $ 40,775 $ 39,092 $ 19,740

A reconciliation of total income from operations of reportable segments to the Company's net income (loss) attributable to stockholders of Priority Technology Holdings, Inc.

is provided in the following table:

Year Ended December 31,

As restated - Note 2

(in thousands) 2020 2019 2018

Total income from operations of reportable segments $ 40,719 $ 32,071 $ 44,081

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Less interest expense ( 44,839 ) ( 40,653 ) ( 29,935 )

Less debt modification and extinguishment expense ( 1,899 ) — ( 2,043 )

Add gain on sale of business 107,239 — —

Add (less) other, net 596 710 ( 4,741 )

Income tax (expense) benefit ( 10,899 ) ( 830 ) 2,490

Net (loss) income

The Company is not significantly reliant upon any single customer for the years ended December 31, 2019, 2018, or 2017.

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

Some of these ISOs have merchant portability rights whereby the ISO can move certain merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period.

In the years ended December 31, 2019, 2018, and 2017, merchants referred by one ISO organizations with merchant portability rights generated approximately 18 % , 14 % and 10 % of the Company's consolidated revenues.

Net income (loss) 71,059 ( 33,589 ) ( 17,836 )

Less earnings attributable to non-controlling interests ( 45,398 ) — —

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

$ 25,661 $ ( 33,589 ) $ ( 17,836 )

Total assets, all located in the United States, by reportable segment reconciled to consolidated assets as of December 31, 2020 and 2019 were as follows:

(in thousands)

As of December 31,

As restated - Note 2

(in thousands) As of December 31,

Consumer Payments $ 261,675 $ 274,136

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Integrated Partners 3,991 74,386

Corporate 71,057 70,831

Total consolidated assets $ 417,829 $ 464,505

Assets in Corporate at December 31, 2019 and 2018 primarily represent internally-developed software and net deferred income tax assets.

Assets in Corporate at December 31, 2020 and 2019 primarily represent prepaid expenses and other current assets;

property, equipment and software;

and net deferred income tax assets.

Substantially all assets related to business operations are assigned to one of the Company's three reportable segments even though some of those assets result in Corporate expenses.

(LOSS) EARNINGS PER SHARE

EARNINGS (LOSS) PER COMMON SHARE

As a result of the Recapitalization, the Company has retrospectively adjusted the weighted-average Class A units outstanding prior to July 25, 2018 by multiplying them by the exchange ratio used to determine the number of Class A common stock into which they converted.

The following tables set forth the computation of the Company's (loss) earnings per share:

(in thousands except per share amounts)

The following tables set forth the computation of the Company's earnings (loss) per common share:

Year Ended December 31,

As restated - Note 2

Net (loss) income

(in thousands except per share amounts) 2020 2019 2018

Net income (loss) $ 71,059 $ ( 33,589 ) $ ( 17,836 )

Income allocated to participating securities — — ( 45 )

Net (loss) income available to common stockholders

Weighted-average common shares outstanding - basic and diluted

Basic and diluted (loss) earnings per share

Anti-dilutive securities that were excluded from EPS that could potentially be dilutive in future periods are as follows:

(in thousands)

Earnings attributable to non-controlling interests ( 45,398 ) — —

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

$ 25,661 $ ( 33,589 ) $ ( 17,881 )

Weighted-average common stock shares outstanding 67,158 67,086 61,607

Basic earnings (loss) per common share $ 0.38 $ ( 0.50 ) $ ( 0.29 )

Fully Diluted:

Weighted-average common stock shares outstanding 67,158 67,086 61,607

Weighted-average dilutive common shares outstanding 105 — —

Weighted-average common shares for fully-diluted earnings (loss) per share 67,263 67,086 61,607

Fully-diluted earnings (loss) per common share $ 0.38 $ ( 0.50 ) $ ( 0.29 )

Anti-dilutive securities that were excluded from earnings (loss) per common share that could potentially be dilutive in future periods are as follows:

As of December 31,

(in thousands) 2020 2019 2018

Stock options (1) 1,506 1,711 2,091

Restricted stock awards

Restricted stock units (1) 280 125 202

Liability-classified restricted stock units (1) 107 — —

Earnout incentive awards subject to vesting (2) — — 95

Warrants on common stock (see Note 14, Stockholders' Deficit Information )

Warrants on common stock (3) 3,556 3,556 5,731

Options and warrants issued to underwriter (3) 600 600 600

Earnout incentive awards subject to issuance (2) — — 9,705

Total 6,049 5,992 18,424

(1) Granted under the 2018 Equity Incentive Plan.

See Note 15 , Share - Based Compensation .

(2) Plan expired on December 31, 2019 with no shares issued.

(3) Issued by M.I.

Acquisitions prior to July 25, 2018.

See Note 14 , Stockholders ' Deficit .

SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)

The Company's consolidated financial statements for all annual reporting periods presented elsewhere in this Annual Report on Form 10-K reflect the full retrospective adoption of the new revenue accounting standard, ASC 606 (see Note 1, Nature of Business and Accounting Policies ).

As an emerging growth company, the Company elected to take advantage of the extended transition provisions for the adoption of ASC 606.

As a result, unaudited quarterly financial results previously reported by the Company in its Unaudited Condensed Consolidated Statements of Operations included in its Form 10-Q for each of the first three quarterly periods of 2019, and the applicable year-to-date reporting periods and comparative prior-period reporting periods presented in each of these Form 10-Q, were not required to reflect the adoption of ASC 606 and were therefore presented using a different basis of accounting than the basis used to prepare the consolidated financial statements for all annual reporting periods presented.

The following tables show a summary of the Company's quarterly financial information for each of:

1) the four quarters of 2019 as effected for the full retrospective adoption of ASC 606 (see the section "Accounting Principles Adopted in 2019" in Note 1, Nature of Business and Accounting Principles ) and 2) the four quarters of 2018 for the full retrospective adoption of ASC 606 and the correction of errors (see Note 2, Restatement of Previously Issued Consolidated Financial Statements ).

(in thousands, except per share amounts) 2020

2019 - As recasted

Revenues prior to ASC 606

Full retrospective adoption of ASC 606 (1)

Revenues, adjusted

Operating expenses prior to ASC 606

Full retrospective adoption of ASC 606 (1)

Operating expenses, adjusted

1Q 2Q 3Q 4Q Year

Revenues $ 96,933 $ 92,356 $ 108,962 $ 106,091 $ 404,342

Operating expenses 93,374 88,325 101,920 99,862 383,481

Income from operations 3,559 4,031 7,042 6,229 20,861

Interest expense ( 10,315 ) ( 11,668 ) ( 13,471 ) ( 9,385 ) ( 44,839 )

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

Debt extinguishment and modification expenses ( 376 ) — ( 1,523 ) — ( 1,899 )

Other, net 30 194 190 182 596

Income tax (benefit) expense ( 1,233 ) 415 13,737 ( 2,020 ) 10,899

Basic and diluted loss per common share (2)

Net (loss) income ( 5,869 ) ( 7,858 ) 85,740 ( 954 ) 71,059

Income attributable to non-controlling interests — — ( 45,348 ) ( 50 ) ( 45,398 )

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

$ ( 5,869 ) ( 7,858 ) $ 40,392 $ ( 1,004 ) $ 25,661

Basic and diluted (loss) income per common share (1) $ ( 0.09 ) $ ( 0.12 ) $ 0.60 $ ( 0.01 ) $ 0.38

(in thousands, except per share amounts) 2019

2018 - As restated

Revenues prior to ASC 606 and error corrections

Full retrospective adoption of ASC 606 (1)

Errors corrections (3)

Revenues, restated

Operating expenses prior to ASC 606 and error corrections

Full retrospective adoption of ASC 606 (1)

Error corrections (3)

Operating expenses, restated

Income from operations, restated

1Q 2Q 3Q 4Q Year

Revenues $ 87,646 $ 92,142 $ 93,883 $ 98,183 $ 371,854

Operating expenses 86,680 89,706 91,158 97,126 364,670

Income from operations 966 2,436 2,725 1,057 7,184

Interest expense ( 9,363 ) ( 10,776 ) ( 10,463 ) ( 10,051 ) ( 40,653 )

Income tax benefit, restated (3)

Net loss, restated

Basic and diluted loss per common share, restated (2)

(1) See Note 1, Nature of Business and Accounting Policies.

