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Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-31 · 195 added, 448 removed, 76 unchanged (89% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management's discussion and analysis of financial condition and results of operations together with " Item 6 - Selected Financial Data " and our audited financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions.

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

The following management's discussion and analysis of financial condition and results of operations should be read together with our audited financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-over-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-over-year comparisons between 2020 and 2019 are not included in this Form 10-K, and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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

The abbreviation "nm" used the the following sections indicates the metric is not meaningful.

For a description and additional information about our three reportable segments, see Note 20, Segment Information , contained in " Item 8 - Financial Statements and Supplementary Data " of this Annual Report on Form 10-K.

Impact of COVID-19 on Results and Trends

The outbreak of COVID-19 in the U.S., 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, particularly in the second quarter of 2020.

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

This impact was evident in a decline in merchant bankcard volume and our revenues particularly during the period of restrictive shelter-in-place requirements instituted across the U.S.

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 e-commerce payment transactions.

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

While there continues to be uncertainty regarding the future economic impacts of COVID-19 variants, our operating results reflect a significant recovery from the pandemic's negative effects during the first half of 2020.

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

Results of Operations

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

This section includes certain components of our results of operations for the years ended December 31, 2021 (or "2021"), December 31, 2020 (or "2020") and December 31, 2019 (or "2019").

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

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

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

Year Ended December 31,

(dollars in thousands) 2020 2019 $ Change % Change

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

For the year ended December 31, 2021, our consolidated revenue of $514.9 million increased by $110.6 million, or 27.4%, from $404.3 million for the year ended December 31, 2020.

This overall increase was driven by an increase in bankcard volumes fueled by:

1) increased consumer spending resulting from post-pandemic recovery in the economy;

and 2) acquisitions made by the Company.

The following table shows our revenues by type for 2021, 2020 and 2019:

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Revenue Type:

Merchant card fees $ 468,764 $ 377,346 $ 339,450 $ 91,418 24.2 % $ 37,896 11.2 %

Outsourced services and other services 21,033 23,103 28,712 (2,070) (9.0) % (5,609) (19.5) %

Money transmission services revenue 19,415 — — 19,415 nm — nm

Equipment 5,689 3,893 3,692 1,796 46.1 % 201 5.4 %

Total revenues $ 514,901 $ 404,342 $ 371,854 $ 110,559 27.3 % $ 32,488 8.7 %

For the year ended December 31, 2021, our merchant card fees revenue of $468.8 million increased by $91.5 million, or 24.3%, from $377.3 million for the year ended December 31, 2020.

This increase was driven by an increase in the merchant bankcard volume processed by the Company.

Outsourced services and other services revenue of $21.0 million for the year ended December 31, 2021 decreased by $2.1 million, or 9.1%, from $23.1 million for the year ended December 31, 2020, primarily due to the wind down of certain customer programs due to the impact of the COVID-19 pandemic.

Money transmission services revenue of $19.4 million for the year ended December 31, 2021 is related to the acquisition of Finxera Holdings, Inc.

("Finxera") in September 2021.

Equipment revenue of $5.7 million for the year ended December 31, 2021 increased by $1.8 million, or 46.2%, from $3.9 million for the year ended December 31, 2020.

The increase was primarily due to the sale of equipment to new merchants added during the year.

Operating Expenses

Operating expenses for 2021, 2020 and 2019 were as follows:

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Operating expenses

Costs of services $ 359,885 $ 277,374 $ 252,569 $ 82,511 29.7 % $ 24,805 9.8 %

3 unchanged sentences

Total operating expenses $ 481,808 $ 383,481 $ 364,670 $ 98,327 25.6 % $ 18,811 5.2 %

Income from operations 20,861 7,184 13,677 190.4 %

Operating margin 5.2 % 1.9 %

OTHER INCOME (EXPENSES):

Costs of Services

Costs of services of $359.9 million for the year ended December 31, 2021 increased by $82.5 million, or 29.7%, from $277.4 million for the year ended December 31, 2020, primarily due to the corresponding increase in revenues.

For the year ended December 31, 2021, costs of services as a percentage of total revenues increased to 69.9% as compared to 68.6% for the year ended December 31, 2020.

This increase was primarily due to bankcard volume growth from larger partners with higher commissions.

Salary and Employee Benefits

Salary and employee benefits expense of $43.8 million for the year ended December 31, 2021 increased by $4.3 million, or 10.9%, from $39.5 million for the year ended December 31, 2020, primarily due to an increase in headcount related to our acquisition of Finxera in September 2021.

The Company's employee headcount increased to 790 in 2021 from 479 in 2020.

Depreciation and Amortization Expense

Depreciation and amortization expense of $49.7 million for the year ended December 31, 2021 increased by $8.9 million, or 21.8%, from $40.8 million for the year ended December 31, 2020, primarily due to the recognition of finite lived intangible assets from the business combinations completed during the year, offset by a decrease related to the sale of certain assets from Priority Real Estate Technology, LLC's (" PRET") real estate services business in 2020.

Selling, General and Administrative

Selling, general and administrative expenses of $28.4 million for the year ended December 31, 2021 increased by $2.6 million, or 10.1%, from $25.8 million for the year ended December 31, 2020, primarily due to expenses from acquired businesses as well as one-time transaction expenses.

Other (Expenses) Income, net

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Other (expenses) income

Interest expense $ (36,485) $ (44,839) $ (40,653) $ 8,354 (18.6) % $ (4,186) 10.3 %

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

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

Debt extinguishment and modification costs (8,322) (1,899) — (6,423) 338.2 % (1,899) nm

Gain on sale of business and investment 7,643 107,239 — (99,596) (92.9) % 107,239 nm

Other income, net 202 596 710 (394) (66.1) % (114) (16.1) %

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

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

Income tax expense 10,899 830 10,069 nm

Total other (expenses) income, net $ (36,962) $ 61,097 $ (39,943) $ (98,059) (160.5) % $ 101,040 (253.0) %

Interest Expense

Interest expense of $36.5 million for the year ended December 31, 2021 decreased by $8.3 million, or 18.5%, from $44.8 million for the year ended December 31, 2020, primarily due to the lower rate of interest on the new loans secured by the Company in connection with the refinancing of its credit facilities in April 2021.

The new term facility and revolving credit facility carry interest rates of 6.75% and 5.75% at December 31, 2021, respectively, as compared to the old term facility and subordinated term loan facility, which carried interest rates of 7.50% and 12.50% at December 31, 2020, respectively.

The decrease in interest expense in 2021 was also driven by the timing of additional borrowings.

The Company borrowed $320.0 million to fund the acquisition of Finxera in September 2021, which was only outstanding during part of the year.

Debt Extinguishment and Modification Costs

Debt extinguishment and modification costs for the year ended December 31, 2021 were $8.3 million, an increase of $6.4 million, or 336.8%, from $1.9 million for the year ended December 31, 2020.

The Company refinanced its credit facilities in April 2021.

As a result the Company expensed unamortized deferred costs and discounts of $3.0 million associated with the retirement of its subordinated debt facility and expensed $5.3 million of third-party costs incurred in connection with the refinancing.

During 2020, the Company expensed unamortized deferred costs and discounts of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Facility and expensed $0.4 million of third-party costs incurred in connection with the amendment of its credit facilities.

Gain on Sale of Business and Investment

Gain on sale of business and investment for the year ended December 31, 2021 was $7.6 million, which resulted from consideration received by the Company in connection with the termination of certain warrants held in the common stock of an entity that was sold during the year.

Th e amount of consideration received may be subject to certain adjustments in the future related to a potential earn out that is contingent on 2022 performance.

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

For the year ended December 31, 2020, gain on sale of business and investment was $107.2 million, which was related to the sale of PRET's real estate services business in September 2020, as discussed in Note 6, Disposal of Business .

Income Tax Expense

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

(Loss) income before income taxes $ (3,869) $ 81,958 $ (32,759) $ (85,827) (104.7) % $ 114,717 (350.2) %

Income tax expense $ (5,258) $ 10,899 $ 830 $ (16,157) (148.2) % $ 10,069 1,213.1 %

Effective tax rate 135.9 % 13.3 % (2.5) %

The effective tax rate for 2021 increased primarily due to:

1) an increase in the valuation allowance against certain business interest carryover deferred tax assets;

2) non-deductible transaction costs incurred in the acquisition of Finxera;

3) the finalization of prior estimates on the sale of PRET's real estate services business impacting amounts attributable to noncontrolling partners;

and 4) an increase in the tax basis of certain intangible assets resulting from a change in a subsidiary's entity status.

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

The consolidated effective income tax rate for 2021 may not be indicative of our effective tax rate for future periods.

Earnings Attributable to Common Shareholders

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Net income (loss) $ 1,389 $ 71,059 $ (33,589) $ (69,670) (98.0) % $ 104,648 (311.6) %

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

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

Dividends and accretion attributable to redeemable senior preferred stockholders (18,009) — — (18,009) nm — nm

Non-controlling interests ("NCI") preferred unit redemptions, net of deferred tax benefit (8,021) — — (8,021) nm — nm

Net income attributable to redeemable and redeemed NCIs — (45,398) — 45,398 (100.0) % (45,398) nm

Net (loss) income attributable to common stockholders $ (24,641) $ 25,661 $ (33,589) $ (50,302) (196.0) % $ 59,250 (176.4) %

Dividends and accretion attributable to redeemable senior preferred stockholders was $18.0 million for the year ended December 31, 2021, and was comprised of $8.7 million of accumulated dividends accrued as part of the carrying value of the redeemable senior preferred stock, $7.5 million of dividends that were paid in cash and $1.8 million related to the accretion of discounts and issuance cost for the redeemable senior preferred stock.

NCI preferred unit redemptions was $(8.0) million for the year ended December 31, 2021, and was related to the redemption of the PHOT preferred units, as discussed in Note 15, Related Party Transactions .

Net income attributable to redeemable and redeemed NCIs for the year ended December 31, 2020 was $(45.4) million, which was related to the portion of the gain on the sale of PRET's real estate services business in 2020 that was due to the NCIs.

Segment Results

The Company reorganized its business segments as of December 31, 2021, resulting in three segments:

Small and medium-sized businesses ("SMB") Payments, business-to-business ("B2B") Payments and Enterprise Payments.

Segment results included in the discussion below were restated in accordance with the new segment structure for comparison purposes.

The impact of the restatement of the prior period results is as follows:

SMB Payments (1)

B2B Payments (2)

Enterprise Payments (3)

2020 2019 2020 2019 2020 2019

nm = not meaningful

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

Year Ended December 31,

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

Consumer Payments:

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

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

Income from operations $ 38,392 $ 32,237 $ 6,155 19.1 %

Operating margin 10.4 % 9.8 %

Restated $ 370,521 $ 334,180 $ 20,922 $ 25,980 $ 12,899 $ 11,694

Historically reported 367,816 330,599 20,922 25,980 15,604 15,275

Difference $ 2,705 $ 3,581 $ — $ — $ (2,705) (3,581)

Operating Income:

Restated $ 37,897 $ 30,936 $ 923 $ (891) $ 1,899 $ 2,027

Historically reported 38,392 32,237 923 (891) 1,404 725

Difference $ (495) $ (1,301) $ — $ — $ 495 $ 1,302

Depreciation and Amortization:

Key Indicators:

Merchant bankcard processing dollar value $ 41,703,661 $ 42,303,880 $ (600,219) (1.4) %

Merchant bankcard transaction volume 455,240 511,852 (56,612) (11.1) %

Commercial Payments:

Restated $ 35,627 $ 33,194 $ 306 $ 323 $ 3,674 $ 4,046

Historically reported 35,002 32,842 306 323 4,299 4,398

Difference $ 625 $ 352 $ — $ — $ (625) $ (352)

(1) Compared to the Company's legacy Consumer Payments segment.

(2) Compared to the Company's legacy Commercial Payments segment.

(3) Compared to the Company's legacy Integrated Partners segment.

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Revenue $ 475,630 $ 370,521 $ 334,180 $ 105,109 28.4 % $ 36,341 10.9 %

Operating expenses 422,746 332,624 303,244 90,122 27.1 % 29,380 9.7 %

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

Operating income $ 52,884 $ 37,897 $ 30,936 $ 14,987 39.5 % $ 6,961 22.5 %

Operating margin 11.1 % 10.2 % 9.3 %

3 unchanged sentences

Merchant bankcard transaction volume 578,102 456,066 511,852 122,036 26.8 % (55,786) (10.9) %

Integrated Partners:

Revenue from our SMB Payments segment was $475.6 million for the year ended December 31, 2021, compared to $370.5 million for the year ended December 31, 2020.

The increase of $105.1 million, or 28.4%, was primarily driven by increased merchant bankcard volume.

The Company's revenue from the SMB Payments segment as a percentage of merchant bankcard processing dollar value during 2021 remained consistent with 2020 at 0.9%.

Operating Income

Operating income from our SMB Payments segment was $52.9 million for the year ended December 31, 2021, compared to $37.9 million for the year ended December 31, 2020.

The increase of $15.0 million, or 39.6%, was primarily driven by the increase in sales and the cost benefit tied to purchased residuals from an acquired portfolio.

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Revenue $ 17,138 $ 20,922 $ 25,980 $ (3,784) (18.1) % $ (5,058) (19.5) %

Operating expenses 17,003 19,999 26,871 (2,996) (15.0) % (6,872) (25.6) %

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

Operating income $ 135 $ 923 $ (891) $ (788) (85.4) % $ 1,814 (203.6) %

Operating margin 0.8 % 4.4 % (3.4) %

3 unchanged sentences

Merchant bankcard transaction volume 220 102 109 118 115.7 % (7) (6.4) %

Income from operations of reportable segments $ 40,719 $ 32,071 $ 8,648 27.0 %

Corporate expenses 19,858 24,887 (5,029) (20.2) %

Consolidated income from operations $ 20,861 $ 7,184 $ 13,677 190.4 %

Corporate depreciation and amortization $ 1,168 $ 1,529 $ (361) (23.6) %

Key Indicators:

Merchant bankcard processing dollar value $ 42,316,749 $ 43,002,323 $ (685,574) (1.6) %

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

Impact of COVID-19 on Results and Trends

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

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

Our results of operations for most of the first quarter of 2020 were not significantly impacted by the COVID-19 pandemic since the economic consequences of the pandemic did not begin to materially impact consumer payment transactions in the United States until the last half of March 2020.

Beginning in mid-March, the pandemic began to negatively impact our daily merchant bankcard processing dollar values (“processing dollars”) as the pandemic spread across the United States and restrictive shelter in place requirements were instituted.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consolidated revenue

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

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

Revenue in Consumer Payments segment

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

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

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

However, our merchant volume mix drove a 10.8% higher average ticket of $91.61 in 2020 compared to $82.65 in 2019.

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

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

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

During 2020, our monthly average of new merchants boarded was 4,669 compared with 4,612 in 2019.

Revenue in Commercial Payments segment

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

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

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

This increase was driven by increased business from existing customers.

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

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

Revenue in Integrated Partners segment

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

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

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

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

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

Consolidated Operating Expenses

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

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

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

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

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

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

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

Income (Loss) from Operations

Consolidated income from operations

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

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

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

Income from operations in Consumer Payments segment

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

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

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

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

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

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

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

Income (loss) from operations in Commercial Payments segment

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

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

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

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

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

Income from operations in Integrated Partners segment

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

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

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

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

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

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

Corporate Expense

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

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

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

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

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

Interest Expense

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

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

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

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

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

Debt Extinguishment and Modification Expenses

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

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

Gain on Sale of Business

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

in March 2019.

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

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

PRET had non-controlling interests ("NCIs"), and based on the cash waterfall provisions in PRET's governing agreement, the NCIs were entitled to $45.1 million of the $107.2 million pre-tax gain, which is included in Net Income Attributable to Non-Controlling Interests on our consolidated statement of operations for the year ended December 31, 2020.

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

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

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

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

Income Tax Expense

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

On July 25, 2018, we recognized a net deferred income tax asset of $47.5 million, which also resulted in a credit to our additional paid-in capital within our consolidated stockholders' deficit.

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

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

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

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

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

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

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

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

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

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

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

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

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

Changes to the valuation allowance for 2018 were not material.

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

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

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

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

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

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

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

Earnings Attributable to Non-Controlling Interests (NCIs)

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

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

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

Net Income (Loss)

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

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

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

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

Year Ended December 31,

(dollars in thousands) 2019 2018 $ Change % Change

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

OPERATING EXPENSES:

Costs of services 252,569 269,284 (16,715) (6.2) %

Salary and employee benefits 42,214 38,324 3,890 10.2 %

Depreciation and amortization 39,092 19,740 19,352 98.0 %

Selling, general and administrative 30,795 32,081 (1,286) (4.0) %

Total operating expenses 364,670 359,429 5,241 1.5 %

Income from operations 7,184 16,393 (9,209) (56.2) %

Operating margin 1.9 % 4.4 %

OTHER (EXPENSES) INCOME:

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

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

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

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

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

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

nm = not meaningful

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

Years Ended December 31,

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

Consumer Payments:

Revenue from our B2B Payments segment was $17.1 million for the year ended December 31, 2021, compared to $20.9 million for the year ended December 31, 2020.

The decrease of $3.8 million, or 18.2%, was primarily driven by the wind down of certain programs in the Managed Services business due to scaled back operations as a result of the COVID-19 pandemic.

Operating Income

Operating income from our B2B Payments segment was $0.1 million for the year ended December 31, 2021, compared to $0.9 million for the year ended December 31, 2020.

The decrease of $0.8 million, or 88.9%, was primarily attributable to the decrease in revenue from the Managed Services business due to scaled back operations as a result of the COVID-19 pandemic.

Enterprise Payments

(in thousands) Years Ended December 31, 2021 vs 2020 2020 vs 2019

2021 2020 2019 $ Change % Change $ Change % Change

Revenue $ 22,133 $ 12,899 $ 11,694 $ 9,234 71.6 % $ 1,205 10.3 %

Operating expenses 15,370 11,000 9,667 4,370 39.7 % 1,333 13.8 %

Income from operations $ 32,237 $ 47,002 $ (14,765) (31.4) %

Operating income $ 6,763 $ 1,899 $ 2,027 $ 4,864 256.1 % $ (128) (6.3) %

Operating margin 30.6 % 14.7 % 17.3 %

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Merchant bankcard transaction volume 549 487 1,380 62 12.7 % (893) (64.7) %

Commercial Payments:

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

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

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

Operating margin (3.4) % (3.5) %

Revenue from our Enterprise Payments segment was $22.1 million for the year ended December 31, 2021, compared to $12.9 million for the year ended December 31, 2020.

The increase of $9.2 million, or 71.3%, was primarily driven by revenues contributed by the Finxera business since its acquisition in September 2021, offset by decreases due to the sale of PRET's real estate services business in 2020.

Operating Income

Operating income from our Enterprise Payments segment was $6.8 million for the year ended December 31, 2021, compared to $1.9 million for the year ended December 31, 2020.

The increase of $4.9 million, or 257.9%, was primarily driven by operating income contributed by the Finxera business since its acquisition in September 2021.

Depreciation and Amortization

Key Indicators:

Merchant bankcard processing dollar value $ 312,342 $ 257,308 $ 55,034 21.4 %

Merchant bankcard transaction volume 109 118 (9) (7.6) %

Integrated Partners:

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

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

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

Operating margin 4.7 % (112.3) %

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

Key Indicators:

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

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

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

Corporate expenses 24,887 27,688 (2,801) (10.1) %

Consolidated income from operations $ 7,184 $ 16,393 $ (9,209) (56.2) %

Corporate depreciation and amortization $ 1,529 $ 1,093 $ 436 39.9 %

Key Indicators:

Merchant bankcard processing dollar value $ 43,002,323 $ 38,155,298 $ 4,847,025 12.7 %

Merchant bankcard transaction volume 513,341 465,757 47,584 10.2 %

nm = not meaningful

Consolidated revenue

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

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

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

Revenue in Consumer Payments segment

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

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

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

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

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

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

Revenue in Commercial Payments segment

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

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

Revenue in Integrated Partners segment

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

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

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

Consolidated Operating Expenses

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

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

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

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

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

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

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

Income (Loss) from Operations

Consolidated income from operations

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

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

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

Income from operations in Consumer Payments segment

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

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

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

Loss from operations in Commercial Payments segment

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

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

Income (loss) from operations in Integrated Partners segment

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

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

Corporate Expense

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

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

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

Interest Expense

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

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

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

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

Income Tax Expense (Benefit)

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

On July 25, 2018, we recognized a net deferred income tax asset of $47.5 million, which also resulted in a credit to our additional paid-in capital within our consolidated stockholders' deficit.

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

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

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

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

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

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

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

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

Depreciation and amortization expense from our Enterprise Payments segment was $7.2 million for the year ended December 31, 2021, compared to $3.7 million for the year ended December 31, 2020.

The increase of $3.5 million, or 94.6%, was primarily driven by the amortization of intangibles resulting from the Finxera acquisition in September 2021.

Liquidity and Capital Resources

3 unchanged sentences

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 a negative $13.0 million at December 31, 2020 and a positive $1.2 million at December 31, 2019.

Our working capital, defined as current assets less current liabilities, was $19.6 million at December 31, 2021 and $(13.0) million at December 31, 2020.

As of December 31, 2021, we had cash totaling $20.3 million compared to $9.2 million at December 31, 2020.

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

These cash balances do not include restricted cash of $28.9 million and $78.9 million at December 31, 2021 and December 31, 2020, respectively, which reflects cash accounts holding customer settlement funds and cash reserves

for potential losses.

The current portion of long-term debt included in current liabilities was $6.2 million at December 31, 2021 compared with $19.4 million at December 31, 2020.

1 unchanged sentence

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

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

Year Ended December 31,

Years Ended December 31,

(in thousands) 2021 2020

5 unchanged sentences

Cash Provided by Operating Activities

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

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

Cash Provided by (Used in) Investing Activities

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

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

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

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

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

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

Cash (Used in) Provided by Financing Activities

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

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

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

in March 2019.

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

Year Ended December 31,

(in thousands) 2019 2018

Net cash provided by (used in):

Operating activities $ 39,364 $ 31,348

Investing activities (97,747) (108,928)

Financing activities 75,017 67,252

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

Cash Provided by Operating Activities

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

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

Cash Used in Investing Activities

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

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

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

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

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

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

Cash Provided by Financing Activities

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

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

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

Net cash provided by operating activities was $9.4 million and $12.2 million for the years ended December 31, 2021 and December 31, 2020, respectively.

The $2.8 million, or 23.0% decrease in 2021 was primarily driven by the payment of payment-in-kind ("PIK") interest upon the refinancing of our credit facilities in April 2021 and changes in operating assets and liabilities offset by cash generated from the operations of the Company.

Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $451.0 million compared to cash provided by investing activities of $166.4 million for the years ended December 31, 2021 and 2020, respectively.

For 2021, net cash used in investing activities included cash purchase consideration of $407.1 million for the acquisition of businesses, additions to property, equipment and software of $9.7 million, and acquisitions of intangible assets of $49.5 million, offset by proceeds from the sale of an investment of $15.3 million.

For 2020, net cash provided by investing activities included proceeds from the sale of a business of $179.4 million, offset by additions to property, equipment and software of $7.5 million, and acquisitions of intangible assets of $5.6 million.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $871.6 million for the year ended December 31, 2021, compared to $140.9 million of cash used in financing activities in the year ended December 31, 2020.

The net cash provided by financing activities for 2021 included proceeds from the issuance of new debt of $598.2 million, net borrowings from the revolving credit facility of $15.0 million, proceeds from the issuance of the redeemable senior preferred stock of $211.0 million, proceeds from the exercise of stock options of $1.2 million and changes in the net obligations for funds held on the behalf of customers of $417.6 million.

These cash inflows were offset by cash used for the repayment of debt of $361.4 million, cash used for the repurchase of common stock of $1.7 million, dividends paid to redeemable senior preferred stockholders of $7.5 million and distribution to NCIs in subsidiaries of $0.8 million.

The net cash used in financing activities for 2020 included changes in the net obligations for funds held on the behalf of customers of $34.9 million.

This cash inflow was offset by cash used for the repayment of debt of $113.3 million, net repayment under the revolving credit facility of $11.5 million, redemption of NCI interest in subsidiary of $5.7 million, and distribution to NCIs in subsidiaries of $45.4 million.

Long-Term Debt

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

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

(the "GS Credit Facility") including accrued payment-in-kind ("PIK") interest through December 31, 2020.

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

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

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

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

The Total Net Leverage Ratio steps down thereafter.

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

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

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

For additional information about the risks associated with our debt agreements and related covenants, refer to the "Risk Factors Related to Our Indebtedness" in Item 1A, Risk Factors , in Part I of this Annual Report on Form 10-K.

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

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

• Consolidated Total Debt is the aggregate principal amount of indebtedness minus the aggregate amount of unrestricted cash at the balance sheet date.

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

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

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

Consolidated Adjusted EBITDA is a non-GAAP liquidity measure.

For determining the Total Net Leverage Ratio at December 31, 2020, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from Section 1.01 of the Sixth Amendment:

(in thousands)

Year Ended December 31, 2020

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

(GAAP) $ 25,661

Applicable Adjustments:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pro forma impact of disposal (8,221)

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

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

(in thousands, except ratio)

December 31, 2020

Consolidated Total Debt:

Current portion of long-term debt $ 19,442

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

Unamortized debt discounts and deferred financing costs 4,725

Less unrestricted cash (9,241)

Consolidated Net Debt $ 372,799

Total Net Leverage Ratio

Contractual Obligations

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

(in thousands) Payments Due by Period

Contractual Obligations Total Less than

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

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

Debt principal (a) 382,040 19,442 362,598 — —

Interest on debt (b) 74,026 25,683 48,343 — —

Contingent consideration (c) 2,133 2,133 — — —

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

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

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

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

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

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

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

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

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

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

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

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

See Note 12 , Commitments and Contingencies .

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

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

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

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

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

Off-Balance Sheet Arrangements

We have not entered into any 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.

On April 27, 2021, the Company entered into a Credit and Guaranty Agreement with Truist Bank ("Truist") (the "Credit Agreement") which provides for:

1) a $300.0 million senior secured term loan facility (the "initial term loan");

2) a $290.0 million senior secured delayed draw term loan facility (the "delayed draw term loan") (together, the "term facility");

and 3) a $40.0 million senior secured revolving credit facility.

The Credit Agreement was amended on September 17, 2021 to

increase the amount of the delayed draw term loan facility by $30.0 million to $320.0 million.

The additional delayed draw term loan is part of the same class of term loans made pursuant to the original commitments under the Credit Agreement.

Outstanding borrowings under the Credit Agreement accrue interest using either a base rate or a LIBOR rate plus an applicable margin per year, subject to a LIBOR rate floor of 1.00% per year.

Accrued interest is payable on each interest payment date (as defined in the Credit Agreement).

The revolving credit facility incurs an unused commitment fee on any undrawn amount in an amount equal to 0.50% per year of the unused portion.

The future applicable interest rate margins may vary based on the Company's Total Net Leverage Ratio in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings.

As of December 31, 2021, we had outstanding debt obligations, including the current portion and net of unamortized debt discount of $610.3 million, compared to $377.3 million at December 31, 2020, resulting in an increase of $233.0 million.

The debt balance at December 31, 2021 consisted of $616.9 million outstanding under the term facility and $15.0 million outstanding under the revolving credit facility, offset by $21.6 million of unamortized debt discounts and issuance costs.

Minimum amortization of the initial term loan are equal quarterly installments in aggregate annual amounts equal to 1.0% of original principal, with the balance paid upon maturity.

The term facility matures in April 2027 and the revolving credit facility expires in April 2026.

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 to the Consolidated Adjusted EBITDA (as defined in the Credit Agreement).

If applicable, the maximum permitted Total Net Leverage Ratio is:

1) 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022;

2) 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023;

and 3) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.

As of December 31, 2021, the Company was in compliance with our financial covenants.

Critical Accounting Policies and Estimates

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We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective, and complex judgments.

Revenue Recognition

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

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

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

At contract inception, we assess the services and goods promised in our contracts with customers and identify the performance obligation for each promise to transfer to the customer a service or good that is distinct.

For substantially all of our services, the nature of our promise to the customer is to stand ready to accept and process the transactions that customers request on a daily basis over the contract term.

Since the timing and quantity of transactions to be processed is not determinable, the services comprise an obligation to stand ready to process as many transactions as the customer requires.

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

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

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

When third parties are involved in the transfer of services or goods to the customer, we consider the nature of each specific promised service or good and applies judgment to determine whether we control the service or good before it is transferred to the customer or whether we are acting as an agent of the third party.

We follow the requirements of ASC 606-10, Principal Agent Considerations , which states that the determination of whether an entity should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement.

To determine whether or not we control the service or good, we assess indicators including:

1) whether we or the third party is primarily responsible for fulfillment;

2) if we or the third party provides a significant service of integrating two or more services or goods into a combined item that is a service or good that the customer contracted to receive;

3) which party has discretion in determining pricing for the service or good;

and 4) other considerations deemed to be applicable to the specific situation.

We account for income taxes under the asset and liability method.

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Goodwill and Long-lived Assets

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

We test goodwill for impairment for each of our reporting units on an annual basis on annual assessment date of October 1 or when events occur, or circumstances indicate the fair value of a reporting unit may be below its carrying value.

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

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

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

Both dates occur in our fourth quarter.

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

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

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

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

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

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

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

For long-lived assets, except goodwill, an impairment loss is indicated when the undiscounted future cash flows estimated to be generated by the asset group are not sufficient to recover the unamortized balance of the asset group.

We amortize the cost of our acquired intangible assets over their estimated useful lives using either a straight-line or an accelerated method that most accurately reflects the estimated pattern in which the economic benefits of the respective asset is consumed.

Potential Impacts of Recently Issued Accounting Standards

For the potential impacts that pending adoptions of recently issued accounting standards may have on our future financial position, results of operations, or cash flows, see Note 1, Nature of Business and Accounting Policies , under the header "Recently Issued Standards Not Yet Adopted."

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Interest rate risk

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

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

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

We do not currently hedge against interest rate risk.

Business Combinations

We allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values.

The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.

For acquisitions that include contingent consideration, we estimate the fair value of contingent consideration at the acquisition date.

The estimated fair value of contingent consideration is updated in future periods based on information available at that time.

Management uses all available information when estimating the fair values of the assets acquired, liabilities assumed and contingent consideration, and must apply judgement and make certain assumptions when making these estimates.

The assumptions management uses when determining fair values include estimated future cash flows or income, market rate assumptions, actuarial assumptions and discount rate assumptions.

We typically engage third-party valuation advisors to assist in estimating the fair values of acquired assets and assumed liabilities.

Our estimates of fair value are based upon assumptions the Company believes to be reasonable, but that are inherently uncertain, and therefore, may not be realized.

Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized, and actual results could differ materially.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis