What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2020-11-13 · 194 added, 314 removed, 153 unchanged (77% of the section changed)

36 unchanged sentences

and its consolidated subsidiaries.

Recent Developments

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.

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.

Results of Operations

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

This section includes a discussion and analysis of our results of operations for the three months ended March 31, 2021 (or first quarter 2021) compared to the three months ended March 31, 2020 (or first quarter 2020).

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

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

(dollars in thousands) Three Months Ended September 30,

2020 2019 Change % Change

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

OPERATING EXPENSES:

Costs of services 74,971 63,718 11,253 17.7 %

Salary and employee benefits 10,010 10,668 (658) (6.2) %

Depreciation and amortization 10,251 10,077 174 1.7 %

Selling, general and administrative 6,688 6,695 (7) (0.1) %

Total operating expenses 101,920 91,158 10,762 11.8 %

Income from operations 7,042 2,725 4,317 158.4 %

OTHER INCOME (EXPENSES):

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

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

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

Other income, net 190 158 32 20.3 %

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

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

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

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

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

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

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

nm = not meaningful

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

(dollars in thousands) Nine Months Ended September 30,

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

(dollars in thousands) Three Months Ended March 31,

2021 2020 Change % Change

7 unchanged sentences

Income from operations 4,527 3,559 968 27.2 %

OTHER INCOME (EXPENSES):

OTHER EXPENSES:

Interest expense (9,168) (10,315) 1,147 (11.1) %

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

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

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

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

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

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

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

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

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

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

nm = not meaningful

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

(in thousands) Three Months Ended September 30,

2020 2019 Change % Change

Consumer Payments:

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

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

Income from operations $ 11,098 $ 7,214 $ 3,884 53.8 %

Operating margin 11.2 % 8.7 %

Depreciation and amortization $ 8,481 $ 8,302 $ 179 2.2 %

Key Indicators:

Merchant bankcard processing dollar value $ 11,235,068 $ 10,566,501 $ 668,567 6.3 %

Merchant bankcard transaction volume 122,623 131,646 (9,023) (6.9) %

Commercial Payments:

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

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

Income (loss) from operations $ 169 $ (382) $ 551 (144.2) %

Operating margin 3.4 % (6.0) %

Depreciation and amortization $ 77 $ 69 $ 8 11.6 %

Key Indicators:

Merchant bankcard processing dollar value $ 58,304 $ 92,290 $ (33,986) (36.8) %

Merchant bankcard transaction volume 24 26 (2) (7.7) %

Integrated Partners:

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

Operating expenses 4,413 3,800 613 16.1 %

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

Operating margin 5.4 % 20.9 %

Depreciation and amortization $ 1,403 $ 1,299 $ 104 8.0 %

Key Indicators:

Merchant bankcard processing dollar value $ 105,537 $ 119,747 $ (14,210) (11.9) %

Merchant bankcard transaction volume 371 421 (50) (11.9) %

Income from operations of reportable segments $ 11,520 $ 7,835 $ 3,685 47.0 %

Corporate expense (4,478) (5,110) 632 (12.4) %

Consolidated income from operations $ 7,042 $ 2,725 $ 4,317 158.4 %

Corporate depreciation and amortization $ 290 $ 407 $ (117) (28.7) %

Key indicators:

Merchant bankcard processing dollar value $ 11,398,909 $ 10,778,538 $ 620,371 5.8 %

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

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

(in thousands) Nine Months Ended September 30,

Other expenses, net (269) (346) 77 (22.3) %

Total other expenses, net (9,437) (10,661) 1,224 (11.5) %

Loss before income taxes (4,910) (7,102) 2,192 (30.9) %

Income tax benefit (2,231) (1,233) (998) 80.9 %

Net loss $ (2,679) $ (5,869) $ 3,190 (54.4) %

The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended March 31, 2021 compared to the three months ended March 31, 2020:

(in thousands) Three Months Ended March 31,

2021 2020 Change % Change

11 unchanged sentences

Operating expenses 3,909 5,604 (1,695) (30.2) %

Income (loss) from operations $ 1,408 $ (1,115) $ 2,523 (226.3) %

(Loss) income from operations $ (409) $ 764 $ (1,173) (153.5) %

Operating margin (11.7) % 12.0 %

20 unchanged sentences

Impact of COVID-19 on Results and Trends

The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, continues to adversely affect commercial activity and has contributed to a significant decline in economic activity in 2020 compared to 2019.

