UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

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

For the transition period from to

Commission file number: 001-37872

Priority Technology Holdings, Inc.

(Exact name of registrant as specified in its charter)


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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, par value $0.001

PRTH

Nasdaq Global Market

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 ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


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 ☒

As of ~~November 6, 2020,~~May 7, 2021, a total of ~~67,670,753~~68,103,122 shares of common stock, par value $0.001 per share, were issued and ~~67,219,529~~67,651,898 shares were outstanding.

Priority Technology Holdings, Inc.

Quarterly Report on Form 10-Q

~~September 30, 2020~~March 31, 2021


			Page

Part I.	Financial Information		1
	Item 1.	Financial Statements	1
		Unaudited Condensed Consolidated Balance Sheets as of ~~September~~March ~~30, 2020~~3 1 , 2021 and December 31, ~~2019~~2020	1
		Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 3 1 , 202 1 and ~~Nine~~March ~~Months Ended~~ 3 ~~September~~1 ~~30, 2020 and~~, ~~September~~20 ~~30, 2019~~20	2
		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three M ~~Months~~onths Ended ~~September~~March ~~30, 2020~~3 1 , 202 1 and ~~September~~March ~~30, 2019~~3 1 , 20 20	3
		Notes to Unaudited Condensed Consolidated Financial Statements	54
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3225
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5139
	Item 4.	Controls and Procedures	5139

Part II.	Other Information		5240
	Item 1.	Legal Proceedings	5240
	Item 1A.	Risk Factors	5240
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5240
	Item 3.	Defaults Upon Senior Securities	5340
	Item 4.	Mine Safety Disclosures	5340
	Item 5.	Other Information	5340

	Item 6.	Exhibits	5441

Signatures			5542

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Priority Technology Holdings, Inc.

Condensed Consolidated Balance Sheets


(in thousands, except share data)	(in thousands, except share data)	Unaudited				(in thousands, except share data)	Unaudited
		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash	Cash	$	21,695	$	3,234	Cash	$	5,827	$	9,241
Restricted cash	Restricted cash	37,135		47,231		Restricted cash	58,933		78,879
Accounts receivable, net of allowance for doubtful accounts of $544 and $803		40,122		37,993
Accounts receivable, net of allowance of $374 and $574						Accounts receivable, net of allowance of $374 and $574	50,886		41,321
Prepaid expenses and other current assets	Prepaid expenses and other current assets	3,968		3,897		Prepaid expenses and other current assets	4,083		3,500
Current portion of notes receivable		1,435		1,326
Current portion of notes receivable, net of allowance of $467 and $467						Current portion of notes receivable, net of allowance of $467 and $467	1,829		2,190
Settlement assets	Settlement assets	327		533		Settlement assets	1,220		753
Total current assets	Total current assets	104,682		94,214		Total current assets	122,778		135,884

Notes receivable, less current portion	Notes receivable, less current portion	4,684		4,395		Notes receivable, less current portion	5,084		5,527
Property, equipment, and software, net	Property, equipment, and software, net	23,490		23,518		Property, equipment, and software, net	23,791		22,875
Goodwill	Goodwill	106,832		109,515		Goodwill	106,832		106,832
Intangible assets, net	Intangible assets, net	97,239		182,826		Intangible assets, net	91,062		98,057
Deferred income taxes, net	Deferred income taxes, net	42,962		49,657		Deferred income taxes, net	48,996		46,697
Other non-current assets	Other non-current assets	522		380		Other non-current assets	1,949		1,957
Total assets	Total assets	$	380,411	$	464,505	Total assets	$	400,492	$	417,829

LIABILITIES AND STOCKHOLDERS' DEFICIT	LIABILITIES AND STOCKHOLDERS' DEFICIT					LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable and accrued expenses	Accounts payable and accrued expenses	$	23,744	$	26,965	Accounts payable and accrued expenses	$	29,880	$	29,821
Accrued residual commissions	Accrued residual commissions	22,028		19,315		Accrued residual commissions	30,300		23,824
Customer deposits and advance payments	Customer deposits and advance payments	3,449		4,928		Customer deposits and advance payments	5,488		2,883
Income taxes payable		5,950		0

Current portion of long-term debt	Current portion of long-term debt	15,583		4,007		Current portion of long-term debt	24,302		19,442
Settlement obligations	Settlement obligations	30,288		37,789		Settlement obligations	50,820		72,878
Total current liabilities	Total current liabilities	101,042		93,004		Total current liabilities	140,790		148,848

Long-term debt, net of current portion, discounts and debt issuance costs	Long-term debt, net of current portion, discounts and debt issuance costs	371,206		485,578		Long-term debt, net of current portion, discounts and debt issuance costs	350,667		357,873

Other non-current liabilities	Other non-current liabilities	6,424		6,612		Other non-current liabilities	8,790		9,672
Total long-term liabilities	Total long-term liabilities	377,630		492,190		Total long-term liabilities	359,457		367,545

Total liabilities	Total liabilities	478,672		585,194		Total liabilities	500,247		516,393

Stockholders' deficit:	Stockholders' deficit:					Stockholders' deficit:
Preferred stock - $0.001 par value per share; 100,000,000 shares authorized; 0 issued or outstanding	Preferred stock - $0.001 par value per share; 100,000,000 shares authorized; 0 issued or outstanding	0		0		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; 67,617,561 and 67,512,167 shares issued, respectively; 67,166,337 and 67,060,943 shares outstanding, respectively		68		68
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						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	Additional paid-in capital	5,068		3,651		Additional paid-in capital	7,257		5,769
Treasury stock, 451,224 common shares, at cost	Treasury stock, 451,224 common shares, at cost	(2,388)		(2,388)		Treasury stock, 451,224 common shares, at cost	(2,388)		(2,388)
Accumulated deficit	Accumulated deficit	(101,009)		(127,674)		Accumulated deficit	(104,692)		(102,013)
Total Priority Technology Holdings, Inc. stockholders' deficit		(98,261)		(126,343)
Non-controlling interest in subsidiary		0		5,654

Total stockholders' deficit	Total stockholders' deficit	(98,261)		(120,689)		Total stockholders' deficit	(99,755)		(98,564)

Total liabilities and stockholders' deficit	Total liabilities and stockholders' deficit	$	380,411	$	464,505	Total liabilities and stockholders' deficit	$	400,492	$	417,829

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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
REVENUES $ 108,962 $ 93,883 $ 298,251 $ 273,671
OPERATING EXPENSES:
Costs of services 74,971 63,718 203,733 185,827
Salary and employee benefits 10,010 10,668 29,695 31,923
Depreciation and amortization 10,251 10,077 30,886 28,763
Selling, general and administrative 6,688 6,695 19,305 21,031
Total operating expenses 101,920 91,158 283,619 267,544
Income from operations 7,042 2,725 14,632 6,127
OTHER INCOME (EXPENSES):
Interest expense (13,471) (10,463) (35,454) (30,602)
Debt extinguishment and modification costs (1,523) 0 (1,899) 0
Gain on sale of business 107,239 0 107,239 0
Other income, net 190 158 414 523
Total other income (expenses), net 92,435 (10,305) 70,300 (30,079)
Income (loss) before income taxes 99,477 (7,580) 84,932 (23,952)
Income tax expense (benefit) 13,737 (1,736) 12,919 2,468
Net income (loss) 85,740 (5,844) 72,013 (26,420)
Less net income attributable to redeemable non-controlling interests and redeemed non-controlling interests (45,348) 0 (45,348) 0
Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. $ 40,392 $ (5,844) $ 26,665 $ (26,420)
Income (loss) per common share:
Basic $ 0.60 $ (0.09) $ 0.40 $ (0.39)
Diluted $ 0.60 $ (0.09) $ 0.40 $ (0.39)
Weighted-average common shares and equivalents:
Basic 67,167 67,007 67,114 67,109
Diluted 67,286 67,007 67,131 67,109


(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

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) Nine Months Ended September 30,
2020 2019
Cash flows from operating activities:
Net income (loss) $ 72,013 $ (26,420)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain recognized on sale of business (107,239) 0
Transaction costs upon sale of business (4,372) 0
Depreciation and amortization of assets 30,886 28,763
Equity-classified and liability-classified stock compensation 1,627 3,354
Amortization of debt issuance costs and discounts 1,798 1,250
Deferred income tax expense (benefit) 10,442 (5,376)
Change in allowance for deferred tax assets (3,747) 7,844
Payment-in-kind interest 6,643 3,807
Debt extinguishment and modification costs 1,523 0
Impairment charge for intangible asset 980 0
Other non-cash items, net 211 (157)
Change in operating assets and liabilities, excluding business sale:
Accounts receivable (3,962) (1,840)
Settlement assets and obligations, net (7,295) 6,696
Prepaid expenses and other current assets (296) (810)
Income taxes payable 6,026 0
Notes receivable (398) (376)
Accounts payable and other accrued liabilities 287 (6,091)
Customer deposits and advance payments (1,479) 250
Other assets and liabilities, net (512) (277)
Net cash provided by operating activities 3,136 10,617
Cash flows from investing activities:
Sale of business 179,416 0
Additions to property, equipment and software (6,011) (8,662)
Acquisitions of intangible assets (4,415) (81,777)
Note receivable loan funding 0 (3,000)
Other investing activity 0 (184)
Net cash provided by (used in) investing activities 168,990 (93,623)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issue discount 0 69,650
Repayment of long-term debt (109,505) (2,827)
Debt modification costs (paid) refunded (2,749) 83
Borrowings under revolving credit facility 7,000 14,000
Repayments under revolving credit facility (7,505) (2,500)
Profit distributions to redeemable non-controlling interests of subsidiaries (45,348) 0
Redemption of redeemable non-controlling interest of subsidiary (5,654) 0
Repurchases of common stock 0 (2,388)
Net cash (used in) provided by financing activities (163,761) 76,018
Net change in cash and restricted cash:
Net increase (decrease) in cash and restricted cash 8,365 (6,988)
Cash and restricted cash at beginning of period 50,465 33,831
Cash and restricted cash at end of period $ 58,830 $ 26,843


(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

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~~Table of Contents~~


Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Cash paid for interest	Cash paid for interest	$	26,828	$	25,527	Cash paid for interest	$	6,553	$	8,186

Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Payment-in-kind interest added to principal of debt obligations	Payment-in-kind interest added to principal of debt obligations	$	6,643	$	3,807	Payment-in-kind interest added to principal of debt obligations	$	1,924	$	1,391

Payment of accrued contingent consideration for asset acquisition from offset of account receivable		$	1,686	$	0

Accrued purchases of property, equipment and software		$	0	$	34
Intangible assets acquired by issuing non-controlling interest in a subsidiary		$	0	$	5,654

Reconciliation of cash and restricted cash:	Reconciliation of cash and restricted cash:					Reconciliation of cash and restricted cash:
Cash	Cash	$	21,695	$	4,191	Cash	$	5,827	$	2,858
Restricted cash	Restricted cash	37,135		22,652		Restricted cash	58,933		36,873
Total cash and restricted cash	Total cash and restricted cash	$	58,830	$	26,843	Total cash and restricted cash	$	64,760	$	39,731

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"), 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 that are not an EGC and/or SRC.~~company effective dates.

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Comprehensive Income (Loss)

For the three months ended March 31, 2021 and ~~nine months ended September 30,~~March 31, 2020, ~~and September 30, 2019,~~ the Company had no activities to report as components of other comprehensive income (loss). Therefore, no separate Statement of Comprehensive Income (Loss) was prepared for any reporting period as the Company's net income (loss) from continuing operations comprises all of its comprehensive income (loss).

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, income (loss) before income taxes, net income (loss), stockholders' deficit, or cash flows from operations, investing, or financing activities for any period presented.

~~The Company adopted Accounting Standards Codification ("ASC") 606,~~ ~~Revenue from Contracts with Customers~~, for the 2019 annual reporting period included in its Annual Report on Form 10-K for the year ended December 31, 2019 using the full retrospective transition method. Accordingly, the unaudited condensed consolidated statement of operations for the three months and nine months ended September 30, 2019 presented herein has been recasted to retroactively reflect the provisions of ASC 606. The adoption of ASC 606 had no net effect on the Company's income from operations, income (loss) before income taxes, net income (loss), consolidated balance sheet, or cash flows from operations, investing, or financing activities.

Accounting Policies and New Accounting Standards Adopted

There have been no material changes to the Company's accounting policies as described in its most recent Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. The Company did not adopt any new accounting standards during the three months ~~and nine months~~ ended ~~September 30, 2020,~~March 31, 2021 except for ~~ASU 2018-13, as described below.~~the following:

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

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

~~On January 1, 2020,~~In December 2019, the ~~Company adopted~~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 ~~Financial~~accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in Accounting Standards ~~Board's~~Codification ("~~FASB"~~ASC") ~~disclosure framework project. Certain amendments must be applied prospectively while others are applied on~~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 15,~~ ~~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

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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.

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 ("ASC 842")~~. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. ~~Based on the current expectation~~As an EGC, this standard is effective for the ~~expiration of the~~ Company's ~~EGC status, the Company must adopt this standard no later than the beginning of 2022 for~~ annual and interim reporting ~~periods.~~periods beginning 2022. The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance ~~sheet. The Company~~sheet, but it is ~~still evaluating~~not expected to have a material effect on the ~~potential effects that the adoption of ASC 842 may have on its~~Company's results of ~~operations.~~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. Since the Company ~~was~~is a ~~SRC on November 15, 2019,~~smaller reporting company ("SRC"), the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods.

Goodwill Impairment Testing (ASU 2017-04)

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. Since the Company ~~was~~is a SRC, ~~on November 15, 2019,~~ the Company must adopt this new standard no later than the beginning of 2023 for annual and interim reporting periods. The 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

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periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements, and such impact will be dependent on any share-based payments issued to non-employees.