(2) May not be additive to the net loss per common share amounts for the year due to the calculation provision of ASC 260, Earnings Per Share .

(3) Affected the Company's Consumer Payments reportable segment.

See Note 2, Restatement of Previously Issued Consolidated Financial Statements , and Note 18, Segment Information .

Other, net 227 138 158 187 710

Income tax (benefit) expense ( 1,724 ) 5,928 ( 1,736 ) ( 1,638 ) 830

Net loss $ ( 6,446 ) $ ( 14,130 ) $ ( 5,844 ) $ ( 7,169 ) $ ( 33,589 )

Basic and diluted loss per common share (1) $ ( 0.10 ) $ ( 0.21 ) $ ( 0.09 ) $ ( 0.11 ) $ ( 0.50 )

(1) May not be additive to the net (loss) income per common share amounts for the year due to the calculation provision of ASC 260, Earnings Per Share .

SUBSEQUENT EVENTS

Amendments to Credit Agreements

On March 18, 2020, amendments were executed for the Senior Credit Agreement and the GS Credit Amendment.

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

COVID-19 Pandemic (Coronavirus)

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China.

In January 2020, this coronavirus spread to other countries, including the U.S., and efforts to contain the spread of this coronavirus intensified.

In March 2020, the World Health Organization declared the COVID-19 virus outbreak a global pandemic.

The outbreak and any preventative or protective actions that governments or others may take in respect of this coronavirus may result in global business disruptions, including for the Company's customers and business partners, and in a period of business disruption, reduced customer demand and reduced operations.

Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the Company's business, financial condition, results of operations, and cash flows, despite the fact that such impacts may not be felt for a significant period of time.

Although the Company is diligently working to ensure that it can operate with minimal disruption, prepare to mitigate the impact of the outbreak on the Company's employees’ health and safety, and address potential business interruptions on the Company and its customers, the full extent to which the coronavirus could affect the global and U.S.

economies and the Company will depend on future developments and factors that cannot be predicted.

Merger with Finxera Holdings, Inc.

On March 5, 2021, the Company entered into a definitive merger agreement to acquire Finxera Holdings, Inc.

Finxera is a provider of deposit account management payment processing services to the debt settlement industry.

The transaction is expected to close in the third quarter of 2021, subject to customary closing conditions, regulatory approvals, shareholder approval for both companies, and Finxera having delivered all required consents of banking departments or other governmental entities related to its money transmitter licenses or an arrangement sufficient to enable Finxera to continue operating the business in any material jurisdictions in compliance with all applicable law without a money transmitter license.

In the event that the condition is waived for a material jurisdiction pursuant to the above, the Company’s closing stock consideration will be reduced by $ 10 million, and if a non-material jurisdiction, Finxera will take all steps necessary to ensure compliance with applicable law.

Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of:

(a) $ 425 million, plus (b) the aggregate value of the current assets of the Finxera and each of its subsidiaries (the “Group Companies”) less the aggregate value of the current liabilities of Group Companies, in each case, determined on a consolidated basis without duplication, as of the close of business on the business day immediately preceding the date of the Closing (which may be a positive or negative number), plus (c) the sum of all cash and cash equivalents of the Group Companies as of the close of business on the business day immediately preceding the date of the Closing, minus (d) the amount of indebtedness of the Group Companies as of the close of the business day immediately prior to the date of the Closing, minus (e) the amount of unpaid transaction expenses, minus (f) 25 % of the earnings of the Group Companies during the period between the signing of the Merger Agreement and the Closing.

If the merger agreement is terminated by the Company because the transactions have not been consummated by February 28, 2022, and every condition to consummate the transactions contemplated by the merger agreement has been satisfied and the merger has not been consummated, or if the Company is in material breach of the representations, warranties or covenants in the merger agreement, then the Company may be required to pay Finxera a $ 22.5 million termination fee.

Debt Commitment Letter

In connection with the definitive merger agreement, Priority entered into a debt commitment letter with Truist Bank and Truist Securities, Inc.

to provide Priority with $ 300 million of term loan commitments, $ 290 million of delayed draw term loan commitments, and a $ 40 million revolving credit facility, subject to the conditions set forth in the debt commitment letter.

The proceeds of the term loan facility and the revolving credit facility will be used to refinance existing Senior loan facilities, to pay fees and expenses in connection with the refinancing, and for working capital and general corporate requirements.