The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, adversely affected commercial activity and contributed to a significant decline in economic activity in 2020.

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

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

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

In May 2020, as shelter in place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return and revenue growth was supplemented by the acceleration of certain specialized product offerings and ecommerce payment transactions.

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

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

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

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

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

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

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

This recovery momentum continued through the second half of 2020 and first quarter of 2021.

While there continues to be considerable uncertainty regarding the future economic impacts of the pandemic, our operating results reflect a recovery from the negative affects during the months immediately following the pandemic declaration.

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

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Consolidated revenue

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

Our consolidated revenue in first quarter 2021 of $113.3 million increased by $16.4 million, or 16.9%, from revenue in first quarter 2020 of $96.9 million.

Revenue growth of $22.4 million in our Consumer Payments segment was partially offset by revenue declines of $2.9 million and $3.1 million in our Commercial Payments and Integrated Partners segments, respectively.

Revenue in Consumer Payments segment

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

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

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

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

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

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

Consumer payments revenue in first quarter 2021 of $108.4 million increased $22.4 million, or 26.0%, compared to revenue in first quarter 2020 of $86.0 million.

This increase was driven by $9.7 million, or 372.1%, revenue growth from high-margin specialized ecommerce merchants, and $12.7 million, or 15.2%, revenue growth in our base consumer payments business.

The commencement of the COVID-19 pandemic in March 2020 reduced our merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States.

This impact to first quarter 2020 revenue contributed to first quarter 2021 comparative revenue growth, but the pandemic’s precise impact to March 2020 revenue is not quantifiable by the Company.

Merchant bankcard processing dollar value in the first quarter of 2021 of $11.9 billion increased by $1.5 billion, or 14.3%, as compared with $10.4 billion in the first quarter of 2020.

Merchant bankcard transactions of 127.5 million in the first quarter of 2021 increased by 6.7%, as compared with 119.4 million in the first quarter of 2020.

Average ticket of $93.12 in first quarter 2021 increased 7.1%, as compared with $86.97 in first quarter 2020.

COVID-19 pandemic economic factors have impacted merchant volume mix and spending trends.

Following the pandemic declaration in March 2020, consumers began to conduct fewer payment transactions at higher average tickets, and card-not-present transactions increased.

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

In the first quarter 2021, we experienced growth in both payment transactions and average ticket.

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

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

Revenue in Commercial Payments segment

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

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

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

This increase was due to increased business from existing customers.

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

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

Revenue in Integrated Partners segment

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

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

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

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

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

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

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

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

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

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

Consolidated revenue

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

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

Revenue in Consumer Payments segment

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

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

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

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

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

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

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

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

During first quarter 2021, our monthly average of new merchants boarded was 4,874 compared with 5,139 in first quarter 2020.

Revenue in Commercial Payments segment

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

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

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

Commercial Payments revenue in first quarter 2021 of $3.5 million decreased by $2.9 million, or 45.0%, compared to revenue in first quarter 2020 of $6.4 million.

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

Revenue from the accounts payable automated solutions business in first quarter 2021 of $1.7 million increased $0.1 million, or 5.3%, from $1.6 million in first quarter 2020.

This increase was due to increased business from existing customers.

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

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

Revenue from our curated managed services business in first quarter 2021 of $1.8 million decreased by $3.0 million, or 61.8%, from revenue in first quarter 2020 of $4.8 million.

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

Revenue in Integrated Partners segment

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

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

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

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

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

Integrated Partners revenue in first quarter 2021 of $1.4 million decreased by $3.1 million, or 69.0%, compared to revenue in first quarter 2020 of $4.5 million.

Priority Real Estate Technology, LLC ("PRET") comprised $0.8 million and $4.0 million of this segment's revenue in first quarter 2021 and first quarter 2020, respectively.

Through September 22, 2020, PRET was comprised of our RentPayment business and our Landlord Station business.

RentPayment, which was sold on September 22, 2020, generated revenue of $3.8 million in first quarter 2020.

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

Revenue of $0.8 million from PRET’s ongoing business increased $0.7 million, or 578.8%, compared with revenue of $0.1 million in the first quarter 2020.

Priority PayRight Health Solutions ("PayRight") and Priority Hospitality Technology ("PHOT") comprise the remainder of this segment's revenue.

Consolidated Operating expenses

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

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

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

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

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

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

Decreases in office and travel-related costs due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment, was offset by a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment.

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

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

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

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

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

SG&A of $19.3

million decreased $1.7 million, or 8.2%, in first nine months of 2019 driven by decreases in office and travel-related costs due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment.

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

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Our consolidated operating expenses in first quarter 2021 of $108.8 million increased $15.4 million, or 16.5%, from consolidated operating expenses in first quarter 2020 of $93.4 million.

This overall increase was driven by an increase in costs of services of $15.5 million, or 23.4%, resulting from higher revenues in first quarter 2021.

Depreciation and amortization expense of $9.1 million decreased by $1.2 million, or 11.7%, in first quarter 2021.

Salary and employee benefits expenses of $9.5 million decreased $0.6 million, or 5.7%, in first quarter 2021 driven by lower comparative headcount.

Selling, general and administrative expenses ("SG&A") of $8.3 million increased $1.7 million, or 25.4% in the first quarter 2021 from $6.6 million in first quarter 2020.

During the first quarter 2021, Corporate SG&A included $3.6 million of professional fees and expenses incurred in connection with the pending acquisition of Finxera, the April 2021 debt refinancing, and the April 2021 issuance of preferred stock.

During the first quarter 2020, Corporate SG&A included $0.5 million of professional fees and expenses incurred in connection with the March 2020 amendment of the debt facility, and Integrated Partners SG&A included $0.9 million of acquisition-related transition services.

Income (loss) from operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

in connection with the assets acquired in March 2019.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

in connection with the assets acquired in March 2019.

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

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

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

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

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

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Consolidated income from operations in first quarter 2021 of $4.5 million increased by $1.0 million, or 27.2%, from $3.6 million in first quarter 2020.

This increase was the result of lower depreciation and amortization expense of $1.2 million, lower salary and employee benefits expenses of $0.6 million, and higher revenues less costs of services of $0.9 million.

These favorable changes for first quarter 2021 were partially offset by higher SG&A of $1.7 million, driven by the $2.2 million increase in professional fees and other expenses described above under Consolidated Operating Expenses.

Our Consumer Payments segment contributed $13.4 million in income from operations for first quarter 2021, an increase of $6.2 million, or 86.8%, from $7.2 million in first quarter 2020.

The main driver of this increase was higher revenue less costs of services of $5.5 million.

Income from operations also benefited from a $0.5 million decrease in SG&A and a $0.2 million decrease in salary and employee benefits.

Our Commercial Payments segment had a loss from operations of $0.4 million for first quarter 2021 compared to income from operations of $0.8 million for first quarter 2020.

This decline was largely driven by lower revenues less costs of services of $1.4 million, resulting from the revenue decline in our curated managed services, slightly offset by a net decrease in salary and employee benefits and SG&A.

Our Integrated Partners segment earned income from operations of $0.1 million for first quarter 2021, a decrease of $0.3 million compared to $0.4 million of income from operations for first quarter 2020.

The decrease was driven by the September 2020 sale of PRET’s RentPayment business.