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

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

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

~~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. ~~SALE OF BUSINESS~~

On September 1, 2020, Priority Real Estate Technology LLC ("PRET"), a majority-owned and consolidated subsidiary of the Company, entered into an asset purchase agreement (the "Agreement") with MRI Payments LLC and MRI Software LLC (together, "MRI" or the buyer) to sell certain assets from PRET's real estate services business. The buyer also agreed to assume certain obligations associated with the assets. The transaction contemplated by the Agreement was completed on September 22, 2020 after receiving regulatory approval. Prior to execution of the Agreement, the buyer was not a related party of PRET or the Company.

The assets covered by the Agreement were substantially the same assets that PRET acquired in March 2019 from YapStone, Inc. and these assets constituted PRET's RentPayment component, which was part of the Integrated Partners reporting unit,

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operating segment and reportable segment. These assets consist of contracts with customers, an assembled workforce, technology-related assets, Internet domains, trade names and trademarks. The buyer also assumed obligations under an in-place and off-balance-sheet operating lease for office space. Since PRET's acquisition of these assets from YapStone, Inc. in March 2019, PRET and the Company have made operational changes that resulted in these assets becoming a business as defined by the provisions of ASU 2017-01, ~~Clarifying the Definition of a Business,~~ ~~before their sale to MRI~~.

~~Proceeds received by PRET were $179.4 million, net of $584,000 for a working capital adjustment. The gain amounted to $107.2 million as follows:~~


~~(in thousands)~~

~~Gross cash consideration from buyer~~	$	~~180,000~~
~~Less working capital adjustment paid in cash~~	~~(584)~~
~~Net proceeds from buyer~~	~~179,416~~

~~Transaction costs incurred~~	~~(5,383)~~
~~Assets sold:~~
~~Intangible assets~~	~~(62,158)~~
~~Other assets sold, net of obligations assumed~~	~~(716)~~
~~Goodwill assigned to business sale~~	~~(2,683)~~
~~Other intangible assets~~	~~(1,237)~~
~~Pre-tax gain on sale of business~~	$	~~107,239~~

PRET is a limited liability company and is a pass-through entity for income tax purposes. Income tax expenses associated with the gain attributable to the stockholders of the Company were estimated to be approximately $12.4 million.

Allocation of net proceeds, after transaction costs, to the PRET members included return of each member's invested capital in PRET and excess proceeds were distributed in accordance with the distribution provisions of the PRET LLC governing agreement. The Company's invested capital amounted to $71.8 million, which included the assets sold, goodwill and other intangible assets. The non-controlling interest's invested capital was $5.7 million. Approximately $51.4 million and $45.1 million of the excess proceeds were distributed to the Company and the non-controlling interests, respectively.

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

~~Operating Lease Obligation~~

The buyer assumed an in-place operating lease in Dallas, Texas which expires on November 1, 2024. The Company has not adopted ASC 842; therefore this lease obligation was not reflected in the Company's balance sheet prior to the assumption by the buyer. The Company has been relieved of minimum lease payment obligations totaling $467,000 for the remainder of the current lease term.

~~Continuing Operations~~

~~Based on historical financial results, the Company does not believe the sale of the RentPayment component represents a strategic shift. Therefore, in accordance with ASC 205-20,~~ ~~Presentation of Financial Statements - Discontinued Operations~~, the Company will not classify or report the business that was sold as discontinued operations in its consolidated financial statements for any reporting period. The Company will continue to serve the rental property market through its ongoing PRET operations.

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~~Pro Forma Information~~

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

(in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenues $ 3,883 $ 3,652 $ 12,118 $ 8,058
Income from operations (1)
$ 307 $ 1,117 $ 1,805 $ 2,586
Net income (2) (3)
$ 259 $ 861 $ 1,765 $ 2,320
Net income attributable to the stockholders of Priority Technology Holdings, Inc. (4)
$ 259 $ 861 $ 1,765 $ 2,320
Income per common share for stockholders of Priority Technology Holdings, Inc. - Basic and Diluted (4)
$ 0 $ 0.01 $ 0.03 $ 0.03

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

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

(3) Pro forma income tax expense based on the following consolidated effective tax (benefit) rates of Priority Technology Holdings, Inc.: 15.5% for third quarter 2020; 22.9% for third quarter 2019; 2.2% for the nine months ended September 30, 2020, and (10.3)% for the nine months ended September 30, 2019. These rates exclude the effect of the $107.2 million gain on the sale recognized during the quarter and nine months ended September 30, 2020.

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

3. 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, 2021 and ~~nine months ended September 30, 2020 and September 30, 2019:~~

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue Type
Merchant card fees $ 102,481 $ 85,719 $ 277,253 $ 249,267
Outsourced services and other services 5,387 7,143 18,143 21,750
Equipment 1,094 1,021 2,855 2,654
Total revenues $ 108,962 $ 93,883 $ 298,251 $ 273,671

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(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

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 Consumer Payments, Commercial Payments, and Integrated 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 and other payment-processing equipment sold to customers in the Company's Consumer 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. 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 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.

Contract Assets and Contract Liabilities

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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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was as follows:

(in thousands)

Consolidated Balance Sheet Location

September 30, 2020

December 31, 2019

(in thousands)

Consolidated Balance Sheet Location

March 31, 2021

December 31, 2020

Liabilities:

Contract liabilities, net (current)

Customer deposits and advance payments

$1,634

$1,912

Contract liabilities, net (current)

Customer deposits and advance payments

$1,162

$1,494

The ~~balance~~balances for the contract liabilities ~~was $1,315,000, $1,738,000,~~were approximately $1.7 million and ~~$1,776,000~~$1.9 million at ~~September 30, June 30,~~March 31, 2020 and ~~January 1,~~December 31, 2019, respectively. The changes in the balances during the three months ended March 31, 2021 and ~~nine months ended September 30,~~March 31, 2020 ~~and September 30, 2019~~ were due to the timing of advance payments received from the customer. Substantially all of these balances are recognized as revenue within twelve months.

Net contract assets were not material for any period presented.

Impairment losses recognized on receivables or contract assets arising from the Company's contracts with customers were not material for the three months ended March 31, 2021 and ~~nine months ended September 30, 2020 and September 30, 2019.~~

March 31, 2020.

~~4. NON-CONTROLLING INTERESTS~~

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

~~YapStone~~

In March 2019, the Company, through one of its subsidiaries, PRET, acquired certain assets and assumed certain related liabilities (the "YapStone net assets") from YapStone, Inc. ("YapStone") under an asset purchase and contribution agreement. The purchase price for the YapStone net assets was $65.0 million in cash plus a non-controlling interest ("NCI") in PRET. The fair value of the NCI was estimated to be approximately $5.7 million. The total purchase price was assigned to customer relationships, except for $1.0 million and $1.2 million which were assigned to a software license agreement and a services agreement, respectively. The $65.0 million of cash was funded from a drawdown of the Senior Credit Facility on a delayed basis as provided for and pursuant to the third amendment thereto executed in December 2018.

During the three months and nine months ended September 30, 2020 and September 30, 2019, 0 earnings from the operations of PRET were attributable to the NCIs pursuant to the PRET operating agreement. However, as disclosed in Note 2, ~~Sale of Business~~, during third quarter 2020, PRET sold assets to a third party that substantially represented the YapStone net assets acquired in March 2019. Based on the PRET operating agreement, the NCIs were attributed with ~~$45.1 million of the gain recognized by PRET for the sale transaction in September 2020. This $45.1 million, along with the~~ $5.7 million carrying value of the NCI issued to YapStone, Inc. in March 2019, were distributed in cash to the PRET NCIs in September 2020. Simultaneous with the cash distributions, all of the NCIs of PRET fully redeemed their interests.

~~Related Party Non-Controlling Interest~~

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

5.3. 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 $~~97.9~~115.4 million and ~~$79.8~~$103.8 million at ~~September 30, 2020~~March 31, 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were as follows:

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(in thousands)	(in thousands)	As of				(in thousands)	March 31, 2021		December 31, 2020
		September 30, 2020		December 31, 2019
Settlement Assets:	Settlement Assets:					Settlement Assets:
Card settlements due from merchants, net of estimated losses	Card settlements due from merchants, net of estimated losses	$	372	$	446	Card settlements due from merchants, net of estimated losses	$	1,065	$	753
Card settlements due (to) from processors		(45)		87
Card settlements due from ISOs						Card settlements due from ISOs	155		0
Total settlement assets	Total settlement assets	$	327	$	533	Total settlement assets	$	1,220	$	753

Settlement Obligations:	Settlement Obligations:					Settlement Obligations:
Card settlements due to merchants		$	2	$	44
Due to ACH payees (1)	Due to ACH payees (1)	30,286		37,745		Due to ACH payees (1)	50,820		72,878
Total settlement obligations	Total settlement obligations	$	30,288	$	37,789	Total settlement obligations	$	50,820	$	72,878

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

6.4. GOODWILL AND OTHER INTANGIBLE ASSETS

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

(in thousands) September 30, 2020 December 31, 2019
Consumer Payments $ 106,832 $ 106,832
Integrated Partners 0 2,683
$ 106,832 $ 109,515
allocated to 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 Consumer Payments reporting unit for the three months ~~and nine months~~ ended ~~September 30, 2020.~~March 31, 2021.

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

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fourth quarter of ~~2020~~2021 using market data and discounted cash flow analysis. The Company concluded there was 0 impairment as of ~~September 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020. As such, there was 0 accumulated impairment loss as of ~~September 30, 2020~~March 31, 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, intangible assets consisted of the following:

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(in thousands)	(in thousands)	September 30, 2020		December 31, 2019		(in thousands)	March 31, 2021		December 31, 2020

Other intangible assets:	Other intangible assets:					Other intangible assets:
Merchant portfolios	Merchant portfolios	$	48,472	$	114,554	Merchant portfolios	$	55,816	$	55,816
Customer relationships	Customer relationships	39,770		40,740		Customer relationships	40,740		40,740
Residual buyouts	Residual buyouts	113,979		112,731		Residual buyouts	116,112		116,112
Non-compete agreements	Non-compete agreements	3,390		3,390		Non-compete agreements	3,390		3,390
Trade names	Trade names	2,700		2,870		Trade names	2,870		2,870
Technology	Technology	13,880		15,390		Technology	14,390		14,390
ISO relationships	ISO relationships	15,200		15,200		ISO relationships	15,200		15,200
Total gross carrying value	Total gross carrying value	237,391		304,875		Total gross carrying value	248,518		248,518

Less accumulated amortization:	Less accumulated amortization:					Less accumulated amortization:
Merchant portfolios	Merchant portfolios	(16,036)		(12,655)		Merchant portfolios	(22,028)		(19,471)
Customer relationships	Customer relationships	(28,454)		(25,836)		Customer relationships	(31,071)		(30,267)
Residual buyouts	Residual buyouts	(69,373)		(59,796)		Residual buyouts	(75,975)		(72,659)
Non-compete agreements	Non-compete agreements	(3,390)		(3,390)		Non-compete agreements	(3,390)		(3,390)
Trade names	Trade names	(1,421)		(1,273)		Trade names	(1,711)		(1,651)
Technology	Technology	(13,417)		(12,758)		Technology	(13,975)		(13,951)
ISO relationships	ISO relationships	(7,081)		(6,341)		ISO relationships	(7,553)		(7,319)
Total accumulated amortization	Total accumulated amortization	(139,172)		(122,049)		Total accumulated amortization	(155,703)		(148,708)

Accumulated allowance for impairment	Accumulated allowance for impairment	(980)		0		Accumulated allowance for impairment	(1,753)		(1,753)

Net carrying value	Net carrying value	$	97,239	$	182,826	Net carrying value	$	91,062	$	98,057

See Note 119, Commitments and Contingencies, for information about an acquired merchant portfolio with a contingent purchase price.

Amortization expense for finite-lived intangible assets was ~~$8.3~~$7.0 million and ~~$25.2~~$8.5 million for the three months ended March 31, 2021 and ~~nine months ended September 30,~~March 31, 2020, ~~respectively, and $8.4 million and $24.0 million for the three months and nine months ended September 30, 2019,~~ respectively. Amortization expense for future periods could differ due to new intangible asset acquisitions, changes in useful lives of existing intangible assets, and other relevant events or circumstances.

The Company tests intangible assets for impairment when events occur or circumstances indicate that the fair value of an intangible asset or group of intangible assets may be impaired. In the Company's Consumer Payments segment, a residual buyout intangible asset with a net carrying value of ~~$2.4~~$2.2 million was deemed to be ~~partially impaired.~~impaired at December 31, 2020. The fair value of this intangible asset was estimated to be ~~$1.4~~approximately $0.5 million, ~~thus~~ resulting in the recognition of an impairment charge of $1.0 million during the third quarter of 2020 and this amount is included in SG&A expenses on the Company's unaudited condensed consolidated statement of operations for the three months and nine months ended September 30, 2020.$1.8 million. This impairment was the result of diminished cash flows generated by the merchant portfolio. Many of the Company's merchant customers in its Consumer Payments reportable segment are associated with ISOs, and these ISOs typically have a right to receive commissions (residuals) from the Company based upon a percentage of the net revenue generated from merchant transactions. The Company may decide to pay an ISO an agreed-upon amount in exchange for the ISO's surrender of its right to receive future commissions on the merchant portfolio. The amount that the Company pays for these residual buyouts is capitalized and subsequently amortized over the expected life of the underlying merchant relationship.

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

March 31, 2021.

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7.5. 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 follows:


(in thousands)	(in thousands)	September 30, 2020		December 31, 2019		(in thousands)	March 31, 2021		December 31, 2020

Furniture and fixtures	Furniture and fixtures	$	2,795	$	2,787	Furniture and fixtures	$	2,795	$	2,795
Equipment	Equipment	10,216		10,101		Equipment	11,442		10,216
Computer software	Computer software	42,871		37,440		Computer software	46,065		44,320
Leasehold improvements	Leasehold improvements	6,250		6,367		Leasehold improvements	6,250		6,250
		62,132		56,695			66,552		63,581
Less accumulated depreciation	Less accumulated depreciation	(38,642)		(33,177)		Less accumulated depreciation	(42,761)		(40,706)
Property, equipment, and software, net	Property, equipment, and software, net	$	23,490	$	23,518	Property, equipment, and software, net	$	23,791	$	22,875

Depreciation expense for property, equipment, and software totaled ~~$2.0~~$2.1 million and ~~$5.7~~$1.8 million for the three months ended March 31, 2021 and ~~nine months ended September 30,~~ 2020, ~~respectively, and $1.7 million and $4.7 million for the three months and nine months ended September 30, 2019,~~ respectively.

8.6. 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 ~~September 30, 2020~~March 31, 2021 or December 31, ~~2019~~2020 consisted of the following:

(in thousands) September 30, 2020 December 31, 2019
Accounts payable $ 4,794 $ 6,968
Accrued network fees $ 7,813 $ 6,950


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


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

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9.7. DEBT OBLIGATIONS

Outstanding debt obligations as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 consisted of the following:


(in thousands)	(in thousands)	September 30, 2020		December 31, 2019		(in thousands)	March 31, 2021		December 31, 2020

Senior Credit Agreement:	Senior Credit Agreement:					Senior Credit Agreement:
Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00% beginning March 18, 2020) plus 6.50% and 5.00% at September 30, 2020 and December 31, 2019, respectively (actual rate of 7.50% and 6.71% at September 30, 2020 and December 31, 2019, respectively)		$	280,419	$	388,837
Revolving credit facility - $25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50% and 5.00% at September 30, 2020 and December 31, 2019, respectively (actual rate of 6.65% and 6.71% at September 30, 2020 and December 31, 2019, respectively)		11,000		11,500
Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.00% plus an applicable margin (actual rate of 12.50% and 10.50% at September 30, 2020 and December 31, 2019, respectively)		100,693		95,142
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)						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)						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)						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	Total debt obligations	392,112		495,479		Total debt obligations	379,104		382,040
Less: current portion of long-term debt	Less: current portion of long-term debt	(15,583)		(4,007)		Less: current portion of long-term debt	(24,302)		(19,442)
Less: unamortized debt discounts and deferred financing costs	Less: unamortized debt discounts and deferred financing costs	(5,323)		(5,894)		Less: unamortized debt discounts and deferred financing costs	(4,135)		(4,725)

Long-term debt, net	Long-term debt, net	$	371,206	$	485,578	Long-term debt, net	$	350,667	$	357,873

Substantially all of the Company's assets are pledged as collateral under the credit agreements. The 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 September 30, 2020 and December 31, 2019, approximately $14.0 million and $13.5 million, respectively, was available under the revolving credit facility. Undrawn commitments for letters of credit under the revolving credit facility were not material at September 30, 2020 and December 31, 2019.

Senior Credit Agreement

Outstanding borrowings under ~~the Senior~~that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Truist (the “Senior Credit Agreement”) accrue interest using either a base rate (as defined) or a LIBOR rate plus an applicable margin, or percentage per annum, as provided in the amended credit agreement. For the term loan facility of ~~the~~our Senior Credit ~~Facility,~~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.

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~~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.

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~~Changes in Applicable Interest Rate Margins~~

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The interest rate margins for the Senior Credit Agreement and the GS Credit Agreement increased incrementally by 1.0% on June 16, 2020, and then increased incrementally by 0.5% on each of the dates July 16, August 15, and September 14, 2020 because the Borrowers did not make a permitted accelerated principal payment of at least $100 million under the term loan facility of the Senior Credit Agreement on or before those dates as described in the Sixth Amendment (the "$100 million principal prepayment"). The additional interest expense incurred by the Borrowers due to the increases in the applicable margin for the revolving credit facility under the Senior Credit Agreement was paid in cash and such increases for the term facility of the Senior Credit Facility and the GS Credit Agreement were accounted for as PIK interest at the election of the Borrowers.

On September 25, 2020, the Borrowers made the $100 million principal prepayment plus an additional $6.5 million principal prepayment to reduce the outstanding indebtedness under the term loan facility of the Senior Credit Agreement. This $106.5 million prepayment resulted in simultaneous reductions in the applicable interest rate margins under the Senior Credit Agreement and the GS Credit Agreement, which prospectively eliminates and reverses the applicable margin increases described in the preceding paragraph.

Under the terms of the Senior Credit Agreement and the GS Credit Agreement, the future applicable interest rate margins may vary based on the Borrowers' future Total Net Leverage Ratio (as defined) in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowings. The Senior Credit Agreement and the GS Credit Agreement also have incremental margins that would apply to the future applicable interest rates if the Borrowers are deemed to be in violation of the terms of the credit agreement.

Contractual Maturities

Based on terms and conditions existing at ~~September 30, 2020,~~March 31, 2021, future minimum principal payments for long-term debt are as follows:


(in thousands)	(in thousands)	Principal Due								(in thousands)	Principal Due
		Senior Credit Agreement				GS Credit Agreement		Total			Senior Credit Agreement				Term Loan Agreement		Total
Twelve-month period ending September 30,		Term		Revolver		Term

2021 (current)		$	15,583	$	0	$	0	$	15,583
2022		34,023		11,000		0		45,023
Twelve-month period ending March 31,										Twelve-month period ending March 31,	Term		Revolver		Term		Total
2022 (current)										2022 (current)	$	24,302	$	0	$	0
2023	2023	230,813		0		0		230,813		2023	250,255		0		0		250,255
2024	2024	0		0		100,693		100,693		2024	0		0		104,547		104,547

Total	Total	$	280,419	$	11,000	$	100,693	$	392,112	Total	$	274,557	$	0	$	104,547	$	379,104

Additionally, the Company may be obligated to make certain additional mandatory prepayments after the end of each year based on excess cash flow, as defined in the Senior Credit Agreement. No such prepayments were ~~due~~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~~between March ~~18, 2021 and 2.0% for certain prepayments occurring between March~~

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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.

PIK Interest

~~PIK Interest~~

The principal amount borrowed and outstanding under the ~~GS Credit~~Term Loan Agreement was $80.0 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. Included in the outstanding ~~principal~~obligation balance at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was accumulated PIK interest of ~~$20.7~~$24.5 million and ~~$15.1~~$22.6 million, ~~respectively. The principal amount of the GS Credit Agreement increased for PIK interest by $2.3 million and $5.6 million for the three months and nine months ended September 30, 2020,~~ respectively. For the three months ended March 31, 2021 and ~~nine months ended September 30, 2019,~~March 31, 2020, PIK interest added ~~$1.3~~$1.9 million and ~~$3.8~~$1.4 million, respectively, to the ~~principal of~~obligation balance under the ~~GS Credit~~Term Loan Agreement.

During the three months and nine months ended September 30, 2020, PIK interest of approximately $0.9 million and $1.1 million, respectively, was added to the principal of the term facility of the Senior Credit Agreement. These amounts were composed entirely of the additional interest expense that resulted from the increases in the applicable margins that were previously described.

Interest Expense and Amortization of Deferred Loan Costs and Discounts

Interest expense, including fees for undrawn amounts under the revolving credit facility and amortization of deferred financing costs and debt discounts, was ~~$13.5~~$9.2 million and ~~$35.5~~$10.3 million for the three months ended March 31, 2021 and ~~nine months ended September 30,~~March 31, 2020, ~~respectively, and $10.5 million and $30.6 million for the three months and nine months ended September 30, 2019,~~ respectively.Interest expense for the nine months ended September 30, 2019 also included a $0.4 million fee for the $70.0 million delayed principal draw under December 2018 amendment to the Senior Credit Agreement, which occurred during the first quarter of 2019.

~~For the Sixth Amendment, $2.7 million of lender fees were capitalized in first quarter of 2020 and this amount was added to then-existing unamortized loan costs and discount of $5.6 million.~~ Interest expense increased due to the amortization of deferred financing costs and debt discounts by ~~$0.7~~$0.6 million and ~~$1.8~~$0.5 million for the three months ended March 31, 2021 and ~~nine months ended September 30,~~March 31, 2020, ~~respectively, and by $0.4 million and $1.2 million for the three months and nine months ended September 30, 2019,~~ respectively.

~~The effective interest rates, which includes PIK interest~~For the Sixth Amendment, executed in the first quarter of 2020, $2.7 million of lender fees were deferred and ~~amortization of deferred financing costs and debt discounts, for the term debt under the Senior Credit Agreement and the GS Credit Agreement were as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
Term Debt 2020 2019 2020 2019
Senior Credit Agreement 9.87 % 7.92 % 8.57 % 7.50 %
GS Credit Agreement 14.62 % 10.90 % 12.99 % 10.80 %

~~Debt Extinguishment Costs and Debt Modification Costs~~

~~The $106.5 million principal repayment made in September 2020 for the term facility of the Senior Credit Agreement was deemed~~added 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~~then-existing unamortized loan costs and ~~discount in the amount of $1.5 million was removed and expensed during the three months and nine months ended September 30, 2020.~~

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discount. Costs that the Company incurs for debt modification that are not eligible for deferral and subsequent amortization as interest expense are reported as debt modification costs on the Company's consolidated statement of operations. Approximately $0.4 million of such costs were expensed in connection with the Sixth Amendment during the first quarter of 2020.

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.

Covenants

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

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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 ~~7.75:~~7.71:1.00 at ~~September 30, 2020.~~March 31, 2021. As of ~~September 30, 2020,~~March 31, 2021, the Company remained in compliance with the covenants.

Refinancing in April 2021

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

~~10.~~8. INCOME TAXES

~~Income Tax Expense (Benefit)~~

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

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Current income tax expense $ 6,115 $ 18 $ 6,224 $ 0
Deferred income tax expense (benefit) 14,011 (1,655) 10,442 (5,376)
Increase (decrease) in DTA valuation allowance 1,171 (108) 5,353 5,197
(Decrease) increase in DTA valuation allowance - discrete item (7,560) 9 (9,100) 2,647
Total income tax expense (benefit) $ 13,737 $ (1,736) $ 12,919 $ 2,468

~~DTA = Deferred income tax asset~~

The Company's effective income tax rate ~~(benefit)~~ for the three months ~~and nine months~~ ended ~~September 30, 2020~~March 31, 2021 was ~~13.8% and 15.2%, respectively, and was 22.9% and (10.3)%~~45.4%. Our effective income tax rate for the three months ~~and nine months~~ ended ~~September 30, 2019, respectively. Approximately $12.4 million~~March 31, 2021 differed from the U.S. statutory rate primarily as a result of changes to our valuation allowance for interest limited under section 163(j) of the Internal Revenue Code.

The Company's effective income tax ~~expense~~rate for the three months ~~and nine~~ended March 31, 2020 was 17.4%. Our effective income tax rate for the three months ended ~~September 30,~~March 31, 2020 ~~was attributable~~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 ~~gain on~~Internal Revenue Code and related favorable interest limitation provisions of the ~~business sale (see Note 2,~~ ~~Sale of Business~~Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

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.

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

Adjustments to the valuation allowance are a component of income tax expense (benefit) in the Company's unaudited condensed consolidated statements of operations. An increase in the valuation allowance for deferred income taxes will increase income tax expense (or reduce an otherwise income tax benefit), and a decrease in the valuation allowance will decrease income tax expense (or increase an otherwise income tax benefit).

Based on management’s assessment, as of the first quarter of 2021, the Company ~~decreased the~~continues to record a full valuation allowance ~~in the three months and nine months ended September 30, 2020 by $6.4 million and $3.7~~ ~~million, respectively,~~ ~~for the business~~against non-deductible interest expense carryover comprised of (i) discrete decreases of $7.6 million and $9.1 million for the three months and nine months ended September 30, 2020, respectively, associated with the 2018 and 2019 business interest deferred income tax assets as a result of the CARES Act and expected utilization of these assets in 2020 and (ii) increases of $1.2 million and $5.4 million for the three months and nine months ended September 30, 2020, respectively, associated with the 2020 debt refinancing that results in excess business interest in future years.

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

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 September 30, 2020, the net amount of our unrecognized tax benefits was not material.

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

~~11.~~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 September 30, 2020 and December~~Based on existing contracts in place at March 31, ~~2019,~~2021, the Company is committed to pay minimum processing fees under these agreements of ~~$14.0~~approximately $14.8 million ~~through the end of 2021.~~in 2021 and $7.8 million in both 2022 and 2023.

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Commitment to Lend

See Note ~~12,~~10, Related Party Transactions, for information on a loan commitment extended by the Company to another entity.

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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 2 agreements with another entity. These 2 related agreements 1) transfer to the Company certain perpetual rights to a merchant portfolio and 2) form a 5-year reseller arrangement whereby the Company will offer and sell to its customer base certain on-line services to be fulfilled by the other entity. No cash consideration was paid to, or received from, the other entity at execution of either agreement. Subsequent cash payments from the Company to the other entity for the merchant portfolio rights are determined based on a combination of both: 1) the actual financial performance of the acquired merchant portfolio rights and 2) actual sales and variable wholesale costs for the on-line services sold by the Company under the reseller arrangement. Amounts subsequently paid to the other entity are accounted for as either 1) standard costs of the services sold by the Company under the 5-year reseller agreement or 2) consideration for the merchant portfolio rights. Amounts paid that are accounted for as consideration for the merchant portfolio rights are capitalized and amortized over the estimated useful life of the merchant portfolio rights. As of September 30, 2020 and December 31, 2019, $3.8 million and $1.1 million, respectively, was capitalized as cost for the merchant portfolio. The capitalized cost, which is in our Consumer Payments reportable segment, is being amortized using an accelerated method. At this time, the Company cannot reasonably estimate the allocation of future cash payments. However, under the 2 contracts the Company does not anticipate any net losses.

On March 15, 2019, a subsidiary of the Company paid $15.2 million cash to acquire certain residual portfolio rights. This asset acquisition became part of the Company's Consumer Payments reportable segment. Of the $15.2 million, $5.0 million was funded from a delayed draw down of the Senior Credit Facility. Additionally, a $10.0 million draw was made against the revolving credit facility under the Senior Credit Facility and cash on hand was used to fund the remaining amount. The initial purchase price is subject to an increase of up to $6.4 million in accordance with the terms of the agreement between the Company and the sellers. As of ~~September 30, 2020,~~March 31, 2021, an additional ~~$2.1~~$4.3 million of the $6.4 million total contingent consideration has been paid to the ~~seller. Additional purchase price is accounted for when payment to~~seller, while the ~~seller becomes probable and is added to~~remaining $2.1 million will be payable in the ~~amortizable carrying value~~first quarter of the asset. During the second quarter 2020, the Company and the seller amended the agreement to provide the Company with additional guaranteed returns from the acquired residual portfolio rights, and the additional consideration from the Company to the seller of $0.8 million was added to the amortizable carrying value of the asset.

~~Contingent Consideration for Business Combinations~~

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

2022 if certain criteria are achieved.

Legal Proceedings

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.

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Concentration of Risks

The Company's revenue is substantially derived from processing Visa and 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.

~~12.~~10. RELATED PARTY TRANSACTIONS

Commitment to Lend and Warrant to Acquire

~~On May 22,~~

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 ~~September 30, 2020~~March 31, 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 $56,000 and $166,000 during the three months and nine months ended September 30, 2020, respectively. Interest income for the comparable periods in 2019 was $46,000 and $66,000, respectively. The Company also received a warrant to purchase a ~~NCI~~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

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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 undistributed earnings generated by the eTab and Cumulus assets that are attributable to the holders of the preferred equity interests are reported by the Company as a form of NCI classified as mezzanine equity on the Company's consolidated balance sheet until $4.5 million and the preferred yield have been distributed to the holders of the preferred equity interests. Subsequent changes, if material, in the value of the NCI will be reported as

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an equity transaction between the Company's consolidated retained earnings (accumulated deficit) and any carrying value of the NCI in mezzanine equity. Such amounts were not material to the Company's results of operations, financial position, or cash flows for the period covering February 1, 2019 (date the assets were contributed to the Company) through June 30 2020, and therefore no recognition of the NCI was reflected in the Company's consolidated financial statements. For the ~~nine months ended September 30,~~period from July 1, 2020 ~~$200,000~~through December 31, 2020, a total of $250,000 of PHOT's earnings were attributable to the NCIs of PHOT, and this same amount was also distributed in cash to the NCIs during the same reporting period.

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

Equity-Method Investment

During the first quarter of 2020, the Company wrote off its $0.2 million carrying value in an equity-method investment. This loss is reported as a component of Other ~~(expense) income,~~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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~~13.~~11. RECONCILIATION OF STOCKHOLDERS' DEFICIT AND NON-CONTROLLING INTERESTS

The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of ~~September 30, 2020~~March 31, 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 ~~NCI:~~non-controlling interest:

(in thousands) Additional Paid-In Capital Accumulated (Deficit) Total Priority Technology Holdings, Inc. Stockholders' (Deficit) NCI (c)
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 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
Equity-classified stock compensation — — — — — — 580 — 580 —
Issue shares of common stock — — 53 — — — — — — —
Net loss — — — — — — — (7,858) (7,858) 0
Distributions to non-controlling interests — — — — — — — — — —
June 30, 2020 0 0 67,114 68 451 (2,388) 4,569 (141,401) (139,152) 5,654
Equity-based stock compensation — — — — — — 499 — 499 —
Issue shares of common stock — — 53 — — — — — — —
Net income — — — — — — — 40,392 40,392 45,348
Redemption of non-controlling interest — — — — — — — — — (5,654)
Distributions to non-controlling interests — — — — — — — — — (45,348)
September 30, 2020 0 $ 0 67,167 $ 68 451 $ (2,388) $ 5,068 $ (101,009) $ (98,261) $ 0


(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) NCI (c)
Preferred Stock Common Stock Treasury Stock (a)
Shares Amount Shares Amount Shares Amount
January 1, 2019 0 $ 0 67,038 $ 67 0 $ 0 $ 0 $ (94,085) $ (94,018) $ 0
Equity-classified stock compensation — — — — — — 1,160 — 1,160 —
Warrant redemptions (b) — — 420 (b) — — (b) — — —
Net loss — — — — — — — (6,446) (6,446) —
Issuance of NCI (c) — — — — — — — — 0 5,654
March 31, 2019 0 0 67,458 67 0 0 1,160 (100,531) (99,304) 5,654
Equity-classified stock compensation — — — — — — 1,023 — 1,023 —
Repurchases of common stock — — (451) — 451 (2,388) — — (2,388) —
Net loss — — — — — — — (14,130) (14,130) —
June 30, 2019 0 0 67,007 67 451 (2,388) 2,183 (114,661) (114,799) 5,654
Equity-classified stock compensation — — — — — — 1,171 — 1,171 —
Net loss — — — — — — — (5,844) (5,844) —
September 30, 2019 0 $ 0 67,007 $ 67 451 $ (2,388) $ 3,354 $ (120,505) $ (119,472) $ 5,654

(a)At cost

~~(a) At cost~~

(b) ~~Par value of the common shares issued in connection with the warrant exchange rounds to less than 1 dollar.~~ In August 2018, the Company was informed by Nasdaq that it intended to delist the Company's outstanding warrants and units due to an insufficient number of round lot holders for the public warrants. The Company subsequently filed a Registration Statement on Form S-4 with the SEC for the purpose of offering holders of the Company's outstanding 5,310,109 public warrants and 421,107 private warrants the opportunity to exchange each warrant for 0.192 shares of the Company's common stock. The exchange offer expired in February 2019 resulting in a portion of the warrants being tendered in exchange for approximately 420,000 shares of the Company's common stock plus cash in lieu of fractional shares. Nasdaq proceeded to delist the remaining outstanding warrants and units, which were comprised of one share of common stock and one warrant, from The Nasdaq Global Market at the open of business on March 6, 2019. The delisting of the remaining outstanding warrants and units had no impact on the Company's financial statements.

~~(c)~~ Prior to third quarter 2020, this balance was related to the acquisition of certain assets from YapStone, Inc. by the Company's PRET subsidiary during 2019. 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. ~~See Note 4,~~ ~~Non-Controlling Interests~~. For all reporting periods since PRET's inception through June 30, 2020, no earnings or losses were attributable to the NCIs of PRET. During the three months ended September 30, 2020, a gain on a sale of assets from PRET ~~(see Note 2,~~ ~~Sale of Business~~) resulted in the attribution of a total of $45.1 million to the NCIs of PRET. This amount was also distributed in a final redemption of the NCIs' interests in PRET during the three months ended September 30, ~~2020.~~2020.

~~During the nine months ended September 30, 2020, a total of $200,000 of PHOT's earnings were attributable to the NCIs of PHOT. See Note 12,~~ ~~Related Party Transactions. This amount was also distributed in cash to the NCIs of PHOT during the same period.~~

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~~14.~~12. STOCK-BASED COMPENSATION

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 for equity-classified stock compensation ~~by plan~~under the 2018 Equity Incentive Plan was ~~as follows:~~

(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
2018 Equity Incentive Plan $ 499 $ 322 $ 1,417 $ 2,087
2014 Management Incentive Plan 0 849 0 1,267
Total $ 499 $ 1,171 $ 1,417 $ 3,354

~~In addition, the Company recognized compensation expense of $102,000~~$0.6 million and ~~$210,000 during~~$0.3 million for the three months ended March 31, 2021 and ~~nine~~March 31, 2020, respectively.

During the three months ended ~~September 30, 2020, respectively, related to~~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.~~grant-date, to an equity-classified award when the restricted stock units were granted.

Income tax benefit for the stock-based compensation was not material for the three months ended March 31, 2021 and ~~nine months ended September 30, 2020 and September 30, 2019.~~

March 31, 2020.

~~15.~~

13. FAIR VALUE

Fair Value Measurements

The estimated fair value of remaining contingent consideration related to two business combinations were each based on a weighted payout probability for the contingent consideration at the original measurement date and each subsequent remeasurement date, which fall within Level 3 on the fair value hierarchy since these recurring fair value measurements are based on significant unobservable inputs. The probabilities used to estimate the payout probability of the contingent consideration for the two business combinations ranged between 15% and 35% for one and between 5% and 80% for the other. The estimated weighted-average probability for payment of the contingent consideration was 21% for one and 70% for the other at September 30, 2020At March 31, 2021 and December 31, 2019, and 26% and 70%, respectively, at September 30, 2019. These weighted average probabilities are based on present value of estimated projections for financial metrics for the remaining earnout periods.

~~At September 30,~~ 2020, the remaining maximum amounts of contingent consideration for these two business combinations were $500,000 for one and $250,000 for the other, and the measured fair values were $170,000 and $190,000, respectively. TheseCompany no longer has any fair value estimates ~~did not change during~~that are required to be remeasured at the ~~three months and nine months ended September 30, 2020 and September 30, 2019.~~

There were no transfers among the fair value levels during the three months and nine months ended September 30, 2020 and September 30, 2019. There were no unrealized gains or losses included in other comprehensive income for 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

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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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was approximately ~~$6.1~~$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.

Debt Obligations

The Borrower's outstanding debt obligations (see Note 9,7, Debt Obligations) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was estimated to be approximately ~~$273~~$275.2 million and ~~$381~~$278.0 million, respectively. The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of ~~$280.4~~$274.6 million and ~~$388.8~~$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 a market for these debt obligations.

~~16.~~14. SEGMENT INFORMATION

At ~~September 30, 2020,~~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. ~~See Note 2,~~ ~~Sale of Business, and Note 6,~~ ~~Goodwill and Other Intangible Assets~~.

Corporate includes costs of corporate functions and shared services not allocated to ~~our~~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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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)	(in thousands)	Three Months Ended				Nine Months Ended				(in thousands)	Three Months Ended March 31,
		September 30,				September 30,					2021		2020
		2020		2019		2020		2019
Revenue:
Revenues:										Revenues:
Consumer Payments	Consumer Payments	$	99,301	$	82,742	$	267,039	$	243,205	Consumer Payments	$	108,393	$	86,031
Commercial Payments	Commercial Payments	4,995		6,338		17,017		19,492		Commercial Payments	3,500		6,368
Integrated Partners	Integrated Partners	4,666		4,803		14,195		10,974		Integrated Partners	1,404		4,534
Consolidated Revenue		$	108,962	$	93,883	$	298,251	$	273,671
Consolidated revenues										Consolidated revenues	$	113,297	$	96,933

Income (loss) from operations:	Income (loss) from operations:									Income (loss) from operations:
Consumer Payments	Consumer Payments	$	11,098	$	7,214	$	25,520	$	22,296	Consumer Payments	$	13,363	$	7,152
Commercial Payments	Commercial Payments	169		(382)		1,408		(1,115)		Commercial Payments	(409)		764
Integrated Partners	Integrated Partners	253		1,003		1,466		1,342		Integrated Partners	92		368
Corporate	Corporate	(4,478)		(5,110)		(13,762)		(16,396)		Corporate	(8,519)		(4,725)
Consolidated income from operations	Consolidated income from operations	$	7,042	$	2,725	$	14,632	$	6,127	Consolidated income from operations	$	4,527	$	3,559

Depreciation and amortization:	Depreciation and amortization:									Depreciation and amortization:
Consumer Payments	Consumer Payments	$	8,481	$	8,302	$	25,721	$	24,215	Consumer Payments	$	8,579	$	8,583
Commercial Payments	Commercial Payments	77		69		231		248		Commercial Payments	74		76
Integrated Partners	Integrated Partners	1,403		1,299		4,048		3,086		Integrated Partners	129		1,311
Corporate	Corporate	290		407		886		1,214		Corporate	288		302
Consolidated depreciation and amortization	Consolidated depreciation and amortization	$	10,251	$	10,077	$	30,886	$	28,763	Consolidated depreciation and amortization	$	9,070	$	10,272

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

(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Total income from operations of reportable segments $ 11,520 $ 7,835 $ 28,394 $ 22,523
Corporate (4,478) (5,110) (13,762) (16,396)
Interest expense (13,471) (10,463) (35,454) (30,602)
Debt modification and extinguishment costs (1,523) 0 (1,899) 0
Gain on sale of business 107,239 0 107,239 0
Other income, net 190 158 414 523
Income tax (expense) benefit (13,737) 1,736 (12,919) (2,468)
Net income (loss) 85,740 (5,844) 72,013 (26,420)
Net income attributable to non-controlling interests (45,348) 0 (45,348) 0
Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. $ 40,392 $ (5,844) $ 26,665 $ (26,420)


(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)

Substantially all revenue is generated in the United States.

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For the three months ~~and nine months~~ ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~, no one merchant customer accounted for 10% or more of the Company's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other referral partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can potentially move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. ~~Merchants~~For the three months ended March 31, 2021 and March 31, 2020, merchants referred by one ISO organization with potential merchant portability rights generated revenue within the Company's Consumer Payments reportable segment that represented approximately ~~21%~~23.3% and ~~20.8%~~20.1%, respectively, of the Company's consolidated ~~revenues for the three months and nine months ended September 30, 2020, respectively, and 18.4% and 17.9% for the three months and nine months ended September 30, 2019, respectively.~~revenues.

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

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

~~17. INCOME (LOSS)~~15. LOSS PER COMMON SHARE

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

(in thousands except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income (loss) $ 85,740 $ (5,844) $ 72,013 $ (26,420)
Less: Earnings attributable to non-controlling interests (45,348) 0 (45,348) 0
Net income (loss) attributable to common stock holders of Priority Technology Holdings, Inc. $ 40,392 $ (5,844) $ 26,665 $ (26,420)
Basic:
Weighted-average common stock shares outstanding 67,167 67,007 67,114 67,109
Basic earnings (loss) per common share: $ 0.60 $ (0.09) $ 0.40 $ (0.39)
Fully Diluted:
Weighted-average common stock shares outstanding 67,167 67,007 67,114 67,109
Weighted-average dilutive common stock equivalents 119 0 17 0
Weighted-average common shares for fully-diluted earnings (loss) per share 67,286 67,007 67,131 67,109
Fully-diluted earnings (loss) per share $ 0.60 $ (0.09) $ 0.40 $ (0.39)


(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)

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

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(in thousands) Common Stock Equivalents at
September 30, 2020 September 30, 2019
Outstanding warrants on common stock (1) 3,557 3,557
Outstanding options and warrants issued to adviser (1) 600 600
Restricted stock unit awards (2) 127 202
Outstanding stock option awards (2) 1,593 1,794
Liability-based restricted stock units (2) 238 0
Restricted stock units granted under the Earnout Incentive Plan (3) 0 95
Earnout incentive awards under the Earnout Incentive Plan (3) 0 9,705
Total 6,115 15,953
Potentially anti-dilutive securities that were excluded from loss per common share for the three months ended March 31, 2021 and March 31, 2020 that could be dilutive in future periods were as follows:


(in thousands)	Common Stock Equivalents at
		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

(1)

~~(1)~~ Issued by M.I. Acquisitions, Inc. prior to July 25, 2018

(2)Granted under the 2018 Equity Incentive Plan

~~(3)~~

16. SUBSEQUENT EVENTS

Merger Agreement

On March 5,2021, we announced that we had entered into an Agreement and Plan ~~expired December 31, 2019~~of Merger (the "Merger Agreement") with 0Finxera 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.

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 discussion and analysis of our results of operations for the three months ended ~~September 30, 2020~~March 31, 2021 (or ~~third~~first quarter ~~2020)~~2021) compared to the three months ended ~~September 30, 2019 (or third quarter 2019), and the nine months ended September 30,~~March 31, 2020 (or ~~2020 period) compared to the nine months ended September 30, 2019 (or 2019 period)~~first quarter 2020). We have derived this data, except key indicators for merchant bankcard processing dollar values and transaction volumes, from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our latest Annual Report on Form 10-K.

Three Months Ended ~~September 30, 2020~~March 31, 2021 Compared to the Three Months Ended ~~September 30, 2019~~March 31, 2020

(dollars in thousands) Three Months Ended September 30,
2020 2019 Change % Change
REVENUES $ 108,962 $ 93,883 $ 15,079 16.1 %
OPERATING EXPENSES:
Costs of services 74,971 63,718 11,253 17.7 %
Salary and employee benefits 10,010 10,668 (658) (6.2) %
Depreciation and amortization 10,251 10,077 174 1.7 %
Selling, general and administrative 6,688 6,695 (7) (0.1) %
Total operating expenses 101,920 91,158 10,762 11.8 %
Income from operations 7,042 2,725 4,317 158.4 %
OTHER INCOME (EXPENSES):
Interest expense (13,471) (10,463) (3,008) 28.7 %
Debt extinguishment costs (1,523) — (1,523) nm
Gain on sale of business 107,239 — 107,239 nm
Other income, net 190 158 32 20.3 %
Total other income (expenses), net 92,435 (10,305) 102,740 nm
Income (loss) before income taxes 99,477 (7,580) 107,057 nm
Income tax expense (benefit) 13,737 (1,736) 15,473 nm
Net income (loss) 85,740 (5,844) 91,584 nm
Less net income attributable to non-controlling interests (45,348) — (45,348) nm
Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. $ 40,392 $ (5,844) $ 46,236 nm

~~nm = not meaningful~~

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

(dollars in thousands) Nine Months Ended September 30,
2020 2019 Change % Change
REVENUES $ 298,251 $ 273,671 $ 24,580 9.0 %
OPERATING EXPENSES:
Costs of services 203,733 185,827 17,906 9.6 %
Salary and employee benefits 29,695 31,923 (2,228) (7.0) %
Depreciation and amortization 30,886 28,763 2,123 7.4 %
Selling, general and administrative 19,305 21,031 (1,726) (8.2) %
Total operating expenses 283,619 267,544 16,075 6.0 %
Income from operations 14,632 6,127 8,505 138.8 %
OTHER INCOME (EXPENSES):
Interest expense (35,454) (30,602) (4,852) 15.9 %
Debt modification and extinguishment costs (1,899) — (1,899) nm
Gain on sale of business 107,239 — 107,239 nm
Other income, net 414 523 (109) (20.8) %
Total other income (expenses), net 70,300 (30,079) 100,379 nm
Income (loss) before income taxes 84,932 (23,952) 108,884 nm
Income tax (benefit) expense 12,919 2,468 10,451 nm
Net income (loss) 72,013 (26,420) 98,433 nm
Less net income attributable to non-controlling interests (45,348) — (45,348) nm
Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc. $ 26,665 $ (26,420) $ 53,085 nm

~~nm = not meaningful~~


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




OPERATING EXPENSES:
Costs of services	81,863		66,364		15,499		23.4	%

Salary and employee benefits	9,548		10,129		(581)		(5.7)	%
Depreciation and amortization	9,070		10,272		(1,202)		(11.7)	%
Selling, general and administrative	8,289		6,609		1,680		25.4	%



Total operating expenses	108,770		93,374		15,396		16.5	%

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

OTHER EXPENSES:

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




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




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

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The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended ~~September 30, 2020~~March 31, 2021 compared to the three months ended ~~September 30, 2019:~~March 31, 2020:

(in thousands) Three Months Ended September 30,
2020 2019 Change % Change
Consumer Payments:
Revenue $ 99,301 $ 82,742 $ 16,559 20.0 %
Operating expenses 88,203 75,528 12,675 16.8 %
Income from operations $ 11,098 $ 7,214 $ 3,884 53.8 %
Operating margin 11.2 % 8.7 %
Depreciation and amortization $ 8,481 $ 8,302 $ 179 2.2 %
Key Indicators:
Merchant bankcard processing dollar value $ 11,235,068 $ 10,566,501 $ 668,567 6.3 %
Merchant bankcard transaction volume 122,623 131,646 (9,023) (6.9) %
Commercial Payments:
Revenue $ 4,995 $ 6,338 $ (1,343) (21.2) %
Operating expenses 4,826 6,720 (1,894) (28.2) %
Income (loss) from operations $ 169 $ (382) $ 551 (144.2) %
Operating margin 3.4 % (6.0) %
Depreciation and amortization $ 77 $ 69 $ 8 11.6 %
Key Indicators:
Merchant bankcard processing dollar value $ 58,304 $ 92,290 $ (33,986) (36.8) %
Merchant bankcard transaction volume 24 26 (2) (7.7) %
Integrated Partners:
Revenue $ 4,666 $ 4,803 $ (137) (2.9) %
Operating expenses 4,413 3,800 613 16.1 %
Income from operations $ 253 $ 1,003 $ (750) (74.8) %
Operating margin 5.4 % 20.9 %
Depreciation and amortization $ 1,403 $ 1,299 $ 104 8.0 %
Key Indicators:
Merchant bankcard processing dollar value $ 105,537 $ 119,747 $ (14,210) (11.9) %
Merchant bankcard transaction volume 371 421 (50) (11.9) %
Income from operations of reportable segments $ 11,520 $ 7,835 $ 3,685 47.0 %
Less: Corporate expense (4,478) (5,110) 632 (12.4) %
Consolidated income from operations $ 7,042 $ 2,725 $ 4,317 158.4 %
Corporate depreciation and amortization $ 290 $ 407 $ (117) (28.7) %
Key indicators:
Merchant bankcard processing dollar value $ 11,398,909 $ 10,778,538 $ 620,371 5.8 %
Merchant bankcard transaction volume 123,018 132,093 (9,075) (6.9) %


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

(in thousands) Nine Months Ended September 30,
2020 2019 Change % Change
Consumer Payments:
Revenue $ 267,039 $ 243,205 $ 23,834 9.8 %
Operating expenses 241,519 220,909 20,610 9.3 %
Income from operations $ 25,520 $ 22,296 $ 3,224 14.5 %
Operating margin 9.6 % 9.2 %
Depreciation and amortization $ 25,721 $ 24,215 $ 1,506 6.2 %
Key Indicators:
Merchant bankcard processing dollar value $ 30,632,724 $ 31,551,405 $ (918,681) (2.9) %
Merchant bankcard transaction volume 334,896 382,676 (47,780) (12.5) %
Commercial Payments:
Revenue $ 17,017 $ 19,492 $ (2,475) (12.7) %
Operating expenses 15,609 20,607 (4,998) (24.3) %
Income (loss) from operations $ 1,408 $ (1,115) $ 2,523 (226.3) %
Operating margin 8.3 % (5.7) %
Depreciation and amortization $ 231 $ 248 $ (17) (6.9) %
Key Indicators:
Merchant bankcard processing dollar value $ 195,229 $ 236,716 $ (41,487) (17.5) %
Merchant bankcard transaction volume 70 84 (14) (16.7) %
Integrated Partners:
Revenue $ 14,195 $ 10,974 $ 3,221 29.4 %
Operating expenses 12,729 9,632 3,097 32.2 %
Income from operations $ 1,466 $ 1,342 $ 124 9.2 %
Operating margin 10.3 % 12.2 %
Depreciation and amortization $ 4,048 $ 3,086 $ 962 31.2 %
Key Indicators:
Merchant bankcard processing dollar value $ 352,144 $ 259,894 $ 92,250 35.5 %
Merchant bankcard transaction volume 1,207 913 294 32.2 %
Income from operations of reportable segments $ 28,394 $ 22,523 $ 5,871 26.1 %
Less: Corporate expense (13,762) (16,396) 2,634 (16.1) %
Consolidated income from operations $ 14,632 $ 6,127 $ 8,505 138.8 %
Corporate depreciation and amortization $ 886 $ 1,214 $ (328) (27.0) %
Key indicators:
Merchant bankcard processing dollar value $ 31,180,097 $ 32,048,015 $ (867,918) (2.7) %
Merchant bankcard transaction volume 336,173 383,673 (47,500) (12.4) %

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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, ~~continues to~~ adversely ~~affect~~affected commercial activity and ~~has~~ contributed to a significant decline in economic activity in ~~2020 compared to 2019.~~2020.

Starting in mid-March 2020 through April 2020, COVID-19 had a significant negative affect on our results. This impact was evident in a ~~significant~~ decline in merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020. In May 2020, as shelter in place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return and revenue growth was supplemented by the acceleration of certain specialized product offerings and ecommerce payment transactions. ~~As a result, we experienced consolidated revenue growth of 10.6% and 0.2% in~~This recovery momentum continued through the ~~first and~~ second ~~quarters~~half of 2020 ~~respectively. Within the second~~and first quarter of 2020 we experienced a trough revenue decline of 11.7% in April with accelerating revenue performance of 1.7% growth in May and 10.8% revenue growth in June as compared with the comparable months in 2019. This momentum continued to accelerate in the third quarter of 2020 where we experienced revenue growth of 16.1% over the third quarter of 2019.2021.

~~Beginning in late summer and continuing into autumn, the level of new COVID-19 cases began to increase again in the United States, with certain states impacted more than others.~~ While there continues to be considerable uncertainty regarding the future economic impacts of ~~this current surge of~~ the pandemic, our ~~October 2020~~ operating results ~~remained consistent with~~reflect a recovery from the ~~third quarter 2020 results.~~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 ~~September 30, 2020~~March 31, 2021 Compared to Three Months Ended ~~September 30, 2019~~March 31, 2020

Consolidated revenue

Our consolidated revenue in ~~third~~first quarter ~~2020~~2021 of ~~$109.0~~$113.3 million increased by ~~$15.1~~$16.4 million, or ~~16.1%~~16.9%, from revenue in ~~third~~first quarter ~~2019~~2020 of ~~$93.9~~$96.9 million. Revenue growth of ~~$16.6~~$22.4 million in our Consumer Payments segment was partially offset by revenue declines of ~~$1.3~~$2.9 million and ~~$0.1~~$3.1 million in our Commercial Payments and Integrated Partners segments, respectively.

Revenue in Consumer Payments segment

Consumer payments revenue in ~~third~~first quarter ~~2020~~2021 of ~~$99.3~~$108.4 million increased ~~$16.6~~$22.4 million, or ~~20.0%~~26.0%, compared to revenue in ~~third~~first quarter ~~2019~~2020 of ~~$82.7~~$86.0 million. This increase was driven by ~~$8.1~~$9.7 million, or ~~806.8%~~372.1%, revenue growth from high-margin specialized ecommerce merchants, and ~~higher overall average~~$12.7 million, or 15.2%, revenue ~~per processing dollar value.~~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 ~~third~~first quarter of ~~2020~~2021 of ~~$11.2~~$11.9 billion increased by ~~$668.6 million,~~$1.5 billion, or ~~6.3%~~14.3%, as compared with ~~$10.6~~$10.4 billion in the ~~third~~first quarter of ~~2019.~~2020. Merchant bankcard transactions of ~~122.6~~127.5 million in the ~~third~~first quarter of ~~2020 declined~~2021 increased by ~~6.9%~~6.7%, as compared with ~~131.6~~119.4 million in the ~~third~~first quarter of ~~2019. However, our merchant volume mix drove a 14.2% higher average~~2020. Average ticket of ~~$91.62~~$93.12 in ~~the third~~first quarter ~~of 2020,~~2021 increased 7.1%, as compared with ~~$80.26~~$86.97 in ~~the third~~first quarter ~~of 2019. Current~~2020. COVID-19 pandemic economic factors have impacted ~~the~~ merchant volume mix ~~including shifts~~and spending trends. Following the pandemic declaration in ~~payment transaction activity among certain vertical industries, spending trends related~~March 2020, consumers began to ~~the COVID-19 pandemic that appear to have resulted in consumers conducting~~conduct fewer payment transactions at higher average ~~transaction values,~~tickets, and ~~an increase in~~ card-not-present ~~transactions.~~transactions increased. Card-not-present volume generally offers more favorable pricing to us than other types of transactions. In the first quarter 2021, we experienced growth in both payment transactions and average ticket. The trend of new merchant boarding remains within our historical range of 4,500 to 5,000 new merchants per month. During ~~the third~~first quarter ~~of 2020,~~2021, our monthly average of new merchants boarded was ~~4,638~~4,874 compared with ~~4,774~~5,139 in ~~the third~~first quarter ~~of 2019.~~

2020.

Revenue in Commercial Payments segment

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Commercial Payments revenue in ~~third~~first quarter ~~2020~~2021 of ~~$5.0~~$3.5 million decreased by ~~$1.3~~$2.9 million, or ~~21.2%~~45.0%, compared to revenue in ~~third~~first quarter ~~2019~~2020 of ~~$6.3~~$6.4 million. Revenue in this segment is derived primarily from ~~our~~the accounts payable automated solutions business and from our curated managed services business.

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Revenue from ~~our~~the accounts payable automated solutions business in ~~third~~first quarter ~~2020~~2021 of ~~$1.5~~$1.7 million increased $0.1 million, or ~~6.9%~~5.3%, from ~~$1.4~~$1.6 million in ~~third~~first quarter ~~2019.~~2020. This increase was due to increased business from existing customers. Revenue from our curated managed services business in ~~third~~first quarter ~~2020~~2021 of ~~$3.5~~$1.8 million decreased by ~~$1.4~~$3.0 million, or ~~29.3%~~61.8%, from revenue in ~~third~~first quarter ~~2019~~2020 of ~~$4.9~~$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.~~

conditions and subsequent changes in the customer’s business model.

Revenue in Integrated Partners segment

Integrated Partners revenue in ~~third~~first quarter ~~2020~~2021 of ~~$4.7~~$1.4 million decreased by ~~$0.1~~$3.1 million, or ~~2.9%~~69.0%, compared to revenue in ~~third~~first quarter ~~2019~~2020 of ~~$4.8~~$4.5 million. Priority Real Estate Technology, LLC ("PRET") comprised ~~$4.1~~$0.8 million and ~~$4.2~~$4.0 million of this segment's revenue in ~~third~~first quarter 2021 and first quarter 2020, ~~and third quarter 2019,~~ respectively. Through September 22, 2020, PRET iswas comprised of ~~the~~our RentPayment business ~~primarily assets acquired from YapStone, Inc. in March 2019,~~ and our ~~RadPad/~~Landlord Station business. ~~The~~ RentPayment, ~~business,~~ which was sold inon September 22, 2020, generated revenue of ~~$3.9~~$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 ~~third~~first quarter ~~of 2020 and $3.7 million in the third quarter of 2019. Revenue from PRET’s RadPad/Landlord Station,~~2020. Priority PayRight Health Solutions ("PayRight") and Priority Hospitality Technology ("PHOT") comprise the remainder of this segment's revenue.

~~As disclosed in Note 2,~~ ~~Sale of Business~~, to the unaudited condensed consolidated financial statements, in September 2020 we sold the RentPayment business. Simultaneously with this sale, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services to the sold business, and offer us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer. The RentPayment business sale will impact the trend of future results of Integrated Partners.

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

~~Consolidated revenue~~

Our consolidated revenue in the first nine months of 2020 of $298.3 million increased by $24.6 million, or 9.0%, from revenue in the first nine months of 2019 of $273.7 million. Revenue growth of $23.8 million in our Consumer Payments segment and $3.2 million in our Integrated Partners segments was partially offset by a decline of $2.5 million in our Commercial Payments segment.

~~Revenue in Consumer Payments segment~~

Consumer Payments revenue in the first nine months of 2020 of $267.0 million increased $23.8 million, or 9.8%, compared to revenue in the first nine months of 2019 of $243.2 million. This increase was driven by $11.6 million, or 199.4%, revenue growth from high margin specialized ecommerce merchants, and higher overall average revenue per processing dollar value.

Merchant bankcard processing dollar value in the first nine months of 2020 of $30.6 billion decreased by $918.7 million, or 2.9%, as compared with $31.6 billion in the first nine months of 2019. Merchant bankcard transactions of 334.9 million in the first nine months of 2020 declined 12.5%, as compared with 382.7 million in the first nine months of 2019. However, our merchant volume mix drove a 10.9% higher average ticket of $91.47 in the first nine months of 2020, as compared with $82.45 in the first nine months of 2019. Current economic factors have impacted the merchant volume mix, including shifts in payment transaction activity among certain vertical industries, spending trends related to the COVID-19 pandemic that appear to have resulted in consumers conducting fewer payment transactions at higher average transaction values, and an increase in card-not-present transactions. Card-not-present volume generally offers more favorable pricing to us than other types of transactions. The trend of new merchant boarding remains within our historical range of 4,500 to 5,000 new merchants per

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

~~Revenue in Commercial Payments segment~~

Commercial Payments revenue in the first nine months of 2020 of $17.0 million decreased by $2.5 million, or 12.7%, compared to revenue in the first nine months of 2019 of $19.5 million. The increase in revenues from our accounts payable automated solutions services were offset by a decrease in revenues from our curated managed services programs.

Revenue from our accounts payable automated solutions business in the first nine months of 2020 of $4.5 million increased $0.6 million, or 14.8%, compared to revenue in the first nine months of 2019 of $3.9 million. This increase was due to increased business from existing customers. Revenue from our curated managed services business in the first nine months of 2019 of $12.5 million decreased by $3.1 million, or 19.6%, compared to revenue in the first nine months of 2019 of $15.6 million. This decrease was driven by a decline and third quarter 2020 curtailment of a customer’s merchant financing program in response to the COVID related economic conditions.

~~Revenue in Integrated Partners segment~~

Integrated Partners revenue in the first nine months of 2020 of $14.2 million increased by $3.2 million, or 29.4%, compared to revenue in the first nine months of 2019 of $11.0 million. PRET comprised $12.6 million and $9.5 million of this segment's revenue in the first nine months of 2020 and the first nine months of 2019, respectively. The RentPayment business, which was formed upon the March 2019 asset acquisition from YapStone, Inc., generated revenue of $12.1 million in the first nine months of 2020 and $8.1 million in the first nine months of 2019. Revenue from PRET’s RadPad/Landlord Station, Priority PayRight Health Solutions ("PayRight") and PHOT comprise the remainder of this segment's revenue.

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

Consolidated Operating expenses

Three Months Ended ~~September 30, 2020~~March 31, 2021 Compared to Three Months Ended ~~September 30, 2019~~March 31, 2020

Our consolidated operating expenses in ~~third~~first quarter ~~2020~~2021 of ~~$101.9~~$108.8 million increased ~~$10.8~~$15.4 million, or ~~11.8%~~16.5%, from consolidated operating expenses in ~~third~~first quarter ~~2019~~2020 of ~~$91.2~~$93.4 million. This overall increase was driven by an increase in costs of services of ~~$11.3~~$15.5 million, or ~~17.7%~~23.4%, resulting from higher revenues in ~~third~~first quarter ~~2020.~~2021. Depreciation and amortization expense of ~~$10.3~~$9.1 million ~~increased slightly~~decreased by ~~$0.2~~$1.2 million, or ~~1.7%~~11.7%, in ~~third~~first quarter ~~2020.~~2021. Salary and employee benefits expenses of ~~$10.0~~$9.5 million decreased ~~$0.7~~$0.6 million, or ~~6.2%~~5.7%, in ~~third~~first quarter ~~2020~~2021 driven by lower ~~headcount in 2020.~~comparative headcount. Selling, general and administrative expenses ("SG&A") of $6.7 million in third quarter 2020 approximated $6.7 million in third quarter 2019. Decreases in office and travel-related costs due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment, was offset by a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment.

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

~~Our consolidated operating expenses in first nine months of 2020 of $283.6~~$8.3 million increased ~~$16.1~~$1.7 million, or 6.0%, from consolidated operating expenses in third quarter 2019 of $267.5 million. This overall increase was driven by an increase in costs of services of $17.9 million, or 9.6%, resulting from higher revenues in first nine months of 2020. Depreciation and amortization expense of $30.9 million increased by $2.1 million, or 7.4%,25.4% in the first ~~nine months~~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, ~~due to higher intangible amortization~~Corporate SG&A included $0.5 million of professional fees and expenses incurred in connection with the ~~Consumer Payments~~March 2020 amendment of the debt facility, and Integrated Partners ~~segments. Salary and employee benefits expenses~~SG&A included $0.9 million of ~~$29.7 million decreased $2.2 million, or 7.0%, in first nine months of 2020 driven by lower headcount in 2020. SG&A of $19.3~~

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million decreased $1.7 million, or 8.2%, in first nine months of 2019 driven by decreases in office and travel-related costs due to the COVID-19 pandemic, lower outside professional fees due to in-sourcing of certain services, and an overall focus on cost containment. These reductions were partially offset by a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment during the first nine months of 2020.

acquisition-related transition services.

Income (loss) from operations

Three Months Ended ~~September 30, 2020~~March 31, 2021 Compared to Three Months Ended ~~September 30, 2019~~March 31, 2020

Consolidated income from operations in ~~third~~first quarter ~~2020~~2021 of ~~$7.0~~$4.5 million increased by ~~$4.3~~$1.0 million, or ~~158.4%~~27.2%, from ~~$2.7~~$3.6 million in ~~third~~first quarter ~~2019. Our consolidated operating margin for third quarter 2020 was 6.5% compared to 2.9% for third quarter 2019.~~2020. This ~~margin~~ increase was the result of lower depreciation and amortization expense of $1.2 million, lower salary and employee benefits expenses of ~~$0.7~~$0.6 million, ~~due to headcount reductions,~~ and higher revenues less costs of services of ~~$3.8~~$0.9 million. These favorable changes for ~~third~~first quarter ~~2020~~2021 were partially offset by higher ~~depreciation~~SG&A of $1.7 million, driven by the $2.2 million increase in professional fees and ~~amortization expense of $0.2 million and a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment.~~other expenses described above under Consolidated Operating Expenses.

Our Consumer Payments segment contributed ~~$11.1~~$13.4 million in income from operations for ~~third~~first quarter ~~2020,~~2021, an increase of ~~$3.9~~$6.2 million, or ~~53.8%~~86.8%, from $7.2 million ~~for third~~in first quarter ~~2019.~~2020. The main driver of this ~~change~~increase was ~~an improved operating margin of 11.2% for third quarter 2020 compared to 8.7% for the third quarter of 2019 which reflected~~ higher revenue less costs of services of ~~$4.2~~$5.5 million. Growth in higher-margin specialty ecommerce transactions and the increase in the average ticket, both previously discussed, were the main drivers of the improved operating margin for third quarter 2020. Income from operations also benefited from a ~~$0.7~~$0.5 million decrease in SG&A and a $0.2 million decrease in salary and employee ~~benefits expenses due to lower headcount.~~benefits.

Our Commercial Payments segment ~~earned income from operations of $0.2 million for third quarter 2020 compared to~~had a loss from operations of $0.4 million for ~~third~~first quarter ~~2019.~~2021 compared to income from operations of $0.8 million for first quarter 2020. This ~~improvement~~decline was largely driven by ~~a $0.2 million decrease in salaries and employee benefits expenses due to~~ lower headcount and a $0.5 million decrease in SG&A expenses. Included in SG&A expenses for third quarter 2019 were certain one-time operational losses of $0.5 million which were substantially recovered in third quarter 2020.

Our Integrated Partners segment earned income from operations of $0.3 million for third quarter 2020, a decrease of $0.8 million compared to $1.0 million of income from operations for third quarter 2019. The overall decrease was caused by a $0.2 million decrease in revenues less costs of services and a $0.6 million increase in SG&A expenses primarily related to transition services provided by YapStone, Inc. in connection with the assets acquired in March 2019. These transition services were $1.0 million in third quarter 2020 and $0.4 million in third quarter 2019. Operating results for third quarter 2020 and third quarter 2019 included depreciation and amortization expense of $1.4 million and $1.3 million, respectively. These factors were partially offset by a $0.2 million decrease in salary and employee benefit expenses.

Corporate expenses were $4.5 million for third quarter 2020, a decrease of $0.6 million, or 12.4%, from expenses of $5.1 million for third quarter 2019. Salaries and employee benefits increased $0.4 million due to higher incentive compensation accruals, SG&A expenses declined $0.9 million, and depreciation and amortization expense decreased $0.1 million. Included in SG&A in third quarter 2020 are expenses we deem to be non-recurring in nature of $0.6 million, offset by litigation settlement income of $0.8 million, and in the third quarter 2019 are non-recurring expenses of $0.9 million, slightly offset by litigation settlement income of $0.1 million.

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

Consolidated income from operations in the first nine months of 2020 of $14.6 million increased by $8.5 million, or 138.8%, from $6.1 million for the first nine months of 2019. Our consolidated operating margin for the first nine months of 2020 was 4.9% compared to 2.2% for the first nine months of 2019. This margin increase was the result of higher revenues less costs of services of ~~$6.7~~$1.4 million, ~~lower salary and employee benefits expenses of $2.2 million, and lower SG&A expenses of $1.7 million, partially~~resulting from the revenue decline in our curated managed services, slightly offset by ~~higher depreciation and amortization expense of $2.1 million.~~

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Our Consumer Payments segment contributed $25.5 million of income from operations for the first nine months of 2020, an increase of $3.2 million, or 14.5%, from the $22.3 million for the first nine months of 2019. This increase was the result of higher revenue less costs of services of $3.6 million and an improved operating margin of 9.6% in the 2020 period from 9.2% in the 2019 period. The overall improvement in the 2020 period was also the result of a ~~$1.7 million~~net decrease in salary and employee ~~benefit expenses due to lower headcount. The improvement was partially offset by a $1.5 million increase in depreciation~~benefits and ~~amortization expense and a $1.0 million write-down in~~ SG~~&A for the carrying value of an intangible asset.~~

Our Commercial Payments segment earned income from operations of $1.4 million for the first nine months of 2020 compared to a loss from operations of $1.1 million for the first nine months of 2019. This improvement was driven by a $0.5 million improvement in revenues less costs of services, a $0.5 million decrease in salaries and employee benefits expenses due to lower headcount, and a $1.5 million decrease in SG&A expenses. The decrease in SG&A expenses was driven by reduced travel and trade show expenses due to the COVID-19 pandemic. Also included in SG&A expenses for the 2019 period were certain one-time operational losses of $0.5 million which were substantially recovered in the 2020 period.

Our Integrated Partners segment contributed $1.5 million of income from operations for the first nine months of 2020, an increase of $0.1 million compared to $1.3 million in the first nine months of 2019. The increase was due to a $2.5 million increase in revenues less costs of services and a $0.3 million decrease in salary and employee benefit expenses, largely offset by $1.7 million increase in SG&A expenses and a $1.0 million increase in depreciation and amortization expense. The increase in SG&A expenses primarily related to transition services provided by YapStone, Inc. in connection with the assets acquired in March 2019. These transition services were $2.8 million in first nine months of 2020 and $1.2 million in first nine months of 2019. The increase in depreciation and amortization expense was due to amortization of the intangible assets acquired in March 2019 from YapStone, Inc.

Corporate expenses were $13.8 million for the first nine months of 2020, a decrease of $2.6 million, or 16.1%, from expenses of $16.4 million for the first nine months of 2019. Salaries and employee benefits increased $0.2 million, SG&A expenses declined $2.5 million, and depreciation and amortization expense decreased $0.3 million. Included in SG&A in the first nine months of 2020 are expenses we deem to be non-recurring in nature of $1.5 million, offset by litigation settlement income of $0.8 million, and in the third quarter 2019 are non-recurring expenses of $2.8 million.

~~Interest expense~~

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

For third quarter 2020, interest expense increased by $3.0 million, or 28.7%, to $13.5 million from $10.5 million in third quarter 2019. The additional expense was due to increases in the applicable margins on the Senior Credit Agreement and the GS Credit Agreement that resulted from the Sixth Amendment in March 2020. For third quarter 2020, the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit agreement were 9.87% and 14.62%, respectively, compared to 7.92% and 10.90%, respectively, for third quarter 2019.

For the first nine months of 2020, interest expense increased $4.9 million, or 15.9%, to $35.5 million from $30.6 million in the first nine months of 2019. The additional expense was due to the increases in the applicable margins noted above, along with higher outstanding borrowings driven by draws on the Senior Credit Agreement in March 2019 and draws on the revolving credit facility. For the first nine months of 2020, the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit Agreement were 8.57% and 12.99%, respectively, compared to 7.50% and 10.80% for the first nine months of 2019.

As a result of the $106.5 million principal pay down that we made in late September 2020 to reduce our outstanding indebtedness under the term facility of our Senior Credit Agreement and the related partial write off of unamortized deferred loans costs and discounts associated with the principal pay down, the applicable margins on the Senior Credit Agreement and the GS Credit Agreement are expected to decrease. Based on applicable margins and LIBOR rate in effect on September 30, 2020, we expect the effective interest rates on the term facility of our Senior Credit Agreement and GS Credit Agreement to be 8.2% and 12.8%, respectively, for the foreseeable future.&A.

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~~Debt extinguishment~~Our Integrated Partners segment earned income from operations of $0.1 million for first quarter 2021, a decrease of $0.3 million compared to $0.4 million of income from operations for first quarter 2020. The decrease was driven by the September 2020 sale of PRET’s RentPayment business. Revenues less costs of services decreased by $3.2 million, which was largely offset by decreases in SG&A of $1.2 million, business depreciation and ~~modification costs~~amortization of $1.2 million and salary and employee benefits of $0.6 million.

~~As noted above, during September 2020 we wrote off unamortized deferred debt costs and discount of $1.5~~Corporate expenses were $8.5 million ~~associated with the $106.5 million principal prepayment~~ for ~~the term facility under our Senior Credit Agreement. In~~ first quarter ~~2020, we expensed $0.4~~2021, an increase of $3.8 million from expenses of ~~third-party costs related~~$4.7 million for first quarter 2020. This increase was driven by a $3.1 million increase in professional fees and expenses described above under Consolidated Operating Expenses. Salaries and employee benefits increased $0.6 million largely due to ~~the Sixth Amendment to the Senior Credit Agreement and the GS Credit Agreement.~~higher incentive compensation accruals.

~~Gain on sale of business~~Interest expense

~~As disclosed~~Interest expense in ~~Note 2,~~ ~~Sale of Business~~the first quarter 2021 decreased by $1.1 million, or 11.1%, ~~to the unaudited condensed consolidated financial statements, during late~~from $10.3 million in first quarter 2020. This decline was driven by lower outstanding debt. In September 2020, ~~our consolidated PRET subsidiary sold~~proceeds from the RentPayment business, which is substantially all of the assets acquired from YapStone, Inc. in March 2019. Based on efforts and changes made by us since the March 2019 acquisition of these assets, the assets constituted a business, as defined by GAAP, when sold in September 2020 for $179.4 million, net of a working capital adjustment. The sale ~~price does not contain any contingent components. After removing the carrying values of the disposed business and incurring costs related~~were used to the transaction, PRET recognized a pre-tax gain of $107.2 million. PRET had non-controlling interests ("NCIs"), and based on the cash waterfall provisions in PRET's operating agreement, the NCIs were entitled to $45.1repay $106.5 million of Senior indebtedness. During the ~~$107.2 million pre-tax gain, which is included in Net Income Attributable to Non-Controlling Interests on our consolidated statement~~third and fourth quarters of ~~operations for the three months and nine months ended September 30, 2020. The $45.1 million was distributed in cash to the NCIs, and the $45.1~~2020, $14.5 million of ~~payments along with the $5.7 million redemption payment made to one of the NCIs, resulted in the full redemption of all NCIs of PRET.~~outstanding revolving credit was repaid.

Interest expense includes cash interest, payment-in-kind interest, and amortization of deferred financing costs and debt discounts. During the first quarters of 2021 and 2020, interest expense was comprised of:


(dollars in thousands)	Three Months Ended March 31,
	2021		2020
Cash	$	6,553	$	8,186
Payment-in-kind	1,924		1,391
Amortization and other	691		738
	$	9,168	$	10,315

Income taxes

We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets. ASC 740, Income Taxes ("("ASC 740"), requires that all sources of future taxable income be considered in making this determination. The Tax Cuts and Jobs Act of 2017 amended section 163(j) of the Internal Revenue Code. Section 163(j), as amended, limits the business interest deduction to 30% of adjusted taxable income ("ATI"). For taxable years through 2021, the calculation of ATI closely aligns with earnings before interest, taxes, depreciation and amortization ("EBITDA"). Commencing in 2022, the ATI limitation more closely aligns with earnings before interest and taxes ("EBIT"), without adjusting for depreciation and amortization. Any business interest in excess of the annual limitation is carried forward indefinitely. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which among other provisions, provides for the increase of the 163(j) ATI limitation from 30% to 50% for tax years 2019 and 2020.

With respect to recording a deferred tax benefit for the carryforward of business interest expense, GAAP applies a "more likely than not" threshold for assessing recoverability. ~~Adjustments~~Based on management’s assessment, as of the first quarter of 2021 the Company continues to ~~the~~record a full valuation allowance are a component of income tax expense (benefit) in our statements of operations. An increase in the valuation allowance for deferred income taxes will increase income tax expense (or reduce an otherwise income tax benefit), and a decrease in the valuation allowance will decrease income tax expense (or increase an otherwise income tax benefit).

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

In first quarter 2020, we recorded a discrete decrease to the valuation allowance of $1.5 million for business interest related to 2019 as a result of the CARES Act, and in third quarter 2020 we recorded another discrete decrease to the valuation allowance of $7.6 million for business interest related to the expected utilization of the prior year carryforward during 2020. During the nine months ended September 30, 2019, we recorded a discrete increase to the valuation allowance of $2.6 million for excess business interest related to a prior years.

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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 ~~25.0%~~40.8% and includes the income tax provision on pre-tax

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income and a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by ~~the 2020 debt refinancing,~~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 a reduction of the tax provision related to income attributable to non-controlling interests of a consolidated subsidiary. In addition, a discrete income tax benefit was recorded related to the release of a portion of our valuation allowance on our 2018 and 2019 Section 163(j) limitation as a result of the CARES Act and forecasted utilization of our 163(j) interest limitation carryforward during 2020.Contractual Obligations

Commitments

~~Approximately $12.4 million~~See Note 9, Commitments and Contingencies, to our unaudited condensed consolidated financial statements in Part I, Item 1 of ~~income tax expense~~this Quarterly Report on Form 10-Q for ~~the three months and nine months ended September 30, 2020 was a attributable~~disclosure information about potential contingent payments that we may be required to ~~the gain on the business sale (see Note 2,~~ ~~Sale~~make in future periods that are not required to be recognized in our consolidated balance sheets as of ~~Business~~).March 31, 2021 or December 31, 2020.

~~Earnings attributable to non-controlling interests~~Contractual Obligations

~~In addition~~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 ~~$45.1 million discussed above~~Annual Report for the ~~NCIs~~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 ~~PRET, we attributed and paid $0.2~~debt repayments, see Note 7, Debt Obligations. Also, at December 31, 2020, the Company accrued approximately $6.2 million ~~to the NCIs of PHOT~~ for the ~~three months ended~~remaining cash consideration it estimates it will be required to pay under an assignment of merchant portfolio rights agreement and related reseller agreement it executed with a third-party in October 2019. Payments are required to be made on a quarterly basis through September 30, ~~2020.~~ 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 4, 10,~~Non-Controlling Interests~~ Related Party Transactions, to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods. Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. There have been no material changes to these critical accounting policies and estimates as of March 31, 2021.

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

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements. See Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.

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Financial Condition

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

March 31, 2021:

Cash

~~Total~~Unrestricted cash ~~and unrestricted cash increased~~decreased by ~~$8.4~~$3.4 million during the first ~~nine months of 2020. Excluding restricted cash, the increase in cash was $18.5 million. The increase in~~quarter 2021. Net unrestricted cash provided by operating activities of $6.5 million was ~~largely attributable to the sale~~offset by $5.7 million used in investing activities and $4.2 million of ~~the real estate business by our PRET subsidiary~~net cash used in ~~September~~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 ~~net~~accrued liabilities for intangible asset acquisitions of $2.9 million. Net cash used in financing activities was comprised of a ~~large~~$4.9 million scheduled debt repayment under our Senior Credit Agreement and ~~payments to~~$0.6 million of proceeds from the ~~non-controlling interests~~exercise of ~~PRET.~~ stock options.

Restricted Cash

Restricted cash decreased by ~~$10.1~~$19.9 million in ~~line with~~first quarter 2021, attributable to the timing of operating activities related to disbursement and receipt of cash held on behalf of customers. This decrease inresulted from net disbursement of $21.9 million of settlement obligations ~~reflected on our balance sheet. For an explanation~~and net receipt of ~~the key drivers~~$2.0 million of ~~this change, see the subsequent section,~~ ~~Liquidity~~customer deposits and ~~Capital Resources, and our unaudited consolidated statement of cash flows included in this Form 10-Q.~~

advance payments.

Intangible Assets

Intangible assets, net of accumulated amortization, decreased ~~a net of $85.6~~$7.0 million during the first ~~nine months~~quarter of ~~2020. As disclosed in Note 2,~~ ~~Sale~~2021, resulting from amortization expense of ~~Business~~, intangible assets were reduced by a net of $63.4 million in September 2020. An impairment charge and resulting impairment reserve for a residual buyout reduced the net carrying value of an intangible asset by $1.0 million in third quarter 2020. Amortization expense during the 2020 period was $25.2$7.0 million. ~~The carrying value increased by $4.4 million for acquisitions.~~

Debt Obligations

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, dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P. (the “Term Loan Agreement”) decreased by a net of ~~$103.4~~$2.9 million during the first ~~nine~~three months of ~~2020.~~2021. This decrease was attributable to principal repayments of ~~$109.5~~$4.9 million for ~~term~~Senior debt, ~~including an unscheduled payment of $106.5 million made in September 2020.~~partially offset by PIK interest of ~~$6.6~~$1.9 million ~~added to the outstanding balances. All new advances made in the 2020 period on the revolving credit facility were repaid by September 2020.~~under our Term Loan Agreement. See the additional discussion about our debt obligations in the subsequent section for Liquidity and Capital Resources.

Stockholders' Deficit

Stockholders' deficit attributable to the stockholders of the Company ~~changed~~increased by ~~$28.1~~$1.2 million, from a deficit of ~~$126.3~~$98.6 million at December 31, ~~2019~~2020 to a deficit of ~~$98.3~~$99.8 million at ~~September 30, 2020.~~March 31, 2021. The primary driver of this change was the net ~~income~~loss attributable to stockholders of the Company of ~~$26.7~~$2.7 million, ~~for the first nine months of 2020 million and $1.4~~partially offset by $1.5 million of increases to additional paid-in capital for equity-based stock ~~compensation.~~

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.

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

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Our working capital, defined as current assets less current liabilities, was ~~$3.6~~$(18.0) million and ~~$1.2~~$(13.0) million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. AsThe current portion of ~~September 30, 2020, we had unrestricted cash totaling $21.7~~long-term debt was $24.3 million ~~compared to $3.2~~and $19.4 million at March 31, 2021 and December 31, ~~2019. These balances do not include restricted cash,~~2020, respectively. On April 27, 2021, we refinanced our credit agreements, which ~~reflects cash accounts holding customer settlement funds~~reduced the current portion of ~~$37.1~~long-term debt to $3.0 million, ~~at September 30, 2020~~improved our working capital and ~~$47.2 million at December 31, 2019.~~increased our revolving credit facility to $40 million. (See the additional discussion about our debt refinancing in the subsequent section for Credit and Guaranty Agreement.)

At ~~September 30, 2020, approximately $14.0 million was available~~March 31, 2021, we had no outstanding borrowings under the $25.0 million revolving credit facility of our Senior Credit Agreement.

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

(dollars in thousands) Nine Months Ended September 30,
2020 2019

Net cash provided by (used in):
Operating activities $ 3,136 $ 10,617
Investing activities 168,990 (93,623)
Financing activities (163,761) 76,018
Net increase (decrease) in cash and restricted cash $ 8,365 $ (6,988)


(dollars in thousands)	Quarter ended March 31,
		2021		2020
Net cash used in:
Operating activities		$	(13,426)	$	(7,254)
Investing activities		(5,691)		(3,229)
Financing activities		(4,243)		(251)
Net decrease in cash and restricted cash		$	(23,360)	$	(10,734)

Cash ~~Provided By~~Used In Operating Activities

Net cash ~~provided by~~used in operating activities, which includes changes in restricted cash, was $13.4 million in ~~the~~ first ~~nine months of 2020 was $3.1 million~~quarter 2021 compared to net cash ~~provided by~~used in operating activities of ~~$10.6~~$7.3 million ~~for the~~in first ~~nine months~~quarter 2020. Restricted cash operating activities, which are operating activities related to disbursement and receipt of ~~2019. This $7.5 million decrease for the 2020 period was largely the result of changes in settlement obligations and~~ restricted cash ~~as well as payments for transactions costs related to the business sale.~~

held on behalf of customers, used $19.9 million of cash in first quarter 2021 and used $10.4 million of cash in first quarter 2020. This comparative change in cash is driven by timing of customer pre-funding and disbursement activities. Unrestricted cash activities provided $6.5 million of cash in first quarter 2021 and provided $3.1 million of cash in first quarter 2020.

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

Net cash provided by (used in) investing activities was $169.0 million and $(93.6) million for the first nine months of 2020 and the first nine months of 2019, respectively. During the 2020 period, we received gross cash of $179.4 million from the sale of a business. Cash used in investing activities ~~for~~was $5.7 million in the first ~~nine months~~quarter 2021 compared to net cash used in investing activities of ~~2019 included $18.0~~$3.2 million ~~used for residual buyouts and $63.8 million~~in the first quarter of 2020. Cash used to ~~acquire assets from YapStone, Inc. Cash of $4.4 million was used during the 2020 period to partially~~ fund a portfolio acquisition and ~~to fund the~~a contingent portion of a residual ~~buyout.~~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 ~~$6.0~~$2.8 million and ~~$8.7~~$2.3 million ~~for~~in the first quarter 2021 and 2020, ~~period and the 2019 period,~~ respectively.

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

Net cash used in financing activities was ~~$163.8 million for the first nine months of 2020 compared to cash provided of $76.0~~$4.2 million in the first ~~nine months~~quarter 2021 compared to net cash used of ~~2019. The amount for the 2020 period included $109.5~~$0.3 million in the first quarter 2020. In first quarter 2021, Senior debt principal repayments ~~on the term facility for our Senior Credit Agreement and $51.0~~of $4.9 million were partially offset by $0.6 million of ~~cash payments to~~proceeds from the ~~non-controlling interests~~exercise of ~~PRET~~stock options. In the first quarter of 2020, Senior debt principal repayments of $1.0 million and ~~PHOT. The amount for the 2019 period included net~~debt modification costs of $2.7 million were largely offset by $3.5 million of borrowings under our ~~Senior Credit Agreement consisting of $11.5 million under the~~ revolving ~~facility and a $69.7 million delayed draw under the term facility that was used to acquire certain assets from YapStone, Inc. in March 2019.~~credit facility.

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Long-Term Debt at March 31, 2021

As of ~~September 30, 2020,~~March 31, 2021, we had outstanding long-term debt of ~~$392.1~~$379.1 million compared to ~~$495.5~~$382.0 million at December 31, ~~2019,~~2020, a decrease of ~~$103.4~~$2.9 million. The debt balance at ~~September 30, 2020~~March 31, 2021 consisted of outstanding term debt of ~~$280.4~~$274.6 million under the Senior Credit ~~Facility~~Agreement and ~~$100.7~~$104.5 million in term debt under the ~~subordinated Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Group, L.P. (the "GS Credit Facility") (including accrued payment-in-kind ("PIK") interest through September 30, 2020).~~Subordinated Term Loan Facility. Additionally, under the Senior Credit Facility, we have a $25 million revolving credit facility, which ~~had $11.0 million drawn and outstanding~~was fully available as of ~~September 30, 2020.~~March 31, 2021. The

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outstanding principal amounts under the Senior Credit Facility and the ~~subordinated GS Credit Facility~~Term Loan Agreement mature in January 2023 and July 2023, respectively. The $25 million revolving credit facility expires in January 2022.

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

~~On March 18, 2020, we modified the Senior Credit Agreement and the GS Credit Amendment (collectively, the "Sixth Amendment").~~ As of September 30, 2020, financial covenants, as amended, under the Senior Credit Facility required the Total Net Leverage Ratio, as defined in the agreement, not to exceed 7.75:1.00 at September 30, 2020 through DecemberMarch 31, ~~2020. The Total Net Leverage Ratio steps down thereafter. The Total Net Leverage Ratio covenant is a material term within the Sixth Amendment.~~

~~As of September 30, 2020,~~2021, we were in compliance with our financial covenants. Noncompliance in the future could have materially adverse impacts on our financial condition, including giving the lenders the right to accelerate the debt repayment schedule and restricting access to the revolving credit facility. Based upon current projections, the Company expects to be in compliance with its debt covenants for at least the foreseeable future. For additional information about the risks associated with our debt agreements and related covenants, refer to the "Risk Factors Related to Our Indebtedness" in Item 1A, Risk Factors, in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2020.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment ~~(Exhibit 10.2~~to the Senior Credit Agreement and ~~Exhibit 10.3 to this Quarterly Report on Form 10-Q) 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, ~~calculation of Consolidated Adjusted EBITDA at each interim quarterly measurement period in 2020 is determined as the current year-to-date Consolidated Adjusted EBITDA annualized. For~~for interim quarterly and full year measurement periods commencing in January 2021, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.

Consolidated Adjusted EBITDA is a non-GAAP liquidity measure. For determining the Total Net Leverage Ratio at ~~September 30, 2020,~~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:

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	~~Nine Months~~
(in thousands)	Last Twelve Months Ended
	~~September 30, 2020~~March 31, 2021

Consolidated Net Income ~~Attributable to Stockholders of Priority Technology Holdings, Inc.~~(GAAP)	$	~~26,665~~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))	~~35,454~~43,692
Depreciation and amortization (clause (i)(d) and (i)(e))	~~30,886~~39,573
Income tax expense (clause (i)(c))	~~12,919~~9,901
Non-cash stock-based compensation (clause (i)(j))	~~1,627~~2,650
Acquisition transition services (clause (i)(k))	~~2,747~~1,732
Debt extinguishment and modification ~~costs~~expenses (clause (i)(h))	~~1,899~~1,523
Impairment of intangible asset (clause (i)(f))	~~980~~1,753
~~Write off of an equity-method investment~~Provision for allowance for note receivable (clause (i)(f))	~~211~~467
Change in fair value of contingent consideration for business combinations (clause (ii)(a))	(360)

Certain legal fees and expenses (clause (i)(m))	~~1,380~~3,167
Litigation settlement recoveries (clause (i)(k))	~~(722)~~(721)
Professional, accounting and consulting fees (clause (i)(k))	~~145~~1,905
Other professional and consulting fees ~~(clause(i)~~ (clause (i)(h))	~~1,125~~1,500
Other adjustments ~~and tax expenses~~ (clause (i)~~(q)~~(k))	~~162~~648
Pro forma impact of disposal	~~(8,320)~~(5,553)
Consolidated Adjusted EBITDA (non-GAAP)	~~45,067~~
~~Factor to annualize year-to-date~~	~~12/9~~
~~Annualized~~	$	~~60,089~~68,637

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At ~~September 30, 2020,~~March 31, 2021, the Total Net Leverage Ratio was ~~6:16:~~5.44:1.00, calculated as follows:


(in thousands, except ratio)	~~September 30, 2020~~March 31, 2021

Consolidated Total Debt:
Current portion of long-term debt	$	~~15,583~~24,302
Long-term debt, net of discounts and deferred financing costs	~~371,206~~350,667
Unamortized debt discounts and deferred financing costs	~~5,323~~4,135
	~~392,112~~379,104
Less unrestricted cash	~~(21,695)~~(5,827)
Consolidated Net Debt	$	~~370,417~~373,277

~~Annualized~~ Consolidated Adjusted EBITDA (non-GAAP)	$	~~60,089~~68,637

Total Net Leverage Ratio	~~6.16~~5.44x

Securities Purchase Agreement

Registration Rights Agreement

Credit and Guaranty Agreement

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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.

Prepayments

Acceleration

Covenants

Refinancing

COVID-19 Pandemic

Our current assessment is that we anticipate cash on hand, funds generated from operations and available borrowings under our revolving credit facility to be sufficient to meet our working capital requirements, and that we will remain in compliance with our debt covenants. However, the ongoing magnitude, duration and effects of the COVID-19 pandemic on our future results of operation, cash flows, and financial condition are difficult to predict at this time, and our current assessment is subject to material revision.

~~Off-Balance Sheet Arrangements~~

~~Commitments and Contractual Obligations~~

~~Commitments~~

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

~~Contractual Obligations~~

There have been no significant changes to our contractual obligations and commitments compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2019, except for changes in minimum principal repayments under our Senior Credit Agreement. For an updated schedule of debt repayments, see Note 9, ~~Debt Obligations, to the unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.~~

~~Related Party Transactions~~

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

~~Critical Accounting Policies and Estimates~~

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

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements. See Note 1, ~~Basis of Presentation and Significant Accounting Policies~~, to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.

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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 ~~September 30, 2020.~~March 31, 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 September 30, 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 DecemberMarch 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 implemented additional policies and procedures to enhance our internal controls with respect to timely reconciliations. As we continue to evaluate and improve our internal controls 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 determined that no material changes were necessary to ensure that our internal control over financial reporting addresses risks of working in a remote environment. We are continually monitoring and assessing the COVID-19 potential effects on the effectiveness of our internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the ~~third~~first quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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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

In addition to the other information set forth in this report, you should carefully consider the factors discussed in our Annual Report under Part I, Item 1A “Risk Factors”, as supplemented by the factors under Part II, Item 1A “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, as filed with the SEC on May 13, 2020 and August 4, 2020, respectively (the “Quarterly Reports”), because these risk factors may affect our operations and financial results.

The risks described in the Annual Report ~~and Quarterly Reports~~ are not the 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, and operating results.

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

N/A

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

N/A

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ITEM 6. EXHIBITS


Exhibit		Description

3.1		Certificate of Designations of Senior Preferred Stock
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		~~Sixt~~hSixth 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†		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).

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

† 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.

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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.


~~November 12, 2020~~May 14, 2021			/s/ THOMAS C. PRIORE Thomas C. Priore Chief Executive Officer and Chairman (Principal Executive Officer)

~~November 12, 2020~~May 14, 2021			/s/ MICHAEL T. VOLLKOMMER Michael T. Vollkommer Chief Financial Officer (Principal Financial Officer)


(in thousands, except per share amounts)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019




REVENUES	$	108,962	$	93,883	$	298,251	$	273,671

OPERATING EXPENSES:
Costs of services	74,971		63,718		203,733		185,827

Salary and employee benefits	10,010		10,668		29,695		31,923
Depreciation and amortization	10,251		10,077		30,886		28,763
Selling, general and administrative	6,688		6,695		19,305		21,031


Total operating expenses	101,920		91,158		283,619		267,544

Income from operations	7,042		2,725		14,632		6,127

OTHER INCOME (EXPENSES):
Interest expense	(13,471)		(10,463)		(35,454)		(30,602)

Debt extinguishment and modification costs	(1,523)		0		(1,899)		0
Gain on sale of business	107,239		0		107,239		0

Other income, net	190		158		414		523
Total other income (expenses), net	92,435		(10,305)		70,300		(30,079)

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

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

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

Less net income attributable to redeemable non-controlling interests and redeemed non-controlling interests	(45,348)		0		(45,348)		0

Net income (loss) attributable to stockholders of Priority Technology Holdings, Inc.	$	40,392	$	(5,844)	$	26,665	$	(26,420)


Income (loss) per common share:
Basic	$	0.60	$	(0.09)	$	0.40	$	(0.39)
Diluted	$	0.60	$	(0.09)	$	0.40	$	(0.39)

Weighted-average common shares and equivalents:
Basic	67,167		67,007		67,114		67,109
Diluted	67,286		67,007		67,131		67,109


	Three Months Ended September 30,				Nine Months Ended September 30,
Term Debt	2020		2019		2020		2019

Senior Credit Agreement	9.87	%	7.92	%	8.57	%	7.50	%

GS Credit Agreement	14.62	%	10.90	%	12.99	%	10.80	%


(in thousands except per share amounts)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

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

Less: Earnings attributable to non-controlling interests	(45,348)		0		(45,348)		0
Net income (loss) attributable to common stock holders of Priority Technology Holdings, Inc.	$	40,392	$	(5,844)	$	26,665	$	(26,420)

Basic:
Weighted-average common stock shares outstanding	67,167		67,007		67,114		67,109
Basic earnings (loss) per common share:	$	0.60	$	(0.09)	$	0.40	$	(0.39)

Fully Diluted:
Weighted-average common stock shares outstanding	67,167		67,007		67,114		67,109
Weighted-average dilutive common stock equivalents	119		0		17		0
Weighted-average common shares for fully-diluted earnings (loss) per share	67,286		67,007		67,131		67,109

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