What changed in this filing

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Item 1. Financial Statements

2021-05-14 compared with 2020-11-13 · 234 added, 461 removed, 388 unchanged (64% of the section changed)

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(in thousands, except share data) Unaudited

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Current assets:

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Restricted cash 58,933 78,879

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

Accounts receivable, net of allowance of $ 374 and $ 574

50,886 41,321

Prepaid expenses and other current assets 4,083 3,500

Current portion of notes receivable 1,435 1,326

Current portion of notes receivable, net of allowance of $ 467 and $ 467

Settlement assets 1,220 753

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Customer deposits and advance payments 5,488 2,883

Income taxes payable 5,950 —

Current portion of long-term debt 24,302 19,442

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Accumulated deficit ( 104,692 ) ( 102,013 )

Total Priority Technology Holdings, Inc.

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

Non-controlling interest in subsidiary — 5,654

Total stockholders' deficit ( 99,755 ) ( 98,564 )

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Condensed Consolidated Statements of Operations

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

2020 2019 2020 2019

(in thousands, except per share amounts) Three Months Ended March 31,

REVENUES $ 113,297 $ 96,933

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Income from operations 4,527 3,559

OTHER INCOME (EXPENSES):

OTHER EXPENSES:

Interest expense ( 9,168 ) ( 10,315 )

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

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

Other income, net 190 158 414 523

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

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

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

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

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

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

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

Income (loss) per common share:

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

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

Weighted-average common shares and equivalents:

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

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

Other expenses, net ( 269 ) ( 346 )

Total other expenses, net ( 9,437 ) ( 10,661 )

Loss before income taxes ( 4,910 ) ( 7,102 )

Income tax benefit ( 2,231 ) ( 1,233 )

Net loss $ ( 2,679 ) $ ( 5,869 )

Loss per common share:

Basic and diluted $ ( 0.04 ) $ ( 0.09 )

Weighted-average common shares outstanding:

Basic and diluted 67,543 67,061

See Notes to Unaudited Condensed Consolidated Financial Statements

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Condensed Consolidated Statements of Cash Flows

(in thousands) Nine Months Ended September 30,

(in thousands) Three Months Ended March 31,

Cash flows from operating activities:

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

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

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

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

Net loss $ ( 2,679 ) $ ( 5,869 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization of assets 9,070 10,272

Equity-classified and liability-classified stock compensation 1,627 3,354

Equity-classified and liability-classified stock-based compensation 558 338

Amortization of debt issuance costs and discounts 590 460

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

Deferred income tax benefit ( 1,661 ) ( 1,699 )

Change in allowance for deferred tax assets ( 638 ) 466

Payment-in-kind interest 1,924 1,391

Debt extinguishment and modification costs 1,523 —

Impairment charge for intangible asset 980 —

Other non-cash items, net ( 64 ) 208

Change in operating assets and liabilities, excluding business sale:

Change in operating assets and liabilities:

Accounts receivable ( 9,575 ) 631

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Prepaid expenses and other current assets ( 583 ) 390

Income taxes payable 6,026 —

Notes receivable 862 ( 927 )

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Other assets and liabilities, net 59 ( 680 )

Net cash provided by operating activities 3,136 10,617

Net cash used in operating activities ( 13,426 ) ( 7,254 )

Cash flows from investing activities:

Sale of business 179,416 —

Additions to property, equipment, and software ( 2,754 ) ( 2,281 )

Acquisitions of intangible assets ( 2,937 ) ( 948 )

Note receivable loan funding — ( 3,000 )

Other investing activity — ( 184 )

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

Net cash used in investing activities ( 5,691 ) ( 3,229 )

Cash flows from financing activities:

Proceeds from issuance of long-term debt, net of issue discount — 69,650

Repayment of long-term debt ( 4,860 ) ( 1,002 )

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

Debt modification costs paid — ( 2,749 )

Borrowings under revolving credit facility — 3,500

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

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

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

Repurchases of common stock — ( 2,388 )

Net cash (used in) provided by financing activities ( 163,761 ) 76,018

Proceeds from exercise of stock options 617 —

Net cash used in financing activities ( 4,243 ) ( 251 )

Net change in cash and restricted cash:

Net increase (decrease) in cash and restricted cash 8,365 ( 6,988 )

Net decrease in cash and restricted cash ( 23,360 ) ( 10,734 )

Cash and restricted cash at beginning of period 88,120 50,465

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Payment-in-kind interest added to principal of debt obligations $ 1,924 $ 1,391

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

Accrued purchases of property, equipment and software $ — $ 34

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

Reconciliation of cash and restricted cash:

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Actual results could differ materially from those estimates.

In particular, the magnitude, duration and effects of the COVID-19 pandemic are difficult to predict at this time, and the ultimate effect could result in future charges related to the recoverability of assets, including financial assets, long-lived assets, goodwill, and other losses .

In particular, the continued magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and the ultimate effect could result in future charges related to the recoverability of assets, including financial assets, long-lived assets, goodwill, and other losses .

Status as an Emerging Growth Company

The Company remains an "emerging growth company" ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012.

The Company is an "emerging growth company" ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012.

The Company may remain an EGC until December 31, 2021.

However, if the Company's non-convertible debt issued within a rolling three-year period exceeds $1.0 billion, the Company would cease to be an EGC immediately, or if its revenue for any fiscal year exceed $1.07 billion, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year.

As an EGC, the Company may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

Additionally, as a smaller reporting company ("SRC") as defined by the SEC, the Company has the option to adopt certain new or revised accounting standards on a permitted delayed basis that is not available to other public companies not meeting the definition of a SRC.

Therefore, the Company's financial statements may not be comparable to other public companies that are not an EGC and/or SRC.

However, if the Company's non-convertible debt issued within a rolling three-year period exceeds $1.0 billion, the Company would cease to be an EGC immediately, or if its revenue for any fiscal year exceeds $1.07 billion, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year.

As an EGC, the Company is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Additionally, the Company may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

As such, the Company's financial statements may not be comparable to that comply with public company effective dates.

Comprehensive Income (Loss)

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

For the three months ended March 31, 2021 and March 31, 2020, the Company had no activities to report as components of other comprehensive income (loss).

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

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

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

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

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

Accounting Policies and New Accounting Standards Adopted

There have been no material changes to the Company's accounting policies as described in its most recent Annual Report on Form 10-K for the year ended December 31, 2020.

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

Disclosures for Fair Value Measurements (ASU 2018-13)

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 financial position, results of operations or cash flows.

Note 15, Fair Value , reflects the disclosure provisions of ASU 2018-13.

Recently Issued Accounting Standards Not Yet Adopted

The Company did not adopt any new accounting standards during the three months ended March 31, 2021 except for the following:

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

In December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to enhance and simplify various aspects of the accounting for income taxes.

The amendments in this update remove certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also clarifies and amends existing guidance to improve consistency in application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill.

The adoption of ASU 2019-12 on January 1, 2021 did not have a material effect on our consolidated financial statements.

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)

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'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)

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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.

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

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 contract 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.

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

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

2016-02, Leases-Topic 842 , which has been codified in ASC 842, Leases .

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

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.

Based on the current expectation for the expiration of the Company's EGC status, the Company must adopt this standard no later than the beginning of 2022 for annual and interim reporting periods.

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.

The Company is still evaluating the potential effects that the adoption of ASC 842 may have on its results of operations.

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.

ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.

Credit Losses (ASU 2016-13)

Credit Losses (ASU 2016-13 and ASU 2018-19)

In June 2016, the FASB issued ASU No.

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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.

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 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 is a smaller reporting company ("SRC"), 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.

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.

Since the Company is a SRC, 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)

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

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

periods beginning first quarter 2021.

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 impact will be dependent on any share-based payments issued to customers.

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

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)

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12").

ASU 2019-12 will affect several topics of income tax accounting, including:

tax-basis step-up in goodwill obtained in a transaction that is not a business combination;

intra-period tax allocation;

ownership changes in investments when an equity method investment becomes a subsidiary of an entity;

interim-period accounting for enacted changes in tax law;

and year-to-date loss limitation in interim-period tax accounting.

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.

SALE OF BUSINESS

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

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

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

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

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

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

operating segment and reportable segment.

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

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

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

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

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

The gain amounted to $ 107.2 million as follows:

(in thousands)

Gross cash consideration from buyer $ 180,000

Less working capital adjustment paid in cash ( 584 )

Net proceeds from buyer 179,416

Transaction costs incurred ( 5,383 )

Intangible assets ( 62,158 )

Other assets sold, net of obligations assumed ( 716 )

Goodwill assigned to business sale ( 2,683 )

Other intangible assets ( 1,237 )

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

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

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

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

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

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

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

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

Operating Lease Obligation

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

The Company has not adopted ASC 842;

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

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

Continuing Operations

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

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

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

Pro Forma Information

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

(in thousands)

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

2020 2019 2020 2019

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

Income from operations (1)

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

Net income (2) (3)

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

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

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

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

- Basic and Diluted (4)

$ — $ 0.01 $ 0.03 $ 0.03

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

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

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

15.5 % for third quarter 2020;

22.9 % for third quarter 2019;

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

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

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

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

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

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

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

2020 2019 2020 2019

(in thousands) Three Months Ended March 31,

Merchant card fees $ 107,702 $ 89,086

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Transaction Price Allocated to Future Performance Obligations

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations.

ASC 606, Revenue Recognition ("ASU 606"), requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations.

However, as allowed by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria.

