Priority Technology Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes for the years ended December 31, 2020, 2019 and 2018 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2021 (the "Annual Report"). Cautionary Note Regarding Forward-Looking Statements Some of the statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward- looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: • the impact of the COVID-19 pandemic; • competition in the payment processing industry; • the use of distribution partners; • any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise; • any breakdowns in our processing systems; • government regulation, including regulation of consumer information; • the use of third-party vendors; • any changes in card association and debit network fees or products; • any failure to comply with the rules established by payment networks or standards established by third-party processor; • any proposed acquisitions or any risks associated with completed acquisitions; and • other risks and uncertainties set forth in the "Item 1A - Risk Factors" included in this Quarterly Report or our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause our actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially - 25 - Table of Contents available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Terms Used in this Quarterly Report on Form 10-Q As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "we," "us" and "our" refer to Priority Technology Holdings, Inc. 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. - 26 - Table of Contents 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. - 27 - Table of Contents Results of Operations 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 March 31, 2021 Compared to the Three Months Ended March 31, 2020 (dollars in thousands) Three Months Ended March 31, 2021 2020 Change % Change REVENUES $ 113,297 $ 96,933 $ 16,364 16.9 % OPERATING EXPENSES: Costs of services 81,863 66,364 15,499 23.4 % Salary and employee benefits 9,548 10,129 (581) (5.7) % Depreciation and amortization 9,070 10,272 (1,202) (11.7) % Selling, general and administrative 8,289 6,609 1,680 25.4 % Total operating expenses 108,770 93,374 15,396 16.5 % Income from operations 4,527 3,559 968 27.2 % OTHER EXPENSES: Interest expense (9,168) (10,315) 1,147 (11.1) % 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) % - 28 - Table of Contents 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 Consumer Payments: Revenue $ 108,393 $ 86,031 $ 22,362 26.0 % Operating expenses 95,030 78,879 16,151 20.5 % Income from operations $ 13,363 $ 7,152 $ 6,211 86.8 % Operating margin 12.3 % 8.3 % Depreciation and amortization $ 8,579 $ 8,583 $ (4) — % Key Indicators: Merchant bankcard processing dollar value $ 11,871,939 $ 10,386,748 $ 1,485,191 14.3 % Merchant bankcard transaction volume 127,488 119,431 8,057 6.7 % Commercial Payments: Revenue $ 3,500 $ 6,368 $ (2,868) (45.0) % Operating expenses 3,909 5,604 (1,695) (30.2) % (Loss) income from operations $ (409) $ 764 $ (1,173) (153.5) % Operating margin (11.7) % 12.0 % Depreciation and amortization $ 74 $ 76 $ (2) (2.6) % Key Indicators: Merchant bankcard processing dollar value $ 63,477 $ 72,677 $ (9,200) (12.7) % Merchant bankcard transaction volume 38 25 13 52.0 % Integrated Partners: Revenue $ 1,404 $ 4,534 $ (3,130) (69.0) % Operating expenses 1,312 4,166 (2,854) (68.5) % Income from operations $ 92 $ 368 $ (276) (75.0) % Operating margin 6.6 % 8.1 % Depreciation and amortization $ 129 $ 1,311 $ (1,182) (90.2) % Key Indicators: Merchant bankcard processing dollar value $ 11,372 $ 124,518 $ (113,146) (90.9) % Merchant bankcard transaction volume 95 448 (353) (78.8) % Income from operations of reportable segments $ 13,046 $ 8,284 $ 4,762 57.5 % Less: Corporate expense (8,519) (4,725) (3,794) (80.3) % Consolidated income from operations $ 4,527 $ 3,559 $ 968 27.2 % Corporate depreciation and amortization $ 288 $ 302 $ (14) (4.6) % Key indicators: Merchant bankcard processing dollar value $ 11,946,788 $ 10,583,943 $ 1,362,845 12.9 % Merchant bankcard transaction volume 127,621 119,904 7,717 6.4 % - 29 - Table of Contents 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, 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 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. 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. Revenue Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Consolidated revenue 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 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 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 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. - 30 - Table of Contents 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 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 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 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 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. - 31 - Table of Contents 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 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, 2021 2020 Cash $ 6,553 $ 8,186 Payment-in-kind 1,924 1,391 Amortization and other 691 738 $ 9,168 $ 10,315 Income taxes We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets. ASC 740, Income Taxes ("ASC 740"), requires that all sources of future taxable income be considered in making this determination. The Tax Cuts and Jobs Act of 2017 amended section 163(j) of the Internal Revenue Code. Section 163(j), as amended, limits the business interest deduction to 30% of adjusted taxable income ("ATI"). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization ("EBITDA"). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes ("EBIT"), without adjusting for depreciation and amortization. Any business interest in excess of the annual limitation is carried forward indefinitely. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020. With respect to recording a deferred tax benefit for the carryforward of business interest expense, GAAP applies a "more likely than not" threshold for assessing recoverability. 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 2021 is 40.8% and includes the income tax provision on pre-tax - 32 - Table of Contents 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 Commitments 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. - 33 - Table of Contents Financial Condition Compared to our consolidated balance sheet as of December 31, 2020, the following key changes have occurred at March 31, 2021: Cash 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 $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 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 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 Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, technology solutions, and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs, including for our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next twelve months. This is based upon management’s estimates and assumptions utilizing the most currently available information regarding the effects of the COVID-19 pandemic on our financial results. Actual future results could differ materially, as the magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and ultimately could negatively impact our liquidity, capital resources, and debt covenant compliance. Our principal uses of cash are to fund business operations, administrative costs, and debt service. - 34 - Table of Contents 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) Quarter ended March 31, 2021 2020 Net cash used in: Operating activities $ (13,426) $ (7,254) Investing activities (5,691) (3,229) Financing activities (4,243) (251) 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. The - 35 - Table of Contents 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. 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. • Consolidated Total Debt is the aggregate principal amount of indebtedness minus the aggregate amount of unrestricted cash at the balance sheet date. • Consolidated Adjusted EBITDA is consolidated net income plus any applicable items determined in accordance with clauses (i)(b) through (i)(v) of the Consolidated Adjusted EBITDA definition, minus any applicable items determined in accordance with clauses (ii)(a) through (ii)(g) of the Consolidated Adjusted EBITDA definition in Section 1.01 of the Sixth Amendment ("Applicable Adjustments"). Under the provisions of the Sixth Amendment, 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 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: Gain on sale of business, less amounts attributable and paid to NCIs (clause (ii)(c)) (62,091) Interest expense (clause (i)(b)) 43,692 Depreciation and amortization (clause (i)(d) and (i)(e)) 39,573 Income tax expense (clause (i)(c)) 9,901 Non-cash stock-based compensation (clause (i)(j)) 2,650 Acquisition transition services (clause (i)(k)) 1,732 Debt extinguishment and modification expenses (clause (i)(h)) 1,523 Impairment of intangible asset (clause (i)(f)) 1,753 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 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 (clause (i)(k)) 648 Pro forma impact of disposal (5,553) Consolidated Adjusted EBITDA (non-GAAP) $ 68,637 - 36 - Table of Contents 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: Current portion of long-term debt $ 24,302 Long-term debt, net of discounts and deferred financing costs 350,667 Unamortized debt discounts and deferred financing costs 4,135 379,104 Less unrestricted cash (5,827) Consolidated Net Debt $ 373,277 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 - 37 - Table of Contents 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. Prepayments 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. Acceleration 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. Covenants 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. Refinancing 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 Our current assessment is that we anticipate cash on hand, funds generated from operations and available borrowings under our revolving credit facility to be sufficient to meet our working capital requirements, and that we will remain in compliance with our debt covenants. 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. - 38 - Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposures to market risk have not changed materially since December 31, 2020.