What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-14 · 374 added, 187 removed, 160 unchanged (78% of the section changed)

23 unchanged sentences

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.

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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

available relevant information.

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

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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.

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.

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).

This section includes a discussion and analysis of our results of operations for the three months ended June 30, 2021 (or second quarter 2021) compared to the three months ended June 30, 2020 (or second quarter 2020), and the six months ended June 30, 2021 (or first half 2021) compared to the six months ended June 30, 2020 (or first half 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,

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Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

(dollars in thousands) Three Months Ended June 30,

2021 2020 Change % Change

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Interest expense (7,285) (11,668) 4,383 (37.6) %

Other expenses, net (269) (346) 77 (22.3) %

Debt extinguishment and modification costs (8,322) — (8,322) nm*

Other income, net 215 194 21 10.8 %

Total other expenses, net (15,392) (11,474) (3,918) 34.1 %

Loss before income taxes (7,987) (7,443) (544) 7.3 %

Income tax expense 1,490 415 1,075 259.0 %

Net loss $ (9,477) $ (7,858) $ (1,619) 20.6 %

*Calculation is not meaningful ("nm").

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Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

(dollars in thousands) Six Months Ended June 30,

2021 2020 Change % Change

REVENUES $ 238,311 $ 189,289 $ 49,022 25.9 %

OPERATING EXPENSES:

Costs of services 171,694 128,762 42,932 33.3 %

Salary and employee benefits 19,899 19,685 214 1.1 %

Depreciation and amortization 19,793 20,635 (842) (4.1) %

Selling, general and administrative 14,993 12,617 2,376 18.8 %

Total operating expenses 226,379 181,699 44,680 24.6 %

Income from operations 11,932 7,590 4,342 57.2 %

OTHER EXPENSES:

Interest (expense) income (16,453) (21,983) 5,530 (25.2) %

Debt extinguishment and modification costs (8,322) (376) (7,946) nm*

Other (expenses) income, net (54) 224 (278) (124.1) %

Total other expenses, net (24,829) (22,135) (2,694) 12.2 %

Loss before income taxes (12,897) (14,545) 1,648 (11.3) %

Income tax benefit (741) (818) 77 (9.4) %

Net loss $ (12,156) $ (13,727) $ 1,571 (11.4) %

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

(in thousands) Three Months Ended March 31,

*Calculation is not meaningful ("nm").

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

(in thousands) Three Months Ended June 30,

2021 2020 Change % Change

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Operating expenses 4,020 5,179 (1,159) (22.4) %

Income (loss) from operations $ 21 $ 475 $ (454) (95.6) %

Operating margin 0.5% 8.4%

Depreciation and amortization $ 73 $ 78 $ (5) (6.4) %

Key Indicators:

Merchant bankcard processing dollar value $ 75,070 $ 64,247 $ 10,823 16.8 %

Merchant bankcard transaction volume 47 21 26 123.8 %

Integrated Partners:

Revenue $ 1,348 $ 4,995 $ (3,647) (73.0) %

Operating expenses 1,183 4,150 (2,967) (71.5) %

Income from operations $ 165 $ 845 $ (680) (80.5) %

Operating margin 12.2% 16.9%

Depreciation and amortization $ 76 $ 1,334 $ (1,258) (94.3) %

Key Indicators:

Merchant bankcard processing dollar value $ 13,051 $ 122,089 $ (109,038) (89.3) %

Merchant bankcard transaction volume 136 388 (252) (64.9) %

Income from operations of reportable segments $ 14,634 $ 8,590 $ 6,044 70.4 %

Corporate expense (7,229) (4,559) (2,670) (58.6) %

Consolidated income from operations $ 7,405 $ 4,031 $ 3,374 83.7 %

Corporate depreciation and amortization $ 277 $ 294 $ (17) (5.8) %

Key indicators:

Merchant bankcard processing dollar value $ 13,964,079 $ 9,197,245 $ 4,766,834 51.8 %

Merchant bankcard transaction volume 150,781 93,250 57,531 61.7 %

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The following table shows our reportable segments' financial performance data and selected performance measures for the six months ended June 30, 2021 compared to the six months ended June 30, 2020:

(in thousands) Six Months Ended June 30,

2021 2020 Change % Change

Consumer Payments:

Revenue $ 228,018 $ 167,738 $ 60,280 35.9 %

Operating expenses 200,207 153,316 46,891 30.6 %

Income from operations $ 27,811 $ 14,422 $ 13,389 92.8 %

Operating margin 12.2 % 8.6 %

Depreciation and amortization $ 18,876 $ 17,240 $ 1,636 9.5 %

Key Indicators:

Merchant bankcard processing dollar value $ 25,747,896 $ 19,397,656 $ 6,350,240 32.7 %

Merchant bankcard transaction volume 278,086 212,273 65,813 31.0 %

Commercial Payments:

Revenue $ 7,541 $ 12,022 $ (4,481) (37.3) %

Operating expenses 7,929 10,783 (2,854) (26.5) %

(Loss) income from operations $ (388) $ 1,239 $ (1,627) (131.3) %

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Merchant bankcard transaction volume 278,403 213,155 65,248 30.6 %

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Impact of COVID-19 on Results and Trends

The outbreak of COVID-19 in the United States, which was declared a pandemic by the World Health Organization on March 11, 2020, adversely affected commercial activity and contributed to a significant decline in economic activity in 2020.

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

This impact was evident in a decline in merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020.

This impact was evident in a decline in merchant bankcard volume and our revenue particularly during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020.

In May 2020, as shelter in place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return, and revenue growth was supplemented by the acceleration of certain specialized product offerings and ecommerce payment transactions.

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

While there continues to be considerable uncertainty regarding the future economic impacts of the pandemic, our operating results reflect a recovery from the negative affects during the months immediately following the pandemic declaration.

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

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

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

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

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Consolidated revenue

Our consolidated revenue in first quarter 2021 of $113.3 million increased by $16.4 million, or 16.9%, from revenue in first quarter 2020 of $96.9 million.

Our consolidated revenue in second quarter 2021 of $125.0 million increased by $32.7 million, or 35.4%, from revenue in second quarter 2020 of $92.4 million.

Revenue growth of $37.9 million in our Consumer Payments segment was partially offset by revenue declines of $1.6 million and $3.6 million in our Commercial Payments and Integrated Partners segments, respectively.

Revenue in Consumer Payments segment

Consumer payments revenue in first quarter 2021 of $108.4 million increased $22.4 million, or 26.0%, compared to revenue in first quarter 2020 of $86.0 million.

This increase was driven by $9.7 million, or 372.1%, revenue growth from high-margin specialized ecommerce merchants, and $12.7 million, or 15.2%, revenue growth in our base consumer payments business.

The commencement of the COVID-19 pandemic in March 2020 reduced our merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States.

This impact to first quarter 2020 revenue contributed to first quarter 2021 comparative revenue growth, but the pandemic’s precise impact to March 2020 revenue is not quantifiable by the Company.

Merchant bankcard processing dollar value in the first quarter of 2021 of $11.9 billion increased by $1.5 billion, or 14.3%, as compared with $10.4 billion in the first quarter of 2020.

Merchant bankcard transactions of 127.5 million in the first quarter of 2021 increased by 6.7%, as compared with 119.4 million in the first quarter of 2020.

Average ticket of $93.12 in first quarter 2021 increased 7.1%, as compared with $86.97 in first quarter 2020.

COVID-19 pandemic economic factors have impacted merchant volume mix and spending trends.

Consumer payments revenue in the second quarter 2021 of $119.6 million increased $37.9 million, or 46.4%, compared to revenue in second quarter 2020 of $81.7 million.

This increase was driven by $36.2 million, or 47.6%, revenue growth from our base merchant business, and was supplemented by $1.7 million, or 30.6%, revenue growth from specialized ecommerce merchants.

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

This impact was evident in a decline in merchant bankcard processing dollar value ("volume") and revenue during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020.

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

The pandemic’s negative impact to second quarter 2020 revenue contributed to the exceptionally high second quarter 2021 comparative revenue growth rate;

however, the pandemic’s precise impact to the second quarter revenue growth rate is not quantifiable by the Company.

Merchant bankcard volume in the second quarter of 2021 of $13.9 billion increased by $4.9 billion, or 54.0%, as compared with $9.0 billion in the second quarter of 2020.

Merchant bankcard transactions of 150.6 million in the second quarter of 2021 increased by 62.2%, as compared with 92.8 million in the second quarter of 2020.

Average ticket (calculated by dividing bankcard processing dollar value by the associated number of transactions processed) of $92.14 in second quarter 2021 decreased by 5.1%, as compared with $97.06 in second quarter 2020.

The pandemic’s influence on consumer behavior impacted the comparative volume, vertical industry mix and overall consumer spending trends.

Following the pandemic declaration in March 2020, consumers began to conduct fewer payment transactions at higher average tickets, and card-not-present transactions increased.

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

In the first quarter 2021, we experienced growth in both payment transactions and average ticket.

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

During first quarter 2021, our monthly average of new merchants boarded was 4,874 compared with 5,139 in first quarter 2020.

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Revenue in Commercial Payments segment

Commercial Payments revenue in first quarter 2021 of $3.5 million decreased by $2.9 million, or 45.0%, compared to revenue in first quarter 2020 of $6.4 million.

Commercial Payments revenue in second quarter 2021 of $4.0 million decreased by $1.6 million, or 28.5%, compared to revenue in second quarter 2020 of $5.7 million.

Revenue in this segment is derived primarily from the accounts payable automated solutions business and from our curated managed services business.

Revenue from the accounts payable automated solutions business in first quarter 2021 of $1.7 million increased $0.1 million, or 5.3%, from $1.6 million in first quarter 2020.

Revenue from the accounts payable automated solutions business in the second quarter of 2021 of $1.6 million increased $0.2 million, or 16.3%, from $1.4 million in second quarter of 2020.

This increase was due to increased volume from existing customers.

Revenue from our curated managed services business in the second quarter of 2021 of $2.4 million decreased by $1.8 million, or 43.3%, from revenue in the second quarter of 2020 of $4.2 million.

This decrease was driven by a decline and curtailment in 2020 of a customer’s merchant financing program in response to the COVID-19 related economic conditions and subsequent changes in the customer’s business model.

However, this customer initiated a new supplier enablement program during the first quarter of 2021 which contributed $1.1 million of revenue in second quarter 2021.

Revenue in Integrated Partners segment

Integrated Partners revenue in the second quarter of 2021 of $1.3 million decreased by $3.6 million, or 73.0%, compared to revenue in the second quarter of 2020 of $5.0 million.

PRET comprised $0.8 million and $4.5 million of this segment's revenue in the second quarter of 2021 and 2020, respectively.

Through September 22, 2020, PRET was comprised of our RentPayment and Landlord Station businesses.

RentPayment, which was sold on September 22, 2020, generated revenue of $4.4 million in the second quarter of 2020.

Simultaneous with the sale of RentPayment, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services, which offers us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer.

Revenue in the second quarter 2021 of $0.8 million from PRET’s ongoing business increased $0.7 million, or 547.1%, compared with revenue of $0.1 million in the second quarter of 2020.

Priority PayRight Health Solutions and PHOT comprise the remainder of this segment's revenue.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Consolidated revenue

Our consolidated revenue in the first half of 2021 of $238.3 million increased by $49.0 million, or 25.9%, from revenue in the first half of 2020 of $189.3 million.

Revenue growth of $60.3 million in our Consumer Payments segment was partially offset by revenue declines of $4.5 million and $6.8 million in our Commercial Payments and Integrated Partners segments, respectively.

Revenue in Consumer Payments segment

Consumer payments revenue in the first half of 2021 of $228.0 million increased $60.3 million, or 35.9%, compared to revenue in the first half of 2020 of $167.7 million.

This increase was driven by $48.8 million, or 30.6%, revenue growth from our base merchant business, and was supplemented by $11.4 million, or 137.9%, revenue growth from specialized ecommerce merchants.

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

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

The pandemic’s negative impact to first half 2020 revenue contributed to the exceptionally high first half 2021 comparative revenue growth rate;

however, the pandemic’s precise impact to the first half revenue growth rate is not quantifiable by the Company.

Merchant bankcard volume in the first half of 2021 of $25.7 billion increased by $6.4 billion, or 32.7%, as compared with $19.4 billion in the first half of 2020.

Merchant bankcard transactions of 278.1 million in the first half of 2021 increased by 31.0%, as compared with 212.3 million in the first half of 2020.

Average ticket of $92.59 in the first half of 2021 increased 1.3%, as compared with $91.38 in first half of 2020.

The pandemic’s influence on consumer behavior impacted the comparative volume, vertical industry mix and overall consumer spending trends.

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Revenue in Commercial Payments segment

Commercial Payments revenue in the first half of 2021 of $7.5 million decreased by $4.5 million, or 37.3%, compared to revenue in the first half of 2020 of $12.0 million.

Revenue in this segment is derived primarily from the accounts payable automated solutions business and from our curated managed services business.

Revenue from the accounts payable automated solutions business in the first half of 2021 of $3.3 million increased $0.3 million, or 10.5%, from $3.0 million in the first half of 2020.

This increase was due to increased business from existing customers.

Revenue from our curated managed services business in first quarter 2021 of $1.8 million decreased by $3.0 million, or 61.8%, from revenue in first quarter 2020 of $4.8 million.

Revenue from our curated managed services business in the first half of 2021 of $4.2 million decreased by $4.8 million, or 53.1%, from revenue in first half 2020 of $9.0 million.

However, this customer initiated a new supplier enablement program during the first quarter 2021 which contributed $1.5 million of revenue in the first half of 2021.

Revenue in Integrated Partners segment

Integrated Partners revenue in first quarter 2021 of $1.4 million decreased by $3.1 million, or 69.0%, compared to revenue in first quarter 2020 of $4.5 million.

Priority Real Estate Technology, LLC ("PRET") comprised $0.8 million and $4.0 million of this segment's revenue in first quarter 2021 and first quarter 2020, respectively.

Through September 22, 2020, PRET was comprised of our RentPayment business and our Landlord Station business.

RentPayment, which was sold on September 22, 2020, generated revenue of $3.8 million in first quarter 2020.

Simultaneous with this sale, PRET entered into revenue-producing agreements with the buyer to provide ongoing technology support and payment processing services, which offers us an opportunity to expand this relationship and provide payment processing services to existing customers of the buyer.

Revenue of $0.8 million from PRET’s ongoing business increased $0.7 million, or 578.8%, compared with revenue of $0.1 million in the first quarter 2020.

Priority PayRight Health Solutions ("PayRight") and Priority Hospitality Technology ("PHOT") comprise the remainder of this segment's revenue.

Integrated Partners revenue in the first half of 2021 of $2.8 million, decreased by $6.8 million, or 71.1%, compared to revenue in the first half of 2020 of $9.5 million.

PRET comprised $1.6 million and $8.5 million of this segment's revenue in the first half of 2021 and 2020, respectively.

Through September 22, 2020, PRET was comprised of our RentPayment and our Landlord Station businesses.

RentPayment, which was sold on September 22, 2020, generated revenue of $8.2 million in the first half of 2020.

Revenue in the first half of 2021 of $1.6 million from PRET’s ongoing business increased $1.3 million, or 562.7%, compared with revenue of $0.2 million in the in the first half of 2020.

Priority PayRight Health Solutions and PHOT comprise the remainder of this segment's revenue.

Consolidated Operating expenses

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

Our consolidated operating expenses in first quarter 2021 of $108.8 million increased $15.4 million, or 16.5%, from consolidated operating expenses in first quarter 2020 of $93.4 million.

This overall increase was driven by an increase in costs of services of $15.5 million, or 23.4%, resulting from higher revenues in first quarter 2021.

Depreciation and amortization expense of $9.1 million decreased by $1.2 million, or 11.7%, in first quarter 2021.

Salary and employee benefits expenses of $9.5 million decreased $0.6 million, or 5.7%, in first quarter 2021 driven by lower comparative headcount.

Selling, general and administrative expenses ("SG&A") of $8.3 million increased $1.7 million, or 25.4% in the first quarter 2021 from $6.6 million in first quarter 2020.

During the first quarter 2021, Corporate SG&A included $3.6 million of professional fees and expenses incurred in connection with the pending acquisition of Finxera, the April 2021 debt refinancing, and the April 2021 issuance of preferred stock.

During the first quarter 2020, Corporate SG&A included $0.5 million of professional fees and expenses incurred in connection with the March 2020 amendment of the debt facility, and Integrated Partners SG&A included $0.9 million of acquisition-related transition services.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Our consolidated operating expenses in the second quarter of 2021 of $117.6 million increased $29.3 million, or 33.2%, from consolidated operating expenses in the second quarter of 2020 of $88.3 million.

This increase was driven by an increase in costs of services.

Costs of services is the second quarter of 2021 of $89.8 million increased by $27.4 million or 44.0%, from costs of services in the second quarter of 2020 of $62.4 million due to higher revenues in the second quarter of 2021.

Depreciation and amortization expense in the second quarter of 2021 of $10.7 million increased by $0.4 million, or 3.5%, from depreciation and amortization expense in the second quarter of 2020 of $10.4 million.

Salary and employee benefits expense in the second quarter of 2021 of $10.4 million increased $0.8 million, or 8.3%, from salary and employee benefits expense in the second quarter of 2020 of $9.6 million, primarily attributable to higher incentive compensation accruals driven by our improved financial results and higher stock-based compensation.

Selling, General & Administrative ("SG&A") expense in the second quarter of 2021 of $6.7 million increased $0.7 million, or 11.6%, from SG&A expense in the second quarter of 2020 of $6.0 million, primarily attributable to acquisition and corporate financing activities.

During the second quarter of 2021, Corporate SG&A expense included $1.8 million of professional fees and expenses incurred in connection with the pending acquisition of Finxera, the April 2021 debt refinancing and issuance of redeemable senior preferred stock, and other acquisition activities.

During the second quarter of 2020, Corporate SG&A expense included $0.5 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, and the Integrated Partners segment SG&A expense included $0.8 million of acquisition-related transition services.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Our consolidated operating expenses in the first half of 2021 of $226.4 million increased $44.7 million, or 24.6%, from consolidated operating expenses in the first half of 2020 of $181.7 million.

This increase was driven by higher costs of services.

Costs of services in the first of half 2021 of $171.7 million increased $42.9 million, or 33.3%, from costs of services in the first of half 2020 of $128.8 million due to higher revenues in the first half of 2021.

Depreciation and amortization expense in the first half of 2021 of $19.8 million decreased by $0.8 million, or 4.1%, from depreciation and amortization expense in the first

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half of 2020 of $20.6 million.

Salary and employee benefits expense in the first half of 2021 of $19.9 million increased $0.2 million, or 1.1%, from salary and employee benefits expense in the first half of 2020 of $19.7 million.

SG&A expense in the first half of 2021 of $15.0 million increased $2.4 million, or 18.8%, from SG&A expense in the first half of 2020 of $12.6 million.

During the first half of 2021, Corporate SG&A expense included $5.5 million of professional fees and expenses incurred in connection with the pending acquisition of Finxera, the April 2021 debt refinancing and issuance of preferred stock, and other acquisition activities.

During the first half of 2020, Corporate SG&A expense included $1.0 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, and the Integrated Partners segment SG&A expense included $1.7 million of acquisition-related transition services.

Income (loss) from operations

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

Consolidated income from operations in first quarter 2021 of $4.5 million increased by $1.0 million, or 27.2%, from $3.6 million in first quarter 2020.

This increase was the result of lower depreciation and amortization expense of $1.2 million, lower salary and employee benefits expenses of $0.6 million, and higher revenues less costs of services of $0.9 million.

These favorable changes for first quarter 2021 were partially offset by higher SG&A of $1.7 million, driven by the $2.2 million increase in professional fees and other expenses described above under Consolidated Operating Expenses.

Our Consumer Payments segment contributed $13.4 million in income from operations for first quarter 2021, an increase of $6.2 million, or 86.8%, from $7.2 million in first quarter 2020.

The main driver of this increase was higher revenue less costs of services of $5.5 million.

Income from operations also benefited from a $0.5 million decrease in SG&A and a $0.2 million decrease in salary and employee benefits.

Our Commercial Payments segment had a loss from operations of $0.4 million for first quarter 2021 compared to income from operations of $0.8 million for first quarter 2020.

This decline was largely driven by lower revenues less costs of services of $1.4 million, resulting from the revenue decline in our curated managed services, slightly offset by a net decrease in salary and employee benefits and SG&A.

Our Integrated Partners segment earned income from operations of $0.1 million for first quarter 2021, a decrease of $0.3 million compared to $0.4 million of income from operations for first quarter 2020.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Consolidated income from operations in the second quarter of 2021 of $7.4 million increased by $3.4 million, or 83.7%, from $4.0 million in the second quarter of 2020.

This increase was the result of $5.2 million of higher revenue less costs of services partially offset by $0.8 million of higher salary and employee benefits expense, $0.7 million of higher SG&A expense and $0.4 million of higher depreciation and amortization expense.

Our Consumer Payments segment contributed $14.4 million in income from operations for the second quarter of 2021, an increase of $7.2 million, or 98.7%, from $7.3 million in the second quarter of 2020.

This increase was the result of $9.5 million higher revenue less costs of services and $0.2 million of lower SG&A expense being partially offset by $0.8 million of higher salary and employee benefits expense and $1.6 million of higher depreciation and amortization expense.

Our Commercial Payments segment had an income from operations slightly above breakeven for the second quarter of 2021 compared to income from operations of $0.5 million for the second quarter of 2020.

This decline was primarily the result of $0.5 million of lower revenues less costs of services.

Our Integrated Partners segment contributed income from operations of $0.2 million for the second quarter of 2021, a decrease of $0.7 million compared to $0.8 million of income from operations for the second quarter of 2020.

The decrease was driven by the September 2020 sale of PRET’s RentPayment business.

Revenues less costs of services decreased by $3.2 million, which was largely offset by decreases in SG&A of $1.2 million, business depreciation and amortization of $1.2 million and salary and employee benefits of $0.6 million.

Corporate expenses were $8.5 million for first quarter 2021, an increase of $3.8 million from expenses of $4.7 million for first quarter 2020.

This increase was driven by a $3.1 million increase in professional fees and expenses described above under Consolidated Operating Expenses.

Salaries and employee benefits increased $0.6 million largely due to higher incentive compensation accruals.

Revenues less costs of services decreased by $3.7 million, which was largely offset by decreases in SG&A of $1.2 million, depreciation and amortization expense of $1.3 million and salary and employee benefits of $0.6 million.

Corporate expenses were $7.2 million for the second quarter of 2021, an increase of $2.7 million from expenses of $4.6 million for the second quarter of 2020.

This increase was driven by a $2.1 million increase in professional fees and expenses and a $0.6 million increase in salaries and employee benefits, as described above in the prior section for Consolidated Operating Expenses.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Consolidated income from operations in the first half of 2021 of $11.9 million increased by $4.3 million, or 57.2%, from $7.6 million in the first half of 2020.

This increase was the result of $6.1 million of higher revenue less costs of services and $0.8 million of lower depreciation and amortization expense being partially offset by $0.2 million of higher salary and employee benefits expense and $2.4 million of higher SG&A expense.

Our Consumer Payments segment contributed $27.8 million in income from operations in the first half of 2021, an increase of $13.4 million, or 92.8%, from $14.4 million in the first half of 2020.

This increase was the result of $15.0 million higher revenue less costs of services and $0.7 million of lower SG&A expense being partially offset by $0.7 million of higher salary and employee benefits expense and $1.6 million of higher depreciation and amortization expense.

Our Commercial Payments segment had a loss from operations of $0.4 million in the first half of 2021 compared to income from operations of $1.2 million in the first half of 2020.

This $1.6 million decline was the result of $2.0 million of lower revenues less costs of services, partially offset by $0.4 million of lower salary and employee benefits.

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Our Integrated Partners segment contributed income from operations of $0.3 million in the first half of 2021, a decrease of $1.0 million compared to $1.2 million of income from operations in the first half of 2020.

The decrease was driven by the September 2020 sale of PRET’s RentPayment business.

Revenues less costs of services decreased by $7.0 million, which was largely offset by decreases in SG&A of $2.4 million, depreciation and amortization expense of $2.4 million and salary and employee benefits of $1.2 million.

Corporate expenses were $15.7 million in the first half of 2021, an increase of $6.5 million from expenses of $9.3 million in the first half of 2020.

This increase was driven by a $5.3 million increase in professional fees and expenses and a $1.2 million increase in salaries and employee benefits, as described above in the prior section for Consolidated Operating Expenses.

Interest expense

Interest expense in the first quarter 2021 decreased by $1.1 million, or 11.1%, from $10.3 million in first quarter 2020.

This decline was driven by lower outstanding debt.

In September 2020, proceeds from the RentPayment sale were used to repay $106.5 million of Senior indebtedness.

During the third and fourth quarters of 2020, $14.5 million of outstanding revolving credit was repaid.

Interest expense includes cash interest, payment-in-kind interest, and amortization of deferred financing costs and debt discounts.

During the first quarters of 2021 and 2020, interest expense was comprised of:

(dollars in thousands) Three Months Ended March 31,

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Interest expense in the second quarter of 2021 of $7.3 million decreased by $4.4 million, or 37.6%, from $11.7 million in the second quarter of 2020.

This decline was primarily driven by lower outstanding debt resulting from the $106.5 million senior debt principal repayment in September 2020 and the $104.5 million subordinated debt retirement in April 2021.

Proceeds from the RentPayment sale in September 2020 were used to fund the senior debt principal repayment, and proceeds from the issuance of our redeemable senior preferred stock in April 2021 were used to fund the subordinated debt retirement.

The senior debt refinancing in April 2021 reduced the interest rate on our senior indebtedness by 75 basis points.

Interest expense included cash interest, payment-in-kind interest, and amortization of deferred financing costs and debt discounts.

During the second quarter of 2021 and 2020, interest expense was comprised of:

(dollars in thousands) Three Months Ended June 30,

Cash $ 5,606 $ 8,854

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$ 7,285 $ 11,668

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Interest expense in the first half of 2021 of $16.5 million decreased by $5.5 million, or 25.2%, from $22.0 million in the first half of 2020.

This decline was primarily driven by the factors described above for the three months ended June 30, 2021 compared to three months ended June 30, 2020.

Interest expense included cash interest, payment-in-kind interest, and amortization of deferred financing costs and debt discounts.

During the first half of 2021 and 2020, interest expense was comprised of:

(dollars in thousands) Six Months Ended June 30,

Cash $ 12,159 $ 17,040

Payment-in-kind 2,512 3,415

Amortization and other 1,782 1,528

$ 16,453 $ 21,983

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Debt extinguishment and modification costs

Three and Six Months Ended June 30, 2021 Compared to Three and Six Months Ended June 30, 2020

During April 2021, we wrote off unamortized deferred costs and discounts of $3.0 million associated with the retirement of our subordinated debt facility and refinancing of our senior debt facility, and expensed $5.3 million of third-party costs incurred in connection with the refinancing.

In the first quarter of 2020, we expensed $0.4 million of third-party costs incurred in connection with the amendment of our debt facilities.

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

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

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

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

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

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

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

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

For taxable years through 2021, the calculation of Available Taxable Income ("ATI") closely aligns with EBITDA.

Commencing in 2022, the ATI limitation more closely aligns with EBITDA, without adjusting for depreciation and amortization.

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

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

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

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

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.

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.

We compute our interim period income tax expense or benefit by using a forecasted estimated annual effective tax rate ("EAETR") and adjust for any discrete items arising during the interim period and any changes in our projected full-year business interest expense and taxable income.

The EAETR for 2021 is 40.8% and includes the income tax provision on pre-tax

income and a tax provision related to establishment of a valuation allowance for deferred income tax on the future portion of the Section 163(j) limitation created by additional 2021 interest expense.

Off-Balance Sheet Arrangements

We have not entered into any other transactions with third parties or unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or other obligations.

Commitments and Contractual Obligations

See Note 9, Commitments and Contingencies , to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of March 31, 2021 or December 31, 2020.

Contractual Obligations

There have been no significant changes to our contractual obligations compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2020, except for changes in the minimum annual spend commitments with third-party processor partners as further described in Note 9, Commitments and Contingencies .

For an updated schedule of debt repayments, see Note 7, Debt Obligations.

Also, at December 31, 2020, the Company accrued approximately $6.2 million for the remaining cash consideration it estimates it will be required to pay under an assignment of merchant portfolio rights agreement and related reseller agreement it executed with a third-party in October 2019.

Payments are required to be made on a quarterly basis through September 30, 2022.

The Company continues to review its estimate of the remaining consideration to be paid and will adjust its obligation accordingly if deemed necessary.

As of March 31, 2021, the only change in the amounts accrued was for the required payment made in the first quarter of 2021.

Related Party Transactions

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

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods.

Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K.

There have been no material changes to these critical accounting policies and estimates as of March 31, 2021.

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

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standards setting bodies that may affect our current and/or future financial statements.

See Note 1, Basis of Presentation and Significant Accounting Policies , to our unaudited condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.

We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to "ordinary" income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period.

We have used a discrete effective tax rate method to calculate taxes for the fiscal three- and six-month periods ended June 30, 2021.

We determined that since small changes in estimated "ordinary" income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate of the year to date tax provision for the fiscal three and six month periods ended June 30, 2021.

Financial Condition

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

Unrestricted cash decreased by $3.4 million during the first quarter 2021.

Net unrestricted cash provided by operating activities of $6.5 million was offset by $5.7 million used in investing activities and $4.2 million of net cash used in financing activities.

Cash used in investing activities was comprised of capitalized software development of $1.5 million, purchases of property and equipment of $1.2 million, and payment of December 31, 2020 accrued liabilities for intangible asset acquisitions of $2.9 million.

Net cash used in financing activities was comprised of a $4.9 million scheduled debt repayment under our Senior Credit Agreement and $0.6 million of proceeds from the exercise of stock options.

The following discussion describes key changes that have occurred to our consolidated balance sheet at June 30, 2021 compared to December 31, 2020.

Total current assets of $86.3 million at June 30, 2021 decreased by $49.6 million from $135.9 million at December 31, 2020 due primarily to the following factors:

Unrestricted cash of $11.1 million at June 30, 2021 increased by $1.9 million from $9.2 million at December 31, 2020.

Net unrestricted cash provided by operating activities of $15.5 million and net cash provided by financing activities of $69.4 million were largely offset by 83.1 million used in investing activities.

Cash used in investing activities was comprised of capitalized software development of $3.7 million, purchases of property and equipment of $1.5 million, and acquisitions of a business and intangible assets of $77.9 million.

Net cash provided by financing activities was comprised of net repayments of long-term debt totaling $384.6 million, primarily in connection with the April 2021 debt refinancing, payment of debt issuance and modification costs of $7.6 million, borrowings under the revolving credit facility of $30.0 million, proceeds from issuing senior preferred equity of $150.0 million, payment of $10.5 million of preferred equity issuance fees and costs, payment of the cash portion of redeemable senior preferred stockholder dividends of $1.6 million, proceeds from the exercise of stock options of $0.8 million and cash distribution to non-controlling interests in a subsidiary of $0.8 million.

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Restricted cash

Restricted cash decreased by $19.9 million in first quarter 2021, attributable to the timing of operating activities related to disbursement and receipt of cash held on behalf of customers.

This decrease resulted from net disbursement of $21.9 million of settlement obligations and net receipt of $2.0 million of customer deposits and advance payments.

Restricted cash of $18.2 million decreased by $60.6 million in first half 2021, largely attributable to the transfer of customer restricted cash from a Priority-owned account to a bank-owned FBO account resulting from a change in our business practice for certain types of customer deposits and cash advance payments.

Accounts receivable, net of allowance for doubtful accounts

Accounts receivable, net of $50.6 million increased $9.3 million in first half 2021, largely attributable to higher revenue.

Total assets of $442.9 million at June 30, 2021 decreased by $25.0 million from $417.8 million at December 31, 2020 due primarily to the $49.6 million decrease in current assets and the following increases in long-term assets:

Goodwill of $124.1 million increased $17.2 million in the first half of 2021, resulting from the acquisition of C&H Financial Services, Inc.

in June 2021.

Intangible assets

Intangible assets, net of accumulated amortization, decreased $7.0 million during the first quarter of 2021, resulting from amortization expense of $7.0 million.

Debt Obligations

Outstanding amounts for our debt obligations under that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Truist (the “Senior Credit Agreement”) and that certain Credit and Guaranty Agreement, dated as of January 3, 2017, with Goldman Sachs Specialty Lending Group, L.P.

(the “Term Loan Agreement”) decreased by a net of $2.9 million during the first three months of 2021.

This decrease was attributable to principal repayments of $4.9 million for Senior debt, partially offset by PIK interest of $1.9 million under our Term Loan Agreement.

See the additional discussion about our debt obligations in the subsequent section for Liquidity and Capital Resources.

Intangible assets, net of accumulated amortization, of $145.8 million increased $47.8 million in first half 2021, resulting from amortization expense of $15.7 million and total additions of $63.4 million from the tuck-in acquisitions in April and June 2021.

Other non-current assets

Other non-current assets of $10.9 million increased $8.9 million in first half 2021, resulting largely from value allocation of $3.3 million to a put right related to future issuance of up to $100 million of additional redeemable senior preferred stock to provide partial financing for the pending acquisition of Finxera and other permitted acquisitions, and $5.7 million of underwriting fees paid in connection with the delayed draw term loan facility, the proceeds of which may be used to provide partial financing for the pending acquisition of Finxera.

The April 2021 issuance of redeemable senior preferred stock and debt refinancing are discussed below in the subsequent section for Liquidity and Capital Resources.

Total current liabilities of $84.2 million at June 30, 2021 decreased by $64.7 million from $148.8 million at December 31, 2020 due primarily to the following factors:

Settlement obligations

Settlement obligations of $11.3 million at June 30, 2021 decreased by $61.6 million from $72.9 million at December 31, 2020 largely attributable to the transfer of customer restricted cash from a Priority-owned account to a bank-owned FBO account resulting from a change in our business practice for certain types of customer cash advance activities.

This decrease is directly correlated with the corresponding decrease in restricted cash.

Current portion of long-term debt

Current portion of long-term debt of $3.0 million at June 30, 2021 decreased by $16.4 million from $19.4 million at December 31, 2020 due to the April 2021 debt refinancing, which reduced minimum annual amortization to quarterly installments in aggregate annual amounts equal to 1.0% of original principal, with the balance paid upon maturity in April 2027.

The April 2021 debt refinancing is discussed below in the subsequent section for Liquidity and Capital Resources.

Total liabilities of $410.7 million at June 30, 2021 decreased by $105.7 million from $516.4 million at December 31, 2020 due primarily to the $64.7 million decrease in current liabilities and the following changes in long-term liabilities:

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Long-term debt, net of current portion, discounts and debt issuance costs

Long-term debt of $318.2 million, including borrowings under the revolving credit facility of $30.0 million at June 30, 2021 decreased by $39.7 million from $357.9 million at December 31, 2020 due largely to the April 2021 debt refinancing.

Borrowings under the revolving credit facility of $30.0 million at June 30, 2021 increased by $30.0 million from no outstanding borrowings at December 31, 2020.

In June 2021, $30.0 million was borrowed under the revolving credit facility to partially fund the acquisition of C&H Financial Services, Inc.

The April 2021 debt refinancing is discussed below in the subsequent section for Liquidity and Capital Resources.

Redeemable senior preferred stock:

Redeemable senior preferred stock of $133.8 million at June 30, 2021 increased by $133.8 million due to the April 2021 issuance and sale of the Initial Redeemable Senior Preferred Stock.

The April 2021 issuance of redeemable senior preferred stock is discussed below in the subsequent section for Liquidity and Capital Resources.

The Company issued $150 million of redeemable senior preferred stock along with detachable Warrants to purchase up to 1,803,841 shares of the Company’s common stock, par value $0.001 per share, at an exercise price $0.001.

The Company received a commitment from the investors to purchase up to an additional $100 million of redeemable senior preferred stock to provide partial financing for the pending Finxera acquisition and other permitted acquisitions.

Issuance fees and costs of $10.5 million were paid by the Company in connection with this transaction.

The net proceeds of $139.5 million were allocated on the balance sheet, based upon valuations, to the redeemable senior preferred stock 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.

Stockholders' deficit:

Stockholders' deficit attributable to the stockholders of the Company increased by $1.2 million, from a deficit of $98.6 million at December 31, 2020 to a deficit of $99.8 million at March 31, 2021.

The primary driver of this change was the net loss attributable to stockholders of the Company of $2.7 million, partially offset by $1.5 million of increases to additional paid-in capital for equity-based stock compensation and proceeds from stock options.

Stockholders' deficit of $101.6 million at June 30, 2021 increased by $3.0 million from a deficit of $98.6 million at December 31, 2020.

Accumulated deficit of $114.2 million increased $12.2 million in the first half of 2021 due to the net loss of $12.2 million.

Additional paid-in capital of $14.9 million increased $9.1 million in first half 2021.

Total increases of $23.8 million resulted from $11.4 million from issuance of detachable warrants, $10.0 million from issuance of common stock in redemptions of non-controlling interest preferred units, $1.7 million from stock-based compensation, and $0.8 million from stock option exercises.

Total decreases of $14.7 million resulted from $10.8 million of non-controlling interest preferred unit redemptions and $3.9 million of dividends to redeemable senior preferred stockholders, including $0.5 million of discount accretion.

The preferred unit redemption is discussed below in PHOT Preferred Unit Redemption – Distribution to Non-Controlling Interests.

Liquidity and Capital Resources

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We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next twelve months.

This is based upon management’s estimates and assumptions utilizing the most currently available information regarding the effects of the COVID-19 pandemic on our financial results.

Actual future results could differ materially, as the magnitude, duration and effects of the COVID-19 pandemic are difficult to predict, and ultimately could negatively impact our liquidity, capital resources, and debt covenant compliance.

This is based upon management’s estimates and assumptions, including utilizing the most currently available information regarding the effects of the COVID-19 pandemic on our financial results.

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

Our working capital, defined as current assets less current liabilities, was $(18.0) million and $(13.0) million at March 31, 2021 and December 31, 2020, respectively.

The current portion of long-term debt was $24.3 million and $19.4 million at March 31, 2021 and December 31, 2020, respectively.

On April 27, 2021, we refinanced our credit agreements, which reduced the current portion of long-term debt to $3.0 million, improved our working capital and increased our revolving credit facility to $40 million.

(See the additional discussion about our debt refinancing in the subsequent section for Credit and Guaranty Agreement.)

At March 31, 2021, we had no outstanding borrowings under the $25.0 million revolving credit facility of our Senior Credit Agreement.

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

(dollars in thousands) Quarter ended March 31,

Net cash used in:

Our working capital, defined as current assets less current liabilities, was $2.2 million at June 30, 2021 and $(13.0) million December 31, 2020, respectively.

At June 30, 2021, we had $30.0 million outstanding under the $40.0 million revolving credit facility of our Senior Credit Agreement.

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The following tables and narrative reflect our changes in cash flows for the comparative six month periods ended June 30, 2021 and 2020:

(dollars in thousands) Six Months Ended June 30,

Net cash (used in) provided by:

Operating activities $ (45,124) $ 9,822

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Financing activities 69,429 (1,752)

Net decrease in cash and restricted cash $ (23,360) $ (10,734)

Cash Used In Operating Activities

Net cash used in operating activities, which includes changes in restricted cash, was $13.4 million in first quarter 2021 compared to net cash used in operating activities of $7.3 million in first quarter 2020.

Restricted cash operating activities, which are operating activities related to disbursement and receipt of restricted cash held on behalf of customers, used $19.9 million of cash in first quarter 2021 and used $10.4 million of cash in first quarter 2020.

This comparative change in cash is driven by timing of customer pre-funding and disbursement activities.

Unrestricted cash activities provided $6.5 million of cash in first quarter 2021 and provided $3.1 million of cash in first quarter 2020.

Net (decrease) increase in cash and restricted cash $ (58,777) $ 535

Cash (Used In) Provided By Operating Activities

Net cash used in operating activities, which includes changes in restricted cash, was $45.1 million in the first half of 2021 compared to net cash provided by operating activities of $9.8 million in the first half of 2020.

Restricted cash operating activities, which are operating activities related to disbursement and receipt of restricted cash held on behalf of customers, used $60.6 million of cash in the first half of 2021 and used $2.1 million of cash in the first half of 2020.

This comparative change in restricted cash flow is driven by the June 2021 transfer of customer restricted cash from a Priority-owned account to a bank-owned FBO account resulting from a change in our business practice for certain types of customer cash advance activities.

Unrestricted cash activities provided $15.5 million of cash in the first half of 2021 and provided $11.9 million of cash in the first half of 2020.

Cash Used In Investing Activities

Net cash used in investing activities was $5.7 million in the first quarter 2021 compared to net cash used in investing activities of $3.2 million in the first quarter of 2020.

Cash used to fund a portfolio acquisition and a contingent portion of a residual buyout amounted to $2.9 million and $0.9 million in the first quarter of 2021 and 2020, respectively.

Cash used to acquire property, equipment, and software amounted to $2.8 million and $2.3 million in the first quarter 2021 and 2020, respectively.

Cash Used In Financing Activities

Net cash used in financing activities was $4.2 million in the first quarter 2021 compared to net cash used of $0.3 million in the first quarter 2020.

In first quarter 2021, Senior debt principal repayments of $4.9 million were partially offset by $0.6 million of proceeds from the exercise of stock options.

In the first quarter of 2020, Senior debt principal repayments of $1.0 million and debt modification costs of $2.7 million were largely offset by $3.5 million of borrowings under our revolving credit facility.

Long-Term Debt at March 31, 2021

As of March 31, 2021, we had outstanding long-term debt of $379.1 million compared to $382.0 million at December 31, 2020, a decrease of $2.9 million.

The debt balance at March 31, 2021 consisted of outstanding term debt of $274.6 million under the Senior Credit Agreement and $104.5 million in term debt under the Subordinated Term Loan Facility.

Additionally, under the Senior Credit Facility, we have a $25 million revolving credit facility, which was fully available as of March 31, 2021.

outstanding principal amounts under the Senior Credit Facility and the Term Loan Agreement mature in January 2023 and July 2023, respectively.

The $25 million revolving credit facility expires in January 2022.

As of March 31, 2021, we were in compliance with our financial covenants.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in Section 1.01 of Exhibit A to the Sixth Amendment to the Senior Credit Agreement and are summarized below:

Net cash used in investing activities was $83.1 million in the first half 2021 compared to net cash used in investing activities of $7.5 million in the first half of 2020.

Cash used to acquire intangible portfolio assets amounted to $43.4 million in the first half of 2021 compared to $3.3 million in the first half of 2020.

Cash used to acquire a business in the first half of 2021 amounted to $34.5 million.

Cash used to acquire property, equipment, and software amounted to $5.2 million in the first half of 2021 and $4.2 million in the first half of 2020.

Cash Provided By (Used In) Financing Activities

Net cash provided by financing activities was $69.4 million in the first half of 2021 compared to net cash used in financing activities of $1.8 million in the first half of 2020.

In the first half of 2021, total debt principal repayments were $384.6 million;

proceeds from the issuance of long-term debt, net of deferred discounts and debt issuance costs, were $286.0 million;

proceeds from borrowings under the revolving credit facility were $30.0 million;

proceeds from issuance of senior preferred equity, net of discounts and issuance costs, were $139.5 million;

cash portion of dividend paid to redeemable senior preferred stockholder was $1.6 million;

cash portion of preferred unit redemption to non-controlling interests was $0.8 million and proceeds from exercise of stock options was $0.8 million.

In the first half of 2020, senior debt principal repayments of $2.0 million and debt modification costs of $2.7 million were offset by $3.0 million of net borrowings under the revolving credit facility.

Long-Term Debt at June 30, 2021

On April 27, 2021, we refinanced our previous credit facilities by entering into a new Credit Agreement.

The Credit Agreement, is comprised of a senior secured first lien term loan facility in an aggregate principal amount of $300.0 million (the "Initial Term Loan", or "Term Loan"), a senior secured revolving credit facility in an aggregate amount not to exceed $40.0 million outstanding at any time, and a senior secured first lien delayed draw term loan facility in an aggregate principal amount of $290.0 million ("Delayed Draw Term Loan", or "Term Loan"), the proceeds of which may be used to fund the Company’s

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acquisition of Finxera.

The Term Loan’s interest rate is LIBOR (1.0% floor) plus 5.75%, which is a 75 basis point reduction from LIBOR (1.0% floor) plus 6.5% under the prior senior indebtedness.

As of June 30, 2021, we had outstanding debt obligations of $330.0 million compared to $382.0 million at December 31, 2020, a decrease of $52.0 million.

The debt balance at June 30, 2021 consisted of $300.0 million outstanding under the Initial Term Loan and $30 million outstanding under the revolving credit facility.

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

The Initial Term Loan matures in April 2027 and the revolving credit facility expires in April 2026.

The Credit Agreement contains representations and warranties, financial and collateral requirements, mandatory payment events, events of default, and affirmative and negative covenants, including without limitation, covenants that restrict among other things, the ability to create liens, pay dividends or distribute assets from the Loan Parties to the Company, merge or consolidate, dispose of assets, incur additional indebtedness, make certain investments or acquisitions, enter into certain transactions (including with affiliates), and to enter into certain leases.

If the aggregate principal amount of outstanding revolving loans and letters of credit under the Credit Agreement exceeds 35% of the total revolving facility thereunder, the Loan Parties are required to comply with certain restrictions on its Total Net Leverage Ratio, which is defined in the Credit Agreement as the ratio of consolidated total debt to the Consolidated Adjusted EBITDA (as defined in the Credit Agreement).

If applicable, the maximum permitted Total Net Leverage Ratio is 6.50:1.00 at each fiscal quarter ended September 30, 2021 through June 30, 2022, 6.00:1.00 at each fiscal quarter ended September 30, 2022 through June 30, 2023, and 5.50:1.00 at each fiscal quarter ended September 30, 2023 each fiscal quarter thereafter.

As of June 30, 2021, we were in compliance with our financial covenants.

Total Net Leverage Ratio, Consolidated Total Debt, and Consolidated Adjusted EBITDA are defined in the Credit and Guaranty Agreement and are summarized below:

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

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

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

Under the provisions of the Sixth Amendment, for interim quarterly and full year measurement periods commencing in January 2021, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.

• Consolidated Adjusted EBITDA is consolidated net income plus any applicable items determined in accordance with clauses (i)(b) through (i)(x) of the Consolidated Adjusted EBITDA definition, minus any applicable items determined in accordance with clauses (ii)(a) through (ii)(h) of the Consolidated Adjusted EBITDA.

Under the provisions of the agreement, calculation of Consolidated Adjusted EBITDA is determined on a last twelve months basis.

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Consolidated Adjusted EBITDA is a non-GAAP liquidity measure.

For determining the Total Net Leverage Ratio at March 31, 2021, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from Section 1.01 of the Sixth Amendment:

For determining the Total Net Leverage Ratio at June 30, 2021, Consolidated Adjusted EBITDA was calculated as follows in accordance with the referenced clause definitions from the Credit and Guaranty Agreement executed on April 27, 2021:

(in thousands) Last Twelve Months Ended

March 31, 2021

June 30, 2021

Consolidated Net Income (GAAP) $ 27,232

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Interest expense (clause (i)(b)) 39,309

Depreciation and amortization (clause (i)(d) and (i)(e)) 39,573

Depreciation and amortization (clause (i)(d)) 39,933

Income tax expense (clause (i)(c)) 10,976

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Pro forma impact of disposal (2,459)

Pro forma impact of acquisitions and transactions 16,900

Consolidated Adjusted EBITDA (non-GAAP) $ 92,904

At March 31, 2021, the Total Net Leverage Ratio was 5.44:1.00, calculated as follows:

(in thousands, except ratio) March 31, 2021

At June 30, 2021, the Total Net Leverage Ratio was 3.43:1.00, calculated as follows:

(in thousands, except ratio) June 30, 2021

Consolidated Total Debt:

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Consolidated Net Debt $ 318,889

Consolidated Adjusted EBITDA (non-GAAP) $ 68,637

Total Net Leverage Ratio 3.43x

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.

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Redeemable Senior Preferred Stock.

On April 27, 2021, we entered into the Securities Purchase Agreement with credit funds managed by certain affiliates of Ares Management Corporation ("Investors"), pursuant to which we issued and sold 150,000 shares of Redeemable Senior Preferred Stock, par value $0.001 per share, at a purchase price of $150.0 million, or $1,000 per Redeemable Senior Preferred Share, less a $5.0 million discount, and issued Warrants to purchase up to 1,803,841 shares of the Company’s common stock, par value $0.001 per share, 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.

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.

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.

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.

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”).

COVID-19 Pandemic

In addition to the issuance and sale of the Initial Redeemable Senior Preferred Stock, under the Securities Purchase Agreement, upon the consummation of the Company’s acquisition of Finxera, we may issue and sell to the Investors an additional 50,000 shares of Redeemable Senior Preferred Stock, at a purchase price of $50.0 million, or $1,000 per share ("Acquisition Redeemable Senior Preferred Stock"), less a discount of $625,000.

We 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 completion of a permitted acquisition and satisfaction of certain customary closing conditions.

We used the proceeds from the sale of the Initial Redeemable Senior Preferred Stock to repay our subordinated debt, pay certain fees and expenses relating to the debt refinancing and the Securities Purchase Agreement, and fund an April 2021 asset acquisition.

On April 27, 2021 the Company entered into a Registration Rights Agreement, by and among the Company and the Investors 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 piggyback rights to be included in certain underwritten offerings of Common Stock and the right to demand a shelf registration of Registrable Securities.

The Redeemable Senior Preferred Stock has a quarterly cumulative preferred dividend at LIBOR plus 12.0%, with a cash portion at the discretion of the Company at LIBOR (1.0% floor) plus 5.0% and PIK portion at 7.0%.

The dividend is subject to a 2.0% increase if the Company elects the cash portion to be added to PIK.

There are scheduled dividend rate increases after the fifth anniversary of issuance.

In June 2021, the Company’s Board of Directors declared and authorized the second quarter 2021 dividend with a 6.0% cash portion of $1.6 million and a 7.0% PIK portion of $1.8 million.

The Company paid the dividend on June 30, 2021.

Additionally, the Company recorded $0.5 million of discount accretion.

Impact of COVID-19 Pandemic on Liquidity and Capital Resources

Our current assessment is that we anticipate cash on hand, funds generated from operations and available borrowings under our revolving credit facility to be sufficient to meet our working capital requirements, and that we will remain in compliance with our debt covenants.

However, the ongoing magnitude, duration and effects of the COVID-19 pandemic on our future results of operation, cash flows, and financial condition are difficult to predict at this time, and our current assessment is subject to material revision.

Related Party Transactions

PHOT Preferred Unit Redemption - Distribution to Non-Controlling Interests

In February 2019, PHOT, a subsidiary of the Company, received a contribution of substantially all of the operating assets eTab and 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 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 NCIs in PHOT.

Under these redeemable NCIs, the contributors were eligible to receive up

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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 debt refinancing.

The April 2021 debt refinancing is discussed above in the prior section for Liquidity and Capital Resources.

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 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 Rule 144 trading restrictions.

Therefore, the total distribution amounted to $10.8 million, comprised of $10.0 million of common stock and $0.8 million of cash.

Off-Balance Sheet Arrangements

Commitments and Contractual Obligations

See Note 4, Acquisitions, and Note 11, Commitments and Contingencies , to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of June 30, 2021 or December 31, 2020.

Contractual Obligations

Except as described in the following, there have been no significant changes to our contractual obligations compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Priority" included in the Annual Report for the year ended December 31, 2020.

Changes in the minimum annual spend commitments with third-party processor partners and contingent consideration for acquisitions are further described in Note 11, Commitments and Contingencies .

For an updated schedule of debt repayments under the Credit and Guaranty Agreement executed on April 27, 2021, see Note 8, Debt Obligations.

Payments are required to be made on a quarterly

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basis through September 30, 2022.

The Company continues to review its estimate of the remaining consideration to be paid and will adjust its obligation accordingly if deemed necessary.

As of June 30, 2021, the only change in the amounts accrued was for the required payment made in the first and second quarters of 2021.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles for interim periods, which often require the judgment of management in the selection and application of certain accounting principles and methods.

Our critical accounting policies and estimates are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K.

There have been no material changes to these critical accounting policies and estimates as of June 30, 2021.

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

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 2. Management’s Discussion and Analysis