Priority Technology Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes for the years ended December 31, 2020, 2019 and 2018 and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2021 (the "Annual Report"). Cautionary Note Regarding Forward-Looking Statements Some of the statements made in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, statements regarding our or our management's expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, such as statements about our future financial performance, including any underlying assumptions, are forward- looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "might," "plan," "possible," "potential," "predict," "project," "seek," "should," "would," "will," "approximately," "shall" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: • the impact of the COVID-19 pandemic; • competition in the payment processing industry; • the use of distribution partners; • any unauthorized disclosures of merchant or cardholder data, whether through breach of our computer systems, computer viruses, or otherwise; • any breakdowns in our processing systems; • government regulation, including regulation of consumer information; • the use of third-party vendors; • any changes in card association and debit network fees or products; • any failure to comply with the rules established by payment networks or standards established by third-party processor; • any proposed acquisitions or any risks associated with completed acquisitions; and • other risks and uncertainties set forth in the "Item 1A - Risk Factors" included in this Quarterly Report or our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause our actual results or performance to be materially different - 29 - Table of Content s 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. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Terms Used in this Quarterly Report on Form 10-Q As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the terms "Company," "we," "us" and "our" refer to Priority Technology Holdings, Inc. and its consolidated subsidiaries. Results of Operations 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. - 30 - Table of Content s 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 REVENUES $ 125,014 $ 92,356 $ 32,658 35.4 % OPERATING EXPENSES: Costs of services 89,831 62,398 27,433 44.0 % Salary and employee benefits 10,351 9,556 795 8.3 % Depreciation and amortization 10,723 10,363 360 3.5 % Selling, general and administrative 6,704 6,008 696 11.6 % Total operating expenses 117,609 88,325 29,284 33.2 % Income from operations 7,405 4,031 3,374 83.7 % OTHER EXPENSES: Interest expense (7,285) (11,668) 4,383 (37.6) % 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"). - 31 - Table of Content s 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) % *Calculation is not meaningful ("nm"). - 32 - Table of Content s 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 Consumer Payments: Revenue $ 119,625 $ 81,707 $ 37,918 46.4 % Operating expenses 105,177 74,437 30,740 41.3 % Income from operations $ 14,448 $ 7,270 $ 7,178 98.7 % Operating margin 12.1% 8.9% Depreciation and amortization $ 10,297 $ 8,657 $ 1,640 18.9 % Key Indicators: Merchant bankcard processing dollar value $ 13,875,957 $ 9,010,908 $ 4,865,049 54.0 % Merchant bankcard transaction volume 150,598 92,842 57,756 62.2 % Commercial Payments: Revenue $ 4,041 $ 5,654 $ (1,613) (28.5) % 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 % Less: 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 % - 33 - Table of Content s 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) % Operating margin (5.1) % 10.3 % Depreciation and amortization $ 147 $ 154 $ (7) (4.5) % Key Indicators: Merchant bankcard processing dollar value $ 138,518 $ 136,925 $ 1,593 1.2 % Merchant bankcard transaction volume 86 46 40 87.0 % Integrated Partners: Revenue $ 2,752 $ 9,529 $ (6,777) (71.1) % Operating expenses 2,495 8,316 (5,821) (70.0) % Income from operations $ 257 $ 1,213 $ (956) (78.8) % Operating margin 9.3 % 12.7 % Depreciation and amortization $ 205 $ 2,645 $ (2,440) (92.2) % Key Indicators: Merchant bankcard processing dollar value $ 24,424 $ 246,607 $ (222,183) (90.1) % Merchant bankcard transaction volume 231 836 (605) (72.4) % Income from operations of reportable segments $ 27,680 $ 16,874 $ 10,806 64.0 % Less: Corporate expense (15,748) (9,284) (6,464) (69.6) % Consolidated income from operations $ 11,932 $ 7,590 $ 4,342 57.2 % Corporate depreciation and amortization $ 565 $ 596 $ (31) (5.2) % Key indicators: Merchant bankcard processing dollar value $ 25,910,838 $ 19,781,188 $ 6,129,650 31.0 % Merchant bankcard transaction volume 278,403 213,155 65,248 30.6 % - 34 - Table of Content s 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, particularly in the second quarter of 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 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 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. Revenue Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 Consolidated revenue 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 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. 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 ecommerce payment transactions. 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. - 35 - Table of Content s Revenue in Commercial Payments segment 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 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 impact was evident in a decline in merchant bankcard volume and revenue during the period of restrictive shelter-in-place requirements instituted across the United States toward the end of March 2020 through April 2020. In May 2020, as shelter in place restrictions began to be lifted and regional economies started to reopen, our processing volumes began to return, and revenue growth was supplemented by the acceleration of ecommerce payment transactions. 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. - 36 - Table of Content s 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 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. 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 2021 which contributed $1.5 million of revenue in the first half of 2021. Revenue in Integrated Partners segment 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. 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 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 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 - 37 - Table of Content s 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 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 $3.7 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. - 38 - Table of Content s 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 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, 2021 2020 Cash $ 5,606 $ 8,854 Payment-in-kind 588 2,024 Amortization and other 1,091 790 $ 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, 2021 2020 Cash $ 12,159 $ 17,040 Payment-in-kind 2,512 3,415 Amortization and other 1,782 1,528 $ 16,453 $ 21,983 - 39 - Table of Content s 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. Income taxes We assess all available positive and negative evidence to estimate whether sufficient taxable income will be generated in the future to permit use of the existing deferred tax assets. ASC 740, Income Taxes, 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 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 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 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 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 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: Cash 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. - 40 - Table of Content s Restricted cash 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 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, 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: - 41 - Table of Content s 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 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 Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, technology solutions, and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs, including for our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit facility are sufficient to meet our working capital requirements for at least the next twelve months. This is based upon management’s estimates and assumptions, including 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 and capital resources. Our principal uses of cash are to fund business operations, administrative costs, and debt service. Our working capital, defined as current assets less current liabilities, was $2.2 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. - 42 - Table of Content s 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, 2021 2020 Net cash (used in) provided by: Operating activities $ (45,124) $ 9,822 Investing activities (83,082) (7,535) Financing activities 69,429 (1,752) 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 $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 - 43 - Table of Content s 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)(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. - 44 - Table of Content s Consolidated Adjusted EBITDA is a non-GAAP liquidity measure. 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 June 30, 2021 Consolidated Net Income (GAAP) $ 27,232 Applicable Adjustments: Gain on sale of business, less amounts attributable and paid to NCIs (clause (ii)(c)) (62,091) Interest expense (clause (i)(b)) 39,309 Depreciation and amortization (clause (i)(d)) 39,933 Income tax expense (clause (i)(c)) 10,976 Non-cash stock-based compensation (clause (i)(j)) 2,818 Acquisition transition services (clause (i)(k)) 903 Debt extinguishment and modification expenses (clause (i)(h)) 9,845 Impairment of intangible asset (clause (i)(f)) 1,753 Provision for allowance for note receivable (clause (i)(f)) 467 Change in fair value of contingent consideration for business combinations (clause (ii)(a)) (360) Certain legal fees and expenses (clause (i)(m)) 4,406 Litigation settlement recoveries (clause (i)(k)) (798) Professional, accounting and consulting fees (clause (i)(k)) 2,021 Other professional and consulting fees (clause (i)(h)) 1,724 Other adjustments (clause (i)(k)) 325 Pro forma impact of disposal (2,459) Pro forma impact of acquisitions and transactions 16,900 Consolidated Adjusted EBITDA (non-GAAP) $ 92,904 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: Current portion of long-term debt $ 3,000 Long-term debt, net of discounts and deferred financing costs 318,187 Unamortized debt discounts and deferred financing costs 8,813 330,000 Less unrestricted cash (11,111) Consolidated Net Debt $ 318,889 Total Net Leverage Ratio 3.43x - 45 - Table of Content s 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 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 - 46 - Table of Content s 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 We have not entered into any other transactions with third parties or unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities or other obligations. Commitments and Contractual Obligations Commitments See Note 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. 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 - 47 - Table of Content s 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 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. - 48 - Table of Content s ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposures to market risk have not changed materially since December 31, 2020.