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Contract Costs

For new, renewed, or anticipated contracts with customers, the Company does not incur material amounts of incremental costs to obtain such contracts, as those costs are defined by ASC 340-40.

For new, renewed, or anticipated contracts with customers, the Company does not incur material amounts of incremental costs to obtain such contracts, as those costs are defined by ASC 340-40, Related Costs to Obtain or Fulfill a Contract with Customers ("ASU 340-40").

Fulfillment costs, as defined by ASC 340-40, typically benefit only the period (typically a month in duration) in which they are incurred and therefore are expensed in the period incurred (i.e., not capitalized) unless they meet criteria to be capitalized under other accounting guidance.

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

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

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.

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

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

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

Supplemental balance sheet information related to contracts from customers as of March 31, 2021 and December 31, 2020 was as follows:

(in thousands) Consolidated Balance Sheet Location March 31, 2021 December 31, 2020

Contract liabilities, net (current) Customer deposits and advance payments $ 1,162 $ 1,494

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

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

The balances for the contract liabilities were approximately $ 1.7 million and $ 1.9 million at March 31, 2020 and December 31, 2019, respectively.

The changes in the balances during the three months ended March 31, 2021 and March 31, 2020 were due to the timing of advance payments received from the customer.

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

Net contract assets were not material for any period presented.

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

NON-CONTROLLING INTERESTS

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

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

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

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

The fair value of the NCI 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 a drawdown of the Senior Credit Facility on a delayed basis as provided for and pursuant to the third amendment thereto executed in December 2018.

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

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

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

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

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

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

Related Party Non-Controlling Interest

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

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months ended March 31, 2021 and March 31, 2020.

SETTLEMENT ASSETS AND OBLIGATIONS

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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.

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.

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

Member banks held merchant funds of $ 115.4 million and $ 103.8 million at March 31, 2021 and December 31, 2020, respectively.

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

4 unchanged sentences

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 three months ended March 31, 2021 and March 31, 2020 were $ 0.4 million and $ 1.0 million, respectively.

Commercial Payments Segment

2 unchanged sentences

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

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

(in thousands) As of

September 30, 2020 December 31, 2019

The Company's settlement assets and obligations at March 31, 2021 and December 31, 2020 were as follows:

(in thousands) March 31, 2021 December 31, 2020

Settlement Assets:

Card settlements due from merchants, net of estimated losses $ 1,065 $ 753

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

Card settlements due from ISOs 155 —

Total settlement assets $ 1,220 $ 753

Settlement Obligations:

Card settlements due to merchants $ 2 $ 44

Due to ACH payees (1) 50,820 72,878

2 unchanged sentences

GOODWILL AND OTHER INTANGIBLE ASSETS

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

The Company's goodwill was as follows:

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

Consumer Payments $ 106,832 $ 106,832

Integrated Partners — 2,683

$ 106,832 $ 109,515

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

The Company 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.

All of the Company's goodwill was allocated to the Company's Consumer Payments reporting unit at March 31, 2021 and December 31, 2020.

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

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

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

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

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

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

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

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

The Company expects to perform its next annual goodwill impairment test during the

fourth quarter of 2021 using market data and discounted cash flow analysis.

The Company concluded there was no impairment as of March 31, 2021 or December 31, 2020.

As such, there was no accumulated impairment loss as of March 31, 2021 and December 31, 2020.

Other Intangible Assets

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

As of March 31, 2021 and December 31, 2020, intangible assets consisted of the following:

(in thousands) March 31, 2021 December 31, 2020

Other intangible assets:

Merchant portfolios $ 55,816 $ 55,816

18 unchanged sentences

See Note 9 , Commitments and Contingencies, for information about an acquired merchant portfolio with a contingent purchase price.

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

Amortization expense for finite-lived intangible assets was $ 7.0 million and $ 8.5 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

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

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

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

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

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.

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

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

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

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

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

The Company also considered the market conditions generated by the COVID-19 pandemic and concluded that there were no additional impairment indicators present at March 31, 2021.

PROPERTY, EQUIPMENT, AND SOFTWARE

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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 September 30, 2020 and December 31, 2019 follows:

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

A summary of property, equipment, and software as of March 31, 2021 and December 31, 2020 follows:

(in thousands) March 31, 2021 December 31, 2020

Furniture and fixtures $ 2,795 $ 2,795

5 unchanged sentences

Property, equipment, and software, net $ 23,791 $ 22,875

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

Depreciation expense for property, equipment, and software totaled $ 2.1 million and $ 1.8 million for the three months ended March 31, 2021 and 2020, respectively.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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

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

Accounts payable $ 4,794 $ 6,968

Accrued network fees $ 7,813 $ 6,950

The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at either March 31, 2021 or December 31, 2020 consisted of the following:

(in thousands) March 31, 2021 December 31, 2020

Accrued card network fees $ 8,160 $ 8,041

DEBT OBLIGATIONS

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

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

Outstanding debt obligations as of March 31, 2021 and December 31, 2020 consisted of the following:

(in thousands) March 31, 2021 December 31, 2020

Senior Credit Agreement:

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

$ 280,419 $ 388,837

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

Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00 % beginning March 18, 2020) plus 6.50 % and 6.50 % at March 31, 2021 and December 31, 2020, respectively (actual rate of 7.50 % and 7.50 % at March 31, 2021 and December 31, 2020, respectively)

$ 274,557 $ 279,417

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

Revolving credit facility - $ 25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50 % and 6.50 % at March 31, 2021 and December 31, 2020, respectively (actual rate of 6.65 % and 6.65 % at March 31, 2021 and December 31, 2020, respectively)

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.00 % plus an applicable margin (actual rate of 12.50 % and 12.50 % at March 31, 2021 and December 31, 2020, respectively)

104,547 102,623

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

Amendments in First Quarter 2020

On March 18, 2020, the Borrowers entered into an amendment to the Senior Credit Agreement with an existing syndicate of lenders (the "Senior Credit Agreement") and into a related amendment to the existing credit agreement with Goldman Sachs Specialty Lending, LLC (the "GS Credit Agreement").

Both amendments were accounted for as debt modifications under GAAP.

Together, these amendments are referred to as the "Sixth Amendment."

Under the Sixth Amendment, the outstanding balances under the term loan facilities of the Senior Credit Agreement and the GS Credit Agreement term loan were not changed.

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

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

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

Senior Credit Agreement

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

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

Accrued interest is payable quarterly.

Outstanding borrowings under that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Truist (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 our Senior Credit Agreement, the Sixth Amendment, which was executed on March 18, 2020, thereto provides for a LIBOR "floor" of 1.0 % per annum.

Accrued interest is payable monthly.

The revolving credit facility incurs a commitment fee on any undrawn amount of the $ 25.0 million credit line, which equates to 0.50 % 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.

Term Loan Agreement

Outstanding borrowings under that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P.

(the “Term Loan 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.

Changes in Applicable Interest Rate Margins

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

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

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

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

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

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

Contractual Maturities

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

Based on terms and conditions existing at March 31, 2021, future minimum principal payments for long-term debt are as follows:

(in thousands) Principal Due

Senior Credit Agreement GS Credit Agreement Total

Twelve-month period ending September 30, Term Revolver Term

Senior Credit Agreement Term Loan Agreement Total

Twelve-month period ending March 31, Term Revolver Term

2022 (current) $ 24,302 $ — $ — $ 24,302

1 unchanged sentence

2024 — — 104,547 104,547

2023 230,813 — — 230,813

2024 — — 100,693 100,693

Total $ 274,557 $ — $ 104,547 $ 379,104

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 year ended December 31, 2019.

No such prepayments were made for the year ended December 31, 2020.

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

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

18, 2021 and March 18, 2022.

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

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

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

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

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

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

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

Under the Term Loan Agreement, prepayments of outstanding principal are subject to a 2.0 % penalty for certain prepayments occurring between March 18, 2021 and March 18, 2022.

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

The principal amount borrowed and outstanding under the Term Loan Agreement was $ 80.0 million at March 31, 2021 and December 31, 2020.

Included in the outstanding obligation balance at March 31, 2021 and December 31, 2020 was accumulated PIK interest of $ 24.5 million and $ 22.6 million, respectively.

For the three months ended March 31, 2021 and March 31, 2020, PIK interest added $ 1.9 million and $ 1.4 million, respectively, to the obligation balance under the Term Loan Agreement.

Interest Expense and Amortization of Deferred Loan Costs and Discounts

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

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

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

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

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

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

Term Debt 2020 2019 2020 2019

Senior Credit Agreement 9.87 % 7.92 % 8.57 % 7.50 %

GS Credit Agreement 14.62 % 10.90 % 12.99 % 10.80 %

Debt Extinguishment Costs and Debt Modification Costs

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

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

Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was $ 9.2 million and $ 10.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

Interest expense increased due to the amortization of deferred financing costs and debt discounts by $ 0.6 million and $ 0.5 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

For the Sixth Amendment, executed in the first quarter of 2020, $ 2.7 million of lender fees were deferred and added to then-existing unamortized loan costs and discount.

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

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

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 September 30, 2020.

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

Income Tax Expense (Benefit)

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

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

2020 2019 2020 2019

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

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

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

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

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

DTA = Deferred income tax asset

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

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

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

As a result, a proportional amount of unamortized loan costs and discount in the amount of $ 1.5 million was removed and expensed during the third quarter of 2020.

The Senior Credit Agreement and the Term Loan 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 maximum permitted Total Net Leverage Ratio was 7.71 :1.00 at March 31, 2021.

As of March 31, 2021, the Company remained in compliance with the covenants.