The proceeds of the delayed draw term loan facility will be used to finance a portion of the merger consideration and paying fees and expenses related to the merger.

The availability of loans under the term loan commitments and the revolving credit facility is subject to certain conditions including, but not limited to, prior or substantially simultaneous completion of the transactions contemplated by the equity commitment letter (as described below), either a successful marketing period in connection with the syndication of the initial term loan facility and the revolving credit facility or substantially simultaneous satisfaction of the conditions precedent for the delayed draw term loan facility, and certain other customary closing conditions.

The availability of loans under the delayed draw term loan facility is subject to certain conditions including, but not limited to, completion of the merger in accordance with the merger agreement substantially concurrently with the borrowing under the delayed draw term loan facility, substantially simultaneous occurrence of the issuance of common equity of the Company as merger consideration, pro forma leverage below a particular threshold, and certain other customary closing conditions.

Equity Commitment Letter

Additionally in connection with the definitive merger agreement, the Company entered into a preferred stock commitment letter with Ares Capital Management LLC (“ACM”) and Ares Alternative Credit Management LLC (“AACM” and together with

ACM, the “Equity Commitment Parties”), pursuant to which, among other things, the Equity Commitment Parties have agreed to purchase perpetual senior preferred equity securities (the “Preferred Stock”) of the Company (a) to be issued in connection with the refinancing and repayment in full of certain Credit and Guaranty Agreements as described in the Equity Commitment Letter (the “Closing Date Refinancing”) (the “Initial Preferred Stock” and the issuance and sale thereof and certain warrants representing 2.50 % of the fully diluted Company Common Shares at the Closing, the “Initial Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $ 90.0 million and (ii) in the case of AACM, $ 60.0 million, (b) to be issued in connection with the Merger (the “Acquisition Preferred Stock” and the issuance and sale thereof, the “Acquisition Preferred Stock Financing”) in an amount equal to (i) in the case of ACM, $ 30.0 million and (ii) in the case of AACM, $ 20.0 million and (c) available to be issued in connection with one or more acquisitions by the Company or its subsidiaries as permitted by the Equity Commitment Letter (the “Delayed Preferred Stock” and the issuance and sale thereof, the “Delayed Preferred Stock Financing” and together with the Initial Preferred Stock Financing and the Acquisition Preferred Stock Financing, the “Preferred Stock Financing”) an amount equal to (i) in the case of ACM, $ 30.0 million and (ii) in the case of AACM, $ 20.0 million.

The Company has also agreed to issue to the Equity Commitment Parties warrants to purchase shares of common stock of the Company equal to an aggregate of 2.5 % of the outstanding shares of common stock at a nominal exercise price.

The Preferred Stock will require quarterly dividend payments initially equal to a LIBOR rate plus 12 % per annum of the liquidation preference, of which at least LIBOR plus 5 % is to be payable in cash and the remainder paid in kind.

In certain circumstances, including if the Company does not pay the minimum cash dividend, the required dividend may be increased.

The Preferred Stock will be redeemable beginning two years after the first issuance of Preferred Stock at a price equal to 102 % of the liquidation preference of the Preferred Stock plus any accrued and unpaid dividends or, beginning three years after the first issuance of Preferred Stock, at a price equal to the liquidation preference plus any accrued and unpaid dividends.

Prior to two years after the first issuance, the Preferred Stock is redeemable at a make-whole rate.

In the event of a change of control or liquidation event, the Company will be required to redeem the outstanding Preferred Stock.

The Preferred Stock will not have any voting rights except as required under Delaware law, but certain actions by the Company will require the consent of holders of a majority of the Preferred Stock.

In addition, the Preferred Stock will include certain covenants restricting, among other things, restricted payments, the incurrence of indebtedness, acquisitions and investments.

The Equity Commitment Parties’ commitment to provide the initial preferred stock financing is subject to certain conditions including but not limited to, the occurrence of the debt commitment refinancing, execution and delivery of the definitive documentation for the preferred stock financing, delivery by the Company to the investors of evidence of a bound buyer-side representation and warranty insurance policy, and certain other customary closing conditions.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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What changed 10-K

Item 8. Financial Statements and Supplementary Data