SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2020~~2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Priority Technology Holdings, Inc.

Quarterly Report on Form 10-Q

March 31, ~~2020~~2021


			Page
			~~Page~~

Part I.	Financial Information		1
	Item 1.	Financial Statements	1
		Unaudited Condensed Consolidated Balance Sheets as of March ~~31, 2020~~ 3 1 , 2021 and December 31, ~~2019~~2020	1
		Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March ~~31, 2020~~ 3 1 , 202 1 and March ~~31, 2019~~ 3 1 , 20 20	2
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three ~~Months~~M onths Ended March ~~31, 2020~~ 3 1 , 202 1 and March ~~31, 2019~~ 3 1 , 20 20	3
		Notes to Unaudited Condensed Consolidated Financial Statements	4
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3739
	Item 4.	Controls and Procedures	3739

Part II.	Other Information		3840
	Item 1.	Legal Proceedings	3840
	Item 1A.	Risk Factors	3840
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3840
	Item 3.	Defaults Upon Senior Securities	3840
	Item 4.	Mine Safety Disclosures	3940
	Item 5.	Other Information	3940

	Item 6.	Exhibits	4041

Signatures			4142

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Priority Technology Holdings, Inc.

Condensed Consolidated Balance Sheets

~~Unaudited~~


(in thousands, except share data)	Unaudited
	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash	$	5,827	$	9,241
Restricted cash	58,933		78,879
Accounts receivable, net of allowance of $374 and $574	50,886		41,321
Prepaid expenses and other current assets	4,083		3,500
Current portion of notes receivable, net of allowance of $467 and $467	1,829		2,190
Settlement assets	1,220		753
Total current assets	122,778		135,884

Notes receivable, less current portion	5,084		5,527
Property, equipment, and software, net	23,791		22,875
Goodwill	106,832		106,832
Intangible assets, net	91,062		98,057
Deferred income taxes, net	48,996		46,697
Other non-current assets	1,949		1,957
Total assets	$	400,492	$	417,829

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	29,880	$	29,821
Accrued residual commissions	30,300		23,824
Customer deposits and advance payments	5,488		2,883

Current portion of long-term debt	24,302		19,442
Settlement obligations	50,820		72,878
Total current liabilities	140,790		148,848

Long-term debt, net of current portion, discounts and debt issuance costs	350,667		357,873

Other non-current liabilities	8,790		9,672
Total long-term liabilities	359,457		367,545

Total liabilities	500,247		516,393





Stockholders' deficit:
Preferred stock - $0.001 par value per share; 100,000,000 shares authorized; 0 issued or outstanding	0		0
Common stock - $0.001 par value per share; 1,000,000,000 shares authorized; 68,091,398 and 67,842,204 shares issued, respectively; 67,640,174 and 67,390,980 shares outstanding, respectively	68		68
Additional paid-in capital	7,257		5,769
Treasury stock, 451,224 common shares, at cost	(2,388)		(2,388)
Accumulated deficit	(104,692)		(102,013)


Total stockholders' deficit	(99,755)		(98,564)
Total liabilities and stockholders' deficit	$	400,492	$	417,829

(in thousands) March 31, 2020 December 31, 2019
ASSETS
Current Assets:
Cash $ 2,858
$ 3,234
Restricted cash 36,873
47,231
Accounts receivable, net of allowance for doubtful accounts of $989 and $803 37,362
37,993
Prepaid expenses and other current assets 3,445
3,897
Current portion of notes receivable 1,266
1,326
Settlement assets 456
533
Total current assets 82,260
94,214

Notes receivable, less current portion 5,382
4,395
Property, equipment, and software, net 24,060
23,518
Goodwill 109,515
109,515
Intangible assets, net 175,303
182,826
Deferred income taxes, net 50,890
49,657
Other non-current assets 509
380
Total assets $ 447,919
$ 464,505

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 24,413
$ 26,965
Accrued residual commissions 18,326
19,315
Customer deposits and advance payments 3,281
4,928
Current portion of long-term debt 7,866
4,007
Settlement obligations 30,665
37,789
Total current liabilities 84,551
93,004

Long-term debt, net of current portion, discounts and debt issuance costs 483,319
485,578
Other non-current liabilities 6,269
6,612
Total long-term liabilities 489,588
492,190

Total liabilities 574,139
585,194

Commitments and Contingencies (Notes 10 and 11)

Stockholders' deficit:
Preferred stock —
—
Common stock 68
68
Additional paid-in capital 3,989
3,651
Treasury stock, 451,224 common shares, at cost (2,388 ) (2,388 )
Accumulated deficit (133,543 ) (127,674 )
Total Priority Technology Holdings, Inc. stockholders' deficit (131,874 ) (126,343 )
Non-controlling interest in a subsidiary 5,654
5,654
Total stockholders' deficit (126,220 ) (120,689 )

Total liabilities and stockholders' deficit $ 447,919
$ 464,505

See Notes to Unaudited Condensed Consolidated Financial Statements

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Priority Technology Holdings, Inc.

Condensed Consolidated Statements of Operations

Unaudited


(in thousands, except per share amounts)	Three Months Ended March 31,
	2021		2020



REVENUES	$	113,297	$	96,933

OPERATING EXPENSES:
Costs of services	81,863		66,364

Salary and employee benefits	9,548		10,129
Depreciation and amortization	9,070		10,272
Selling, general and administrative	8,289		6,609


Total operating expenses	108,770		93,374

Income from operations	4,527		3,559

OTHER EXPENSES:
Interest expense	(9,168)		(10,315)




Other expenses, net	(269)		(346)
Total other expenses, net	(9,437)		(10,661)

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

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

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


Loss per common share:
Basic and diluted	$	(0.04)	$	(0.09)


Weighted-average common shares outstanding:
Basic and diluted	67,543		67,061

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

2020
2019

REVENUES $ 96,933
$ 87,646

OPERATING EXPENSES:
Costs of services 66,364
60,106
Salary and employee benefits 10,129
10,899
Depreciation and amortization 10,272
8,925
Selling, general and administrative 6,609
6,750
Total operating expenses 93,374
86,680

Income from operations 3,559
966

OTHER INCOME (EXPENSES):
Interest expense (10,315 ) (9,363 )
Other (expense) income, net (346 ) 227
Total other expenses, net (10,661 ) (9,136 )

Loss before income taxes (7,102 ) (8,170 )

Income tax benefit (1,233 ) (1,724 )

Net loss $ (5,869 ) $ (6,446 )

Loss per common share:
Basic and diluted $ (0.09 ) $ (0.10 )

Weighted-average common shares outstanding:
Basic and diluted 67,061
67,164

See Notes to Unaudited Condensed Consolidated Financial Statements

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Priority Technology Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

Unaudited

(in thousands) Three Months Ended March 31,
2020 2019
Cash flows from operating activities:
Net loss $ (5,869 ) $ (6,446 )
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of assets 10,272
8,925
Stock-based compensation 338
1,160
Amortization of debt issuance costs and discounts 460
405
Deferred income tax benefit (1,699 ) (1,621 )
Change in allowance for deferred tax assets 466
—
Payment-in-kind interest 1,391
1,210
Other non-cash items 208
(168 )
Change in operating assets and liabilities:
Accounts receivable 631
(2,252 )
Settlement assets and obligations, net (7,047 ) 2,285
Prepaid expenses and other current assets 390
(752 )
Notes receivable (927 ) (324 )
Accounts payable and other accrued liabilities (3,541 ) (4,089 )
Customer deposits and advance payments (1,647 ) 455
Other assets and liabilities (680 ) (28 )
Net cash used in operating activities (7,254 ) (1,240 )

Cash flows from investing activities:
Additions to property, equipment and software (2,281 ) (2,382 )
Acquisitions of intangible assets (948 ) (79,612 )
Other investing activity —
(184 )
Net cash used in investing activities (3,229 ) (82,178 )

Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issue discount —
69,650
Repayment of long-term debt (1,002 ) (823 )
Debt modification costs (2,749 ) —
Borrowings under revolving credit facility 3,500
10,000
Net cash (used in) provided by financing activities (251 ) 78,827

Net change in cash and restricted cash:
Net decrease in cash and restricted cash (10,734 ) (4,591 )
Cash and restricted cash at beginning of year 50,465
33,831
Cash and restricted cash at March 31 $ 39,731
$ 29,240


(in thousands)	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(2,679)	$	(5,869)
Adjustments to reconcile net loss to net cash used in operating activities:


Depreciation and amortization of assets	9,070		10,272
Equity-classified and liability-classified stock-based compensation	558		338
Amortization of debt issuance costs and discounts	590		460


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

Change in allowance for deferred tax assets	(638)		466

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


Other non-cash items, net	(64)		208
Change in operating assets and liabilities:
Accounts receivable	(9,575)		631
Settlement assets and obligations, net	(22,526)		(7,047)
Prepaid expenses and other current assets	(583)		390

Notes receivable	862		(927)

Accounts payable and other accrued liabilities	8,633		(3,541)

Customer deposits and advance payments	2,604		(1,647)
Other assets and liabilities, net	59		(680)

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

Cash flows from investing activities:


Additions to property, equipment, and software	(2,754)		(2,281)
Acquisitions of intangible assets	(2,937)		(948)


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

Cash flows from financing activities:

Repayment of long-term debt	(4,860)		(1,002)
Debt modification costs paid	0		(2,749)
Borrowings under revolving credit facility	0		3,500









Proceeds from exercise of stock options	617		0

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

Net change in cash and restricted cash:
Net decrease in cash and restricted cash	(23,360)		(10,734)
Cash and restricted cash at beginning of period	88,120		50,465
Cash and restricted cash at end of period	$	64,760	$	39,731


Supplemental cash flow information:
Cash paid for interest	$	6,553	$	8,186


Non-cash investing and financing activities:
Payment-in-kind interest added to principal of debt obligations	$	1,924	$	1,391










Reconciliation of cash and restricted cash:
Cash	$	5,827	$	2,858
Restricted cash	58,933		36,873
Total cash and restricted cash	$	64,760	$	39,731

Supplemental cash flow information:
Cash paid for interest $ 8,186
$ 7,126

Non-cash investing and financing activities:
Intangible assets acquired by issuing non-controlling interest in a subsidiary $ —
$ 5,654

Reconciliation of cash and restricted cash:
Cash $ 2,858
$ 9,091
Restricted cash 36,873
20,149
Total cash and restricted cash $ 39,731
$ 29,240

See Notes to Unaudited Condensed Consolidated Financial Statements

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PRIORITY TECHNOLOGY HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Business, Consolidation, and Presentation

Priority Technology Holdings, Inc. and its consolidated subsidiaries are referred to herein collectively as "Priority," "PRTH," the "Company," "we," "our" or "us," unless the context requires otherwise. Priority is a provider of merchant acquiring, integrated payment software and commercial payment solutions.

The Company operates on a calendar year ending each December 31 and on four calendar quarters ending on March 31, June 30, September 30, and December 31 of each year. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

These unaudited condensed consolidated financial statements include the accounts of the Company including those of its majority-owned subsidiaries, and all material intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated balance sheet as of December 31, ~~2019~~2020 was derived from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 but does not include all disclosures required by GAAP for annual financial statements.

In the opinion of the Company's management, all known adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist of normal recurring accruals and estimates that affect the carrying amount of assets and liabilities. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. In particular, the continued magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, ~~at this time,~~ and the ultimate effect could result in future charges related to the recoverability of assets, including financial assets, long-lived assets, goodwill, and other losses.

Status as an Emerging Growth Company

The Company ~~remains~~is an "emerging growth company" ~~(EGC)~~("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012. The Company may remain an EGC until December 31, 2021. However, if the Company's non-convertible debt issued within a rolling three-year period exceeds $1.0 billion, the Company would cease to be an EGC immediately, or if its revenue for any fiscal year ~~exceed~~exceeds $1.07 billion, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year. As an EGC, the Company is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, the Company may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Additionally, as a smaller reporting company ("SRC") as defined by the SEC, the Company has the option to adopt certain new or revised accounting standards on a permitted delayed basis that is not available to other public companies not meeting the definition of a SRC. Therefore,As such, the Company's financial statements may not be comparable to ~~other~~that comply with public ~~companies.~~company effective dates.

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Comprehensive Income (Loss)

For the ~~three-month periods~~three months ended March 31, ~~2020~~2021 and ~~2019,~~March 31, 2020, the Company had no activities to report as components of other comprehensive income (loss). Therefore, no separate Statement of Comprehensive Income (Loss) was prepared for any reporting period as the Company's net ~~loss~~income (loss) from continuing operations comprises all of its comprehensive ~~loss.~~income (loss).

Comparability of Reporting Periods

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

~~The Company adopted Accounting Standards Codification ("ASC") 606,~~ ~~Revenue from Contracts with Customers~~, for the 2019 annual reporting period included in its Annual Report on Form 10-K for the year ended December 31, 2019 using the full retrospective transition method. Accordingly, the unaudited condensed consolidated statement of operations for the three months ended March 31, 2019 presented herein has been recasted to retroactively reflect the provisions of ASC 606. The adoption of ASC 606 had no net effect on the Company's income from operations, loss before income taxes, net loss, consolidated balance sheet, or cash flows from operations, investing, or financing activities.

Accounting Policies and New Accounting Standards Adopted

There have been no material changes to the Company's accounting policies as described in its most recent Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. The Company did not adopt any new accounting standards during the three months ended March 31, ~~2020,~~2021 except for ~~ASU 2018-13, as described below.~~

~~Disclosures for Fair Value Measurements (ASU 2018-13)~~

the following:

~~On January 1, 2020,~~

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

In December 2019, the FASB issued Accounting Standards Update ("ASU") ~~No. 2018-13,~~2019-12, ~~Fair Value Measurement (Topic 820): Disclosure Framework — Changes to~~Simplifying the ~~Disclosure Requirements~~Accounting for ~~Fair Value Measurement~~Income Taxes ("ASU ~~2018-13"~~2019-12")~~. ASU 2018-13 eliminated, added,~~, which is intended to enhance and ~~modified certain disclosure requirements for fair value measurements as part~~simplify various aspects of the ~~FASB's disclosure framework project. Certain~~accounting for income taxes. The amendments ~~must be applied prospectively while others are applied on~~in this update remove certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistency in application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a ~~retrospective~~step-up in the tax basis ~~to all periods presented. As disclosure guidance, the~~of goodwill. The adoption of ~~this~~ ASU ~~had no~~2019-12 on January 1, 2021 did not have a material effect on ~~the Company's~~our consolidated financial ~~position, results of operations or cash flows. Note 14,~~ ~~Fair Value, reflects the disclosure provisions of ASU 2018-13.~~statements.

Recently Issued Accounting Standards ~~Not Yet Adopted~~Pending Adoption

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

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

In August 2018, the FASB issued ASU 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements ("ASU 2018-15"),which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As an EGC, this ASU is effective for the Company's annual reporting period beginning January 1, 2021, and will be effective for interim periods beginning in 2022. The amendments are applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and the Company has not yet made a determination to use the retrospective or prospective adoption method. Based on current operations of the Company, the adoption of ASU 2018-15 is not expected to have a material effect on the Company's results of operations, financial position, or cash flows.

Reference Rate Reform (ASU 2020-04)

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial ~~Reporting~~.Reporting. This ASU provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financial Rate. Entities can elect not to apply certain modification accounting requirements to

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contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the ~~contact~~contract at the modification date or reassess a previous accounting determination. ASU 2021-01 ASU 2020-04 can be adopted at any time before December 31, 2022. The provisions of ASU 2020-04 may impact the Company if future debt modifications or refinancings utilize one or more of the reference rates covered by the provisions of this ASU.

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Leases (ASC 842)

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases~~, and supplemented by subsequent ASUs.~~. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. As an EGC, this standard is effective for the Company's annual ~~reporting period beginning in 2021~~ and interim reporting periods beginning ~~first quarter of~~ 2022. The FASB has recently proposed delaying the effective date of ASC 842 for certain entities. If the proposal becomes effective, the Company will be required to adopt ASC 842 for interim and annual periods beginning January 1, 2022 based on the current expectation for the expiration of the Company's EGC status. The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but it is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable and notes receivable. AsSince the Company is a ~~Smaller Reporting Company (as defined by the SEC)~~smaller reporting company ("SRC"), the Company must adopt this new standard no later than the beginning of ~~2023.~~2023 for annual and interim reporting periods.

Goodwill Impairment Testing (ASU 2017-04)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (i.e., step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, the ASU will be applied prospectively. ~~As an EGC,~~Since the Company is a SRC, the Company must adopt this ~~ASU will be effective~~new standard no later than the beginning of 2023 for annual and interim ~~impairment tests performed in periods beginning in 2022.~~reporting periods. The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.

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

~~In June 2018, the FASB issued ASU 2018-07,~~
~~Share-based Payments to Non-Employees~~, to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. As an EGC, the ASU is effective for annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such impact will be dependent on any share-based payments issued to non-employees.

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

~~In November 2019, the FASB issued ASU 2019-08,~~ ~~Stock Compensation and Revenue from Contracts with Customers~~ ("ASU 2019-08"). ASU 2019-08 will apply to share-based payments granted in conjunction with the sale of goods and services to a customer that are not in exchange for a distinct good or service. Entities will apply ASC 718 to measure and classify share-based sales incentives, and reflect the measurement of such incentives, as a reduction of the transaction price and also recognize such incentives in accordance with the guidance in ASC 606 on consideration payable to a customer. Entities that receive distinct goods or services from a customer will account for the share-based payment in the same manner as they account for other purchases from suppliers (i.e., by applying the guidance in ASC 718). Any excess of the fair-value-based measure of the share-based payment award over the fair value of the distinct goods or services received will be reflected as a reduction to the transaction price and recognized in accordance with the guidance in ASC 606 on consideration payable to a customer. ASU 2019-08 is effective for the Company at the same time it adopts ASU 2018-07, which is annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such impact will be dependent on any share-based payments issued to customers.

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

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Implementation Costs Incurred in Cloud Computing Arrangements~~ ~~("ASU 2018-15"),~~which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As an EGC, this ASU is effective for the Company for annual reporting periods beginning in 2021, and interim periods within annual periods beginning in 2022. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact this ASU will have on its consolidated financial statements.

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

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Simplifying the Accounting for Income Taxes~~ ("ASU 2019-12"). ASU 2019-12 will affect several topics of income tax accounting, including: tax-basis step-up in goodwill obtained in a transaction that is not a business combination; intra-period tax allocation; ownership changes in investments when an equity method investment becomes a subsidiary of an entity; interim-period accounting for enacted changes in tax law; and year-to-date loss limitation in interim-period tax accounting. This ASU is effective for the Company on January 1, 2022. The effects that the adoption of this ASU will have on the Company's results of operations, financial position, and cash flows will depend on specific events occurring for the Company after the adoption of ASU 2019-12.

2. REVENUES

For all periods presented, substantially all of the Company’s revenues from services were recognized over time. Revenues and commissions earned from the sales of payment equipment were typically recognized at a point in time.

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The following table presents a disaggregation of the Company's consolidated revenues by type, and the relationships to the Company's reportable segments, for the three months ended March 31, ~~2020~~2021 and ~~2019:~~March 31, 2020:

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(in thousands) Three Months Ended March 31,
2020 2019

Revenue Type

Merchant card fees $ 89,086
$ 79,594
Outsourced services 5,662
5,977
Other services 1,129
1,433
Equipment 1,056
642
Total revenues $ 96,933
$ 87,646


(in thousands)	Three Months Ended March 31,
	2021		2020

Revenue Type
Merchant card fees	$	107,702	$	89,086





Outsourced services and other services	4,378		6,791











Equipment	1,217		1,056

Total revenues	$	113,297	$	96,933

~~The Company's revenues by type are~~

Revenues earned in these disaggregated categories consist of following:

•Merchant card fees - revenues related to discount rates and interchange fees earned from payment services provided by the Company's ~~reportable segments as follows: merchant card fees primarily in~~ Consumer ~~Payments; outsourced services revenues primarily in Commercial Payments; other services revenues in~~Payments, Commercial Payments, and Integrated ~~Partners;~~Partners segments.

•Outsourced services and other services - business process outsourcing services provided by our Commercial Payments segment primarily to certain business customers of American Express, auxiliary services provided primarily to customers in the Company's Integrated Partners segment, and revenue from automated clearing house ("ACH") services.

•Equipment - revenues from sales of point-of-sale equipment ~~revenues~~and other payment-processing equipment sold to customers in the Company's Consumer ~~Payments.~~Payments segment.

Transaction Price Allocated to Future Performance Obligations

ASC 606,Revenue Recognition ("ASU 606"), requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. However, as allowed by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. ~~As described above, the~~The Company’s most significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion. Therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.

Contract Costs

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

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

The Company pays commissions to most of its ~~ISOs,~~independent sales organizations ("ISOs"), and for certain ISOs the Company also pays (through a higher commission rate) them to provide customer service and other services directly to our merchant customers. The ISO is typically an independent contractor or agent of the Company. Although certain ISOs may have merchant portability rights, the merchant meets the definition of a customer for the Company even if the ISO has merchant portability rights. Since payments to ISOs are dependent substantially on variable merchant payment volumes generated after the merchant enters into a new or renewed contract, these payments to ISOs are not deemed to be a cost to acquire a new contract since the ISO payments are based on factors that will arise subsequent to the event of obtaining a new or renewed contract. Also,

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payments to ISOs pertain only to a specific month’s activity. For payments made, or due, to an ISO, the expenses are reported within income from operations on our statements of operations.

The Company from time-to-time may elect to buy out all or a portion of an ISO’s rights to receive future commission payments related to certain merchants. Amounts paid to the ISO for these residual buyouts are capitalized by the Company under the accounting guidance for intangible assets.

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~~Table of Contents~~

Contract Assets and Contract Liabilities

A contract with a customer creates legal rights and obligations. As the Company performs under customer contracts, its right to consideration that is unconditional is considered to be accounts receivable. If the Company’s right to consideration for such performance is contingent upon a future event or satisfaction of additional performance obligations, the amount of revenues recognized in excess of the amount billed to the customer is recognized as a contract asset. Contract liabilities represent consideration received from customers in excess of revenues recognized. Material contract assets and liabilities are presented net at the individual contract level in the consolidated balance sheet and are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.

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

(in thousands)

Consolidated Balance Sheet Location

March 31, 2021

December 31, 2020

Liabilities:

Contract liabilities, net (current)

Customer deposits and advance payments

$1,162

$1,494

The balances for the contract liabilities were approximately $1.7 million and $1.9 million at March 31, 2020 and December 31, 2019, ~~was as follows:~~

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

Liabilities:
Contract liabilities, net (current) Customer deposits and advance payments $1,682 $1,912

respectively. The ~~balance for~~changes in the ~~contract liabilities was approximately $1,738,000 and $1,776,000 at~~balances during the three months ended March 31, ~~2019~~2021 and ~~January 1, 2019, respectively.~~March 31, 2020 were due to the timing of advance payments received from the customer. Substantially all of these balances are recognized as revenue within twelve months. ~~The changes in the balances during the three months ended March 31, 2020 and 2019 were due to the timing of advance payments received from the customer.~~

Net contract assets were not material for any period presented.

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months ended March 31, ~~2020~~2021 and ~~2019.~~

~~3. ASSET ACQUISITIONS~~

~~YapStone~~

In March 2019, the Company, through one of its subsidiaries, Priority Real Estate Technology, LLC ("PRET"), acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone, Inc. ("YapStone") under an asset purchase and contribution agreement. The purchase price for the YapStone net assets was $65.0 million in cash plus a non-controlling interest in PRET. The fair value of the non-controlling interest was estimated to be approximately $5.7 million. The total purchase price was assigned to customer relationships, except for $1.0 million and $1.2 million which were assigned to a software license agreement and a services agreement, respectively. The $65.0 million of cash was funded from a draw down of the Senior Credit Facility on a delayed basis as provided for and pursuant to the third amendment thereto executed in December 2018. During the three months ended March 31, ~~2020 and 2019, no earnings of PRET were allocated to the non-controlling interest pursuant to the profit-sharing agreement between the Company and the non-controlling interest.~~

2020.

~~See Note 10,~~ ~~Commitments and Contingencies, for information about merchant portfolios acquired in 2019 that included contingent purchase prices.~~

~~See Note 11,~~ ~~Related Party Transactions, for information about assets contributed to the Company during the first quarter of 2019 that involved a contingent purchase price.~~

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4.3. SETTLEMENT ASSETS AND OBLIGATIONS

Consumer Payments Segment

In the Company’s Consumer Payments reportable segment, funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. The standards of the card networks restrict non-members, such as the Company, from performing funds settlement or accessing merchant settlement funds. Instead, these funds must be in the possession of a member bank until the merchant is funded. The Company has agreements with member banks which allow the Company to route transactions under the member bank's control to clear transactions through the card networks. Timing differences, interchange fees, merchant reserves and exception items cause differences between the amounts received from the card networks and the amounts funded to the merchants. Since settlement funds are required to be in the possession of a member bank until the merchant is funded, these funds are not assets of the Company and the associated obligations related to these funds are not liabilities of the Company. Therefore, neither is recognized in the Company’s consolidated balance sheets. Member banks held merchant funds of ~~approximately~~ $~~71.7~~115.4 million and ~~$79.8~~$103.8 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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Exception items include items such as customer chargeback amounts received from merchants and other losses. Under agreements between the Company and its merchant customers, the merchants assume liability for such chargebacks and losses. If the Company is ultimately unable to collect amounts from the merchants for any charges or losses due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for these charges. In order to mitigate the risk of such liability, the Company may 1) require certain merchants to establish and maintain reserves designed to protect the Company from such charges or losses under its risk-based underwriting policy and 2) engage with certain ISOs in partner programs in which the ISOs assume liability for these charges or losses. A merchant reserve account is funded by the merchant and held by the member bank during the term of the merchant agreement. Unused merchant reserves are returned to the merchant after termination of the merchant agreement or in certain instances upon a reassessment of risks during the term of the merchant agreement.

Exception items that become the liability of the Company are recorded as merchant losses, a component of costs of services in the consolidated statements of operations. Exception items that the Company is still attempting to collect from the merchants through the funds settlement process or merchant reserves ~~or from the ISO partners~~ are recognized as settlement assets in the Company’s consolidated balance sheets, with an offsetting reserve for those amounts the Company estimates it will not be able to recover. ~~Provisions~~Expenses for actual and estimated merchant losses ~~are included as a component of costs of services in~~for the ~~Company’s consolidated statements of operations.~~

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

Commercial Payments Segment

In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing ACH transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in bank accounts controlled by the Company until such time as the ACH transactions are made. The Company recognizes these cash balances within restricted cash and settlement obligations in its consolidated balance sheets.

The Company's settlement assets and obligations at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


(in thousands)	March 31, 2021		December 31, 2020
Settlement Assets:
Card settlements due from merchants, net of estimated losses	$	1,065	$	753
Card settlements due from ISOs	155		0
Total settlement assets	$	1,220	$	753

Settlement Obligations:
Due to ACH payees (1)	50,820		72,878
Total settlement obligations	$	50,820	$	72,878

(in thousands) As of
March 31, 2020 December 31, 2019
Settlement Assets:
Card settlements due from merchants, net of estimated losses $ 195
$ 446
Card settlements due from processors 261
87
Total settlement assets $ 456
$ 533

Settlement Obligations:
Card settlements due to merchants $ 22
$ 44
Due to ACH payees (1) 30,643
37,745
Total settlement obligations $ 30,665
$ 37,789

(1) Amounts due to ACH payees are held by the Company in restricted cash.

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5.4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying separately-identifiable tangible and intangible assets acquired and the liabilities assumed. ~~The~~All of the Company's goodwill was allocated to ~~two~~the Company's Consumer Payments reporting unit at March 31, 2021 and December 31, 2020.

The Company considered the market conditions generated by the COVID-19 pandemic and concluded that there were no indicators of impairment for the goodwill of the ~~Company's reportable segments as follows:~~

(in thousands) March 31, 2020 December 31, 2019
Consumer Payments $ 106,832
$ 106,832
Integrated Partners 2,683
2,683
$ 109,515
$ 109,515

~~There were no changes in the carrying amount of goodwill~~Consumer Payments reporting unit for the three months ended March 31, ~~2020.~~2021.

The Company tests goodwill for impairment ~~for each of its reporting units~~ on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit may be below its carrying value. The Company will continue to monitor the economic impact of COVID-19 on its ongoing assessment of goodwill. The Company expects to perform its next annual goodwill impairment test asduring the

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Table of ~~November 30, 2020~~Contents

fourth quarter of 2021 using market data and discounted cash flow analysis. The Company concluded there was no0 impairment as of March 31, ~~2020~~2021 or December 31, ~~2019.~~2020. As such, there was 0 accumulated impairment loss as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Other Intangible Assets

The Company's other intangible assets include acquired merchant portfolios, customer relationships, ISO relationships, trade names, technology, ~~non-compete agreements,~~ and residual buyouts. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, intangible assets consisted of the following:

(in thousands) March 31, 2020 December 31, 2019
Other intangible assets:
Merchant portfolios $ 115,502
$ 114,554
Customer relationships 40,740
40,740
Residual buyouts 112,731
112,731
Non-compete agreements 3,390
3,390
Trade names 2,870
2,870
Technology 15,390
15,390
ISO relationships 15,200
15,200
Total gross carrying value 305,823
304,875
Less accumulated amortization:
Merchant portfolios (16,107 ) (12,655 )
Customer relationships (26,818 ) (25,836 )
Residual buyouts (62,895 ) (59,796 )
Non-compete agreements (3,390 ) (3,390 )
Trade names (1,331 ) (1,273 )
Technology (13,387 ) (12,758 )
ISO relationships (6,592 ) (6,341 )
Total accumulated amortization (130,520 ) (122,049 )

Net carrying value $ 175,303
$ 182,826


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

Other intangible assets:
Merchant portfolios	$	55,816	$	55,816
Customer relationships	40,740		40,740
Residual buyouts	116,112		116,112
Non-compete agreements	3,390		3,390
Trade names	2,870		2,870
Technology	14,390		14,390
ISO relationships	15,200		15,200
Total gross carrying value	248,518		248,518

Less accumulated amortization:
Merchant portfolios	(22,028)		(19,471)
Customer relationships	(31,071)		(30,267)
Residual buyouts	(75,975)		(72,659)
Non-compete agreements	(3,390)		(3,390)
Trade names	(1,711)		(1,651)
Technology	(13,975)		(13,951)
ISO relationships	(7,553)		(7,319)
Total accumulated amortization	(155,703)		(148,708)

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

Net carrying value	$	91,062	$	98,057

See Note 109, Commitments and Contingencies, for information about aan acquired merchant portfolio with a contingent purchase price.

Amortization expense for finite-lived intangible assets was ~~approximately $8.5~~$7.0 million and ~~$7.5~~$8.5 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~March 31, 2020, respectively. Amortization expense for future periods could differ due to new intangible asset acquisitions, changes in useful lives of existing intangible assets, and other relevant events or circumstances.

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The Company tests intangible assets for impairment when events occur or circumstances indicate that the fair value of an intangible asset or group of intangible assets may be impaired. In the Company's Consumer Payments segment, a residual buyout intangible asset with a net carrying value of $2.2 million was deemed to be impaired at December 31, 2020. The fair value of this intangible asset was estimated to be approximately $0.5 million, resulting in the recognition of an impairment charge of $1.8 million. This impairment was the result of diminished cash flows generated by the merchant portfolio.

The Company also considered the market conditions generated by the COVID-19 pandemic and concluded that there were no ~~impairments as of~~additional impairment indicators present at March 31, ~~2020 or December 31, 2019. As such, there was 0 accumulated impairment loss as~~2021.

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Table of ~~March 31, 2020 and December 31, 2019.~~Contents

6.5. PROPERTY, EQUIPMENT, AND SOFTWARE

The Company's property, equipment, and software balance primarily consists of furniture, fixtures, and equipment used in the normal course of business, computer software developed for internal use, and leasehold improvements. Computer software represents purchased software and internally developed back office and merchant interfacing systems used to assist the reporting of merchant processing transactions and other related information.

A summary of property, equipment, and software as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 follows:

(in thousands) March 31, 2020 December 31, 2019 Useful Life

Furniture and fixtures $ 2,808
$ 2,787
2-7 years
Equipment 10,225
10,101
3-7 years
Computer software 39,553
37,440
3-5 years
Leasehold improvements 6,390
6,367
5-10 years
58,976
56,695

Less accumulated depreciation (34,916 ) (33,177 )
Property, equipment, and software, net $ 24,060
$ 23,518


(in thousands)	March 31, 2021		December 31, 2020
Furniture and fixtures	$	2,795	$	2,795
Equipment	11,442		10,216
Computer software	46,065		44,320
Leasehold improvements	6,250		6,250
	66,552		63,581
Less accumulated depreciation	(42,761)		(40,706)
Property, equipment, and software, net	$	23,791	$	22,875

Depreciation expense for property, equipment, and software totaled ~~$1.8~~$2.1 million and ~~$1.4~~$1.8 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

~~Purchases of property, equipment and software accrued in accounts payable were not material for any period presented.~~

7.6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

The components of accounts payable and accrued expenses that exceeded five percent of total current liabilities at either March 31, ~~2020~~2021 or December 31, ~~2019~~2020 consisted of the following:

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

Accounts payable $ 7,375
$ 6,968
Accrued network fees $ 6,779
$ 6,950


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


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

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8.7. DEBT OBLIGATIONS

Outstanding debt obligations as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 consisted of the following:


(in thousands)	March 31, 2021		December 31, 2020
Senior Credit Agreement:
Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00% beginning March 18, 2020) plus 6.50% and 6.50% at March 31, 2021 and December 31, 2020, respectively (actual rate of 7.50% and 7.50% at March 31, 2021 and December 31, 2020, respectively)	$	274,557	$	279,417
Revolving credit facility - $25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50% and 6.50% at March 31, 2021 and December 31, 2020, respectively (actual rate of 6.65% and 6.65% at March 31, 2021 and December 31, 2020, respectively)	0		0
Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.00% plus an applicable margin (actual rate of 12.50% and 12.50% at March 31, 2021 and December 31, 2020, respectively)	104,547		102,623
Total debt obligations	379,104		382,040
Less: current portion of long-term debt	(24,302)		(19,442)
Less: unamortized debt discounts and deferred financing costs	(4,135)		(4,725)

Long-term debt, net	$	350,667	$	357,873

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

Senior Credit Agreement - Bears interest at LIBOR plus 6.5% and 5.0% at March 31, 2020 and December 31, 2019, respectively (rate of 8.11% at March 31, 2020 and 6.71% at December 31, 2019):
Term facility - Matures January 3, 2023 $ 387,836
$ 388,837
Revolving credit facility - $25.0 million line, matures January 22, 2022 15,000
11,500
Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus an applicable margin (rate of 12.5% and 10.5% at March 31, 2020 and December 31, 2019, respectively) 96,533
95,142
Total debt obligations 499,369
495,479
Less: current portion of long-term debt (7,866 ) (4,007 )
Less: unamortized debt discounts and deferred financing costs (8,184 ) (5,894 )
Long-term debt, net $ 483,319
$ 485,578

Substantially all of the Company's assets are pledged as collateral under the credit agreements. The ~~Company's parent entity, Priority Technology Holdings, Inc.,~~Company is neither a borrower nor a guarantor of the credit agreements. The Company's subsidiaries that are borrowers or guarantors under the credit agreements are referred to as the "Borrowers."

~~Amendments in First Quarter 2020~~

On March 18, 2020, the Borrowers entered into an amendment to the Senior Credit Agreement with an existing syndicate of lenders (the "Senior Credit Agreement") and into a related amendment to the existing credit agreement with Goldman Sachs Specialty Lending, LLC (the "GS Credit Agreement"). Both amendments were accounted for as debt modifications under GAAP. Together, these amendments are referred to as the "Sixth Amendment."

Under the Sixth Amendment, the outstanding balances under the term loan facilities of the Senior Credit Agreement and the GS Credit Agreement term loan were not changed. Additionally, the Senior Credit Agreement continues to provide a $25.0 million revolving credit facility, which includes accommodation for any outstanding letters of credit and a $5.0 million swing line facility. At March 31, 2020 and December 31, 2019, approximately $10.0 million and $13.5 million, respectively, was available under the revolving credit facility. Undrawn commitments for letters of credit under the revolving credit facility were not material at March 31, 2020 and December 31, 2019.

Senior Credit Agreement

Outstanding borrowings under ~~the term loan facility~~that certain Credit and Guaranty Agreement, dated as of ~~the Senior~~January 3, 2017, with Truist (the “Senior Credit ~~Agreement~~Agreement”) accrue interest using either a base rate (as defined) or a LIBOR rate plus an applicable margin, or percentage per annum, as provided in the amended credit agreement. For the term loan facility of our Senior Credit Agreement, the Sixth Amendment, which was executed on March 18, 2020, thereto provides for a LIBOR "floor" of 1.0% per annum. Accrued interest is payable ~~quarterly.~~monthly. The revolving credit facility incurs a commitment fee on any undrawn amount of the $25.0 million credit line, which equates to 0.50% per annum for the unused portion.

~~GS Credit~~Term Loan Agreement

Outstanding borrowings under ~~the GS~~that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P. (the “Term Loan Agreement”) accrue interest at 5.0%, plus an applicable margin, or percentage per annum, as indicated in the amended credit agreement. Accrued interest is payable quarterly at 5.0% per annum, and the accrued interest attributable to the applicable margin is capitalized as payment-in-kind ("PIK") interest each quarter.

- 1312 -

~~Potential Changes in Future Applicable Interest Rate Margins~~

Under the terms of the Senior Credit Agreement and the GS Credit Agreement, the future applicable interest rate margins may vary based on the Borrowers' future Total Net Leverage Ratio (as defined) in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings. Additionally, the future interest rate margins will increase 1.0% if the Borrowers do not make a permitted accelerated principal payment of at least $100 million under the term loan facility of the Senior Credit Agreement on or before June 16, 2020, with additional 50 basis-point increases in the applicable margins every successive 30 days through October 14, 2020 if the permitted accelerated principal payment of at least $100 million does not occur, up to a total interest rate margin increase of 3.0%. Any increase in the interest rate margin will not be applicable at any time after the Borrowers have made the accelerated payment of at least $100 million, other than with proceeds of indebtedness. Should these increases in the applicable interest rate margins occur, all or a portion of such additional interest rates, at the option of the Borrowers, may be payable in kind. The Company is pursuing the ability to make the accelerated payment by raising cash through various means.

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

Contractual Maturities

Based on terms and conditions existing at March 31, ~~2020,~~2021, future minimum principal payments for long-term debt are as follows:

(in thousands) Principal Due
Senior Credit Agreement GS Credit Agreement Total
Twelve-month period ending March 31, Term Revolver Term

2021 (current)
$ 7,866
$ —
$ —
$ 7,866
2022 24,302
15,000
—
39,302
2023 355,668
—
—
355,668
2024 —
—
96,533
96,533
Total $ 387,836
$ 15,000
$ 96,533
$ 499,369

Additionally, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as defined in the Senior Credit Agreement. No such prepayments were ~~due~~made for the year ended December 31, ~~2019.~~2020.

Under the Senior Credit Agreement, prepayments of outstanding principal may be made in permitted increments with a 1% penalty for certain prepayments. Under the ~~GS Credit~~Term Loan Agreement, ~~prepayment~~prepayments of outstanding principal isare subject to a ~~4.0%~~2.0% penalty ~~for certain prepayments occurring prior to March 18, 2021 and 2.0%~~ for certain prepayments occurring between March 18, 2021 and March 18, 2022. Such penalties ~~will be~~are based on the principal amount that is prepaid, subject to the terms of the credit agreements.

~~Interest Expense, Deferred Financing Costs, and Debt Discounts~~

The principal amount borrowed and ~~still~~ outstanding under the ~~GS Credit~~Term Loan Agreement was $80.0 ~~million.~~million at March 31, 2021 and December 31, 2020. Included in the outstanding ~~principal~~obligation balance at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was accumulated PIK interest of ~~approximately $16.5~~$24.5 million and ~~$15.1~~$22.6 million, respectively. For the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, PIK interest ~~under the GS Credit Agreement~~ added ~~$1.4~~$1.9 million and ~~$1.2~~$1.4 million, respectively, to the ~~principal amount~~obligation balance under the Term Loan Agreement.

Interest Expense and Amortization of ~~the subordinated debt.~~Deferred Loan Costs and Discounts

~~For the three months ended March 31, 2020 and 2019, interest~~Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was ~~$10.3~~$9.2 million and ~~$9.4~~$10.3 million ~~respectively.~~

~~Interest expense~~ for the three months ended March 31, ~~2019 also included a $0.4 million fee for the $70.0 million delayed principal draw under December 2018 amendment~~2021 and March 31, 2020, respectively. Interest expense increased due to the ~~Senior Credit Agreement, which occurred during the first quarter of 2019.~~

For the Sixth Amendment, approximately $2.7 million of lender fees were capitalized and, along with existing unamortized loan costs and discount of approximately $5.6 million, continue to be amortized as a component of interest expense on the Company's statements of operations. Interest expense related to amortization of deferred financing costs and debt discounts ~~was approximately $0.5~~by $0.6 million and ~~$0.4~~$0.5 million for the three months ended March 31, 2021 and March 31, 2020, ~~and 2019,~~ respectively. ~~As a result of~~

For the Sixth Amendment, executed in the ~~effective interest rates, which includes the amortization~~first quarter of ~~capitalized~~2020, $2.7 million of lender fees were deferred ~~financing~~and added to then-existing unamortized loan costs and discount. Costs that the Company incurs for debt ~~discounts,~~modification that are ~~8.87%~~not eligible for deferral and ~~12.91% for~~subsequent amortization as interest expense are reported as debt modification costs on the ~~term debt under the Senior Credit Agreement and the GS Credit Agreement, respectively, and are subject to future changes in the applicable interest rate margins as previously described.~~Company's consolidated statement of operations. Approximately $0.4 million of ~~third-party~~such costs were expensed in connection with the Sixth ~~Amendment.~~Amendment during the first quarter of 2020.

When the $106.5 million principal repayment was made in September 2020 for the term facility of the Senior Credit Agreement, it was deemed to be a partial extinguishment of debt that was permitted and contemplated by the existing debt agreement, as previously amended. As a result, a proportional amount of unamortized loan costs and discount in the amount of $1.5 million was removed and expensed during the third quarter of 2020.

The Senior Credit Agreement and the ~~GS Credit~~Term Loan Agreement, as amended, contain representations and warranties, financial and collateral requirements, mandatory payment events, events of default, and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from

the Company's subsidiaries to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates), and to enter into certain leases.

The Company is also required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the credit agreements as the ratio of consolidated total debt of the Borrowers to the Company's consolidated adjusted EBITDA (as defined in the Senior Credit Agreement and ~~GS Credit~~Term Loan Agreement). The maximum permitted Total Net Leverage Ratio was ~~8.00:~~7.71:1.00 at March 31, ~~2020.~~2021. As of March 31, ~~2020,~~2021, the Company remained in compliance with the covenants.

Refinancing in April 2021

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

~~Income Tax Benefit~~

The Company's ~~benefit for federal and state income taxes was as follows:~~

~~DTA = Deferred~~effective income tax ~~asset~~rate for the three months ended March 31, 2021 was 45.4%. Our effective income tax rate for the three months ended March 31, 2021 differed from the U.S. statutory rate primarily as a result of changes to our valuation allowance for interest limited under section 163(j) of the Internal Revenue Code.

Valuation Allowance for Deferred Income Tax Assets

The Company considers all available positive and negative evidence to determine whether sufficient taxable income will be generated in the future to permit realization of the existing deferred tax assets. In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.

Among other provisions, the Tax Cuts and Jobs Act of 2017 amended Internal Revenue Code Section 163(j) to create limitations on the deductibility of business interest expense. Section 163(j) limits the business interest deduction to 30% of adjusted taxable income (ATI). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization (EBITDA). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes (EBIT), without adjusting for depreciation and amortization. Any business interest in excess of the annual limitation is carried forward indefinitely. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020.

~~With respect to recording a deferred tax benefit for the carryforward of business interest expense, the Company is required to apply the "more likely than not" threshold for assessing recoverability.~~ Based on management’s assessment, as of the first quarter of 2021, the Company ~~recorded an increase in the~~continues to record a full valuation allowance ~~in the three months ended March 31, 2020 of~~ ~~$0.5 million~~ ~~for the business~~against non-deductible interest ~~expense carryover comprised of (i) a discrete valuation allowance benefit of~~ ~~$1.5 million~~ ~~associated with the 2019 business interest deferred tax asset as a result of the CARES Act and (ii) a provision for the valuation allowance of~~ ~~$2.0 million~~ ~~associated with the 2020 excess business interest.~~

~~The provisions for and adjustments to the valuation allowance are a component of income tax expense (benefit) in the Company's unaudited condensed consolidated statements of operations.~~

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

~~Uncertain Tax Positions~~

The Company recognizes the tax effects of uncertain tax positions only if such positions are more likely than not to be sustained based solely upon its technical merits at the reporting date. The Company refers to the difference between the tax benefit recognized in its financial statements and the tax benefit claimed in the income tax return as an "unrecognized tax benefit." As of March 31, 2020, the net amount of our unrecognized tax benefits was not material.

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

~~10.~~9. COMMITMENTS AND CONTINGENCIES

Minimum Annual Commitments with Third-Party Processors

The Company has multi-year agreements with third parties to provide certain payment processing services to the Company. The Company pays processing fees under these agreements that are based on the volume and dollar amounts of processed ~~payments~~payment transactions. Some of these agreements have minimum annual requirements for processing volumes. ~~As of~~Based on existing contracts in place at March 31, ~~2020,~~2021, the Company is committed to pay minimum processing fees under these agreements of approximately ~~$14.0~~$14.8 million ~~through the end of 2021.~~in 2021 and $7.8 million in both 2022 and 2023.

See Note ~~11,~~10, Related Party Transactions, for information on a loan commitment extended by the Company to another entity.

Contingent Consideration for Asset Acquisitions

Under GAAP that applies to asset acquisitions that do not meet the definition of a business, the portion of the unpaid purchase price that is contingent on future activities is not initially recorded by the acquirer on the date of acquisition. Rather, the acquirer generally recognizes contingent consideration when it becomes probable and estimable.

During the year ended December 31, 2019, the Company simultaneously entered into two agreements with another entity. These two related agreements 1) transfer to the Company certain perpetual rights to a merchant portfolio and 2) form a 5-year reseller arrangement whereby the Company will offer and sell to its customer base certain on-line services to be fulfilled by the other entity. No cash consideration was paid to, or received from, the other entity at execution of either agreement. Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both: 1) the actual financial performance of the acquired merchant portfolio rights and 2) actual sales and variable wholesale costs for the on-line services sold by the Company under the reseller arrangement. Amounts subsequently paid to the other entity are accounted for as either 1) standard costs of the services sold by the Company under the 5-year reseller agreement or 2) consideration for the merchant portfolio rights. Amounts paid that are accounted for as consideration for the merchant portfolio rights are capitalized and amortized over the estimated useful life of the merchant portfolio rights. As of March 31, 2020 and December 31, 2019, approximately $2.1 million and $1.1 million, respectively, was capitalized as cost for the merchant portfolio. The capitalized cost, which is in our Consumer Payments reportable segment, is being amortized using an accelerated method. At this time, the Company cannot reasonably estimate the allocation of future cash payments. However, under the two contracts the Company does not anticipate any net losses.

On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. This asset acquisition became part of the Company's Consumer Payments reportable segment. Of the $15.2 million, $5.0 million was funded from a delayed draw down of the Senior Credit Facility. Additionally, a $10.0 million draw was made against the revolving credit facility under the Senior Credit Facility and cash on hand was used to fund the remaining amount. The initial purchase price ~~may be~~is subject to an increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers. ~~Additional purchase price is accounted for when payment~~As of March 31, 2021, an additional $4.3 million of the $6.4 million total contingent consideration has been paid to the seller, ~~becomes probable and is added to~~while the ~~carrying value of the asset. The Company estimates that~~remaining $2.1 million will be payable in the first quarter of ~~the contingent consideration is owed to the seller at March 31, 2020.~~

~~Contingent Consideration for Business Combinations~~

2022 if certain criteria are achieved.

~~See Note 14,~~
~~Fair Value, for information about contingent consideration related to 2018 business acquisitions.~~

The Company is involved in certain legal proceedings and claims which arise in the ordinary course of business. In the opinion of the Company and based on consultations with inside and outside counsel, the results of any of these matters, individually and in the aggregate, are not expected to have a material effect on the Company's results of operations, financial condition, or cash flows. As more information becomes available, and the Company determines that an unfavorable outcome is probable on a claim and that the amount of probable loss that the Company will incur on that claim is reasonably estimable, the Company will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact the Company's results of operations, financial condition, and cash flows.

Concentration of Risks

The Company's revenue is substantially derived from processing ~~Visa®~~Visa and ~~MasterCard®~~MasterCard bank card transactions. Because the Company is not a member bank, in order to process these bank card transactions, the Company maintains sponsorship agreements

with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card associations.

A majority of the Company's cash and restricted cash is held in certain financial institutions, substantially all of which is in excess of federal deposit insurance corporation limits. The Company does not believe it is exposed to any significant credit risk from these transactions.

~~11.~~10. RELATED PARTY TRANSACTIONS

Commitment to Lend and Warrant to Acquire

During 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity. The Company has loaned the entity a total of $3.5 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, with a commitment to loan up to a total of $10.0 million based on certain growth metrics of the entity and continued compliance by the entity with the terms and covenants of the agreement. The Company's commitment to make additional advances under the loan agreement is dependent upon such advances not conflicting with covenants or restrictions under any of the Company's debt or other applicable agreements. Amounts loaned to this entity by the Company are secured by substantially all of the assets of the entity and by a personal guarantee. The note receivable has an interest rate of 12.0% per annum and is repayable in full in May 2024. The Company ~~recognized interest income of $0.1 million during the three months ended March 31, 2020. The Company~~ also received a warrant to purchase a non-controlling interest in this entity's equity at a fixed amount. The loan agreement also gives the Company certain rights to purchase some or all of this entity's equity in the future, at the entity's then-current fair value. The fair values of the warrant, loan commitment, and purchase right were not material at inception or ~~as of any subsequent reporting period.~~at March 31, 2021.

Contributions of Assets and Contingent Payment

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

contribution agreements. No material liabilities were assumed by PHOT. These contributed assets were composed substantially of technology-related assets. Prior to these transactions, eTab was 80.0% owned by the Company's Chairman and Chief Executive Officer. No cash consideration was paid to the contributors of the eTab or Cumulus assets on the date of the transactions. As consideration for these contributed assets, the contributors were issued redeemable preferred equity interests in PHOT. Under these redeemable preferred equity interests, the contributors are eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per annum) on any of the $4.5 million amount that has not been distributed to them. The Company's Chairman and Chief Executive Officer owns 83.3% of the redeemable preferred equity interests in PHOT. Once a total of $4.5 million plus the preferred yield has been distributed to the holders of the redeemable preferred equity interests, the redeemable preferred equity interests will cease to exist. The Company determined that the contributor's carrying value of the eTab net assets (as a common control transaction under GAAP) was not material. Under the guidance for a common control transaction, the contribution of the eTab net assets did not result in a change of entity or the receipt of a business, therefore the Company's financial statements for prior periods have not been adjusted to reflect the historical results attributable to the eTab net assets. Additionally, no material amount was estimated for the fair value of the contributed Cumulus net assets. PHOT is a part of the Company's Integrated Partners reportable segment.

Pursuant to the limited liability company agreement of PHOT, any material ~~future~~undistributed earnings generated by the eTab and Cumulus assets that are attributable to the holders of the preferred equity interests ~~will be~~are reported by the Company as a form of ~~non-controlling interests~~NCI classified as mezzanine equity on the Company's consolidated balance sheet until $4.5 million and the preferred yield have been distributed to the holders of the preferred equity interests. Subsequent changes, if material, in the value of the NCI will be reported as an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the ~~non-controlling interests~~NCI in mezzanine equity. Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through ~~March 31,~~June 30 2020, and therefore no recognition of the NCI ~~has been~~was reflected in the Company's ~~unaudited condensed~~ consolidated financial statements.

~~Equity-Method Investment~~

~~During~~$250,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this same amount was also distributed in cash to the NCIs during the same reporting period. Such amounts were not material to the Company's results of operations, financial position, or cash flows for the three months ended March 31, 2021.

Equity-Method Investment

During the first quarter of 2020, the Company wrote off its $0.2 million carrying value in an equity-method investment. This loss is reported as a component of Other ~~(expense) income,~~expenses, net on the Company's unaudited condensed consolidated statement of operations. ~~The Company's share of this entity's income or loss was not material for any reporting period presented.~~

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~~12.~~11. RECONCILIATION OF STOCKHOLDERS' DEFICIT AND NON-CONTROLLING ~~INTEREST~~INTERESTS

The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company has not issued any shares of preferred stock. See Note 16, Subsequent Events, for information on the Securities Purchase Agreement the Company executed on April 27, 2021.

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


(in thousands)												Additional Paid-In Capital		Accumulated (Deficit)		Total Priority Technology Holdings, Inc. Stockholders' (Deficit)
	Preferred Stock	Common Stock		Treasury Stock (a)
			Shares	Amount		Shares	Amount		Shares	Amount



January 1, 2021			0	$	0	67,391	$	68	451	$	(2,388)	$	5,769	$	(102,013)	$	(98,564)
Equity-classified stock-based compensation			—	—		—	—		—	—		558		—		558
Vesting of stock-based compensation			—	—		159	—		—	—		—		—		—
Liability-classified stock-based compensation converted to equity-classified			—	—		—	—		—	—		313		—		313

Net loss			—	—		—	—		—	—		—		(2,679)		(2,679)
Proceeds from exercise of stock options			—	—		90	—		—	—		617		—		617

March 31, 2021			0	$	0	67,640	$	68	451	$	(2,388)	$	7,257	$	(104,692)	$	(99,755)


(in thousands)												Additional Paid-In Capital		Accumulated (Deficit)		Total Priority Technology Holdings, Inc. Stockholders' (Deficit)		NCI (b)
	Preferred Stock	Common Stock		Treasury Stock (a)
			Shares	Amount		Shares	Amount		Shares	Amount



January 1, 2020			0	$	0	67,061	$	68	451	$	(2,388)	$	3,651	$	(127,674)	$	(126,343)	$	5,654
Equity-classified stock-based compensation			—	—		—	—		—	—		338		—		338		—

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

March 31, 2020			0	$	0	67,061	$	68	451	$	(2,388)	$	3,989	$	(133,543)	$	(131,874)	$	5,654

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(in thousands) Additional Paid-In Capital Accumulated (Deficit) Total Priority Technology Holdings, Inc. Stockholders' (Deficit) Non-Controlling Interest (c)
Preferred Stock Common Stock Treasury Stock (a)
Shares Amount Shares Amount Shares Amount

January 1, 2020 —
$ —
67,061
$ 68
451
$ (2,388 ) $ 3,651
$ (127,674 ) $ (126,343 ) $ 5,654
Stock-based compensation —
—
—
—
—
—
338
—
338
—
Net loss —
—
—
—
—
—
—
(5,869 ) (5,869 ) —
March 31, 2020 —
$ —
67,061
$ 68
451
$ (2,388 ) $ 3,989
$ (133,543 ) $ (131,874 ) $ 5,654

January 1, 2019 —
$ —
67,038
$ 67
—
$ —
$ —
$ (94,085 ) $ (94,018 ) $ —
Stock-based compensation —
—
—
—
—
—
1,160
—
1,160
—
Warrant redemptions (b) —
—
420
(b)
—
—
(b)
—
—
—
Net loss —
—
—
—
—
—
—
(6,446 ) (6,446 ) —
Issuance of non-controlling interest (c) —
—
—
—
—
—
—
—
—
5,654
March 31, 2019 —
$ —
67,458
$ 67
—
$ —
$ 1,160
$ (100,531 ) $ (99,304 ) $ 5,654

(a)At cost

(b) ~~Par value of the common shares issued in connection with the warrant exchange rounds~~Prior to ~~less than 1000 dollars.~~ ~~In August 2018, the Company~~third quarter 2020, this balance was informed by Nasdaq that it intended to delist the Company's outstanding warrants and units due to an insufficient number of round lot holders for the public warrants. The Company subsequently filed a Registration Statement on Form S-4 with the SEC for the purpose of offering holders of the Company's outstanding 5,310,109 public warrants and 421,107 private warrants the opportunity to exchange each warrant for 0.192 shares of the Company's common stock. The exchange offer expired in February 2019 resulting in a portion of the warrants being tendered in exchange for approximately 420,000 shares of the Company's common stock plus cash in lieu of fractional shares. Nasdaq proceeded to delist the remaining outstanding warrants and units, which were comprised of one share of common stock and one warrant, from The Nasdaq Global Market at the open of business on March 6, 2019. The delisting of the remaining outstanding warrants and units had no impact on the Company's financial statements.

~~(c) Related~~related to the acquisition of certain assets from YapStone, Inc. ~~See Note 3,~~ ~~Asset Acquisitions~~. ~~During~~by the ~~three months ended March 31,~~Company's PRET subsidiary during 2019. As part of the consideration for the assets acquired from YapStone, Inc. by PRET, YapStone, Inc. was issued a NCI in PRET with an initial estimated fair value and carrying value of $5,654,000. For all reporting periods since PRET's inception through June 30, 2020, ~~and 2019, 0~~no earnings or losses were attributable to the ~~non-controlling interest.~~NCIs of PRET. During the three months ended September 30, 2020, a gain on a sale of assets from PRET resulted in the attribution of a total of $45.1 million to the NCIs of PRET. This amount was also distributed in a final redemption of the NCIs' interests in PRET during the three months ended September 30, 2020.

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~~13.~~12. STOCK-BASED COMPENSATION ~~PLANS~~

Stock-based compensation expense is included in Salary and employee benefits in the accompanying unaudited condensed consolidated statements of operations. The Company recognizes the effects of forfeitures on compensation expense as the forfeitures occur. ~~Expense recognized by plan was as follows:~~

(in thousands) Three Months Ended March 31,
2020 2019

2018 Equity Incentive Plan $ 338
$ 924
2014 Management Incentive Plan —
236
Total $ 338
$ 1,160

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

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

Income tax benefit for the stock-based compensation was not material for the three months ended March 31, ~~2020~~2021 and ~~2019.~~March 31, 2020.

~~14.~~13. FAIR VALUE

Fair Value Measurements

The estimated fair value of remaining contingent consideration related to the Priority Payment Systems Tech Partners ("PPS Tech") and Priority Payment Systems Northeast ("PPS Northeast") business combinations were each based on a weighted payout probability for the contingent consideration at the original measurement date and each subsequent remeasurement date, which fall within Level 3 on the fair value hierarchy since these recurring fair value measurements are based on significant unobservable inputs. Both of these business combinations consummated during the third quarter of 2018. For PPS Tech and PPS Northeast, the probabilities used to estimate the payout probability of the contingent considerations ranged between 15% and 35% and between 5% and 80%, respectively. For PPS Tech and PPS Northeast, the estimated weighted average probability for payment of the contingent consideration was 21% and 70%, respectively, at March 31, 2020 and December 31, 2019, and 26% and 70%, respectively, at March 31, 2019. These weighted average probabilities are based on present value of estimated projections for financial metrics for the remaining earnout periods.

At March 31, 2021 and December 31, 2020, the remaining maximum amounts of contingent consideration for the PPS Tech and the PPS Northeast business combinations were $500,000 and $250,000, respectively, and the measured fair values were $170,000 and $190,000, respectively. TheseCompany no longer has any fair value ~~amounts did not change during~~estimates that are required to be remeasured at the ~~three months ended March 31, 2020 and 2019.~~

There were no transfers among the fair value levels during the three months ended March 31, 2020 and March 31, 2019. There were no unrealized gains or losses included in other comprehensive income for anyend of each reporting period ~~therefore there were no changes in unrealized gains and losses for any reporting period included in other comprehensive income for~~on a recurring ~~Level 3 fair value measurements.~~basis.

Fair Value Disclosures

Notes Receivable

Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company has provided for allowances when it believes that ~~all of its~~certain notes receivable ~~are~~may not be collectible. The fair value of the Company's notes receivable, net at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was approximately ~~$6.6~~$6.9 million and ~~$5.7~~$7.7 million, respectively. On the fair value hierarchy, Level 3 inputs are used to estimate the fair value of these notes receivable.

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~~Table of Contents~~

Debt Obligations

The Borrower's outstanding debt obligations (see Note 8,7, Debt Obligations) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at March 31, 2021 and December 31, 2020 was estimated to be approximately ~~$327.7 million.~~$275.2 million and $278.0 million, respectively. The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of ~~$387.8~~$274.6 million and $279.4 million, respectively, was estimated using binding and non-binding quoted prices in an active secondary market, which considers the Borrowers' credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.

The carrying values of the Borrowers' other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of ~~an active~~a market for these ~~notes.~~debt obligations.

~~15.~~14. SEGMENT INFORMATION

~~The~~At March 31, 2021, the Company has 3 reportable segments that are reviewed by the Company's chief operating decision maker ("CODM"), who is the Company's Chief Executive Officer and Chairman. The Consumer Payments operating segment and the Integrated Partners operating segments are each reported as separate reportable segments. The Commercial Payments

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and Institutional Services (sometimes referred to as Managed Services) operating segments are aggregated into 1 reportable segment, Commercial Payments.

•

More information about our 3 reportable segments:

•Consumer Payments – represents consumer-related services and offerings including merchant acquiring and transaction processing services including the proprietary MX enterprise suite. Either through acquisition of merchant portfolios or through resellers, the Company becomes a party or enters into contracts with a merchant and a sponsor bank. Pursuant to the contracts, for each card transaction, the sponsor bank collects payment from the credit, debit or other payment card issuing bank, net of interchange fees due to the issuing bank, pays credit card association (e.g., Visa, MasterCard) assessments and pays the transaction fee due to the Company for the suite of processing and related services it provides to merchants, with the remainder going to the merchant.

•Commercial Payments – represents services provided to certain enterprise customers, including outsourced sales force to those customers and accounts payable automation services to commercial customers.

•Integrated Partners – represents payment adjacent services that are provided primarily to the health care, real estate, and hospitality industries. In September 2020, the Company sold a substantial portion of the assets of this segment.

represents consumer-related services and offerings including merchant acquiring and transaction processing services including the proprietary MX enterprise suite. Either through acquisition of merchant portfolios or through resellers, the Company becomes a party or enters into contracts with a merchant and a sponsor bank. Pursuant to the contracts, for each card transaction, the sponsor bank collects payment from the credit, debit or other payment card issuing bank, net of interchange fees due to the issuing bank, pays credit card association (e.g., Visa, MasterCard) assessments and pays the transaction fee due to the Company for the suite of processing and related services it provides to merchants, with the remainder going to the merchant.


•	~~Commercial Payments –~~ ~~represents services provided to certain enterprise customers, including outsourced sales force to those customers and accounts payable automation services to commercial customers.~~


•	~~Integrated Partners –~~ ~~represents payment adjacent services that are provided primarily to the health care and residential real estate industries.~~

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

Prior to second quarter of 2019, the Integrated Partners operating segment was aggregated with the Commercial Payments and Institutional Services operating segments and reported as 1 aggregated reportable segment. In the second quarter of 2019, the Integrated Partners operating segment was no longer aggregated with the Commercial Payments and Institutional Services operating segments. All comparative periods have been adjusted to reflect the current 3 reportable segments.

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~~Table of Contents~~

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


(in thousands)	Three Months Ended March 31,
	2021		2020
Revenues:
Consumer Payments	$	108,393	$	86,031
Commercial Payments	3,500		6,368
Integrated Partners	1,404		4,534
Consolidated revenues	$	113,297	$	96,933

Income (loss) from operations:
Consumer Payments	$	13,363	$	7,152
Commercial Payments	(409)		764
Integrated Partners	92		368
Corporate	(8,519)		(4,725)
Consolidated income from operations	$	4,527	$	3,559

Depreciation and amortization:
Consumer Payments	$	8,579	$	8,583
Commercial Payments	74		76
Integrated Partners	129		1,311
Corporate	288		302
Consolidated depreciation and amortization	$	9,070	$	10,272

(in thousands) Three Months Ended March 31,
2020 2019
Revenue:
Consumer Payments $ 86,031
$ 79,009
Commercial Payments 6,368
6,658
Integrated Partners 4,534
1,979
Consolidated Revenue $ 96,933
$ 87,646

Income (loss) from operations:
Consumer Payments $ 7,152
$ 7,719
Commercial Payments 764
(451 )
Integrated Partners 368
(233 )
Corporate (4,725 ) (6,069 )
Consolidated income from operations $ 3,559
$ 966

Depreciation and amortization:
Consumer Payments $ 8,583
$ 7,808
Commercial Payments 76
98
Integrated Partners 1,311
691
Corporate 302
328
Consolidated depreciation and amortization $ 10,272
$ 8,925

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


(in thousands)	Three Months Ended March 31,
	2021		2020
Total income from operations of reportable segments	$	13,046	$	8,284
Corporate	(8,519)		(4,725)
Interest expense	(9,168)		(10,315)


Other expenses, net	(269)		(346)
Income tax benefit	2,231		1,233
Net loss	$	(2,679)	$	(5,869)

(in thousands) Three Months Ended
March 31,
2020 2019

Total income from operations of reportable segments $ 8,284
$ 7,035
Corporate (4,725 ) (6,069 )
Interest expense (10,315 ) (9,363 )
(Less) plus other, net (346 ) 227
Income tax benefit 1,233
1,724
Net loss $ (5,869 ) $ (6,446 )

Substantially all revenue is generated in the United States.

For the three months~~months~~ ended March 31, ~~2020~~2021 and ~~2019~~March 31, 2020, no one merchant customer accounted for 10% or more of the Company's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other referral partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can potentially move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down"

period. For the three months ended March 31, ~~2020~~2021 and ~~2019,~~March 31, 2020, merchants referred by one ISO organization with potential merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately ~~20%~~23.3% and ~~18%~~20.1%, respectively, of the Company's consolidated revenues.

On September 22, 2020, Priority Real Estate Technology, LLC (“PRET”), a majority-owned and consolidated subsidiary of the Company, sold certain assets comprising its RentPayment business, which was part of the Integrated Partners reportable segment. The allocation of net proceeds from the sale, after transaction costs, to the PRET members included the return of each member’s invested capital in PRET and excess proceeds were distributed in accordance with the distribution provisions of the PRET LLC governing agreement. Approximately $51.4 million and $45.1 million of the excess proceeds were distributed to the Company and the non-controlling interests, respectively. The initial allocation of net proceeds remained subject to final adjustment with the PRET members at December 31, 2020. During the first quarter of 2021, it was determined that an additional $0.5 million of the excess proceeds are due to the non-controlling interests, which amounts were accrued at March 31, 2021 and included in Other expenses, net in the unaudited condensed consolidated statement of operations.

15. LOSS PER COMMON SHARE

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


(in thousands, except per share amounts)	Three Months Ended March 31,
	2021		2020
Basic and Diluted Loss Per Common Share:
Numerator:
Net loss	$	(2,679)	$	(5,869)
Less: Income attributable to non-controlling interests	0		0
Net loss attributable to common shareholders	$	(2,679)	$	(5,869)

Denominator:
Weighted-average common stock shares outstanding	67,543		67,061
Basic and Diluted Loss Per Common Share	$	(0.04)	$	(0.09)

Three Months Ended March 31,
(in thousands except per share amounts) 2020 2019

Basic and Diluted Loss Per Common Share:
Numerator:
Net loss $ (5,869 ) $ (6,446 )
Less: Income (loss) attributable to non-controlling interests —
—
Net loss attributable to common stockholders $ (5,869 ) $ (6,446 )

Denominator:
Weighted-average shares outstanding 67,061
67,164

Basic and Diluted Loss Per Common Share $ (0.09 ) $ (0.10 )

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Potentially anti-dilutive securities that were excluded from ~~earnings~~loss per common share for the three months ended March 31, ~~2020~~2021 and ~~2019~~March 31, 2020 that could be dilutive in future periods were as follows:


(in thousands)	Common Stock Equivalents at
		March 31, 2021	March 31, 2020
Outstanding warrants on common stock (1)		3,556	3,556
Outstanding options and warrants issued to adviser (1)		600	600
Restricted stock unit awards (2)		842	395
Outstanding stock option awards (2)		1,394	1,644
Total		6,392	6,195

(in thousands) Common Stock Equivalents
March 31, 2020 March 31, 2019

Outstanding warrants on common stock 3,556
3,556
Restricted stock unit awards granted under the 2018 Equity Incentive Plan 395
238
Outstanding stock option awards granted under the 2018 Equity Incentive Plan 1,644
2,047
Restricted stock units granted under the Earnout Incentive Plan —
95
Total 5,595
5,936
(1)Issued by M.I. Acquisitions, Inc. prior to July 25, 2018

(2)Granted under the 2018 Equity Incentive Plan

16. SUBSEQUENT EVENTS

Merger Agreement

On March 5,2021, we announced that we had entered into an Agreement and Plan of Merger (the "Merger Agreement") with Finxera Holdings, Inc. ("Finxera"), Prime Warrior Acquisition Corp., an indirect wholly owned subsidiary of the Company ("Merger Sub") and solely in its capacity as the representative of the stockholders or optionholders of Finxera (the "Equityholder Representative"), Stone Point Capital, LLC. Priority will acquire, through a merger of Merger Sub with and into Finxera, the Finxera business. Finxera is a provider of deposit account management payment processing services to the debt settlement industry in the United States.

The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (a) Merger Sub will merge with and into Finxera (the “Merger”), with the separate existence of Merger Sub ceasing and Finxera continuing as the surviving entity of the Merger (the “Surviving Entity”); (b) at the effective time of the Merger (the “Effective Time”) each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into 1 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.

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Securities Purchase Agreement

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

In addition to the issuance and sale of Senior Preferred Shares which pursuant to the Purchase Agreement, upon the consummation of the Company’s acquisition of Finxera and the satisfaction of other customary closing conditions, the Company will issue and sell to the Investors an additional 50,000 shares of Senior Preferred Stock, at a purchase price of $50,000,000, or $1,000 per share. The Company may also issue and sell to the Investors up to an additional 50,000 shares of Senior Preferred Stock, at a purchase price of $1,000 per share within 18 months after the consummation of the Acquisition Senior Preferred Stock Sale upon the satisfaction of certain customary closing conditions.

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

Registration Rights Agreement

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

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

Credit and Guaranty Agreement

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

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

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.

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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”).

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.

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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 ~~2018~~ and ~~2017~~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 ~~30, 2020~~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

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available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

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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”).

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Residual Purchase Agreement

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Results of Operations

This section includes a ~~summary of our results of operations for the periods presented followed by a detailed~~ discussion and analysis of our results of operations for the three months ended March 31, ~~2020~~2021 (or first quarter ~~2020)~~2021) compared to the three months ended March 31, ~~2019~~2020 (or first quarter ~~2019)~~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, ~~2020~~2021 Compared to the Three Months Ended March 31, ~~2019~~2020


(dollars in thousands)	Three Months Ended March 31,											(dollars in thousands)	Three Months Ended March 31,
	2020			2019			Change			% Change			2021		2020		Change		% Change
REVENUES												REVENUES	$	113,297	$	96,933	$	16,364	16.9	%

REVENUES	$	96,933		$	87,646		$	9,287		10.6	%


OPERATING EXPENSES:												OPERATING EXPENSES:
Costs of services	66,364			60,106			6,258			10.4	%	Costs of services	81,863		66,364		15,499		23.4	%

Salary and employee benefits	10,129			10,899			(770		)	(7.1	)%	Salary and employee benefits	9,548		10,129		(581)		(5.7)	%
Depreciation and amortization	10,272			8,925			1,347			15.1	%	Depreciation and amortization	9,070		10,272		(1,202)		(11.7)	%
Selling, general and administrative	6,609			6,750			(141		)	(2.1	)%	Selling, general and administrative	8,289		6,609		1,680		25.4	%

Total operating expenses	93,374			86,680			6,694			7.7	%	Total operating expenses	108,770		93,374		15,396		16.5	%

Income from operations	3,559			966			2,593			268.4	%	Income from operations	4,527		3,559		968		27.2	%

OTHER INCOME (EXPENSES):
OTHER EXPENSES:												OTHER EXPENSES:

Interest expense	(10,315		)	(9,363		)	(952		)	10.2	%	Interest expense	(9,168)		(10,315)		1,147		(11.1)	%
Other (expense) income, net	(346		)	227			(573		)	(252.4	)%

Other expenses, net												Other expenses, net	(269)		(346)		77		(22.3)	%
Total other expenses, net	(10,661		)	(9,136		)	(1,525		)	16.7	%	Total other expenses, net	(9,437)		(10,661)		1,224		(11.5)	%
Loss before income taxes												Loss before income taxes	(4,910)		(7,102)		2,192		(30.9)	%
Income tax benefit												Income tax benefit	(2,231)		(1,233)		(998)		80.9	%

Loss before income taxes	(7,102		)	(8,170		)	1,068			(13.1	)%

Income tax expense benefit	(1,233		)	(1,724		)	491			(28.5	)%


Net loss	$	(5,869	)	$	(6,446	)	$	577		(9.0	)%	Net loss	$	(2,679)	$	(5,869)	$	3,190	(54.4)	%

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The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended March 31, ~~2020~~2021 compared to the three months ended March 31, ~~2019:~~

2020:

(in thousands) Three Months Ended March 31,
2020 2019 Change % Change

Consumer Payments:
Revenue $ 86,031
$ 79,009
$ 7,022
8.9 %
Operating expenses 78,879
71,290
7,589
10.6 %
Income from operations $ 7,152
$ 7,719
$ (567 ) (7.3 )%
Operating margin 8.3 % 9.8 %
Depreciation and amortization $ 8,583
$ 7,808
$ 775
9.9 %

Key Indicators:
Merchant bankcard processing dollar value $ 10,386,748
$ 10,210,755
$ 175,993
1.7 %
Merchant bankcard transaction volume 119,431
120,884
(1,453 ) (1.2 )%

Commercial Payments:
Revenue $ 6,368
$ 6,658
$ (290 ) (4.4 )%
Operating expenses 5,604
7,109
(1,505 ) (21.2 )%
Income (loss) from operations $ 764
$ (451 ) $ 1,215
(269.4 )%
Operating margin 12.0 % (6.8 )%
Depreciation and amortization $ 76
$ 98
$ (22 ) (22.4 )%

Key Indicators:
Merchant bankcard processing dollar value $ 72,677
$ 69,897
$ 2,780
4.0 %
Merchant bankcard transaction volume 25
30
(5 ) (16.7 )%

Integrated Partners:
Revenue $ 4,534
$ 1,979
$ 2,555
129.1 %
Operating expenses 4,166
2,212
1,954
88.3 %
Income (loss) from operations $ 368
$ (233 ) $ 601
(257.9 )%
Operating margin 8.1 % (11.8 )%
Depreciation and amortization $ 1,311
$ 691
$ 620
100.0 %

Key Indicators:
Merchant bankcard processing dollar value $ 124,518
$ 33,985
$ 90,533
266.4 %
Merchant bankcard transaction volume 448
128
320
250.0 %

Income from operations of reportable segments $ 8,284
$ 7,035
$ 1,249
17.8 %
Less: Corporate expense (4,725 ) (6,069 ) 1,344
(22.1 )%
Consolidated income from operations $ 3,559
$ 966
$ 2,593
268.4 %
Corporate depreciation and amortization $ 302
$ 328
$ (26 ) (7.9 )%

Key indicators:
Merchant bankcard processing dollar value $ 10,583,943
$ 10,314,637
$ 269,306
2.6 %
Merchant bankcard transaction volume 119,904
121,042
(1,138 ) (0.9 )%


(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	%

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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, ~~2020~~2021 Compared to Three Months Ended March 31, ~~2019~~2020

~~For the first three months of 2020, our~~Consolidated revenue

Our consolidated revenue in first quarter 2021 of $113.3 million increased by ~~$9.3~~$16.4 million, or ~~10.6%~~16.9%, from ~~$87.6 million to~~revenue in first quarter 2020 of $96.9 million. ~~This revenue~~Revenue growth ~~reflected increases~~ of ~~$7.0~~$22.4 million and $2.6 million in our Consumer Payments and Integrated Partners segments, respectively, partially offset by a decrease in our Commercial Payments segment of $0.3 million. Consolidated merchant bankcard processing dollar value increased 2.6% while merchant bankcard transactions decreased 0.9%.

~~The increase in revenue for the first three months of 2020~~ in our Consumer Payments segment was ~~due to a higher average ticket price and growth in processing volume of 1.7%,~~ partially offset by ~~a decline in merchant bankcard transactions~~revenue declines of 1.2%. The lower merchant bankcard transaction volume for the first three months of 2020 was mainly due to the effects of the COVID-19 pandemic during the last half of March 2020, partially offset by the continuation of strong consumer spending trends from January through mid-March and positive net onboarding of new merchants. The average dollar amount per bankcard transaction (calculated by dividing bankcard processing volume by the associated number of transactions processed) of $86.97 increased 3.0% for the first three months of 2020 from $84.47 for the first three months of 2019.

Commercial Payments segment revenue for the first three months of 2020 decreased by $0.3 million, or 4.4%, compared to the first three months of 2019. This decrease was due to lower revenue from our curated managed services program, partially offset by increases in our commercial payments exchange ("CPX") accounts payable automated solutions services, which grew by $0.4 million, or 31.4%, from $1.2 million to $1.6 million. Revenue from our curated managed services programs declined by $0.7 million from $5.4 million to $4.8 million, driven by lower program activity and incentive revenue in the first three months of 2020.

Revenue in our Integrated Partners reportable segment was $4.5 million for the first three months of 2020 compared to $2.0 million for the first three months of 2019. Priority Real Estate Technology ("PRET") comprised $4.0$2.9 million and ~~$1.6~~$3.1 million of this reportable segment's revenue in the first three months of 2020 and 2019, respectively. PRET is comprised primarily of the assets acquired from YapStone in March 2019 and the net assets acquired from RadPad Holdings, Inc. Revenue from Priority PayRight Health Solutions and Priority Hospitality Technology, whose assets we acquired in April 2018 and February 2019, respectively, comprise the remainder of this reportable segment's revenue.

~~Operating expenses~~

~~Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019~~

Our consolidated operating expenses increased $6.7 million, or 7.7%, from $86.7 million for the first three months of 2019 to $93.4 million for the first three months of 2020. This overall increase was primarily due to the increase in costs of services of $6.3 million, or 10.4%, related to the corresponding 10.6% increase in revenues, and higher amortization expense of $1.3 million primarily for the acquired YapStone assets and internally developed software. This increase was partially offset by a $0.8 million decrease, or 7.1%, in salaries and employee benefits and a decrease of $0.1 million, or 2.1%, in selling, general, and administrative ("SG&A") expenses. This decrease in salaries and employee benefits was related to lower incentive compensation and a decrease of $0.8 million in non-cash stock-based compensation for the first three months of 2020.

~~Income from operations~~

~~Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019~~

Consolidated income from operations increased by $2.6 million, or 268.4%, from $1.0 million for the first three months of 2019 to $3.6 million for the first three months of 2020. Our consolidated operating margin for the first three months of 2020 was 3.7% compared to 1.1% for the first three months of 2019. This margin increase was driven by profitability in our Commercial Payments and Integrated Partners segments, ~~lower corporate expense, partially offset~~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.

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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 ~~our Consumer Payments segment attributable to additional~~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.~~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.

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Our Consumer Payments ~~reportable~~ segment contributed ~~$7.2~~$13.4 million in income from operations for ~~the~~ first ~~three months~~quarter 2021, an increase of ~~2020, a decrease of $0.6~~$6.2 million, or ~~7.3%~~86.8%, from ~~the $7.7~~$7.2 million ~~for the first three months of 2019. This decrease largely reflected lower merchant bankcard transaction volume, higher residual expenses, and an increase~~ in ~~amortization expense primarily for residual rights in merchant portfolios acquired after the~~ first quarter 2020. The main driver of ~~2019, partially offset by~~this increase was higher ~~merchant bankcard processing dollar value due to the increase~~revenue less costs of services of $5.5 million. Income from operations also benefited from a $0.5 million decrease in ~~the average dollar amount per bankcard transaction, as previously discussed.~~SG&A and a $0.2 million decrease in salary and employee benefits.

Our Commercial Payments ~~reportable~~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.

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Our Integrated Partners segment earned income from operations of ~~approximately $0.8~~$0.1 million for ~~the~~ first ~~three months~~quarter 2021, a decrease of ~~2020~~$0.3 million compared to a loss from operations of approximately $0.5 million for the first three months of 2019. This improvement in 2020 was largely driven by growth in our CPX accounts payable automated solutions services, partially offset by a contraction in our curated managed services.

~~Our Integrated Partners reportable segment contributed~~ $0.4 million inof income from operations for first quarter 2020. The decrease was driven by the ~~first three months~~September 2020 sale of ~~2020 compared to a loss from operations~~PRET’s RentPayment business. Revenues less costs of ~~$0.2~~services decreased by $3.2 million, ~~in the first three months of 2019. The growth in 2020~~which was largely ~~attributable to the YapStone assets acquired~~offset by decreases in ~~late first quarter~~SG&A of ~~2019. Operating results for first three months of 2020 included~~$1.2 million, business depreciation and amortization ~~expense~~ of ~~$1.3~~$1.2 million ~~primarily related to the YapStone assets acquired. Other operating~~and salary and employee benefits of $0.6 million.

Corporate expenses ~~in the first quarters of 2020 included $0.9~~were $8.5 million for ~~transition services related to the acquired YapStone assets.~~

~~Corporate expense was~~first quarter 2021, an increase of $3.8 million from expenses of $4.7 million for ~~the~~ first ~~three months of 2020,~~quarter 2020. This increase was driven by a ~~decrease of $1.3~~$3.1 million ~~22.1%, from~~increase in professional fees and expenses ~~of $6.1~~described above under Consolidated Operating Expenses. Salaries and employee benefits increased $0.6 million ~~for the first three months of 2019. Corporate expenses that we deem~~largely due to ~~be non-recurring in nature were $0.5 million~~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, ~~and $1.2~~$14.5 million ~~in the first quarter 2019. The decline in Corporate expenses~~of outstanding revolving credit was ~~also due to decreases in non-cash stock-based compensation expense and certain SG&A costs.~~repaid.

Interest expense

~~For the first three months of 2020,~~ includes cash interest, expense increased by $1.0 million, or 10.2%, to $10.3 million from $9.4 million from the first three months of 2019. The increase in 2020 was primarily due to higher outstanding borrowings driven by draws on the revolving credit facilitypayment-in-kind interest, and ~~a delayed draw on the term facility of our Senior Credit Agreement that occurred in March 2019. The~~ amortization of deferred financing costs and debt ~~discounts increased our reported~~discounts. During the first quarters of 2021 and 2020, interest expense ~~and such amortization resulted in an effective interest rate of 8.87% for our senior term loan and 12.91% for our subordinated term loan at March 31, 2020.~~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

~~Other, net~~

Other, net resulted in an expense of $0.3 million in the first three months of 2020 compared to income of $0.2 million for the first three months of 2019. The first three months of 2020 included expenses of $0.4 million related to debt modifications and a $0.2 million non-cash write-off of an equity-method investment.

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)~~("ATI"). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization ~~(EBITDA)~~("EBITDA"). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes ~~(EBIT)~~("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. ~~On the basis~~Based on management’s assessment, as of ~~our assessment, during~~ the first ~~three months~~quarter of ~~2020 we recorded an increase in~~2021 the Company continues to record a full valuation allowance ~~of $0.5 million~~ ~~for our business~~against non-deductible interest ~~carryover comprised of (i) a discrete valuation allowance benefit of $1.5 million associated with our 2019 business interest deferred tax asset as a result of the CARES Act and~~

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(ii) a provision for the valuation allowance of $2.0 million associated with our 2020 excess business interest. These provisions are a component of our income tax benefit reported on our consolidated statements of operations.

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

We compute our interim period income tax expense or benefit by using a forecasted estimated annual effective tax rate ("EAETR") and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income. The EAETR for ~~2020~~2021 is ~~a tax benefit of 4.3%~~40.8% and includes the income tax ~~benefit~~provision on pre-tax ~~losses, offset by~~

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income and a tax provision related to establishment of a valuation allowance for deferred income tax on the ~~2020~~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 ~~tax provision adjustment related~~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 ~~release~~unaudited condensed consolidated financial statements contained in Part I, Item 1 of ~~a portion of our valuation allowance~~this Quarterly Report on ~~our 2019 Section 163(j) limitation as a result of the CARES Act.~~Form 10-Q.

Critical Accounting Policies and Estimates

~~Certain Non-GAAP Financial Measures~~

~~We periodically review the following key non-GAAP measures to evaluate our business and trends, measure our performance, prepare~~Our unaudited condensed consolidated financial ~~projections and make strategic decisions.~~

~~EBITDA, which represents net loss before interest, income tax, and depreciation and amortization, is reconciled to net loss calculated under GAAP.~~

Adjusted EBITDA starts with EBITDA and further adjusts for certain non-cash, non-recurring or non-core expenses including: 1) stock-based compensation; 2) debt modification expenses; 2) write-off of an equity-method investment; 3) certain legal expenses; 4) certain professional, accounting and consulting fees; and 5) temporary transition services related to the YapStone asset acquisition.

In addition, the financial covenants under the debt agreements of the Company's subsidiaries (the "Borrowers") are based on a non-GAAP measure referred to as Consolidated Adjusted EBITDA. The calculation of Consolidated Adjusted EBITDA starts with Adjusted EBITDA and further adjusts for the pro-forma impact of acquisitions and residual streams and run rate adjustments for certain contracted savings on an annualized basis, other consulting and professional fees, and other tax expenses and other adjustments, which are not included as adjustments to Adjusted EBITDA.

We believe these non-GAAP measures illustrate the underlying financial and business trends relating to our results of operations and comparability between current and prior periods. We also use these non-GAAP measures to establish and monitor operational goals.

These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performancestatements have been prepared in accordance with ~~GAAP. Using only~~U.S. generally accepted accounting principles for interim periods, which often require the ~~non-GAAP financial measures, particularly Adjusted EBITDA~~judgment of management in the selection and ~~Consolidated Adjusted EBITDA,~~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 ~~analyze our performance would have material limitations because their calculations are based on subjective determination regarding the nature~~these critical accounting policies and ~~classification~~estimates as of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of our operating results. Although other companies may report measures entitled "Adjusted EBITDA" or similar in nature, numerous methods may exist for calculating a company's Adjusted EBITDA or similar measures. As a result, the methods we use to calculate Adjusted EBITDA may differ from the methods used by other companies to calculate their non-GAAP measures.

~~Our income from operations for the three months ended~~ March 31, ~~2020~~2021.

Effect of New Accounting Pronouncements and ~~2019~~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 ~~SG&A expenses that we consider to be non-recurring~~ in ~~nature. These expenses totaled $1.4 million and $1.2 million in the three months ended March 31, 2020 and 2019, respectively. In the first quarter~~Part 1, Item 1 of ~~2020, these expenses included $0.9 million associated with transition services from YapStone, Inc. related to integration~~this Quarterly Report on Form 10-Q for a discussion of ~~the March 2019 asset acquisition, and $0.5 million of certain legal expenses. In the first quarter of 2019, these expenses included $0.7 million of~~recently issued accounting ~~services associated with the conversion to a public company and $0.5 million of certain legal expenses.~~pronouncements not yet adopted.

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Other (expense) income, net in the first three months of 2020 included $0.6 million of non-operating expenses that we consider non-recurring in nature, which consisted of $0.4 million of debt modification expenses and a $0.2 million non-cash write-off of the carrying value of an equity method investment.

The non-GAAP reconciliations of EBITDA, Adjusted EBITDA, and Consolidated Adjusted EBITDA to consolidated net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, include adjustments for these and certain other items, are shown in the table below:

(in thousands) Three Months Ended March 31,
2020 2019

Consolidated Net Loss (GAAP) $ (5,869 ) $ (6,446 )
Add: Interest expense (1) 10,315
9,363
Add: Depreciation and amortization 10,272
8,925
Less: Income tax benefit (1,233 ) (1,724 )
EBITDA (non-GAAP) 13,485
10,118
Further adjusted by:

Add: Non-cash stock-based compensation 338
1,160
Add: Non-recurring expenses:

Debt modification expenses 376
—
Write-off of an equity-method investment 211
—
Certain legal services (2) 474
514
Professional, accounting and consulting fees (3) 24
671
YapStone transition services 896
—
Adjusted EBITDA (non-GAAP) $ 15,804
$ 12,463
Further adjusted by:

Add: Pro-forma impact of acquisitions —
2,995
Add: Other professional and consulting fees 375
395
Less: Other tax expenses and other adjustments —
(169 )
Consolidated Adjusted EBITDA (non-GAAP) (4) $ 16,179
$ 15,684

~~(1) Interest expense includes amortization of debt issuance costs and discount.~~

~~(2) Legal expenses related to business and asset acquisition activity, settlement negotiation and other litigation expenses.~~

~~(3) Primarily transaction-related, capital markets and accounting advisory services.~~

(4) Presented to reflect the definition in the Company's credit agreements, as amended. Until December 31, 2019, the Consolidated Adjusted EBITDA of the Borrowers under the credit agreements excluded expenses of Priority Technology Holdings, Inc., which is neither a Borrower nor a guarantor under the credit agreements, subsequent to the Business Combination. Effective December 31, 2019, in accordance with the Sixth Amendment to the Company's Credit and Guaranty Agreement, the Consolidated Adjusted EBITDA of the Borrowers under the credit agreements includes expenses of Priority Technology Holdings, Inc. Consolidated Adjusted EBITDA of the Borrowers was approximately $16.2 million and $19.4 million for the quarters ended March 31, 2020 and 2019, respectively. The 2019 amount excludes $3.7 million of expenses of Priority Technology Holdings, Inc.

Compared to our consolidated balance sheet as of December 31, ~~2019,~~2020, the following key changes have occurred ~~as of~~at March 31, ~~2020.~~2021:

~~Cash~~Unrestricted cash decreased by ~~$0.4~~$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. ~~For an explanation~~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 ~~key drivers~~exercise of ~~this change, see the subsequent section,~~stock options.

~~Liquidity and Capital Resources~~.

Intangible assets, net of accumulated amortization, decreased $7.0 million during the first ~~three months~~quarter of ~~2020 by $7.5 million due to~~2021, resulting from amortization expense of ~~$8.5 million, partially offset by $0.9 million payment for a portion of a contingent purchase price for a merchant portfolio intangible asset.~~$7.0 million.

Outstanding amounts for our debt obligations under ~~our Senior~~that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Truist (the “Senior Credit Agreement”) and ~~our GS~~that certain Credit and Guaranty Agreement, ~~increased~~dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P. (the “Term Loan Agreement”) decreased by a net ~~$3.9~~of $2.9 million during the first three months of ~~2020.~~2021. This ~~increase~~decrease was ~~driven~~attributable to principal repayments of $4.9 million for Senior debt, partially offset by ~~additional borrowings of $3.5 million on the revolving facility under our Senior Credit Agreement and~~ PIK interest of ~~$1.4~~$1.9 million ~~added to the amount outstanding~~ under our ~~GS Credit~~Term Loan Agreement. ~~These new borrowings were partially offset by $1.0 million of principal repayment on~~See the ~~term facility of~~additional discussion about our ~~Senior Credit Agreement~~debt obligations in the subsequent section for Liquidity and Capital Resources.

Stockholders' Deficit

Stockholders' deficit attributable to the stockholders of the Company ~~changed~~increased by ~~$5.5~~$1.2 million, from a deficit of ~~$126.3~~$98.6 million at December 31, ~~2019~~2020 to a deficit of ~~$131.9~~$99.8 million at March 31, ~~2020.~~2021. The primary driver of this change was the net loss attributable to stockholders of ~~$5.9 million for~~ the ~~first three months~~Company of ~~2020~~$2.7 million, partially offset by ~~a $0.3~~$1.5 million ~~increase~~of increases to additional paid-in capital for ~~stock-based compensation.~~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.

Our working capital, defined as current assets less current liabilities, was ~~$(2.3)~~$(18.0) million and ~~$1.2~~$(13.0) million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. AsThe current portion of ~~March 31, 2020, we had cash totaling $2.9~~long-term debt was $24.3 million ~~compared to $3.2 million at December 31, 2019. These balances do not include restricted cash, which reflects cash accounts holding customer settlement funds of $36.9~~and $19.4 million at March 31, ~~2020~~2021 and ~~$47.2 million at~~ December 31, ~~2019.~~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.)


(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)

(dollars in thousands) Three Months Ended March 31,
2020 2019

Net cash (used in) provided by:

Operating activities $ (7,254 ) $ (1,240 )
Investing activities (3,229 ) (82,178 )
Financing activities (251 ) 78,827
Net decrease in cash and restricted cash $ (10,734 ) $ (4,591 )

Cash Used In Operating Activities

Net cash used in operating activities, which includes changes in restricted cash, was $13.4 million in ~~the~~ first ~~three months of 2020 was $7.3 million~~quarter 2021 compared to net cash used in operating activities of ~~$1.2~~$7.3 million ~~for the~~in first ~~three months~~quarter 2020. Restricted cash operating activities, which are operating activities related to disbursement and receipt of ~~2019. This $6.0 million decrease for the first three months of 2020 was principally the result of a decrease in~~ restricted cash ~~partially offset~~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 ~~a lower net loss.~~

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 ~~$3.2~~$5.7 million ~~and $82.2 million for~~in the first ~~three months of 2020 and 2019, respectively. Cash~~quarter 2021 compared to net cash used in investing activities ~~for~~of $3.2 million in the first ~~three months~~quarter of ~~2019 included $15.8 million used for residual buyouts and $63.8 million~~2020. Cash used to ~~acquire certain intangible assets from YapStone.~~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 ~~and $2.4 million for~~in the first ~~three months of~~quarter 2021 and 2020, ~~and 2019,~~ respectively.

Cash ~~(Used In) Provided By~~Used In Financing Activities

Net cash used in financing activities was ~~$0.3 million for the first three months of 2020 compared to cash provided of $78.8~~$4.2 million in the first ~~three months~~quarter 2021 compared to net cash used of ~~2019. The amount for~~$0.3 million in the first ~~three months~~quarter 2020. In first quarter 2021, Senior debt principal repayments of ~~2019 included new borrowings under our Senior Credit Agreement consisting~~$4.9 million were partially offset by $0.6 million of ~~$10.0 million under~~proceeds from the ~~revolving facility and a $69.7 million delayed draw under~~exercise of stock options. In the ~~term facility that was used to acquire certain assets from YapStone, Inc.~~

~~COVID-19 Pandemic~~

~~Our results of operations for the entire~~ first quarter of 2020, Senior debt principal repayments of $1.0 million and debt modification costs of $2.7 million were ~~not significantly impacted~~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

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

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

Registration Rights Agreement

Credit and Guaranty Agreement

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 ~~COVID-19 pandemic since~~equity interests of Holdings.

The credit facilities under the ~~economic consequences~~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.

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 ~~United States until~~Credit Agreement), at the ~~last half~~option of ~~March 2020. However, starting~~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 ~~mid-March,~~ the ~~pandemic began~~Credit Agreement, in each case, subject to ~~negatively impact our daily consumer~~any applicable cure periods provided therein.

The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment ~~processing volumes~~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 ~~pandemic spread across the United States and restrictive shelter in place requirements were instituted. From mid-March 2020 through the end~~ratio of April 2020, we experienced a significant decline of approximately 35% in consumer payment processing dollar volumes as compared with the comparable period in 2019. In May 2020, as shelter in place restrictions began to be removed, we have experienced a rebound in daily consumer payment processing dollar volumes, with a currently projected decline of 15% to 20% in May 2020 as compared with May 2019.

In mid-April 2020, we implemented several actions to reduce expenses and preserve cash in order to mitigate the financial impact of COVID-19, including the furlough of 47 employees, reduction of 21 full-time contractors, freezing of new hires, and postponement of certain capital expenditures. We continue to closely monitor the effectsconsolidated total debt of the ~~pandemic on our financial results,~~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 ~~will take additional cost-saving actions, if necessary,~~(iii) 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.

Holdings and certain other Loan Parties have previously entered into (A) the Term Loan Agreement and (B) the Senior Credit Agreement, the proceeds from the sale of the Securities and from the Initial Term Loan were used to ~~further mitigate its impact.~~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”).

~~- 34 -~~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.

~~Off-Balance Sheet Arrangements~~

~~Commitments and Contractual Obligations~~

~~See Note 10,~~ ~~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, 2020 or December 31, 2019.

~~Contractual Obligations~~

There have been no significant changes to our contractual obligations and commitments compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2019, except for changes in minimum principal repayments under our Senior Credit Agreement. For an updated schedule of debt repayments, see Note 8, ~~Debt Obligations, to the unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.~~

~~Related Party Transactions~~

~~See Note 11,~~ ~~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, 2020.

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

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, ~~2019.~~2020. Our exposures to market risk have not changed materially since December 31, ~~2019.~~2020.

ITEM 4. CONTROLS AND PROCEDURES

a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized or reported within the time periods specified in SEC rules and regulations and that such information is accumulated and communicated to our management, including our principal executive officer (CEO) and chief financial officer (CFO) and, as appropriate, to allow timely decisions regarding required disclosures.

Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, ~~2020.~~2021. Based on that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures were ~~not~~ effective as of March 31, 2020 due to the material weaknesses in our internal control over financial reporting that were most recently described in the Report of Management on Internal Control Over Financial Reporting in Item 9A, "Controls and Procedures," of our Annual Report on Form 10-K for the year ended December 31, 2019.2021.

b) ~~Remediation of Material Weakness~~

As a result of these weaknesses, in December 2018 the Company hired an experienced Chief Financial Officer with significant public accounting and reporting experience and has hired additional accounting and finance staff with significant public accounting and reporting experience. We also engaged third party consultants to assist in the preparation of our financial statements and SEC disclosures.

Beginning in 2019, we also began to implement additional policies and procedures to enhance our internal controls with respect to timely reconciliations. As we continue to evaluate and improve our internal control over financial reporting, additional measures to remediate the material weaknesses or modifications to certain of the remediation procedures described above may be necessary, including improvements to, or replacement of, the accounting and financial reporting system.

Management is committed to improving our internal control processes and meets with our Audit Committee on a regular basis to monitor the status of remediation activities. Management believes that, once fully completed, the measures described above should remediate the material weaknesses identified and strengthen our internal control over financial reporting.

c) Changes in Internal Control over Financial Reporting

In response to the COVID-19 pandemic, most of our employees have been working remotely since mid-March 2020. We have taken measures to ensure our internal control over financial reporting addressed risks of working in a remote environment. We are continually monitoring and assessing the COVID-19 potential effects on the design and operating effectiveness of our internal control over financial reporting. There were no ~~other~~ changes in the Company’s internal control over financial reporting during the first quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in certain legal proceedings and claims which occur in the normal course of our business. We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

~~As of March 31, 2020, there have been no material changes~~In addition to the ~~risk~~other information set forth in this report, you should carefully consider the factors ~~previously disclosed~~discussed in our Annual Report ~~on Form 10-K, except as follows.~~

~~Our business has been and is likely to continue to be negatively affected by the recent COVID-19 outbreak.~~

The recent outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, continues to adversely affect commercial activity and has contributed to significant decline in economic activity. Starting in mid-March 2020, COVID-19 began to significantly affect our results. The deterioration accelerated toward the end of March and has adversely affected and is likely to have a further negative effect on our near-term financial results due to reduced consumer spending upon which our revenues depend.

~~In particular, we may experience financial losses due to a number of operational factors, including:~~

~~Merchant temporary closures and failures;~~

~~Continued and/or worsening unemployment which may negatively influence consumer spending;~~

~~Third-party disruptions, including potential outages at network providers, and other suppliers; and~~

~~Increased cyber and payment fraud risk.~~

~~These~~under Part I, Item 1A “Risk Factors” because these risk factors may ~~remain prevalent for a significant period of time and may continue to adversely~~ affect our ~~business, results of~~ operations and financial ~~condition even after~~results.

The risks described in the COVID-19 pandemic has subsided. The full effects of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and difficult to predict at this time, including, but not limited to, the duration and spread of the pandemic, its severity, the restrictive actions taken to contain the virus or treat its effects, its effects on our customers and how quickly and to what extent normal economic and operating conditions, operations and demand for our services can resume. It is also likely that the current outbreak or continued spread of COVID-19 will cause an economic slowdown, and it is possible that it could cause a recession. Accordingly, the ultimate effects on our operations, financial condition and cash flows cannot be determined at this time. Nevertheless, despite the uncertainty of the COVID-19 situation, we expect that the COVID-19 pandemic will have an adverse effect on our revenues and financial results for the remainder of 2020.

~~Furthermore, the COVID-19 pandemic and the resulting adverse and unpredictable economic conditions are likely to implicate or exacerbate other risks identified in our~~ Annual Report ~~on Form 10-K for~~are not the ~~year ended December 31, 2019, which in turn could~~only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, ~~results of operations~~ and ~~liquidity.~~operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

N/A

~~- 38 -~~

~~Table of Contents~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

N/A

- 3940 -

Table of Contents

ITEM 6. EXHIBITS


Exhibit				Description

~~Exhibit~~ 3.1				~~Description~~
		Certificate of Designations of Senior Preferred Stock
~~10.1~~4.1				Form of Warrant
10.1				Asset Purchase Agreement by and between MRI Payments LLC, MRI Software LLC, and Priority Real Estate Technology LLC, dated August 31, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed September 1, 2020)

10.1†				Securities Purchase Agreement, dated as of April 27, 2021, among the Company and the Investors named therein
10.2				Sixth Amendment to the Credit and Guaranty Agreement dated as of March 18, 2020 by and among Pipeline Cynergy Holdings LLC, Priority Institutional Partner Services LLC, Priority Payment Systems Holdings LLC, Priority Holdings LLC, the others Guarantors, and Truist Bank (successor by merger to SunTrust Bank), (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed March 23, 2020).
~~10.2~~10.2†				Registration Rights Agreement, dated as of April 27, 2021, among the Company and the Investors, named therein
10.3†				Credit Agreement, dated as of April 27, 2021, among the Loan Parties named therein and Truist Bank
10.3				Consent and Sixth Amendment to Credit and Guaranty Agreement, dated as of March 18, 2020 by and among Priority Holdings LLC, the Guarantors, the Lenders and Goldman Sachs Specialty Group LP (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed March 23, 2020).
~~10.3~~			*†	~~Restricted Stock Unit Award Agreement dated April 1, 2020 between the Registrant and Matthew Kearney, Director~~
~~10.4~~31.1			*†	~~Restricted Stock Unit Award Agreement dated April 1, 2020 between the Registrant and Michael Passilla, Director~~
~~10.5~~	*†	~~Restricted Stock Unit Award Agreement dated April 1, 2020 between the Registrant and Christina Favilla, Director~~
~~10.6~~	*†	~~Restricted Stock Unit Award Agreement dated April 1, 2020 between the Registrant and William Gahan, Director~~
~~31.1~~	*	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
31.2			*	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
32			**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			*	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			*	XBRL Taxonomy Extension Schema Document
101.CAL			*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE			*	XBRL Taxonomy Extension Presentation Linkbase Document
104			*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†				Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

* Filed herewith

** Furnished herewith

† ~~Indicates exhibits that constitute management contracts or compensation plans or arrangements.~~ Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes

to furnish supplemental copies of any of the omitted schedules upon request by the SEC.

- 4041 -

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

PRIORITY TECHNOLOGY HOLDINGS, INC.



May ~~13, 2020~~14, 2021			/s/ THOMAS C. PRIORE Thomas C. Priore Chief Executive Officer and Chairman (Principal Executive Officer)

May ~~13, 2020~~14, 2021			/s/ MICHAEL T. VOLLKOMMER Michael T. Vollkommer Chief Financial Officer (Principal Financial Officer)



Delaware		47-4257046
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2001 Westside Parkway
Suite 155
Alpharetta,	GA	30004
(Address of principal executive offices, including zip code)

(800)		935-5964
(Registrant's phone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)



(in thousands)	March 31, 2020			December 31, 2019
ASSETS
Current Assets:
Cash	$	2,858		$	3,234
Restricted cash	36,873			47,231
Accounts receivable, net of allowance for doubtful accounts of $989 and $803	37,362			37,993
Prepaid expenses and other current assets	3,445			3,897
Current portion of notes receivable	1,266			1,326
Settlement assets	456			533
Total current assets	82,260			94,214

Notes receivable, less current portion	5,382			4,395
Property, equipment, and software, net	24,060			23,518
Goodwill	109,515			109,515
Intangible assets, net	175,303			182,826
Deferred income taxes, net	50,890			49,657
Other non-current assets	509			380
Total assets	$	447,919		$	464,505

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	24,413		$	26,965
Accrued residual commissions	18,326			19,315
Customer deposits and advance payments	3,281			4,928
Current portion of long-term debt	7,866			4,007
Settlement obligations	30,665			37,789
Total current liabilities	84,551			93,004

Long-term debt, net of current portion, discounts and debt issuance costs	483,319			485,578
Other non-current liabilities	6,269			6,612
Total long-term liabilities	489,588			492,190

Total liabilities	574,139			585,194

Commitments and Contingencies (Notes 10 and 11)

Stockholders' deficit:
Preferred stock	—			—
Common stock	68			68
Additional paid-in capital	3,989			3,651
Treasury stock, 451,224 common shares, at cost	(2,388		)	(2,388		)
Accumulated deficit	(133,543		)	(127,674		)
Total Priority Technology Holdings, Inc. stockholders' deficit	(131,874		)	(126,343		)
Non-controlling interest in a subsidiary	5,654			5,654
Total stockholders' deficit	(126,220		)	(120,689		)

Total liabilities and stockholders' deficit	$	447,919		$	464,505



(in thousands, except per share amounts)	Three Months Ended March 31,
	2020			2019

REVENUES	$	96,933		$	87,646

OPERATING EXPENSES:
Costs of services	66,364			60,106
Salary and employee benefits	10,129			10,899
Depreciation and amortization	10,272			8,925
Selling, general and administrative	6,609			6,750
Total operating expenses	93,374			86,680

Income from operations	3,559			966

OTHER INCOME (EXPENSES):
Interest expense	(10,315		)	(9,363		)
Other (expense) income, net	(346		)	227
Total other expenses, net	(10,661		)	(9,136		)

Loss before income taxes	(7,102		)	(8,170		)

Income tax benefit	(1,233		)	(1,724		)

Net loss	$	(5,869	)	$	(6,446	)

Loss per common share:
Basic and diluted	$	(0.09	)	$	(0.10	)

Weighted-average common shares outstanding:
Basic and diluted	67,061			67,164



(in thousands)	As of
	March 31, 2020		December 31, 2019
Settlement Assets:
Card settlements due from merchants, net of estimated losses	$	195	$	446
Card settlements due from processors	261		87
Total settlement assets	$	456	$	533

Settlement Obligations:
Card settlements due to merchants	$	22	$	44
Due to ACH payees (1)	30,643		37,745
Total settlement obligations	$	30,665	$	37,789


(in thousands)	Principal Due
	Senior Credit Agreement				Term Loan Agreement		Total
Twelve-month period ending March 31,	Term		Revolver		Term
2022 (current)	$	24,302	$	0	$	0	$	24,302
2023	250,255		0		0		250,255
2024	0		0		104,547		104,547


Total	$	274,557	$	0	$	104,547	$	379,104



(in thousands)	Three Months Ended
	March 31,
	2020			2019

Current income tax benefit	$	—		$	(103	)
Deferred income tax benefit	(1,699		)	(1,621		)
Provision for DTA valuation allowance	2,006			—
Adjustment for DTA valuation allowance - discrete item	(1,540		)	—
Total income tax benefit	$	(1,233	)	$	(1,724	)



January 1, 2019	—	$	—	67,038	$	67	—	$	—	$	—	$	(94,085	)	$	(94,018	)	$	—
Stock-based compensation	—	—		—	—		—	—		1,160		—			1,160			—
Warrant redemptions (b)	—	—		420	(b)		—	—		(b)		—			—			—
Net loss	—	—		—	—		—	—		—		(6,446		)	(6,446		)	—
Issuance of non-controlling interest (c)	—	—		—	—		—	—		—		—			—			5,654
March 31, 2019	—	$	—	67,458	$	67	—	$	—	$	1,160	$	(100,531	)	$	(99,304	)	$	5,654



	Three Months Ended March 31,
(in thousands except per share amounts)	2020			2019

Basic and Diluted Loss Per Common Share:
Numerator:
Net loss	$	(5,869	)	$	(6,446	)
Less: Income (loss) attributable to non-controlling interests	—			—
Net loss attributable to common stockholders	$	(5,869	)	$	(6,446	)

Denominator:
Weighted-average shares outstanding	67,061			67,164

Basic and Diluted Loss Per Common Share	$	(0.09	)	$	(0.10	)



(in thousands)	Common Stock Equivalents
	March 31, 2020	March 31, 2019

Outstanding warrants on common stock	3,556	3,556
Restricted stock unit awards granted under the 2018 Equity Incentive Plan	395	238
Outstanding stock option awards granted under the 2018 Equity Incentive Plan	1,644	2,047
Restricted stock units granted under the Earnout Incentive Plan	—	95
Total	5,595	5,936