Refinancing in April 2021

See Note 16, Subsequent Events , for information on the new Credit and Guaranty Agreement executed by the Borrowers on April 27, 2021.

The Company's effective income tax rate for the three months ended March 31, 2021 was 45.4 %.

Our effective income tax rate for the three months ended March 31, 2021 differed from the U.S.

statutory rate primarily as a result of changes to our valuation allowance for interest limited under section 163(j) of the Internal Revenue Code.

The Company's effective income tax rate for the three months ended March 31, 2020 was 17.4 %.

Our effective income tax rate for the three months ended March 31, 2020 differed from the U.S.

statutory rate primarily as a result of changes to our valuation allowance for interest limited under section 163(j) of the Internal Revenue Code and related favorable interest limitation provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

Valuation Allowance for Deferred Income Tax Assets

1 unchanged sentence

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

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

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

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

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

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

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

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

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

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

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

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

Uncertain Tax Positions

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

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

The Company is subject to U.S.

federal income tax and income tax in multiple state jurisdictions.

Tax periods for 2016 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2015 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.

Based on management’s assessment, as of the first quarter of 2021, the Company continues to record a full valuation allowance against non-deductible interest expense.

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

COMMITMENTS AND CONTINGENCIES

1 unchanged sentence

The Company has multi-year agreements with third parties to provide certain payment processing services to the Company.

The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed payments transactions.

The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed payment transactions.

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

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

Based on existing contracts in place at March 31, 2021, the Company is committed to pay minimum processing fees under these agreements of approximately $ 14.8 million in 2021 and $ 7.8 million in both 2022 and 2023.

Commitment to Lend

3 unchanged sentences

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

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.

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

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

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.

On March 15, 2019, a subsidiary of the Company paid $ 15.2 million cash to acquire certain residual portfolio rights.

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

Of the $ 15.2 million, $ 5.0 million was funded from a delayed draw down of the Senior Credit Facility.

Additionally, a $ 10.0 million draw was made against the revolving credit facility under the Senior Credit Facility and cash on hand was used to fund the remaining amount.

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

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

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

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

Contingent Consideration for Business Combinations

See Note 15, Fair Value , for information about contingent consideration related to 2018 business acquisitions.

As of March 31, 2021, an additional $ 4.3 million of the $ 6.4 million total contingent consideration has been paid to the seller, while the remaining $ 2.1 million will be payable in the first quarter of 2022 if certain criteria are achieved.

Legal Proceedings

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Commitment to Lend and Warrant to Acquire

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

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

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

The Company has loaned the entity a total of $ 3.5 million at March 31, 2021 and December 31, 2020, with a commitment to loan up to a total of $ 10.0 million based on certain growth metrics of the entity and continued compliance by the entity with the terms and covenants of the agreement.

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

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

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

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

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

The Company also received a warrant to purchase a non-controlling interest in this entity's equity at a fixed amount.

The loan agreement also gives the Company certain rights to purchase some or all of this entity's equity in the future, at the entity's then-current fair value.

The fair values of the warrant, loan commitment, and purchase right were not material at inception or as of any subsequent reporting period.

The fair values of the warrant, loan commitment, and purchase right were not material at inception or at March 31, 2021.

Contributions of Assets and Contingent Payment

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.

contribution agreements.

No material liabilities were assumed by PHOT.

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

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

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

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 NCI in mezzanine equity.

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

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

For the period from July 1, 2020 through 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.

Such amounts were not material to the Company's results of operations, financial position, or cash flows for the three months ended March 31, 2021.

Equity-Method Investment

During the first quarter of 2020, the Company wrote off its $ 0.2 million carrying value in an equity-method investment.

This loss is reported as a component of Other (expense) income, net on the Company's unaudited condensed consolidated statement of operations.

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

This loss is reported as a component of Other expenses, net on the Company's unaudited condensed consolidated statement of operations.

RECONCILIATION OF STOCKHOLDERS' DEFICIT AND NON-CONTROLLING INTERESTS

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

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

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

As of March 31, 2021 and December 31, 2020, the Company has not issued any shares of preferred stock.

See Note 16, Subsequent Events , for information on the Securities Purchase Agreement the Company executed on April 27, 2021.

The following tables provide a reconciliation of the beginning and ending carrying amounts for the periods presented for the components of which is the deficit attributable to stockholders of the Company and equity attributable to non-controlling interest:

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

Stockholders' (Deficit) NCI (c)

Stockholders' (Deficit)

Preferred Stock Common Stock Treasury Stock (a)

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January 1, 2021 — $ — 67,391 $ 68 451 $ ( 2,388 ) $ 5,769 $ ( 102,013 ) $ ( 98,564 )

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

Equity-classified stock-based compensation — — — — — — 558 — 558

Vesting of stock-based compensation — — 159 — — — — — —

Liability-classified stock-based compensation converted to equity-classified — — — — — — 313 — 313

Net loss — — — — — — — ( 2,679 ) ( 2,679 )

Proceeds from exercise of stock options — — 90 — — — 617 — 617

March 31, 2021 — $ — 67,640 $ 68 451 $ ( 2,388 ) $ 7,257 $ ( 104,692 ) $ ( 99,755 )

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

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

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

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

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

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

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

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

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

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

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

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

Stockholders' (Deficit) NCI (c)

Stockholders' (Deficit) NCI (b)

Preferred Stock Common Stock Treasury Stock (a)

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

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

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

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

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

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

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

Equity-classified stock compensation — — — — — — 1,023 — 1,023 —

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

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

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

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

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

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

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

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

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 portion of the warrants being tendered in exchange for approximately 420,000 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.

(b) Prior to third quarter 2020, this balance was related to the acquisition of certain assets from YapStone, Inc.

by the Company's PRET subsidiary during 2019.

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was issued a NCI in PRET with an initial estimated fair value and carrying value of $ 5,654,000 .

See Note 4, Non-Controlling Interests .

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

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

During the three months ended September 30, 2020, a gain on a sale of assets from PRET resulted in the attribution of a total of $ 45.1 million to the NCIs of PRET.

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

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

See Note 12, Related Party Transactions .

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

STOCK-BASED COMPENSATION

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The Company recognizes the effects of forfeitures on compensation expense as the forfeitures occur.

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

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

2020 2019 2020 2019

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

2014 Management Incentive Plan — 849 — 1,267

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

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

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

Expense recognized for equity-classified stock compensation under the 2018 Equity Incentive Plan was $ 0.6 million and $ 0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

During the three months ended March 31, 2021, the Company converted a $ 0.3 million liability-classified stock compensation accrual for restricted stock units under the 2018 Equity Incentive Plan, whereby the service inception date preceded the future grant-date, to an equity-classified award when the restricted stock units were granted.

Income tax benefit for the stock-based compensation was not material for the three months ended March 31, 2021 and March 31, 2020.

Fair Value Measurements

The estimated fair value of remaining contingent consideration related to two business combinations were each based on a weighted payout probability for the contingent consideration at the original measurement date and each subsequent remeasurement date, which fall 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 % and 80 % for the other.

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

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

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

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

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

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

At March 31, 2021 and December 31, 2020, the Company no longer has any fair value estimates that are required to be remeasured at the end of each reporting period on a recurring basis.

Fair Value Disclosures

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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 September 30, 2020 and December 31, 2019 was approximately $ 6.1 million and $ 5.7 million, respectively.

Substantially all of the Company's notes receivable are secured, and the Company has provided for allowances when it believes that certain notes receivable may not be collectible.

The fair value of the Company's notes receivable, net at March 31, 2021 and December 31, 2020 was approximately $ 6.9 million and $ 7.7 million, respectively.

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

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The Borrower's outstanding debt obligations (see Note 7, Debt Obligations ) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

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

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at March 31, 2021 and December 31, 2020 was estimated to be approximately $ 275.2 million and $ 278.0 million, respectively.

The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of $ 274.6 million and $ 279.4 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.

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SEGMENT INFORMATION

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

At March 31, 2021, the Company has three reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's Chief Executive Officer and Chairman.

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

The Commercial Payments and Institutional Services (sometimes referred to as Managed Services) operating segments are aggregated into one reportable segment, Commercial Payments.

The Commercial Payments

and Institutional Services (sometimes referred to as Managed Services) operating segments are aggregated into one reportable segment, Commercial Payments.

More information about our three reportable segments:

• Consumer Payments – represents consumer-related services and offerings including merchant acquiring and transaction processing services including the proprietary MX enterprise suite.

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

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

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

Prior to second quarter of 2019, the Integrated Partners operating segment was aggregated with the Commercial Payments and Institutional Services operating segments and reported as one aggregated reportable segment.

In the second quarter of 2019, the Integrated Partners operating segment was no longer aggregated with the Commercial Payments and Institutional Services operating segments.

All comparative periods have been adjusted to reflect the current three reportable segments.

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

(in thousands) Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

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

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

(in thousands) Three Months Ended March 31,

Consumer Payments $ 108,393 $ 86,031

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Integrated Partners 1,404 4,534

Consolidated Revenue $ 108,962 $ 93,883 $ 298,251 $ 273,671

Consolidated revenues $ 113,297 $ 96,933

Income (loss) from operations:

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Consolidated depreciation and amortization $ 9,070 $ 10,272

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

(in thousands) Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

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

(in thousands) Three Months Ended March 31,

Total income from operations of reportable segments $ 13,046 $ 8,284

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Interest expense ( 9,168 ) ( 10,315 )

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

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

Other income, net 190 158 414 523

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

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

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

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

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

Other expenses, net ( 269 ) ( 346 )

Income tax benefit 2,231 1,233

Net loss $ ( 2,679 ) $ ( 5,869 )

Substantially all revenue is generated in the United States.

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

For the three months ended March 31, 2021 and March 31, 2020 , no one merchant customer accounted for 10% or more of the Company's consolidated revenues.

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

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

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

INCOME ( LOSS) PER COMMON SHARE

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

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

September 30, September 30,

2020 2019 2020 2019

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

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

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

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

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

Basic earnings (loss) per common share:

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

Fully Diluted:

For the three months ended March 31, 2021 and March 31, 2020, merchants referred by one ISO organization with potential merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately 23.3 % and 20.1 %, respectively, of the Company's consolidated revenues.

On September 22, 2020, Priority Real Estate Technology, LLC (“PRET”), a majority-owned and consolidated subsidiary of the Company, sold certain assets comprising its RentPayment business, which was part of the Integrated Partners reportable segment.

The allocation of net proceeds from the sale, after transaction costs, to the PRET members included the 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.

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

The initial allocation of net proceeds remained subject to final adjustment with the PRET members at December 31, 2020.

During the first quarter of 2021, it was determined that an additional $ 0.5 million of the excess proceeds are due to the non-controlling interests, which amounts were accrued at March 31, 2021 and included in Other expenses, net in the unaudited condensed consolidated statement of operations.

During the first quarter of 2020, RentPayment generated $ 3.8 million of revenue and $ 0.6 million of income from operations.

L OSS PER COMMON SHARE

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

(in thousands, except per share amounts) Three Months Ended March 31,

Basic and Diluted Loss Per Common Share:

Net loss $ ( 2,679 ) $ ( 5,869 )

Income attributable to non-controlling interests — —

Net loss attributable to common shareholders $ ( 2,679 ) $ ( 5,869 )

Weighted-average common stock shares outstanding 67,543 67,061

Weighted-average dilutive common stock equivalents 119 — 17 —

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

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

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

Basic and Diluted Loss Per Common Share $ ( 0.04 ) $ ( 0.09 )

Potentially anti-dilutive securities that were excluded from loss per common share for the three months ended March 31, 2021 and March 31, 2020 that could be dilutive in future periods were as follows:

(in thousands) Common Stock Equivalents at

September 30, 2020 September 30, 2019

March 31, 2021 March 31, 2020

Outstanding warrants on common stock (1) 3,556 3,556

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Outstanding stock option awards (2) 1,394 1,644

Liability-based restricted stock units (2) 238 —

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

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

Total 6,392 6,195

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(2) Granted under the 2018 Equity Incentive Plan

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

SUBSEQUENT EVENTS

Merger Agreement

On March 5,2021, we announced that we had entered into an Agreement and Plan of Merger (the "Merger Agreement") with Finxera Holdings, Inc.

("Finxera"), Prime Warrior Acquisition Corp., an indirect wholly owned subsidiary of the Company ("Merger Sub") and solely in its capacity as the representative of the stockholders or optionholders of Finxera (the "Equityholder Representative"), Stone Point Capital, LLC.

Priority will acquire, through a merger of Merger Sub with and into Finxera, the Finxera business.

Finxera is a provider of deposit account management payment processing services to the debt settlement industry in the United States.

The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (a) Merger Sub will merge with and into Finxera (the “Merger”), with the separate existence of Merger Sub ceasing and Finxera continuing as the surviving entity of the Merger (the “Surviving Entity”);

(b) at the effective time of the Merger (the “Effective Time”) each share of common stock, par value $ 0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $ 0.01 per share, of the Surviving Entity;

and (c) the shares of common stock of Finxera designated as “Class A Common Stock”, “Class B Common Stock” and preferred stock “Series C Participating Preferred Stock” issued and outstanding immediately prior to the closing of the transactions contemplated by the Merger Agreement (the “Closing”) will be converted into rights to receive certain cash and stock consideration and a contingent right to receive a portion of any payments made following the determination of the purchase price adjustments (a “Deferred Payment”).

Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of:

(a) $ 425,000,000 , 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 the 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.

Each option to purchase one or more shares of Class B Common Stock of Finxera issued pursuant to the Finxera Holdings, Inc.

2018 Equity Incentive Plan (the “Company Options”), vested as of immediately prior to the Closing (the “Vested Company Option”), that is issued and outstanding immediately prior to the Closing will be deemed to be exercised and converted into the right to receive a cash payment with respect to such Vested Company Option and a contingent right to receive a portion of any Deferred Payments.

Securities Purchase Agreement

On April 27, 2021, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with credit funds managed by certain affiliates of Ares Management Corporation (the “Investors”), pursuant to which the Company (i) issued and sold 150,000 shares of senior preferred stock, par value $ 0.001 per share (the “Senior Preferred Stock”, and the shares issued the “Senior Preferred Shares”) at a purchase price of $ 150,000,000 , or $ 1,000 per Senior Preferred Share (the “Initial Senior Preferred Stock Sale”), and (ii) issued warrants (the “Warrants”) to purchase up to 1,803,841 shares of the Company’s common stock, par value $ 0.001 per share (“Common Stock” and together with the Warrants, the “Securities”), at an exercise price $ 0.001 .

The exercise price and the number of shares issuable upon exercise of the warrants are subject to certain adjustments from time to time on the terms outlined in the Warrants.

In addition to the issuance and sale of Senior Preferred Shares which pursuant to the Purchase Agreement, upon the consummation of the Company’s acquisition of Finxera and the satisfaction of other customary closing conditions, the Company will issue and sell to the Investors an additional 50,000 shares of Senior Preferred Stock, at a purchase price of $ 50,000,000 , or $ 1,000 per share.

The Company may also issue and sell to the Investors up to an additional 50,000 shares of Senior Preferred Stock, at a purchase price of $ 1,000 per share within 18 months after the consummation of the Acquisition Senior Preferred Stock Sale upon the satisfaction of certain customary closing conditions.

The Company used the proceeds from the sale of the Securities to fund the Refinancing (as defined below) and to pay certain fees and expenses relating to the Refinancing and the offering of the Securities.

Registration Rights Agreement

On April 27, 2021 the Company entered into a Registration Rights Agreement, by and among the Company and the Investors (the “Registration Rights Agreement”), pursuant to which the Company agreed to provide certain registration rights with respect to the shares of Common Stock issuable upon exercise of the Warrants (the “Registrable Securities”).

Under the Registration Rights Agreement, the holders of the Registrable Securities were granted (i) piggyback rights to be included in certain underwritten offerings of Common Stock and (ii) the right to demand a shelf registration of Registrable Securities.

Credit and Guaranty Agreement

On April 27, 2021, Priority Holdings, LLC, a Delaware limited liability company (“Holdings”), which is a direct wholly-owned subsidiary of the Company, and certain direct and indirect subsidiaries of Holdings (together with Holdings, collectively, the “Loan Parties”), entered into a Credit and Guaranty Agreement (the “Credit Agreement”) with Truist Bank (“Truist”) and the lenders party thereto, pursuant to which Holdings has access to senior credit facilities in an aggregate principal amount of $ 630.0 million which are secured by substantially all of the assets of the Loan Parties and by the equity interests of Holdings.

The credit facilities under the Credit Agreement are comprised of (i) a senior secured first lien term loan facility in an aggregate principal amount of $ 300,000,000 (the “Initial Term Loan”), the proceeds of which have been used to fund the Refinancing, (ii) a senior secured revolving credit facility in an aggregate amount not to exceed $ 40,000,000 outstanding at any time and (iii) a senior secured first lien delayed draw term loan facility in an aggregate principal amount of $ 290,000,000 , the proceeds of which may be used to fund the Company’s acquisition of Finxera.

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

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

The outstanding amount of any loans and any other amounts owing by the Loan Parties under the Credit Agreement may, after the occurrence of an Event of Default (as defined in the Credit Agreement), at the option of Truist, be declared immediately due and payable.

Events of Default include, without limitation, the failure of the Loan Parties to pay principal, premium or interest when due under the Credit Agreement, or the failure by the Loan Parties to perform or comply with any term or covenant in the Credit Agreement, in each case, subject to any applicable cure periods provided therein.

The Credit Agreement contains 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 Loan Parties 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.

If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35 % of the total revolving facility thereunder, the Loan Parties are required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the Credit Agreement as the ratio of consolidated total debt of the Loan Parties to the Loan Parties Consolidated Adjusted EBITDA (as defined in the Credit Agreement).

If applicable, the maximum permitted Total Net Leverage Ratio is (i) 6.50 :1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022, (ii) 6.00 :1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023, and (iii) 5.50 :1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.

Holdings and certain other Loan Parties have previously entered into (A) the Term Loan Agreement and (B) the Senior Credit Agreement, the proceeds from the sale of the Securities and from the Initial Term Loan were used to refinance the Term Loan Agreement and the Senior Credit Agreement and all outstanding obligations thereunder were repaid in full (or in the case of outstanding undrawn letters of credit, deemed issued under the Credit Agreement), and all commitments and guaranties in connection therewith have been terminated or released (the “Refinancing”).

Residual Purchase Agreement

On April 28, 2021, a subsidiary of the Company completed an asset acquisition of certain residual portfolio rights for a purchase price of $ 42.4 million.

The seller’s note payable to the Company of $ 5.0 million at the time of the purchase was netted against the purchase price, resulting in cash of $ 37.4 million being paid by the Company to the seller, which was funded from cash proceeds of the Securities Purchase Agreement executed on April 27, 2021.

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

What changed 10-Q

Item 1. Financial Statements