Revenues less costs of services decreased by $3.2 million, which was largely offset by decreases in SG&A of $1.2 million, business depreciation and amortization of $1.2 million and salary and employee benefits of $0.6 million.

Corporate expenses were $8.5 million for first quarter 2021, an increase of $3.8 million from expenses of $4.7 million for first quarter 2020.

This increase was driven by a $3.1 million increase in professional fees and expenses described above under Consolidated Operating Expenses.

Salaries and employee benefits increased $0.6 million largely due to higher incentive compensation accruals.

Interest expense

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

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

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

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

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

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

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

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

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

Debt extinguishment and modification costs

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

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

Gain on sale of business

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

in March 2019.

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

The sale price does not contain any contingent components.

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

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

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

Interest expense in the first quarter 2021 decreased by $1.1 million, or 11.1%, from $10.3 million in first quarter 2020.

This decline was driven by lower outstanding debt.

In September 2020, proceeds from the RentPayment sale were used to repay $106.5 million of Senior indebtedness.

During the third and fourth quarters of 2020, $14.5 million of outstanding revolving credit was repaid.

Interest expense includes cash interest, payment-in-kind interest, and amortization of deferred financing costs and debt discounts.

During the first quarters of 2021 and 2020, interest expense was comprised of:

(dollars in thousands) Three Months Ended March 31,

Cash $ 6,553 $ 8,186

Payment-in-kind 1,924 1,391

Amortization and other 691 738

$ 9,168 $ 10,315

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

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

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

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

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

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

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

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

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.

We compute our interim period income tax expense or benefit by using a forecasted estimated annual effective tax rate ("EAETR") and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income.

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

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

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

Earnings attributable to non-controlling interests

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

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

The EAETR for 2021 is 40.8% and includes the income tax provision on pre-tax

income and a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2021 interest expense.

Off-Balance Sheet Arrangements

We have not entered into any other transactions with third parties or unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or other obligations.

Commitments and Contractual Obligations

See Note 9, Commitments and Contingencies , to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of March 31, 2021 or December 31, 2020.

Contractual Obligations

There have been no significant changes to our contractual obligations compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2020, except for changes in the minimum annual spend commitments with third-party processor partners as further described in Note 9, Commitments and Contingencies .

For an updated schedule of debt repayments, see Note 7, Debt Obligations.

Also, at December 31, 2020, the Company accrued approximately $6.2 million for the remaining cash consideration it estimates it will be required to pay under an assignment of merchant portfolio rights agreement and related reseller agreement it executed with a third-party in October 2019.

Payments are required to be made on a quarterly basis through September 30, 2022.

The Company continues to review its estimate of the remaining consideration to be paid and will adjust its obligation accordingly if deemed necessary.

As of March 31, 2021, the only change in the amounts accrued was for the required payment made in the first quarter of 2021.

Related Party Transactions

See Note 10, Related Party Transactions , to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods.

Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K.

There have been no material changes to these critical accounting policies and estimates as of March 31, 2021.

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

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements.

See Note 1, Basis of Presentation and Significant Accounting Policies , to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.

Financial Condition

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

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

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

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

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

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

Compared to our consolidated balance sheet as of December 31, 2020, the following key changes have occurred at March 31, 2021:

Unrestricted cash decreased by $3.4 million during the first quarter 2021.

Net unrestricted cash provided by operating activities of $6.5 million was offset by $5.7 million used in investing activities and $4.2 million of net cash used in financing activities.

Cash used in investing activities was comprised of capitalized software development of $1.5 million, purchases of property and equipment of $1.2 million, and payment of December 31, 2020 accrued liabilities for intangible asset acquisitions of $2.9 million.

Net cash used in financing activities was comprised of a $4.9 million scheduled debt repayment under our Senior Credit Agreement and $0.6 million of proceeds from the exercise of stock options.

Restricted Cash

Restricted cash decreased by $19.9 million in first quarter 2021, attributable to the timing of operating activities related to disbursement and receipt of cash held on behalf of customers.

This decrease resulted from net disbursement of $21.9 million of settlement obligations and net receipt of $2.0 million of customer deposits and advance payments.

Intangible Assets

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

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

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

Amortization expense during the 2020 period was $25.2 million.

The carrying value increased by $4.4 million for acquisitions.

Intangible assets, net of accumulated amortization, decreased $7.0 million during the first quarter of 2021, resulting from amortization expense of $7.0 million.

Debt Obligations

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

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

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

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

Outstanding amounts for our debt obligations under that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Truist (the “Senior Credit Agreement”) and that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P.

(the “Term Loan Agreement”) decreased by a net of $2.9 million during the first three months of 2021.

This decrease was attributable to principal repayments of $4.9 million for Senior debt, partially offset by PIK interest of $1.9 million under our Term Loan Agreement.

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

Stockholders' Deficit

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

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

Stockholders' deficit attributable to the stockholders of the Company increased by $1.2 million, from a deficit of $98.6 million at December 31, 2020 to a deficit of $99.8 million at March 31, 2021.

The primary driver of this change was the net loss attributable to stockholders of the Company of $2.7 million, partially offset by $1.5 million of increases to additional paid-in capital for equity-based stock compensation and proceeds from stock options.

Liquidity and Capital Resources

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Our principal uses of cash are to fund business operations, administrative costs, and debt service.

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

As of September 30, 2020, we had unrestricted cash totaling $21.7 million compared to $3.2 million at December 31, 2019.

These balances do not include restricted cash, which reflects cash accounts holding customer settlement funds of $37.1 million at September 30, 2020 and $47.2 million at December 31, 2019.

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

Our working capital, defined as current assets less current liabilities, was $(18.0) million and $(13.0) million at March 31, 2021 and December 31, 2020, respectively.

The current portion of long-term debt was $24.3 million and $19.4 million at March 31, 2021 and December 31, 2020, respectively.

On April 27, 2021, we refinanced our credit agreements, which reduced the current portion of long-term debt to $3.0 million, improved our working capital and increased our revolving credit facility to $40 million.

(See the additional discussion about our debt refinancing in the subsequent section for Credit and Guaranty Agreement.)

At March 31, 2021, we had no outstanding borrowings under the $25.0 million revolving credit facility of our Senior Credit Agreement.

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

(dollars in thousands) Nine Months Ended September 30,

Net cash provided by (used in):

(dollars in thousands) Quarter ended March 31,

Net cash used in:

Operating activities $ (13,426) $ (7,254)

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Financing activities (4,243) (251)

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

Cash Provided By Operating Activities

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

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

Cash Provided By (Used In) Investing Activities

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

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

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

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

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

Cash (Used In) Provided By Financing Activities

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

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

The amount for the 2019 period included net borrowings under our Senior Credit Agreement consisting of $11.5 million under the revolving facility and a $69.7 million delayed draw under the term facility that was used to acquire certain assets from YapStone, Inc.

in March 2019.

Long-Term Debt

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

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

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

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

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

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

Cash Used In Operating Activities

Net cash used in operating activities, which includes changes in restricted cash, was $13.4 million in first quarter 2021 compared to net cash used in operating activities of $7.3 million in first quarter 2020.

Restricted cash operating activities, which are operating activities related to disbursement and receipt of restricted cash held on behalf of customers, used $19.9 million of cash in first quarter 2021 and used $10.4 million of cash in first quarter 2020.

This comparative change in cash is driven by timing of customer pre-funding and disbursement activities.

Unrestricted cash activities provided $6.5 million of cash in first quarter 2021 and provided $3.1 million of cash in first quarter 2020.

Cash Used In Investing Activities

Net cash used in investing activities was $5.7 million in the first quarter 2021 compared to net cash used in investing activities of $3.2 million in the first quarter of 2020.

Cash used to fund a portfolio acquisition and a contingent portion of a residual buyout amounted to $2.9 million and $0.9 million in the first quarter of 2021 and 2020, respectively.

Cash used to acquire property, equipment, and software amounted to $2.8 million and $2.3 million in the first quarter 2021 and 2020, respectively.

Cash Used In Financing Activities

Net cash used in financing activities was $4.2 million in the first quarter 2021 compared to net cash used of $0.3 million in the first quarter 2020.

In first quarter 2021, Senior debt principal repayments of $4.9 million were partially offset by $0.6 million of proceeds from the exercise of stock options.

In the first quarter of 2020, Senior debt principal repayments of $1.0 million and debt modification costs of $2.7 million were largely offset by $3.5 million of borrowings under our revolving credit facility.

Long-Term Debt at March 31, 2021

As of March 31, 2021, we had outstanding long-term debt of $379.1 million compared to $382.0 million at December 31, 2020, a decrease of $2.9 million.

The debt balance at March 31, 2021 consisted of outstanding term debt of $274.6 million under the Senior Credit Agreement and $104.5 million in term debt under the Subordinated Term Loan Facility.

Additionally, under the Senior Credit Facility, we have a $25 million revolving credit facility, which was fully available as of March 31, 2021.

outstanding principal amounts under the Senior Credit Facility and the Term Loan Agreement mature in January 2023 and July 2023, respectively.

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

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

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

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

The Total Net Leverage Ratio steps down thereafter.

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

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

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

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

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

Securities and Exchange Commission on March 30, 2020.

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

As of March 31, 2021, we were in compliance with our financial covenants.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment to the Senior Credit Agreement and are summarized below:

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

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

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

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

Under the provisions of the Sixth Amendment, for interim quarterly and full year measurement periods commencing in January 2021, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.

Consolidated Adjusted EBITDA is a non-GAAP liquidity measure.

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

(in thousands) Ended

September 30, 2020

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

For determining the Total Net Leverage Ratio at March 31, 2021, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from Section 1.01 of the Sixth Amendment:

(in thousands) Last Twelve Months Ended

March 31, 2021

Consolidated Net Income (GAAP) $ 28,851

Applicable Adjustments:

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Acquisition transition services (clause (i)(k)) 1,732

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

Debt extinguishment and modification expenses (clause (i)(h)) 1,523

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

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

Provision for allowance for note receivable (clause (i)(f)) 467

Change in fair value of contingent consideration for business combinations (clause (ii)(a)) (360)

Certain legal fees and expenses (clause (i)(m)) 3,167

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

Litigation settlement recoveries (clause (i)(k)) (721)

Professional, accounting and consulting fees (clause (i)(k)) 1,905

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

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

Other adjustments (clause (i)(k)) 648

Pro forma impact of disposal (5,553)

Consolidated Adjusted EBITDA (non-GAAP) $ 68,637

Factor to annualize year-to-date 12/9

Annualized $ 60,089

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

(in thousands, except ratio) September 30, 2020

At March 31, 2021, the Total Net Leverage Ratio was 5.44:1.00, calculated as follows:

(in thousands, except ratio) March 31, 2021

Consolidated Total Debt:

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Consolidated Net Debt $ 373,277

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

Total Net Leverage Ratio 6.16

Consolidated Adjusted EBITDA (non-GAAP) $ 68,637

Total Net Leverage Ratio 5.44x

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”).

COVID-19 Pandemic

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However, the ongoing magnitude, duration and effects of the COVID-19 pandemic on our future results of operation, cash flows, and financial condition are difficult to predict at this time, and our current assessment is subject to material revision.

Off-Balance Sheet Arrangements

Commitments and Contractual Obligations

See Note 11, Commitments and Contingencies , to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of September 30, 2020 or December 31, 2019.

Contractual Obligations

There have been no significant changes to our contractual obligations and commitments compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2019, except for changes in minimum principal repayments under our Senior Credit Agreement.

For an updated schedule of debt repayments, see Note 9, Debt Obligations , to the unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Related Party Transactions

See Note 12, Related Party Transactions , to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods.

Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K.

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

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis