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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 June 30, 2021

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to 
          Priority Technology Holdings, Inc.       
Commission file number: 001-37872
prth-20210630_g1.jpg
(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 August 6, 2021, a total of 69,588,501 shares of common stock, par value $0.001 per share, were issued and 69,137,277 shares were outstanding.





  Priority Technology Holdings, Inc.
Quarterly Report on Form 10-Q
June 30, 2021

TABLE OF CONTENTS


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
June 30, 2021December 31, 2020
ASSETS
Current assets:
Cash$11,111 $9,241 
Restricted cash18,232 78,879 
Accounts receivable, net of allowance of $417 and $574
50,596 41,321 
Prepaid expenses and other current assets5,443 3,500 
Current portion of notes receivable, net of allowance of $467 and $467
230 2,190 
Settlement assets722 753 
Total current assets86,334 135,884 
Notes receivable, less current portion3,915 5,527 
Property, equipment, and software, net24,245 22,875 
Goodwill124,078 106,832 
Intangible assets, net145,836 98,057 
Deferred income taxes, net47,578 46,697 
Other non-current assets10,890 1,957 
Total assets$442,876 $417,829 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses$37,420 $29,821 
Accrued residual commissions28,201 23,824 
Customer deposits and advance payments4,269 2,883 
Current portion of long-term debt3,000 19,442 
Settlement obligations11,278 72,878 
Total current liabilities84,168 148,848 
Long-term debt, net of current portion, discounts and debt issuance costs318,187 357,873 
Other non-current liabilities8,333 9,672 
Total long-term liabilities326,520 367,545 
Total liabilities410,688 516,393 
Commitments and contingencies (Note 11)
Redeemable senior preferred stock:
Redeemable senior preferred stock - $0.001 par value per share; 250,000 shares authorized; 150,000 issued; 150,000 shares outstanding at June 30, 2021
133,762  
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; 1.0 billion shares authorized; 69,561,311 shares issued at June 30, 2021 and 67,842,204 shares issued at December 31, 2020; 69,110,087 shares outstanding at June 30, 2021 and 67,390,980 shares outstanding at December 31, 2020
70 68 
Additional paid-in capital14,913 5,769 
Treasury stock, 451,224 common shares, at cost
(2,388)(2,388)
Accumulated deficit(114,169)(102,013)
Total stockholders' deficit(101,574)(98,564)
Total liabilities, redeemable senior preferred stock and stockholders' deficit$442,876 $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 June 30,Six Months Ended June 30,
2021202020212020
REVENUES$125,014 $92,356 $238,311 $189,289 
OPERATING EXPENSES:
Costs of services89,831 62,398 171,694 128,762 
Salary and employee benefits10,351 9,556 19,899 19,685 
Depreciation and amortization10,723 10,363 19,793 20,635 
Selling, general and administrative6,7046,008 14,993 12,617 
Total operating expenses117,609 88,325 226,379 181,699 
Income from operations7,405 4,031 11,932 7,590 
OTHER EXPENSES:
Interest expense(7,285)(11,668)(16,453)(21,983)
Debt extinguishment and modification costs(8,322) (8,322)(376)
Other income (expenses), net215 194 (54)224 
Total other expenses, net(15,392)(11,474)(24,829)(22,135)
Loss before income taxes(7,987)(7,443)(12,897)(14,545)
Income tax expense (benefit) 1,490 415 (741)(818)
Net loss(9,477)(7,858)(12,156)(13,727)
Dividends and accretion attributable to redeemable senior preferred stockholders(3,911) (3,911) 
Non-controlling interest preferred unit redemptions(10,777) (10,777) 
Net loss attributable to common stockholders of PRTH$(24,165)$(7,858)$(26,844)$(13,727)
Loss per common share:
Basic and diluted$(0.35)$(0.12)$(0.39)$(0.20)
Weighted-average common shares outstanding:
Basic and diluted69,496 67,114 68,525 67,088 

See Notes to Unaudited Condensed Consolidated Financial Statements
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Priority Technology Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss$(12,156)$(13,727)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization of assets19,793 20,635 
Equity-classified and liability-classified stock-based compensation1,414 1,026 
Amortization of debt issuance costs and discounts1,158 1,116 
Write off of deferred loan costs and discount3,006  
Deferred income tax benefit(3,446)(3,569)
Change in allowance for deferred tax assets2,565 2,642 
Payment-in-kind interest2,512 3,415 
Other non-cash items, net(39)206 
Change in operating assets and liabilities (net of acquisitions):
Accounts receivable(9,115)974 
Settlement assets and obligations, net(61,570)1,584 
Prepaid expenses and other current assets(1,626)851 
Notes receivable198 (888)
Accounts payable and other accrued liabilities10,490 (1,845)
Customer deposits and advance payments1,385 (2,046)
Other assets and liabilities, net307 (552)
Net cash (used in) provided by operating activities(45,124)9,822 
Cash flows from investing activities:
Acquisition of business(34,507) 
Additions to property, equipment, and software(5,222)(4,249)
Acquisitions of intangible assets(43,353)(3,286)
Net cash used in investing activities(83,082)(7,535)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issue discount293,619  
Debt issuance and modification costs paid(7,597)(2,749)
Repayments of long-term debt(384,552)(2,003)
Borrowings under revolving credit facility30,000 7,000 
Repayments under revolving credit facility (4,000)
Proceeds from issuance of senior preferred equity, net of issue discount145,000  
Senior preferred equity issuance fees and costs(5,472) 
Dividends paid to redeemable senior preferred stockholders(1,575) 
Redemptions of non-controlling interests of subsidiary(815) 
Proceeds from exercise of stock options821  
Net cash provided by (used in) financing activities69,429 (1,752)
Net change in cash and restricted cash:
Net (decrease) increase in cash and restricted cash(58,777)535 
Cash and restricted cash at beginning of period88,120 50,465 
Cash and restricted cash at end of period$29,343 $51,000 
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Supplemental cash flow information:
Cash paid for interest$10,276 $17,032 
Non-cash investing and financing activities:
Payment-in-kind interest added to principal of debt obligations$2,512 $3,415 
Payment of accrued contingent consideration for asset acquisition from offset of account receivable$ $1,686 
Accruals for asset acquisition contingent consideration$3,797 $ 
Notes receivable from sellers used as partial consideration for acquisitions$3,499 $ 
Reconciliation of cash and restricted cash:
Cash$11,111 $5,854 
Restricted cash18,232 45,146 
Total cash and restricted cash$29,343 $51,000 
See Notes to Unaudited Condensed Consolidated Financial Statements
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PRIORITY TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


1.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business, Consolidation, and Presentation
Priority Technology Holdings, Inc. and its consolidated subsidiaries are referred to herein collectively as "Priority," "PRTH," the "Company," "we," "our" or "us," unless the context requires otherwise. Priority is a provider of merchant acquiring, integrated payment software and commercial payment solutions.
The Company operates on a calendar year ending each December 31 and on four calendar quarters ending on March 31, June 30, September 30, and December 31 of each year. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
These unaudited condensed consolidated financial statements include the accounts of the Company including those of its majority-owned subsidiaries, and all material intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles 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 Coronavirus Disease ("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, 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 companies that comply with public company effective dates.
Comprehensive Income (Loss)
For the three months and six months ended June 30, 2021 and June 30, 2020, the Company had no activities to report as components of other comprehensive income (loss). Therefore, no separate Statement of Comprehensive Income (Loss) was
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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
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, 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 ASC Topic 740 related to the approach for intra-period 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, 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 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.
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Leases (ASC 842)
In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases. 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.

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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.
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 and six months ended June 30, 2021 and June 30, 2020:
(in thousands)Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenue Type
Merchant card fees$118,367 $85,686 $226,069 $174,772 
Outsourced services and other services4,825 5,965 9,203 12,756 
Equipment1,822 705 3,039 1,761 
Total revenues$125,014 $92,356 $238,311 $189,289 
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 ("ISO"), 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
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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, 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 June 30, 2021 and December 31, 2020 was as follows:
(in thousands)Consolidated Balance Sheet LocationJune 30, 2021December 31, 2020
Liabilities:
Contract liabilities, net (current)Customer deposits and advance payments$1,494$1,494
The balances for the contract liabilities were approximately $1.6 million, $1.7 million and $1.9 million at June 30, 2020, March 31, 2020 and January 1, 2020 respectively. The changes in the balances during the three months and six months ended June 30, 2021 and June 30, 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 and six months ended June 30, 2021 and June 30, 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.
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Member banks held merchant funds of $120.9 million and $103.8 million at June 30, 2021 and December 31, 2020, respectively.
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 and six months ended June 30, 2021 were $0.6 million and $1.0 million, respectively. Expenses for actual and estimated merchant losses for the three months and six months ended June 30, 2020 were $1.2 million and $2.1 million, respectively.
Commercial Payments Segment
In the Company’s Commercial Payments segment, the Company earns revenue from certain of its services by processing transactions for financial institutions and other business customers. Customers transfer funds to the Company, which are held in either company-owned bank accounts controlled by the Company or bank-owned For the Benefit Of ("FBO") accounts controlled by the banks, until such time as the transactions are settled with the customer payees. Amounts due to customer payees that are held by the Company in Company-owned bank accounts are included in restricted cash. Amounts due to customer payees that are held in bank-owned FBO accounts 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. Bank-owned FBO accounts held funds of $57.9 million at June 30, 2021, which was the result of a transfer of customer restricted cash from Company-owned bank accounts to bank-owned FBO accounts due to a change in our business practice for certain types of customer deposits and cash advance payments. Company-owned bank accounts held $11.3 million at June 30, 2021 and $72.9 million at December 31, 2020; therefore, these cash balances are included within restricted cash and settlement obligations in the Company’s consolidated balance sheets.
The Company's settlement assets and obligations at June 30, 2021 and December 31, 2020 were as follows:
(in thousands)June 30, 2021December 31, 2020
Settlement Assets:
Card settlements due from merchants, net of estimated losses$722 $753 
Settlement Obligations:
Due to customer payees$11,278 $72,878 
4.    ACQUISITIONS
Based on their purchase prices and pre-acquisition operating results and assets, none of the businesses acquired by the Company in 2021, as described below, met the materiality requirements for pro forma disclosures.
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Pending Merger with Finxera
On March 5,2021, we announced that we entered into a Merger Agreement (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 option holders of Finxera (the "Equityholder Representative"), and Stone Point Capital, LLC in which Priority will acquire, via merger, 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; (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 (a) $425.0 million, 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.
This transaction is expected to close in the third quarter of 2021.
Asset Acquisition
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 and $24.8 million of post-closing payments and earn-out payments based on meeting certain attrition thresholds over a three-year period from the date of acquisition. As of June 30, 2021, the sellers earned $3.8 million of the $24.8 million, which was accrued at June 30, 2021, increasing the total purchase price recorded at June 30, 2021 to $46.2 million, which was recorded to residual buyout intangible assets with a seven-year useful life amortized on a straight-line basis. In addition to the $24.8 million, there is a further earn-out opportunity based on a percentage of annual portfolio performance in excess of targets for five years from the date of acquisition. As this is an asset acquisition, additional purchase price is accounted for when payment to the seller becomes probable and is added to the carrying value of the asset. The seller’s note payable to the Company of $3.0 million and an advance of $2.0 million outstanding at the time of the purchase was netted against the initial purchase price, resulting in cash of $37.4 million being paid by the Company to the seller at closing, which was funded from cash proceeds of the Securities Purchase Agreement executed on April 27, 2021 (refer to Note 9, Redeemable Senior Preferred Stock and Warrants). This asset acquisition became part of the Company's Consumer Payments reportable segment. Transaction costs were not material and were expensed. Simultaneous with the purchase of the residual portfolio rights, the Company and the seller entered into a five-year processing agreement whereby the seller shall refer prospective new merchants to the Company in exchange for commissions and up to an additional $11.2 million for achieving certain targets for
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new merchant accounts over specified periods of time. This processing agreement is exclusive for years one through three and has minimum requirements for years four and five.
Business Combination
On June 25, 2021, a subsidiary of the Company acquired certain assets and assumed certain related liabilities under an asset purchase agreement. The purchase of these net assets was deemed a business under ASC 805. Prior to this acquisition, the business was an ISO partner of the Company where it developed expertise in software-integrated payment services, as well as marketing programs for specific verticals such as automotive and youth sports. This business is reported within the Company's Consumer Payments reportable segment. The initial purchase price for the net assets was $35.0 million in cash and a total purchase price of not more than $60.0 million including post-closing payments and earn-out payments based on certain gross profit and revenue achievements over a three-year period from the date of acquisition. The seller's note payable to the Company of $0.5 million at the time of purchase was netted against the initial purchase price, resulting in cash of $34.5 million being paid by the Company to the seller, which was funded from a $30.0 million draw down of the revolving credit facility under the Credit Agreement and held by the Company and $4.5 million cash on hand. The initial consideration included $17.3 million recorded in merchant portfolio intangible assets with a ten-year useful life amortized on a straight-line basis, $0.5 million recorded in fixed assets and other current assets, and $17.3 million recorded in goodwill. The initial assignment of consideration is subject to revision during the measurement period of up to one year from the acquisition date. Transaction costs were not material and were expensed.
The goodwill and intangibles for acquisitions that have closed as of June 30, 2021 are deductible by the Company for income tax purposes.
5.    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 June 30, 2021 and December 31, 2020.
The Company considered the market conditions for triggering events including those generated by the COVID-19 pandemic and concluded that there were no indicators of impairment for the goodwill of the Consumer Payments reporting unit for the three months and six months ended June 30, 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 triggering events including 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 fourth quarter of 2021 using market data and discounted cash flow analysis. The Company concluded there was no impairment as of June 30, 2021 or December 31, 2020. As such, there was no accumulated impairment loss as of June 30, 2021 and December 31, 2020.
See Note 4, Acquisitions, for information about goodwill recorded in the three months ended June 30, 2021 related to the business combination.
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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 June 30, 2021 and December 31, 2020, intangible assets consisted of the following:
(in thousands)June 30, 2021December 31, 2020
Other intangible assets:
Merchant portfolios$73,062 $55,816 
Customer relationships40,740 40,740 
Residual buyouts162,312 116,112 
Non-compete agreements3,390 3,390 
Trade names2,870 2,870 
Technology14,390 14,390 
ISO relationships15,200 15,200 
 Total gross carrying value311,964 248,518 
Less accumulated amortization:
Merchant portfolios(24,586)(19,471)
Customer relationships(31,837)(30,267)
Residual buyouts(81,009)(72,659)
Non-compete agreements(3,390)(3,390)
Trade names(1,770)(1,651)
Technology(14,000)(13,951)
ISO relationships(7,783)(7,319)
Total accumulated amortization (164,375)(148,708)
Accumulated allowance for impairment(1,753)(1,753)
 Net carrying value$145,836 $98,057 
Amortization expense for finite-lived intangible assets was $8.7 million and $15.7 million for the three months and six months ended June 30, 2021, respectively, and $8.4 million and $16.9 million for the three months and six months ended June 30, 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 June 30, 2021.
See Note 4, Acquisitions, for information about other intangible assets recorded in the three months ended June 30, 2021 related to an asset acquisition and a business combination, and see Note 11, Commitments and Contingencies, for information about contingent consideration related to an acquisition consummated in 2019.
6.    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
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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 June 30, 2021 and December 31, 2020 follows:
(in thousands)June 30, 2021December 31, 2020
Furniture and fixtures$2,795 $2,795 
Equipment11,846 10,216 
Computer software48,143 44,320 
Leasehold improvements6,252 6,250 
 69,036 63,581 
Less accumulated depreciation(44,791)(40,706)
Property, equipment, and software, net$24,245 $22,875 
Depreciation expense for property, equipment, and software totaled $2.0 million and $4.1 million for the three months and six months ended June 30, 2021, respectively, and $1.9 million and $3.7 million for the three months and six months ended June 30, 2020, respectively.
7.    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 June 30, 2021 or December 31, 2020 consisted of the following:
(in thousands)June 30, 2021December 31, 2020
Accounts payable - trade$6,094 $4,308 
Accrued card network fees9,505 8,041 
 $15,599 $12,349 

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8.    DEBT OBLIGATIONS
Outstanding debt obligations as of June 30, 2021 and December 31, 2020 consisted of the following:
(in thousands)June 30, 2021December 31, 2020
Credit and Guaranty Agreement:
Term facility - Matures April 27, 2027 and bears interest at LIBOR (with a LIBOR "floor" of 1.00%) plus 5.75% at June 30, 2021 (actual rate of 6.75% at June 30, 2021)
$300,000 $ 
Revolving credit facility - $40.0 million line, matures April 27, 2026 and bears interest at LIBOR (with a LIBOR "floor" of 1.00%) plus 4.75% at June 30, 2021 (actual rate of 5.75% at June 30, 2021)
30,000  
Senior Credit Agreement:
Term facility - Original maturity at January 3, 2023 and bore interest at LIBOR (with a LIBOR "floor" of 1.00% beginning March 18, 2020) plus 6.50% at December 31, 2020 (actual rate of 7.50% at December 31, 2020)
 279,417 
Term Loan - Subordinated, original maturity at July 3, 2023 and bore interest at 5.00% plus an applicable margin (actual rate of 12.50% at December 31, 2020)
 102,623 
Total debt obligations330,000 382,040 
Less: current portion of long-term debt(3,000)(19,442)
Less: unamortized debt discounts and deferred financing costs(8,813)(4,725)
Long-term debt, net$318,187 $357,873 
Credit and Guaranty Agreement
On April 27, 2021, Priority Holdings LLC ("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 $300.0 million (the "Initial Term Loan"), the proceeds of which were used to fund the refinancing described below, (ii) a senior secured revolving credit facility in an aggregate amount not to exceed $40.0 million outstanding at any time (the “Revolving Credit Facility”) and (iii) a senior secured first lien delayed draw term loan facility in an aggregate principal amount of $290.0 million (the “Delayed Draw Term Loan”), the proceeds of which may be used to fund the Company’s acquisition of Finxera. Until the Delayed Draw Term Loan is drawn, the Loan Parties will pay a fee on the undrawn amounts at a rate of 2.875% per annum from the 46th day after the closing date of the Credit Agreement to the 90th day after closing and 5.75% per annum thereafter for so long as the amounts remain committed and undrawn.
Outstanding borrowings under the Credit Agreement accrue interest using either a base rate (as defined therein) or a LIBOR rate plus an applicable margin per annum, as provided in the Credit Agreement, which includes a LIBOR rate floor of 1.0% per annum. Accrued interest is payable on each interest payment date (as defined in the Credit Agreement). The revolving credit facility incurs an unused commitment fee on any undrawn amount of the $40.0 million credit line in an amount equal to 0.5% per annum of the unused portion. Under the terms of the Credit Agreement, the future applicable interest rate margins may vary based on the Loan Parties Total Net Leverage Ratio in addition to future changes in the underlying market rates for LIBOR and the rate used for base-rate borrowing.
Holdings and certain other Loan Parties have previously entered into (i) the Senior Credit Agreement and (ii) the Term Loan Agreement, both of which are described below. The proceeds from the sale of the Securities (refer to Note 9, Redeemable Senior Preferred Stock and Warrants) and from the Initial Term Loan were used to refinance the Senior Credit Agreement and the Term Loan Agreement and all outstanding obligations thereunder were repaid in full (or in the case of outstanding undrawn
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letters of credit, deemed issued under the Credit Agreement), and all commitments and guaranties in connection therewith have been terminated or released (the "Refinancing").
Prepayments
Under the Credit Agreement, prepayments of outstanding principal may be made in permitted increments with a 1.0% penalty for certain prepayments made in connection with repricing transactions. Such premium will be based on the principal amount that is prepaid, subject to the terms of the credit agreements.
Acceleration
The outstanding amount of any loans and any other amounts owing by the Borrowers 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 and each fiscal quarter thereafter.
Senior Credit Agreement
Outstanding borrowings under that certain Credit and Guaranty Agreement, dated as of January 3, 2017 and subsequently amended, with Truist (the "Senior Credit Agreement"), accrued 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 provided for a LIBOR "floor" of 1.0% per annum. Accrued interest was payable monthly. The revolving credit facility incurred a commitment fee on any undrawn amount of the $25.0 million credit line, which equated to 0.50% per annum for the unused portion. The outstanding obligations under the Senior Credit Agreement at the time of the Refinancing were $274.6 million.
Term Loan Agreement
Outstanding borrowings under that certain Credit and Guaranty Agreement, dated as of January 3, 2017 and subsequently amended, with Goldman Sachs Specialty Lending Group, L.P. (the "Term Loan Agreement") accrued interest at 5.0%, plus an applicable margin, or percentage per annum, as indicated in the amended credit agreement. Accrued interest was payable quarterly at 5.0% per annum, and the accrued interest attributable to the applicable margin was capitalized as payment-in-kind ("PIK") interest each quarter. The outstanding obligations under the Term Loan Agreement at the time of the Refinancing were $105.1 million, which consisted of the principal amount borrowed under the Term Loan Agreement of $80.0 million plus accumulated PIK interest of $25.1 million.
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Contractual Maturities
Based on terms and conditions existing at June 30, 2021, future minimum principal payments for long-term debt are as follows:
(in thousands)Principal Due
Credit and Guaranty Agreement
Twelve-month period ending June 30,Term LoanRevolverTotal
2022 (current)$3,000 $ $3,000 
20233,000  3,000 
20243,000  3,000 
20253,000  3,000 
20263,000 30,000 33,000 
Beyond five years285,000  285,000 
Total$300,000 $30,000 $330,000 
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 Credit Agreement.
Interest Expense and Amortization of Deferred Loan Costs and Discounts
Interest expense, including fees for undrawn amounts under the revolving credit facility and the delayed draw term loan facility, as well as amortization of deferred financing costs and debt discounts, was $7.3 million and $16.5 million for the three months and six months ended June 30, 2021, respectively, and $11.7 million and $22.0 million for the three months and six months ended June 30, 2020, respectively. Interest expense included amortization of deferred financing costs and debt discounts of $0.6 million and $1.2 million for the three months and six months ended June 30, 2021, respectively, and $0.7 million and $1.1 million for the three months and six months ended June 30, 2020, respectively.
Deferred Loan Costs and Discounts, and Debt Extinguishment and Modification Expenses
Refinancing: The Initial Term Loan under the Credit Agreement was issued at a discount of $6.4 million. Additionally, the Company incurred approximately $12.9 million of costs for the Refinancing, including $5.7 million of fees related to the Delayed Draw Term Loan that was not drawn at June 30, 2021. The fees related to the Delayed Draw Term Loan have been deferred and included in other non-current assets on the Company’s consolidated balance sheet at June 30, 2021.The Company determined that the issuance of the Initial Term Loan under the Refinancing was partially an extinguishment and a modification. Of the remaining $7.2 million of costs incurred for the Refinancing, the Company recorded approximately $1.9 million as deferred financing costs, which are presented, along with the discount of $6.4 million, as a deduction from the debt obligations on the Company’s consolidated balance sheet at June 30, 2021. Additionally, the Company recorded debt extinguishment and modification costs of $8.3 million during the three months and six months ended June 30, 2021, which consisted primarily of $5.3 million of lender and third-party fees incurred in connection with the Refinancing and a $3.0 million partial write-off of previously deferred fees and costs under the Senior Credit Agreement and the Term Loan Agreement. These costs are reported within other expenses, net on the Company’s consolidated statements of operations.
Senior Credit Agreement: 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. Approximately $0.4 million of such costs were expensed in connection with the Sixth Amendment during the first quarter of 2020
9.    REDEEMABLE SENIOR PREFERRED STOCK AND WARRANTS
On April 27, 2021, the Company, entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") pursuant to which the Company (i) issued and sold 150,000 shares of redeemable senior preferred stock, par value $0.001 per share (the "Redeemable Senior Preferred Stock", and the shares issued the "Redeemable Senior Preferred Shares") at a purchase price of $150 million, or $1,000 per Redeemable Senior Preferred Share (the "Initial Redeemable Senior Preferred Stock Sale"), less a
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$5.0 million discount, 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 of $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 Redeemable Senior Preferred Shares which occurred on April 27, 2021, pursuant to the Securities Purchase Agreement, upon the consummation of the Company’s acquisition of Finxera and the satisfaction of other customary closing conditions, the Company may issue and sell to the Investors an additional 50,000 shares of Redeemable Senior Preferred Stock, at a purchase price of $50 million, or $1,000 per share (the "Acquisition Redeemable Senior Preferred Stock Sale"), less a discount of $625,000. The Company may also issue and sell to the Investors up to an additional 50,000 shares of Redeemable Senior Preferred Stock, at a purchase price of $1,000 per share, less a discount of $625,000, within 18 months after the consummation of the Acquisition Redeemable Senior Preferred Stock Sale upon the satisfaction of certain customary closing conditions.
The terms of the Redeemable Senior Preferred Shares are more fully described in the Certificate of Designations (“Certificate of Designations”), which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Redeemable Senior Preferred Shares. The Redeemable Senior Preferred Shares have no stated maturity. The Redeemable Senior Preferred Stock will remain outstanding indefinitely until redeemed in accordance with the terms of the Certificate of Designations or otherwise repurchased by the Company.
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.
Dividends
The dividend rate (the "Dividend Rate") will initially be equal to the Three-Month LIBOR Rate (subject to a 1.00% floor) plus 12.00% per annum, reset quarterly as provided in the Certificate of Designations in the Securities Purchase Agreement (the "Certificate of Designations").
The Dividend Rate shall increase automatically by (i) 2.00% per annum effective as of the first day of each Dividend Period, as defined in the Certificate of Designations, in respect of which the Company for any reason does not pay cash Dividends at or greater than the Three-Month LIBOR Rate for such Dividend Period plus 5.00% per annum through the final day of such Dividend Period, (ii) 3.00% per annum effective immediately upon the occurrence of and during the continuance of a Preferred Default, as defined in the Certificate of Designations, and (iii) 5.00% per annum effective immediately upon the 120th calendar day following the approval by the Sale Demand Special Committee of a Sale Transaction, as defined in the Certificate of Designations, if all required stockholder approval shall not have been obtained on or prior to such 120th calendar day, plus an additional 5.00% per annum on the 30th calendar day after such 120th calendar day and on the first day of each subsequent 30 calendar day period, which incremental increase(s) shall continue until such time as the Required Stockholder Approval, as defined in the Certificate of Designations, shall have been obtained.
The Company’s Board of Directors declared a dividend on June 30, 2021 in the amount of $3,412,500, comprised of (i) a cash payment of $1,575,000 determined at a Base Rate of 5.0% plus a LIBOR Rate of 1.0%, and (ii) a PIK of $1,837,500 determined at a Base Rate of 7.0%. The PIK dividend has been added to the carrying amount of the Redeemable Senior Preferred Shares in the Company’s consolidated balance sheet at June 30, 2021.
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Redemption
The liquidation preference (the "Liquidation Preference") of the Redeemable Senior Preferred Shares is $1,000 per share of Senior Preferred Stock. Prior to April 27, 2023, the Company may redeem the outstanding shares of Redeemable Senior Preferred Stock, in whole or in part, for cash at a price equal to 100% of the Liquidation Preference plus any accrued and unpaid dividends as of the redemption date.
On and after April 27, 2023, the Company may redeem the outstanding shares of Redeemable Senior Preferred Stock at any time, in whole or in part, for cash at a price equal to the sum of the (a) outstanding Liquidation Preference plus (b) any accrued and unpaid dividends on the shares of Redeemable Senior Preferred Stock redeemed, through and including the applicable redemption date.
Upon the occurrence of a change in control or a liquidation event, the Company will redeem all of the then outstanding Redeemable Senior Preferred Shares for cash at the redemption price described above.
From and after the earliest of (i) October 27, 2028, (ii) 30 days after written notice from the Investors to the Company of a failure by the Company to take steps within its control to prevent the Common Stock from no longer being listed, and (iii) the date that is 90 days following the Company’s failure to consummate when due a Mandatory Redemption of the Redeemable Senior Preferred Stock upon the occurrence of a change in control or liquidation event, the Investors may request the Company to pursue a sale transaction, the proceeds of which would be used to redeem the Redeemable Senior Preferred Shares.
Direct costs associated with the issuance of the Securities were $5.5 million, which along with the $5.0 million discount, have been accounted for as a reduction in the proceeds of the Securities. These net proceeds of $139.5 million have been allocated on the balance sheet to the Redeemable Senior Preferred Shares of $131.4 million, additional paid-in capital of $11.4 million for the warrants, and non-current assets of $3.3 million for the committed financing put right. The Company has presented the Redeemable Senior Preferred Shares in temporary equity and is accreting the carrying amount to its full redemption amount from the date of issuance to the earliest redemption date using the effective interest method. Such accretion totaled $0.5 million for the three and six months ended June 30, 2021.
The Company used the proceeds from the sale of the Securities to fund the Refinancing (see Note 8, Debt Obligations) and to pay certain fees and expenses relating to the Refinancing and the offering of the Securities.
10.    INCOME TAXES
The Company's effective income tax rate (benefit) for the three months and six months ended June 30, 2021 was (18.7)% and 5.7%, respectively. Our effective income tax rate for the three months ended June 30, 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 (benefit) for the three months and six months ended June 30, 2020 was (5.6)% and 5.6%, respectively. Our effective income tax rate for the three months ended June 30, 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, the Company is required to provide a valuation allowance against deferred income tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized.
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Based on management’s assessment, as of the second 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.
11.    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 June 30, 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 12, Related Party Transactions, for information on a loan commitment extended by the Company to another entity.
Contingent Consideration for Acquisitions
For 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 June 30, 2021, $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.
See Note 4, Acquisitions, for information about contingent consideration related to acquisitions consummated in 2021.
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.
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12.    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 June 30, 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 June 30, 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.
PHOT Preferred Unit Redemption - Distribution to Non-Controlling Interests
In February 2019, Priority Hospitality Technology, LLC ("PHOT"), a subsidiary of the Company, received a contribution of substantially all of the operating assets of eTab, LLC ("eTab") and CUMULUS POS, LLC ("Cumulus") under asset contribution agreements. PHOT is a part of the Company's Integrated Partners reportable segment. 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 ("CEO"). 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 non-controlling preferred equity interests ("NCIs") in PHOT. Under these redeemable NCIs, the contributors were eligible to receive up to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per annum) on any undistributed preferred equity interest ("Total Preferred Equity Interest"). Once the Total Preferred Equity Interest is distributed to the holders, the redeemable NCIs cease to exist. The Company's CEO initially owned 83.3% of the redeemable NCIs, which ownership interest was subsequently reduced to 35.3% through the CEO’s disposition of interests to others.
At the time of contribution, the Company determined that the contributor’s carrying value of the eTab and Cumulus net assets (as a common control transaction under GAAP) were not material. Under the guidance for a common control transaction, the contribution of the eTab and Cumulus 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 were not adjusted to reflect the historical results attributable to the eTab net assets. For the period from February 1, 2019 through October 31, 2020, a total of $250,000 of PHOT’s earnings were attributable to the NCIs of PHOT, and this same amount was distributed in cash to the NCIs during the same period.
In November 2020, the Company agreed with the contributors to an exchange of shares of common stock of the Company, or cash, for the remaining undistributed Total Preferred Equity Interests of $4.8 million. An exchange valuation for the Company’s common stock was established as of November 12, 2020 at the prior 20-day volume weighted average price of $2.78 per share. The exchange was contingent upon receiving approval of the Company’s lenders; therefore, the binding exchange agreements were not entered into until after lender approval was received in April 2021 in connection with the Refinancing.
In May 2021, the Company entered into exchange agreements and completed the exchange of 1,428,358 shares of common stock and $814,219 of cash for the Total Preferred Equity Interests. The CEO received 605,623 shares of common stock of the Company in exchange for his 35.3% interest, and the Company’s Executive Vice President of M&A and Corporate Development received 413,081 shares of common stock of the Company in exchange for her 24.1% interest. Subsequent to
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establishing the common stock valuation in November 2020 and the date of exchange in May 2021, the Company’s common stock price appreciated to $7.75 per share. The Company’s financial statements for the three months ended June 30, 2021 reflect this exchange as a distribution to non-controlling interests at an appreciated common stock value of $6.975 per share, which incorporates a 10% liquidity discount of $0.775 per share due to trading restrictions under Securities Rule 144. Therefore, the total distribution amounted to $10.8 million, comprised of $10.0 million of common stock and $0.8 million of cash.

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13.    RECONCILIATION OF STOCKHOLDERS' DEFICIT, NON-CONTROLLING INTERESTS AND REDEEMABLE SENIOR PREFERRED STOCK
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 June 30, 2021 and December 31, 2020, the Company has not issued any shares of preferred stock. See Note 9, Redeemable Senior Preferred Stock and Warrants, for information about the Redeemable Senior Preferred Stock.
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)
Redeemable Senior Preferred Stock (a)Preferred StockCommon StockTreasury Stock (b)
SharesAmountSharesAmountSharesAmountSharesAmount
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 
Proceeds from exercise of stock options— — — — 90 — — — 617 — 617 
Net loss— — — — — — — — — (2,679)(2,679)
March 31, 2021 $  $ 67,640 $68 451 $(2,388)$7,257 $(104,692)$(99,755)
Equity-classified stock-based compensation— — — — — — — — 821 — 821 
Vesting of stock-based compensation— — — — 12 — — — — — — 
Proceeds from issuance of redeemable senior preferred stock, net of discount and issuance costs150 131,426 — — — — — — — — — 
Proceeds from exercise of stock options— — — — 30 — — — 204 — 204 
Cash dividends declared and paid on redeemable senior preferred stock— — — — — — — (1,575)— (1,575)
PIK dividends declared on redeemable senior preferred stock— 1,838 — — — — — (1,838)— (1,838)
Fair value of warrants issued— — — — — — — 11,357 — 11,357 
Accretion of redeemable senior preferred stock discount— 498 — — — — (498)— (498)
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Fair value of PHOT preferred units redemption— — — — — — — (10,777)— (10,777)
Fair value of common shares issued for PHOT redemption— — — 1,428 2 9,962 — 9,964 
Net loss— — —