0001653558falseDecember 31Q1202100016535582021-01-012021-03-31xbrli:shares00016535582021-05-07iso4217:USD00016535582021-03-3100016535582020-12-31iso4217:USDxbrli:shares00016535582020-01-012020-03-3100016535582019-12-3100016535582020-03-310001653558prth:MerchantCardFeesMember2021-01-012021-03-310001653558prth:MerchantCardFeesMember2020-01-012020-03-310001653558prth:OutsourcedServicesAndOtherServicesMember2021-01-012021-03-310001653558prth:OutsourcedServicesAndOtherServicesMember2020-01-012020-03-310001653558prth:EquipmentSalesMember2021-01-012021-03-310001653558prth:EquipmentSalesMember2020-01-012020-03-310001653558prth:CardSettlementsDueFromMerchantsMember2021-03-310001653558prth:CardSettlementsDueFromMerchantsMember2020-12-310001653558prth:CardSettlementsDueFromProcessorsMember2021-03-310001653558prth:CardSettlementsDueFromProcessorsMember2020-12-310001653558prth:DueToACHPayeesMember2021-03-310001653558prth:DueToACHPayeesMember2020-12-3100016535582020-01-012020-12-310001653558us-gaap:ServiceAgreementsMember2021-03-310001653558us-gaap:ServiceAgreementsMember2020-12-310001653558us-gaap:CustomerRelationshipsMember2021-03-310001653558us-gaap:CustomerRelationshipsMember2020-12-310001653558prth:ResidualBuyoutsMember2021-03-310001653558prth:ResidualBuyoutsMember2020-12-310001653558us-gaap:NoncompeteAgreementsMember2021-03-310001653558us-gaap:NoncompeteAgreementsMember2020-12-310001653558us-gaap:TradeNamesMember2021-03-310001653558us-gaap:TradeNamesMember2020-12-310001653558us-gaap:DevelopedTechnologyRightsMember2021-03-310001653558us-gaap:DevelopedTechnologyRightsMember2020-12-310001653558prth:ISORelationshipsMember2021-03-310001653558prth:ISORelationshipsMember2020-12-310001653558prth:ResidualBuyoutsMember2020-12-310001653558prth:ResidualBuyoutsMember2020-01-012020-12-310001653558us-gaap:FurnitureAndFixturesMember2021-03-310001653558us-gaap:FurnitureAndFixturesMember2020-12-310001653558us-gaap:EquipmentMember2021-03-310001653558us-gaap:EquipmentMember2020-12-310001653558us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2021-03-310001653558us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2020-12-310001653558us-gaap:LeaseholdImprovementsMember2021-03-310001653558us-gaap:LeaseholdImprovementsMember2020-12-31xbrli:pure0001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2021-01-012021-03-310001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2020-01-012020-12-310001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Memberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-03-310001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Memberus-gaap:LondonInterbankOfferedRateLIBORMember2020-01-012020-12-310001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2021-03-310001653558us-gaap:SeniorNotesMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2020-12-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2021-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMemberus-gaap:LondonInterbankOfferedRateLIBORMember2020-01-012020-12-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2021-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2020-12-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMemberprth:SeniorTermLoanMaturingJanuary32023Member2020-12-310001653558us-gaap:LineOfCreditMemberprth:PaymentInKindInterestRateMemberprth:GoldmanSachsSpecialtyLendingGroupMember2021-01-012021-03-310001653558us-gaap:LineOfCreditMemberprth:PaymentInKindInterestRateMemberprth:GoldmanSachsSpecialtyLendingGroupMember2020-01-012020-12-310001653558us-gaap:LineOfCreditMemberprth:GoldmanSachsSpecialtyLendingGroupMember2021-03-310001653558us-gaap:LineOfCreditMemberprth:GoldmanSachsSpecialtyLendingGroupMember2020-12-310001653558us-gaap:SubordinatedDebtMemberprth:SubordinatedTermLoanMaturingJuly32023Memberprth:GoldmanSachsSpecialtyLendingGroupMember2021-03-310001653558us-gaap:SubordinatedDebtMemberprth:SubordinatedTermLoanMaturingJuly32023Memberprth:GoldmanSachsSpecialtyLendingGroupMember2020-12-310001653558srt:MinimumMemberus-gaap:LineOfCreditMemberprth:SyndicateOfLendersMember2021-01-012021-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2021-01-012021-03-310001653558prth:ApplicableMarginMemberus-gaap:LineOfCreditMemberprth:GoldmanSachsSpecialtyLendingGroupMember2021-01-012021-03-310001653558us-gaap:LineOfCreditMemberprth:SyndicateOfLendersMemberprth:TermLoanMember2021-03-310001653558us-gaap:LineOfCreditMemberprth:TermLoanMemberprth:GoldmanSachsSpecialtyLendingGroupMember2021-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2020-03-182020-03-180001653558srt:ScenarioForecastMemberus-gaap:LineOfCreditMemberprth:GoldmanSachsSpecialtyLendingGroupMember2021-03-182022-03-180001653558prth:GoldmanSachsSpecialtyLendingGroupMember2021-03-310001653558prth:GoldmanSachsSpecialtyLendingGroupMember2020-12-310001653558prth:GoldmanSachsSpecialtyLendingGroupMember2021-01-012021-03-310001653558prth:GoldmanSachsSpecialtyLendingGroupMember2020-01-012020-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2020-03-310001653558us-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberprth:SyndicateOfLendersMember2020-01-012020-03-310001653558us-gaap:LineOfCreditMemberprth:SyndicateOfLendersMember2020-09-012020-09-300001653558us-gaap:LineOfCreditMemberprth:SyndicateOfLendersMember2020-07-012020-09-3000016535582019-03-152019-03-1500016535582019-05-220001653558prth:ChiefExecutiveOfficerAndChairmanMember2019-01-312019-01-3100016535582019-02-2800016535582019-02-012019-02-280001653558prth:PriorityHospitalityTechnologyLLCMember2020-07-012020-12-310001653558us-gaap:PreferredStockMember2020-12-310001653558us-gaap:CommonStockMember2020-12-310001653558us-gaap:TreasuryStockMember2020-12-310001653558us-gaap:AdditionalPaidInCapitalMember2020-12-310001653558us-gaap:RetainedEarningsMember2020-12-310001653558us-gaap:ParentMember2020-12-310001653558us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001653558us-gaap:ParentMember2021-01-012021-03-310001653558us-gaap:CommonStockMember2021-01-012021-03-310001653558us-gaap:RetainedEarningsMember2021-01-012021-03-310001653558us-gaap:PreferredStockMember2021-03-310001653558us-gaap:CommonStockMember2021-03-310001653558us-gaap:TreasuryStockMember2021-03-310001653558us-gaap:AdditionalPaidInCapitalMember2021-03-310001653558us-gaap:RetainedEarningsMember2021-03-310001653558us-gaap:ParentMember2021-03-310001653558us-gaap:PreferredStockMember2019-12-310001653558us-gaap:CommonStockMember2019-12-310001653558us-gaap:TreasuryStockMember2019-12-310001653558us-gaap:AdditionalPaidInCapitalMember2019-12-310001653558us-gaap:RetainedEarningsMember2019-12-310001653558us-gaap:ParentMember2019-12-310001653558us-gaap:NoncontrollingInterestMember2019-12-310001653558us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001653558us-gaap:ParentMember2020-01-012020-03-310001653558us-gaap:RetainedEarningsMember2020-01-012020-03-310001653558us-gaap:PreferredStockMember2020-03-310001653558us-gaap:CommonStockMember2020-03-310001653558us-gaap:TreasuryStockMember2020-03-310001653558us-gaap:AdditionalPaidInCapitalMember2020-03-310001653558us-gaap:RetainedEarningsMember2020-03-310001653558us-gaap:ParentMember2020-03-310001653558us-gaap:NoncontrollingInterestMember2020-03-310001653558us-gaap:NoncontrollingInterestMemberprth:PriorityRealEstateTechnologyLLCPRETMember2020-03-310001653558prth:PriorityRealEstateTechnologyLLCPRETMember2020-01-012020-09-300001653558prth:A2018EquityIncentivePlanMember2021-01-012021-03-310001653558prth:A2018EquityIncentivePlanMember2020-01-012020-03-310001653558us-gaap:SeniorNotesMemberprth:SeniorTermLoanMaturingJanuary32023Member2021-03-310001653558us-gaap:SeniorNotesMemberprth:SeniorTermLoanMaturingJanuary32023Member2020-12-31prth:segment0001653558prth:CommercialPaymentsAndManagedServicesSegmentMember2021-01-012021-03-310001653558prth:ConsumerPaymentsSegmentMemberus-gaap:OperatingSegmentsMember2021-01-012021-03-310001653558prth:ConsumerPaymentsSegmentMemberus-gaap:OperatingSegmentsMember2020-01-012020-03-310001653558us-gaap:OperatingSegmentsMemberprth:CommercialPaymentsAndManagedServicesSegmentMember2021-01-012021-03-310001653558us-gaap:OperatingSegmentsMemberprth:CommercialPaymentsAndManagedServicesSegmentMember2020-01-012020-03-310001653558prth:IntegratedPartnersSegmentMemberus-gaap:OperatingSegmentsMember2021-01-012021-03-310001653558prth:IntegratedPartnersSegmentMemberus-gaap:OperatingSegmentsMember2020-01-012020-03-310001653558us-gaap:OperatingSegmentsMember2021-01-012021-03-310001653558us-gaap:OperatingSegmentsMember2020-01-012020-03-310001653558us-gaap:CorporateNonSegmentMember2021-01-012021-03-310001653558us-gaap:CorporateNonSegmentMember2020-01-012020-03-310001653558prth:ConsumerPaymentsSegmentMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2021-01-012021-03-310001653558prth:ConsumerPaymentsSegmentMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2020-01-012020-03-310001653558us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMemberprth:RentPaymentMember2020-09-222020-09-220001653558us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMemberprth:RentPaymentMember2021-03-310001653558us-gaap:DisposalGroupDisposedOfBySaleNotDiscontinuedOperationsMemberprth:RentPaymentMember2020-01-012020-03-310001653558us-gaap:WarrantMember2021-01-012021-03-310001653558us-gaap:WarrantMember2020-01-012020-03-310001653558prth:OptionsAndWarrantsIssuedToAdvisorMember2021-01-012021-03-310001653558prth:OptionsAndWarrantsIssuedToAdvisorMember2020-01-012020-03-310001653558us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-03-310001653558us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-03-310001653558us-gaap:EmployeeStockOptionMember2021-01-012021-03-310001653558us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001653558prth:PrimeWarriorAcquisitionCorpMember2021-03-050001653558prth:FinxeraHoldingsIncMergerMember2021-03-052021-03-050001653558prth:FinxeraMember2021-03-050001653558prth:FinxeraHoldingsIncMergerMember2021-03-300001653558us-gaap:SubsequentEventMemberus-gaap:PrivatePlacementMember2021-04-272021-04-270001653558us-gaap:SubsequentEventMemberus-gaap:PrivatePlacementMember2021-04-270001653558us-gaap:SubsequentEventMember2021-04-270001653558prth:CreditAgreementMemberus-gaap:SubsequentEventMember2021-04-270001653558prth:InitialTermLoanMemberus-gaap:SubsequentEventMemberus-gaap:MediumTermNotesMember2021-04-270001653558prth:SeniorSecuredRevolvingCreditFacilityMemberus-gaap:LineOfCreditMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:SubsequentEventMember2021-04-270001653558prth:DelayedDrawTermLoanMemberus-gaap:SubsequentEventMemberus-gaap:MediumTermNotesMember2021-04-270001653558us-gaap:LineOfCreditMemberus-gaap:SubsequentEventMember2021-04-272021-04-270001653558us-gaap:SubsequentEventMemberprth:CertainResidualPortfolioRightsMember2021-04-282021-04-28

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 March 31, 2021

OR
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)
Delaware47-4257046
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2001 Westside Parkway
Suite 155
Alpharetta,GA30004
(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 classTrading SymbolName of each exchange on which registered
Common stock, par value $0.001PRTHNasdaq 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 filerAccelerated filer
Non-accelerated filerSmaller 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 May 7, 2021, a total of 68,103,122 shares of common stock, par value $0.001 per share, were issued and 67,651,898 shares were outstanding.



  Priority Technology Holdings, Inc.
Quarterly Report on Form 10-Q
March 31, 2021

Page
 


Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Priority Technology Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)Unaudited
March 31, 2021December 31, 2020
ASSETS
Current assets:
Cash$5,827 $9,241 
Restricted cash58,933 78,879 
Accounts receivable, net of allowance of $374 and $574
50,886 41,321 
Prepaid expenses and other current assets4,083 3,500 
Current portion of notes receivable, net of allowance of $467 and $467
1,829 2,190 
Settlement assets1,220 753 
Total current assets122,778 135,884 
Notes receivable, less current portion5,084 5,527 
Property, equipment, and software, net23,791 22,875 
Goodwill106,832 106,832 
Intangible assets, net91,062 98,057 
Deferred income taxes, net48,996 46,697 
Other non-current assets1,949 1,957 
Total assets$400,492 $417,829 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses$29,880 $29,821 
Accrued residual commissions30,300 23,824 
Customer deposits and advance payments5,488 2,883 
Current portion of long-term debt24,302 19,442 
Settlement obligations50,820 72,878 
Total current liabilities140,790 148,848 
Long-term debt, net of current portion, discounts and debt issuance costs350,667 357,873 
Other non-current liabilities8,790 9,672 
Total long-term liabilities359,457 367,545 
Total liabilities500,247 516,393 
Stockholders' deficit:
Preferred stock - $0.001 par value per share; 100,000,000 shares authorized; zero issued or outstanding
  
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 capital7,257 5,769 
Treasury stock, 451,224 common shares, at cost
(2,388)(2,388)
Accumulated deficit(104,692)(102,013)
Total stockholders' deficit(99,755)(98,564)
Total liabilities and stockholders' deficit$400,492 $417,829 

See Notes to Unaudited Condensed Consolidated Financial Statements
- 1 -


Table of Contents
Priority Technology Holdings, Inc.
Condensed Consolidated Statements of Operations
Unaudited
(in thousands, except per share amounts)Three Months Ended March 31,
20212020
REVENUES$113,297 $96,933 
OPERATING EXPENSES:
Costs of services81,863 66,364 
Salary and employee benefits9,548 10,129 
Depreciation and amortization9,070 10,272 
Selling, general and administrative8,2896,609 
Total operating expenses108,770 93,374 
Income from operations4,527 3,559 
OTHER EXPENSES:
Interest expense(9,168)(10,315)
Other expenses, net(269)(346)
Total other expenses, net(9,437)(10,661)
Loss before income taxes(4,910)(7,102)
Income tax benefit(2,231)(1,233)
Net loss$(2,679)$(5,869)
Loss per common share:
Basic and diluted$(0.04)$(0.09)
Weighted-average common shares outstanding:
Basic and diluted67,543 67,061 

See Notes to Unaudited Condensed Consolidated Financial Statements
- 2 -


Table of Contents
Priority Technology Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)Three Months Ended March 31,
20212020
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 assets9,070 10,272 
Equity-classified and liability-classified stock-based compensation558 338 
Amortization of debt issuance costs and discounts590 460 
Deferred income tax benefit(1,661)(1,699)
Change in allowance for deferred tax assets(638)466 
Payment-in-kind interest1,924 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 receivable862 (927)
Accounts payable and other accrued liabilities8,633 (3,541)
Customer deposits and advance payments2,604 (1,647)
Other assets and liabilities, net59 (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 (2,749)
Borrowings under revolving credit facility 3,500 
Proceeds from exercise of stock options617  
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 period88,120 50,465 
Cash and restricted cash at end of period$64,760 $39,731 
Supplemental cash flow information:
Cash paid for interest$6,553 $8,186 
Non-cash investing and financing activities:
Payment-in-kind interest added to principal of debt obligations$1,924 $1,391 
Reconciliation of cash and restricted cash:
Cash$5,827 $2,858 
Restricted cash58,933 36,873 
Total cash and restricted cash$64,760 $39,731 

See Notes to Unaudited Condensed Consolidated Financial Statements
- 3 -


Table of Contents

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, 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, 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, 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, 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 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 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. As such, the Company's financial statements may not be comparable to that comply with public company effective dates.

- 4 -


Table of Contents
Comprehensive Income (Loss)

For the three months ended March 31, 2021 and March 31, 2020, the Company had no activities to report as components of other comprehensive income (loss). Therefore, no separate Statement of Comprehensive Income (Loss) was prepared for any reporting period as the Company's net 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.

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, 2020. The Company did not adopt any new accounting standards during the three months ended March 31, 2021 except for the following:

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

In December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to enhance and simplify various aspects of the accounting for income taxes. The amendments in this update remove certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and amends existing guidance to improve consistency in application of the accounting for franchise taxes, enacted changes in tax laws or rates and transactions that result in a step-up in the tax basis of goodwill. The adoption of ASU 2019-12 on January 1, 2021 did not have a material effect on our consolidated financial statements.

Recently Issued Accounting Standards 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.

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. 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
- 5 -


Table of Contents
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 contract at the modification date or reassess a previous accounting determination. ASU 2021-01 ASU 2020-04 can be adopted at any time before December 31, 2022. The provisions of ASU 2020-04 may impact the Company if future debt modifications or refinancings utilize one or more of the reference rates covered by the provisions of this ASU.

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. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. As an EGC, this standard is effective for the Company's annual and interim reporting 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, but it is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.

Credit Losses (ASU 2016-13 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 is a 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 is a SRC, 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.

2.    REVENUES

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

- 6 -


Table of Contents
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 March 31, 2020:

(in thousands)Three Months Ended March 31,
20212020
Revenue Type
Merchant card fees$107,702 $89,086 
Outsourced services and other services4,378 6,791 
Equipment1,217 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, 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,
- 7 -


Table of Contents
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

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

Supplemental balance sheet information related to contracts from customers as of March 31, 2021 and December 31, 2020 was as follows:
(in thousands)Consolidated Balance Sheet LocationMarch 31, 2021December 31, 2020
Liabilities:
Contract liabilities, net (current)Customer deposits and advance payments$1,162$1,494

The balances for the contract liabilities were approximately $1.7 million and $1.9 million at March 31, 2020 and December 31, 2019, respectively. The changes in the balances during the three months ended March 31, 2021 and March 31, 2020 were due to the timing of advance payments received from the customer. Substantially all of these balances are recognized as revenue within twelve months.

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 March 31, 2020.


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 $115.4 million and $103.8 million at March 31, 2021 and December 31, 2020, respectively.

- 8 -


Table of Contents
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 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. Expenses for actual and estimated merchant losses for the three months ended March 31, 2021 and March 31, 2020 were $0.4 million and $1.0 million, respectively.
Commercial Payments Segment

In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing ACH transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in bank accounts controlled by the Company until such time as the ACH transactions are made. The Company recognizes these cash balances within restricted cash and settlement obligations in its consolidated balance sheets.
The Company's settlement assets and obligations at March 31, 2021 and December 31, 2020 were as follows:

(in thousands)March 31, 2021December 31, 2020
Settlement Assets:
Card settlements due from merchants, net of estimated losses$1,065 $753 
Card settlements due from ISOs155  
Total settlement assets$1,220 $753 
Settlement Obligations:
Due to ACH payees (1)50,820 72,878 
Total settlement obligations$50,820 $72,878 

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


4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying separately-identifiable tangible and intangible assets acquired and the liabilities assumed. All of the Company's goodwill was 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 ended 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
- 9 -


Table of Contents
fourth quarter of 2021 using market data and discounted cash flow analysis. The Company concluded there was no impairment as of March 31, 2021 or December 31, 2020. As such, there was no accumulated impairment loss as of March 31, 2021 and December 31, 2020.

Other Intangible Assets

The Company's other intangible assets include acquired merchant portfolios, customer relationships, ISO relationships, trade names, technology, and residual buyouts. As of March 31, 2021 and December 31, 2020, intangible assets consisted of the following:
(in thousands)March 31, 2021December 31, 2020
Other intangible assets:
Merchant portfolios$55,816 $55,816 
Customer relationships40,740 40,740 
Residual buyouts116,112 116,112 
Non-compete agreements3,390 3,390 
Trade names2,870 2,870 
Technology14,390 14,390 
ISO relationships15,200 15,200 
 Total gross carrying value248,518 248,518 
Less accumulated amortization:
Merchant portfolios(22,028)(19,471)
Customer relationships(31,071)(30,267)
Residual buyouts(75,975)(72,659)
Non-compete agreements(3,390)(3,390)
Trade names(1,711)(1,651)
Technology(13,975)(13,951)
ISO relationships(7,553)(7,319)
Total accumulated amortization (155,703)(148,708)
Accumulated allowance for impairment(1,753)(1,753)
 Net carrying value$91,062 $98,057 
 
See Note 9, Commitments and Contingencies, for information about an acquired merchant portfolio with a contingent purchase price.

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

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

The Company also considered the market conditions generated by the COVID-19 pandemic and concluded that there were no additional impairment indicators present at March 31, 2021.


- 10 -


Table of Contents
5.    PROPERTY, EQUIPMENT, AND SOFTWARE

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

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

(in thousands)March 31, 2021December 31, 2020
Furniture and fixtures$2,795 $2,795 
Equipment11,442 10,216 
Computer software46,065 44,320 
Leasehold improvements6,250 6,250 
 66,552 63,581 
Less accumulated depreciation(42,761)(40,706)
Property, equipment, and software, net$23,791 $22,875 

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


6.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

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

(in thousands)March 31, 2021December 31, 2020
Accrued card network fees$8,160 $8,041 


- 11 -


Table of Contents
7.    DEBT OBLIGATIONS

Outstanding debt obligations as of March 31, 2021 and December 31, 2020 consisted of the following:
(in thousands)March 31, 2021December 31, 2020
Senior Credit Agreement:
Term facility - Matures January 3, 2023 and bears interest at LIBOR (with a LIBOR "floor" of 1.00% beginning March 18, 2020) plus 6.50% and 6.50% at March 31, 2021 and December 31, 2020, respectively (actual rate of 7.50% and 7.50% at March 31, 2021 and December 31, 2020, respectively)
$274,557 $279,417 
Revolving credit facility - $25.0 million line, matures January 22, 2022, and bears interest at LIBOR plus 6.50% and 6.50% at March 31, 2021 and December 31, 2020, respectively (actual rate of 6.65% and 6.65% at March 31, 2021 and December 31, 2020, respectively)
  
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 obligations379,104 382,040 
Less: current portion of long-term debt(24,302)(19,442)
Less: unamortized debt discounts and deferred financing costs(4,135)(4,725)
Long-term debt, net$350,667 $357,873 

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."

Senior Credit Agreement

Outstanding borrowings under 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 our Senior Credit Agreement, the Sixth Amendment, which was executed on March 18, 2020, thereto provides for a LIBOR "floor" of 1.0% per annum. Accrued interest is payable 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.

Term Loan Agreement

Outstanding borrowings under 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.
- 12 -


Table of Contents
Contractual Maturities

Based on terms and conditions existing at March 31, 2021, future minimum principal payments for long-term debt are as follows:
(in thousands)Principal Due
Senior Credit AgreementTerm Loan AgreementTotal
Twelve-month period ending March 31,TermRevolverTerm
2022 (current)$24,302 $ $ $24,302 
2023250,255   250,255 
2024  104,547 104,547 
Total$274,557 $ $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 made for the year ended December 31, 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 Term Loan Agreement, prepayments of outstanding principal are subject to a 2.0% penalty for certain prepayments occurring between March 18, 2021 and March 18, 2022. Such penalties are based on the principal amount that is prepaid, subject to the terms of the credit agreements.
PIK Interest

The principal amount borrowed and outstanding under the Term Loan Agreement was $80.0 million at March 31, 2021 and December 31, 2020. Included in the outstanding obligation balance at March 31, 2021 and December 31, 2020 was accumulated PIK interest of $24.5 million and $22.6 million, respectively. For the three months ended March 31, 2021 and March 31, 2020, PIK interest added $1.9 million and $1.4 million, respectively, to the obligation balance under the Term Loan Agreement.
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 $9.2 million and $10.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Interest expense increased due to the amortization of deferred financing costs and debt discounts by $0.6 million and $0.5 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

For the Sixth Amendment, executed in the first quarter of 2020, $2.7 million of lender fees were deferred and added to then-existing unamortized loan costs and 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 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
- 13 -


Table of Contents
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 Term Loan Agreement). The maximum permitted Total Net Leverage Ratio was 7.71:1.00 at March 31, 2021. As of 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.


8.    INCOME TAXES

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

The Company's effective income tax rate for the three months ended March 31, 2020 was 17.4%. Our effective income tax rate for the three months ended March 31, 2020 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 and related favorable interest limitation provisions of the 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.
Based on management’s assessment, as of the first quarter of 2021, the Company continues to record a full valuation allowance against non-deductible interest expense. The Company will continue to evaluate the realizability of the net deferred tax asset on a quarterly basis and, as a result, the valuation allowance may change in future periods.
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 payment transactions. Some of these agreements have minimum annual requirements for processing volumes. Based on existing contracts in place at March 31, 2021, the Company is committed to pay minimum processing fees under these agreements of approximately $14.8 million in 2021 and $7.8 million in both 2022 and 2023.

Commitment to Lend

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

- 14 -


Table of Contents
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.

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. 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 March 31, 2021, an additional $4.3 million of the $6.4 million total contingent consideration has been paid to the seller, while the remaining $2.1 million will be payable in the first quarter of 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.

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.


10.    RELATED PARTY TRANSACTIONS

Commitment to Lend and Warrant to Acquire

During 2019, the Company, through one of its wholly-owned subsidiaries, executed an interest-bearing loan and commitment agreement with another entity. The Company has loaned the entity a total of $3.5 million at March 31, 2021 and December 31, 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 also received a warrant to purchase a non-controlling interest in this entity's equity at a fixed amount. The loan agreement also gives the Company certain rights to purchase some or all of this entity's equity in the future, at the entity's then-current fair value. The fair values of the warrant, loan commitment, and purchase right were not material at inception or 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
- 15 -


Table of Contents
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 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 period from July 1, 2020 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 expenses, net on the Company's unaudited condensed consolidated statement of operations.


- 16 -


Table of Contents
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 March 31, 2021 and December 31, 2020, the Company has not issued any shares of preferred stock. See Note 16, Subsequent Events, for information on the Securities Purchase Agreement the Company executed on April 27, 2021.
The following tables provide a reconciliation of the beginning and ending carrying amounts for the periods presented for the components of which is the deficit attributable to stockholders of the Company and equity attributable to non-controlling interest:

(in thousands)Additional Paid-In CapitalAccumulated (Deficit)Total Priority Technology Holdings, Inc. Stockholders' (Deficit)
Preferred StockCommon StockTreasury Stock (a)
SharesAmountSharesAmountSharesAmount
January 1, 2021 $ 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 $ 67,640 $68 451 $(2,388)$7,257 $(104,692)$(99,755)


(in thousands)Additional Paid-In CapitalAccumulated (Deficit)Total Priority Technology Holdings, Inc. Stockholders' (Deficit)NCI (b)
Preferred StockCommon StockTreasury Stock (a)
SharesAmountSharesAmountSharesAmount
January 1, 2020 $ 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 $ 67,061 $68 451 $(2,388)$3,989 $(133,543)$(131,874)$5,654 
- 17 -


Table of Contents
(a)At cost
(b)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. 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 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.


- 18 -


Table of Contents

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 under the 2018 Equity Incentive Plan was $0.6 million and $0.3 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
During the three months ended March 31, 2021, the Company converted a $0.3 million liability-classified stock compensation accrual for restricted stock units under the 2018 Equity Incentive Plan, whereby the service inception date preceded the future grant-date, to an equity-classified award when the restricted stock units were granted.

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


13.    FAIR VALUE

Fair Value Measurements

At March 31, 2021 and December 31, 2020, the Company no longer has any fair value estimates that are required to be remeasured at the end of each reporting period on a recurring basis.

Fair Value Disclosures

Notes Receivable

Notes receivable are carried at amortized cost. Substantially all of the Company's notes receivable are secured, and the Company has provided for allowances when it believes that certain notes receivable may not be collectible. The fair value of the Company's notes receivable, net at March 31, 2021 and December 31, 2020 was approximately $6.9 million and $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 7, Debt Obligations) are reflected in the Company's consolidated balance sheets at carrying value since the Company did not elect to remeasure debt obligations to fair value at the end of each reporting period.

The fair value of the term loan facility under the Borrowers' Senior Credit Agreement at March 31, 2021 and December 31, 2020 was estimated to be approximately $275.2 million and $278.0 million, respectively. The fair value of these notes with a notional value and carrying value (gross of deferred costs and discounts) of $274.6 million and $279.4 million, respectively, was estimated using binding and non-binding quoted prices in an active secondary market, which considers the Borrowers' credit risk and market related conditions, and is within Level 3 of the fair value hierarchy.
The carrying values of the Borrowers' other long-term debt obligations approximate fair value due to mechanisms in the credit agreements that adjust the applicable interest rates and the lack of a market for these debt obligations.


14.    SEGMENT INFORMATION

At March 31, 2021, the Company has three 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
- 19 -


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

More information about our three 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.

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

Information on reportable segments and reconciliations to consolidated revenues, consolidated income (loss) from operations, and consolidated depreciation and amortization are as follows for the periods presented:
(in thousands)Three Months Ended March 31,
20212020
Revenues:
Consumer Payments$108,393 $86,031 
Commercial Payments3,500 6,368 
Integrated Partners1,404 4,534 
Consolidated revenues$113,297 $96,933 
Income (loss) from operations:
Consumer Payments$13,363 $7,152 
Commercial Payments(409)764 
Integrated Partners92 368 
Corporate(8,519)(4,725)
Consolidated income from operations$4,527 $3,559 
Depreciation and amortization:
Consumer Payments$8,579 $8,583 
Commercial Payments74 76 
Integrated Partners129 1,311 
Corporate288 302 
Consolidated depreciation and amortization$9,070 $10,272 


- 20 -


Table of Contents
A reconciliation of total income from operations of reportable segments to net loss is provided in the following table:
(in thousands)Three Months Ended March 31,
20212020
Total income from operations of reportable segments$13,046 $8,284 
Corporate(8,519)(4,725)
Interest expense(9,168)(10,315)
Other expenses, net(269)(346)
Income tax benefit2,231 1,233 
Net loss$(2,679)$(5,869)

Substantially all revenue is generated in the United States.

For the three months ended March 31, 2021 and March 31, 2020, no one merchant customer accounted for 10% or more of the Company's consolidated revenues. Most of the Company's merchant customers were referred to the Company by an ISO or other referral partners. If the Company's agreement with an ISO allows the ISO to have merchant portability rights, the ISO can potentially move the underlying merchant relationships to another merchant acquirer upon notice to the Company and completion of a "wind down" period. For the three months ended March 31, 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 23.3% and 20.1%, respectively, of the Company's consolidated revenues.

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

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


15.     LOSS PER COMMON SHARE

The following tables set forth the computation of the Company's basic and diluted loss per common share:
(in thousands, except per share amounts)Three Months Ended March 31,
20212020
Basic and Diluted Loss Per Common Share:
Numerator:
Net loss$(2,679)$(5,869)
Less: Income attributable to non-controlling interests  
Net loss attributable to common shareholders$(2,679)$(5,869)
Denominator:
Weighted-average common stock shares outstanding67,543 67,061 
Basic and Diluted Loss Per Common Share$(0.04)$(0.09)

- 21 -


Table of Contents
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, 2021March 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 
Total6,392 6,195 
(1)Issued by M.I. Acquisitions, Inc. prior to July 25, 2018
(2)Granted under the 2018 Equity Incentive Plan


16.     SUBSEQUENT EVENTS

Merger Agreement

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

The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (a) Merger Sub will merge with and into Finxera (the “Merger”), with the separate existence of Merger Sub ceasing and Finxera continuing as the surviving entity of the Merger (the “Surviving Entity”); (b) at the effective time of the Merger (the “Effective Time”) each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the Surviving Entity; and (c) the shares of common stock of Finxera designated as “Class A Common Stock”, “Class B Common Stock” and preferred stock “Series C Participating Preferred Stock” issued and outstanding immediately prior to the closing of the transactions contemplated by the Merger Agreement (the “Closing”) will be converted into rights to receive certain cash and stock consideration and a contingent right to receive a portion of any payments made following the determination of the purchase price adjustments (a “Deferred Payment”).

Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of: (a) $425,000,000, plus (b) the aggregate value of the current assets of the Finxera and each of its subsidiaries (the “Group Companies”) less the aggregate value of the current liabilities of the Group Companies, in each case, determined on a consolidated basis without duplication, as of the close of business on the business day immediately preceding the date of the Closing (which may be a positive or negative number), plus (c) the sum of all cash and cash equivalents of the Group Companies as of the close of business on the business day immediately preceding the date of the Closing, minus (d) the amount of indebtedness of the Group Companies as of the close of the business day immediately prior to the date of the Closing, minus (e) the amount of unpaid transaction expenses, minus (f) 25% of the earnings of the Group Companies during the period between the signing of the Merger Agreement and the Closing.

Each option to purchase one or more shares of Class B Common Stock of Finxera issued pursuant to the Finxera Holdings, Inc. 2018 Equity Incentive Plan (the “Company Options”), vested as of immediately prior to the Closing (the “Vested Company Option”), that is issued and outstanding immediately prior to the Closing will be deemed to be exercised and converted into the right to receive a cash payment with respect to such Vested Company Option and a contingent right to receive a portion of any Deferred Payments.

- 22 -


Table of Contents
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.

- 23 -


Table of Contents
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.






- 24 -


Table of Contents
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes for the years ended December 31, 2020, 2019 and 2018 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2021 (the "Annual Report").


Cautionary Note Regarding Forward-Looking Statements 

Some of the statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward- looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: 

the impact of the COVID-19 pandemic;
competition in the payment processing industry;
the use of distribution partners;
any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise;
any breakdowns in our processing systems;
government regulation, including regulation of consumer information;
the use of third-party vendors;
any changes in card association and debit network fees or products;
any failure to comply with the rules established by payment networks or standards established by third-party processor;
any proposed acquisitions or any risks associated with completed acquisitions; and
other risks and uncertainties set forth in the "Item 1A - Risk Factors" included in this Quarterly Report or our Annual Report.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. 

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause our actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially
- 25 -


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

You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. 

Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Terms Used in this Quarterly Report on Form 10-Q

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "we," "us" and "our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries.

Recent Developments

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

The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (a) Merger Sub will merge with and into Finxera (the “Merger”), with the separate existence of Merger Sub ceasing and Finxera continuing as the surviving entity of the Merger (the “Surviving Entity”); (b) at the effective time of the Merger (the “Effective Time”) each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the Surviving Entity; and (c) the shares of common stock of Finxera designated as “Class A Common Stock”, “Class B Common Stock” and preferred stock “Series C Participating Preferred Stock” issued and outstanding immediately prior to the closing of the transactions contemplated by the Merger Agreement (the “Closing”) will be converted into rights to receive certain cash and stock consideration and a contingent right to receive a portion of any payments made following the determination of the purchase price adjustments (a “Deferred Payment”).

Consideration for the Merger will consist of a combination of cash and stock, with the purchase price comprising of: (a) $425,000,000, plus (b) the aggregate value of the current assets of the Finxera and each of its subsidiaries (the “Group Companies”) less the aggregate value of the current liabilities of the Group Companies, in each case, determined on a consolidated basis without duplication, as of the close of business on the business day immediately preceding the date of the Closing (which may be a positive or negative number), plus (c) the sum of all cash and cash equivalents of the Group Companies as of the close of business on the business day immediately preceding the date of the Closing, minus (d) the amount of indebtedness of the Group Companies as of the close of the business day immediately prior to the date of the Closing, minus (e) the amount of unpaid transaction expenses, minus (f) 25% of the earnings of the Group Companies during the period between the signing of the Merger Agreement and the Closing.

Each option to purchase one or more shares of Class B Common Stock of Finxera issued pursuant to the Finxera Holdings, Inc. 2018 Equity Incentive Plan (the “Company Options”), vested as of immediately prior to the Closing (the “Vested Company Option”), that is issued and outstanding immediately prior to the Closing will be deemed to be exercised and converted into the right to receive a cash payment with respect to such Vested Company Option and a contingent right to receive a portion of any Deferred Payments.

- 26 -


Table of Contents
Residual Purchase Agreement

On April 28, 2021, a subsidiary of the Company completed an asset acquisition of certain residual portfolio rights for a purchase price of $42.4 million. The seller’s note payable to the Company of $5.0 million at the time of the purchase was netted against the purchase price, resulting in cash of $37.4 million being paid by the Company to the seller, which was funded from cash proceeds of the Securities Purchase Agreement executed on April 27, 2021.

- 27 -


Table of Contents
Results of Operations

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

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

(dollars in thousands)Three Months Ended March 31,
20212020Change% Change
REVENUES$113,297 $96,933 $16,364 16.9 %
OPERATING EXPENSES:
Costs of services81,863 66,364 15,499 23.4 %
Salary and employee benefits9,548 10,129 (581)(5.7)%
Depreciation and amortization9,070 10,272 (1,202)(11.7)%
Selling, general and administrative8,289 6,609 1,680 25.4 %
Total operating expenses108,770 93,374