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 processors; • any proposed acquisitions or any risks associated with completed acquisitions; and • other risks and uncertainties set forth in the "Item 1A - Risk Factors" included in this Quarterly Report or our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our securities. We cannot assure you that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause our actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties - 31 - Table of Contents 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. - 32 - Table of Contents Results of Operations This section includes a discussion and analysis of our results of operations for the three months ended September 30, 2021 (or third quarter 2021) compared to the three months ended September 30, 2020 (or third quarter 2020), and the nine months ended September 30, 2021 (or 2021 period) compared to the nine months ended September 30, 2020 (or 2020 period). We have derived this data, except key indicators for merchant bankcard processing dollar values and transaction volumes, from our Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q and our audited Consolidated Financial Statements included in our latest Annual Report on Form 10-K. Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020 (dollars in thousands) Three Months Ended September 30, 2021 2020 Change % Change Revenue $ 132,542 $ 108,962 $ 23,580 21.6 % Operating expenses Costs of services 92,833 74,971 17,862 23.8 % Salary and employee benefits 11,909 10,010 1,899 19.0 % Depreciation and amortization 12,330 10,251 2,079 20.3 % Selling, general and administrative 7,220 6,688 532 8.0 % Total operating expenses 124,292 101,920 22,372 22.0 % Operating income 8,250 7,042 1,208 17.2 % Other (expenses) income Interest expense (8,155) (13,471) 5,316 (39.5) % Debt extinguishment and modification costs — (1,523) 1,523 (100.0) % Gain on sale of business — 107,239 (107,239) (100.0) % Other income, net 146 190 (44) (23.2) % Total other (expenses) income, net (8,009) 92,435 (100,444) (108.7) % Income before income taxes 241 99,477 (99,236) (99.8) % Income tax expense 790 13,737 (12,947) (94.2) % Net (loss) income $ (549) $ 85,740 $ (86,289) (100.6) % - 33 - Table of Contents Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 (dollars in thousands) Nine Months Ended September 30, 2021 2020 Change % Change Revenue $ 370,853 $ 298,251 $ 72,602 24.3 % Operating expenses Costs of services 264,527 203,733 60,794 29.8 % Salary and employee benefits 31,808 29,695 2,113 7.1 % Depreciation and amortization 32,123 30,886 1,237 4.0 % Selling, general and administrative 22,213 19,305 2,908 15.1 % Total operating expenses 350,671 283,619 67,052 23.6 % Operating income 20,182 14,632 5,550 37.9 % Other (expenses) income Interest expense (24,608) (35,454) 10,846 (30.6) % Debt extinguishment and modification costs (8,322) (1,899) (6,423) 338.2 % Gain on sale of business — 107,239 (107,239) (100.0) % Other income, net 92 414 (322) (77.8) % Total other (expenses) income, net (32,838) 70,300 (103,138) (146.7) % (Loss) income before income taxes (12,656) 84,932 (97,588) (114.9) % Income tax expense 49 12,919 (12,870) (99.6) % Net (loss) income $ (12,705) $ 72,013 $ (84,718) (117.6) % - 34 - Table of Contents The following table shows our reportable segments' financial performance data and selected performance measures for the three months ended September 30, 2021 compared to the three months ended September 30, 2020: (in thousands) Three Months Ended September 30, 2021 2020 Change % Change Consumer Payments: Revenues $ 124,027 $ 99,301 $ 24,726 24.9 % Operating expenses 109,371 88,203 21,168 24.0 % Operating income $ 14,656 $ 11,098 $ 3,558 32.1 % Operating margin 11.8% 11.2% Depreciation and amortization $ 10,971 $ 8,481 $ 2,490 29.4 % Key Indicators: Merchant bankcard processing dollar value $ 13,817,001 $ 11,235,068 $ 2,581,933 23.0 % Merchant bankcard transaction volume 151,524 122,623 28,901 23.6 % Commercial Payments: Revenues $ 4,181 $ 4,995 $ (814) (16.3) % Operating expenses 4,210 4,826 (616) (12.8) % Operating (loss) income $ (29) $ 169 $ (198) (117.2) % Operating margin (0.7)% 3.4% Depreciation and amortization $ 73 $ 77 $ (4) (5.2) % Key Indicators: Merchant bankcard processing dollar value $ 86,855 $ 58,304 $ 28,551 49.0 % Merchant bankcard transaction volume 54 $ 24 $ 30 125.0 % Integrated Partners: Revenues $ 4,334 $ 4,666 $ (332) (7.1) % Operating expenses 3,114 4,413 (1,299) (29.4) % Operating income $ 1,220 $ 253 $ 967 382.2 % Operating margin 28.1% 5.4% Depreciation and amortization $ 1,017 $ 1,403 $ (386) (27.5) % Key Indicators: Merchant bankcard processing dollar value $ 13,832 $ 105,537 $ (91,705) (86.9) % Merchant bankcard transaction volume 160 371 (211) (56.9) % Operating income of reportable segments $ 15,847 $ 11,520 $ 4,327 37.6 % Less: Corporate expense (7,597) (4,478) (3,119) (69.7) % Consolidated operating income $ 8,250 $ 7,042 $ 1,208 17.2 % Corporate depreciation and amortization $ 269 $ 290 $ (21) (7.2) % Key indicators: Merchant bankcard processing dollar value $ 13,917,688 $ 11,398,909 $ 2,518,779 22.1 % Merchant bankcard transaction volume 151,738 123,018 28,720 23.3 % - 35 - Table of Contents The following table shows our reportable segments' financial performance data and selected performance measures for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020: (in thousands) Nine Months Ended September 30, 2021 2020 Change % Change Consumer Payments: Revenues $ 352,045 $ 267,039 $ 85,006 31.8 % Operating expenses 309,578 241,519 68,059 28.2 % Operating income $ 42,467 $ 25,520 $ 16,947 66.4 % Operating margin 12.1 % 9.6 % Depreciation and amortization $ 29,847 $ 25,721 $ 4,126 16.0 % Key Indicators: Merchant bankcard processing dollar value $ 39,564,898 $ 30,632,724 $ 8,932,174 29.2 % Merchant bankcard transaction volume 429,610 334,896 94,714 28.3 % Commercial Payments: Revenues $ 11,722 $ 17,017 $ (5,295) (31.1) % Operating expenses 12,139 15,609 (3,470) (22.2) % Operating income (loss) $ (417) $ 1,408 $ (1,825) (129.6) % Operating margin (3.6) % 8.3 % Depreciation and amortization $ 220 $ 231 $ (11) (4.8) % Key Indicators: Merchant bankcard processing dollar value $ 225,373 $ 195,229 $ 30,144 15.4 % Merchant bankcard transaction volume 140 70 70 100.0 % Integrated Partners: Revenues $ 7,086 $ 14,195 $ (7,109) (50.1) % Operating expenses 5,609 12,729 (7,120) (55.9) % Operating income $ 1,477 $ 1,466 $ 11 0.8 % Operating margin 20.8 % 10.3 % Depreciation and amortization $ 1,222 $ 4,048 $ (2,826) (69.8) % Key Indicators: Merchant bankcard processing dollar value $ 38,256 $ 352,144 $ (313,888) (89.1) % Merchant bankcard transaction volume 390 1,207 (817) (67.7) % Operating income of reportable segments $ 43,527 $ 28,394 $ 15,133 53.3 % Less: Corporate expense (23,345) (13,762) (9,583) (69.6) % Consolidated operating income $ 20,182 $ 14,632 $ 5,550 37.9 % Corporate depreciation and amortization $ 834 $ 886 $ (52) (5.9) % Key indicators: Merchant bankcard processing dollar value $ 39,828,527 $ 31,180,097 $ 8,648,430 27.7 % Merchant bankcard transaction volume 430,140 336,173 93,967 28.0 % - 36 - Table of Contents 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 effect on our results. This impact was evident in a decline in merchant bankcard volume and our revenues 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 e-commerce payment transactions. This recovery momentum continued through the second half of 2020 and first nine months 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 effects during the first half of 2020. The pandemic's impact on the overall economy and on our comparative historical results and future results are beyond our ability to quantify predict or control. Revenues Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Consolidated revenues Our consolidated revenues in the third quarter of 2021 of $132.5 million increased by $23.6 million, or 21.6%, from revenues in the third quarter of 2020 of $109.0 million. Revenue growth of $24.7 million in our Consumer Payments segment was partially offset by revenue declines of $0.8 million and $0.3 million in our Commercial Payments and Integrated Partners segments, respectively. Revenues in Consumer Payments segment Consumer payments revenues in the third quarter 2021 of $124.0 million increased $24.7 million, or 24.9%, compared to revenues in the third quarter of 2020 of $99.3 million. This increase was driven by $30.0 million, or 33.3%, in revenue growth from our base merchant business, and was partially offset by a $5.3 million, or 58.0%, revenue decline from specialized e-commerce merchants. Merchant bankcard volume in the third quarter of 2021 of $13.8 billion increased by $2.6 billion, or 23.0%, as compared with $11.2 billion in the third quarter of 2020. Merchant bankcard transactions of 151.5 million in the third quarter of 2021 increased by 23.6%, as compared with 122.6 million in the third quarter of 2020. Average ticket (calculated by dividing bankcard processing dollar value by the associated number of transactions processed) of $91.19 in the third quarter of 2021 decreased by 0.5%, as compared with $91.62 in the third quarter of 2020. The pandemic's influence on consumer behavior impacted the comparative volume, vertical industry mix and overall consumer spending trends. Revenues in Commercial Payments segment Commercial Payments revenues in the third quarter of 2021 of $4.2 million decreased by $0.8 million, or 16.3%, compared to revenues in the third quarter of 2020 of $5.0 million. Revenues in this segment are derived primarily from the accounts payable automated solutions business and from our curated managed services business. Revenues from the accounts payable automated solutions business in the third quarter of 2021 of $1.6 million increased $0.1 million, or 3.9%, from $1.5 million in the third quarter of 2020. This increase was moderate due to increased volume from customers with lower yield. Revenues from our curated managed services business in the third quarter of 2021 of $2.6 million decreased by $0.9 million, or 25.7%, from revenues in the third quarter of 2020 of $3.5 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 - 37 - Table of Contents 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 $1.0 million of additional revenue in the third quarter of 2021. Revenues in Integrated Partners segment Integrated Partners revenues in the third quarter of 2021 of $4.3 million decreased by $0.3 million, or 7.1%, compared to revenues in the third quarter of 2020 of $4.7 million. PRET comprised $0.8 million and $4.1 million of this segment's revenues in the third 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 $3.9 million in the third 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. Revenues in the third quarter 2021 of $0.8 million from PRET's ongoing business increased $0.6 million, or 274.2%, compared with revenues of $0.2 million in the third quarter of 2020. Finxera Holdings, Inc. ("Finxera"), which was acquired on September 17, 2021, contributed $3.0 million to this segment’s revenues in the third quarter of 2021. Priority PayRight Health Solutions and PHOT contributed $0.6 million of this segment's revenues in the third quarter of 2021. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Consolidated revenues Our consolidated revenues in the first nine months of 2021 of $370.9 million increased by $72.6 million, or 24.3%, from revenues in the first nine months of 2020 of $298.3 million. Revenue growth of $85.0 million in our Consumer Payments segment was partially offset by revenue declines of $5.3 million and $7.1 million in our Commercial Payments and Integrated Partners segments, respectively. Revenues in Consumer Payments segment Consumer payments revenues in the first nine months of 2021 of $352.0 million increased $85.0 million, or 31.8%, compared to revenues in the first nine months of 2020 of $267.0 million. This increase was driven by $87.6 million, or 35.1%, revenue growth from our base merchant business, and a $2.6 million, or 14.9%, decrease in revenue from specialized e-commerce merchants. Merchant bankcard volume in the first nine months of 2021 of $39.6 billion increased by $8.9 billion, or 29.2%, as compared with $30.6 billion in the first nine months of 2020. Merchant bankcard transactions of 429.6 million in the first nine months of 2021 increased by 28.3%, as compared with 334.9 million in the first nine months of 2020. Average ticket of $92.09 in the first nine months of 2021 increased 0.7%, as compared with $91.47 in first nine months of 2020. Revenues in Commercial Payments segment Commercial Payments revenues in the first nine months of 2021 of $11.7 million decreased by $5.3 million, or 31.1%, compared to revenues in the first nine months of 2020 of $17.0 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 nine months of 2021 of $4.9 million increased $0.4 million, or 8.9%, from $4.5 million in the first nine months of 2020. This increase was due to increased volume from customers with lower yield. Revenue from our curated managed services business in the first nine months of 2021 of $6.8 million decreased by $5.7 million, or 45.6%, from revenue in the first nine months 2020 of $12.5 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 $1.7 million of additional revenue in the first nine months of 2021. - 38 - Table of Contents Revenues in Integrated Partners segment Integrated Partners revenues in the first nine months of 2021 of $7.1 million, decreased by $7.1 million, or 50.1%, compared to revenues in the first nine months of 2020 of $14.2 million. PRET comprised $2.3 million and $12.6 million of this segment's revenues in the first nine months 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 $12.1 million in the first nine months 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 nine months of 2021 of $2.3 million from PRET's ongoing business increased $1.9 million, or 475.0%, compared with revenue of $0.4 million in the in the first nine months of 2020. Finxera, which was acquired on September 17, 2021, contributed $3.0 million to this segment’s revenue in the first nine months of 2021. Priority PayRight Health Solutions and PHOT contributed $1.8 million of this segment's revenue in the first nine months of 2021. Consolidated Operating expenses Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Our consolidated operating expenses in the third quarter of 2021 of $124.3 million increased $22.4 million, or 22.0%, from consolidated operating expenses in the third quarter of 2020 of $101.9 million. This increase was driven by an increase in costs of services. Costs of services is the third quarter of 2021 of $92.8 million increased by $17.9 million or 23.8%, from costs of services in the third quarter of 2020 of $74.9 million due to higher revenues in the third quarter of 2021. Depreciation and amortization expense in the third quarter of 2021 of $12.3 million increased by $2.1 million, or 20.3%, from depreciation and amortization expense in the third quarter of 2020 of $10.3 million primarily due to amortization expense from intangible assets acquired during the period. Salary and employee benefits expense in the third quarter of 2021 of $11.9 million increased $1.9 million, or 19.0%, from salary and employee benefits expense in the third quarter of 2020 of $10.0 million, primarily attributable to an increase in the number of employees and contracted resources caused by the increased level of operations and acquisitions, as well as higher stock-based compensation expense. Selling, general and administrative ("SG&A") expense in the third quarter of 2021 of $7.2 million increased $0.5 million, or 8.0%, from SG&A expense in the third quarter of 2020 of $6.7 million, primarily attributable to acquisition and corporate financing activities, tax-related assessments, and slightly higher costs for travel, tradeshows and office-related expenses. During the third quarter of 2021, SG&A expense included $1.3 million of professional fees and expenses incurred in connection with the acquisition of Finxera, as well as certain litigation activities, and $0.6 million of tax-related assessments and acquisition-related transition services. During the third quarter of 2020, SG&A expense included $0.6 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, $1.0 million of acquisition-related transition services in the Integrated Partners segment, and a $1.0 million write-down in the carrying value of an intangible asset in the Consumer Payments segment. These expenses were partially offset by a $0.8 million legal recovery settled in the third quarter of 2020. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Our consolidated operating expenses in the first nine months of 2021 of $350.7 million increased $67.1 million, or 23.6%, from consolidated operating expenses in the first nine months of 2020 of $283.6 million. This increase was driven by higher costs of services. Costs of services in the first nine months 2021 of $264.5 million increased $60.8 million, or 29.8%, from costs of services in the first nine months 2020 of $203.7 million due to higher revenues in the first nine months of 2021. Depreciation and amortization expense in the first nine months of 2021 of $32.1 million increased by $1.2 million, or 4.0%, from depreciation and amortization expense in the first nine months of 2020 of $30.9 million due to amortization expense from intangible assets acquired during the period. Salary and employee benefits expense in the first nine months of 2021 of $31.8 million increased $2.1 million, or 7.1%, from salary and employee benefits expenses in the first nine months of 2020 of $29.7 million, primarily attributable to an increase in the number of employees and contracted resources caused by the increased level of operations, as well as higher stock-based compensation expense. SG&A expense in the first nine months of 2021 of $22.2 million increased $2.9 million, or 15.1%, from SG&A expense in the first nine months of 2020 of $19.3 million. During the first nine months of 2021, SG&A expense included $6.8 million of professional fees and expenses incurred in connection with the acquisition of Finxera, the April 2021 debt refinancing and issuance of preferred stock and other acquisition activities, as well as litigation activities, and $0.6 million of tax-related assessments and acquisition-related - 39 - Table of Contents transition services. During the first nine months of 2020, Corporate SG&A expense included $1.5 million of professional fees and expenses primarily incurred in connection with acquisition and litigation activities, partially offset by $0.7 million of legal settlement recoveries. The Integrated Partners segment SG&A expense included $2.7 million of acquisition-related transition services, while the Consumer Payments segment expense included a $1.0 million write-down of the carrying value of an intangible asset. Operating income (loss) Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Consolidated operating income in the third quarter of 2021 of $8.3 million increased by $1.2 million, or 17.2%, from $7.0 million in the third quarter of 2020. This increase was the result of $5.7 million of higher revenues less costs of services partially offset by $1.9 million of higher salary and employee benefits expense, $0.5 million of higher SG&A expense and $2.1 million of higher depreciation and amortization expense. Our Consumer Payments segment contributed $14.7 million in operating income for the third quarter of 2021, an increase of $3.6 million, or 32.1%, from $11.1 million in the third quarter of 2020. This increase was the result of $6.6 million higher revenues less costs of services and $0.8 million of lower SG&A expense being partially offset by $1.3 million of higher salary and employee benefits expense and $2.5 million of higher depreciation and amortization expense. Our Commercial Payments segment had an operating income slightly below breakeven for the third quarter of 2021 compared to operating income of $0.2 million for the third quarter of 2020. This decline was primarily the result of $0.4 million of lower revenues less costs of services being partially offset by $0.2 million of lower other operating costs, primarily salaries and employee benefits. Our Integrated Partners segment contributed operating income of $1.2 million for the third quarter of 2021, an increase of $1.0 million compared to $0.3 million of operating income for the third quarter of 2020. The increase was driven by the September 2021 acquisition of Finxera. Revenues less costs of services decreased by $0.5 million, which was more than offset by a decrease in SG&A of $1.1 million, and a decrease in depreciation and amortization expense of $0.4 million. SG&A in the third quarter of 2020 included $1.0 million of RentPayment acquisition-related transition services. The RentPayment business was sold in September, 2020. Corporate expenses were $7.6 million for the third quarter of 2021, an increase of $3.1 million from expenses of $4.5 million for the third quarter of 2020. This increase was driven by an increase in professional fees, selling, general and administrative expenses, and salaries and employee benefits, as described above in the prior section for Consolidated Operating expenses. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Consolidated operating income in the first nine months of 2021 of $20.2 million increased by $5.6 million, or 37.9%, from $14.6 million in the first nine months of 2020. This increase was the result of $11.8 million of higher revenues less costs of services being partially offset by $2.1 million of higher salary and employee benefits expense, $2.9 million of higher SG&A expense and $1.2 million of higher depreciation and amortization expense. Our Consumer Payments segment contributed $42.5 million in operating income in the first nine months of 2021, an increase of $16.9 million, or 66.4%, from $25.5 million in the first nine months of 2020. This increase was the result of $21.6 million higher revenues less costs of services and $1.4 million of lower SG&A expense being partially offset by $1.9 million of higher salary and employee benefits expense and $4.1 million of higher depreciation and amortization due to an increase in intangible assets from acquisitions. Our Commercial Payments segment had an operating loss of $0.4 million in the first nine months of 2021 compared to operating income of $1.4 million in the first nine months of 2020. This $1.8 million decline was the result of $2.3 million of lower revenues less costs of services, partially offset by $0.5 million of lower salary and employee benefits. - 40 - Table of Contents Our Integrated Partners segment contributed operating income of $1.5 million in the first nine months of 2021, which is consistent with $1.5 million of operating income in the first nine months of 2020. The September 2021 acquisition of Finxera resulting in $1.0 million of operating profit, and PRET's ongoing operating profit increased $0.8 million for the first nine months of 2021, which was offset by the September 2020 sale of PRET's RentPayment business, which had operating profit of $1.8 million for the first nine months of 2020. Corporate expenses were $23.3 million in the first nine months of 2021, an increase of $9.5 million from expenses of $13.8 million in the first nine months of 2020. This increase was driven by a $5.5 million increase in professional fees, a $2.1 million increase in selling, general and administrative expenses, and a $1.9 million increase in salaries and employee benefits, as described above in the prior section for Consolidated Operating expenses. Interest expense Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Interest expense in the third quarter of 2021 of $8.2 million decreased by $5.3 million, or 39.5%, from $13.5 million in the third quarter of 2020. This decline was primarily driven by lower rate of interest on the new loans secured by the Company on the refinancing of its credit facilities in April 2021. The new term and revolver loans carry an interest rate of 6.75% and 5.75%, respectively, as compared to the old term loans and subordinated term loans, which carried an interest rate of 7.5% and 12.5%, respectively. The outstanding debt during the third quarter 2020 was also higher as proceeds from the RentPayment sale in September 2020 were used to fund the senior debt principal repayment. Additionally, proceeds from the issuance of our redeemable senior preferred stock in April 2021 were used to repay the subordinated debt which carried a higher rate of interest. Interest expense included cash interest, payment-in-kind interest and amortization of deferred financing costs and debt discounts. During the third quarter of 2021 and 2020, interest expense was comprised of: (dollars in thousands) Three Months Ended September 30, 2021 2020 Cash $ 8,296 $ 9,589 Payment-in-kind — 3,228 Amortization and other (141) 654 $ 8,155 $ 13,471 Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Interest expense in the first nine months of 2021 of $24.6 million decreased by $10.9 million, or 30.6%, from $35.5 million in the first nine months of 2020. This decline was primarily driven by the factors described above for the three months ended September 30, 2021 compared to three months ended September 30, 2020. Interest expense included cash interest, payment-in-kind interest and amortization of deferred financing costs and debt discounts. During the first nine months of 2021 and 2020, interest expense was comprised of: (dollars in thousands) Nine Months Ended September 30, 2021 2020 Cash $ 17,250 $ 27,028 Payment-in-kind 2,512 6,643 Amortization and other 4,846 1,783 $ 24,608 $ 35,454 - 41 - Table of Contents Debt extinguishment and modification costs Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020 During April 2021, the Company expensed 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. During September 2020 the Company expensed unamortized deferred costs and discount of $1.5 million associated with the $106.5 million principal prepayment for the term facility under our Senior Credit Facility. In the first quarter of 2020, the Company 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 third 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 (pre-tax 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 month and nine month periods ended September 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 month and nine month periods ended September 30, 2021. Financial Condition The following discussion describes key changes that have occurred to our consolidated balance sheet at September 30, 2021 compared to December 31, 2020. Total current assets of $580.7 million at September 30, 2021 increased by $444.8 million from $135.9 million at December 31, 2020 due primarily to the following factors: Cash and cash equivalents Unrestricted cash of $17.0 million at September 30, 2021 increased by $7.8 million from $9.2 million at December 31, 2020. The increase is largely attributable to net cash used in operating activities of $2.6 million, offset by the net impact of cash provided by (used in) investing and financing activities. - 42 - Table of Contents Restricted cash Restricted cash of $17.3 million decreased by $61.6 million in the first nine months 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. Prepaid expenses and other current assets Prepaid expenses and other current assets of $13.3 million increased by $9.8 million in the first nine months 2021, largely attributable to acquisition of Finxera. Settlement assets and customer account balances Settlement assets and customer account balances of $480.3 million increased by $479.5 million in the first nine months of 2021, largely attributable to the acquisition of Finxera for cash balances in client and subscriber accounts. Accounts receivable, net of allowance for doubtful accounts Accounts receivable, net of $52.7 million increased by $11.3 million in the first nine months of 2021, largely attributable to higher revenues. Total assets of $1,335.2 million at September 30, 2021 increased by $917.4 million from $417.8 million at December 31, 2020 due primarily to the $444.8 million increase in current assets and the following increases in long-term assets: Goodwill Goodwill of $372.7 million increased by $265.9 million in the first nine months of 2021, resulting from the acquisition of C&H Financial Services, Inc.in June 2021 and the acquisition of Finxera in September 2021. Intangible assets Intangible assets, net of accumulated amortization, of $346.7 million increased by $248.6 million in the first nine months of 2021, resulting from acquisitions of $274.5 million, offset by amortization expense of $25.9 million. Deferred taxes The net deferred tax asset of $3.5 million decreased by $43.2 million in the first nine months of 2021, primarily resulting from a deferred tax liability recorded as part of the acquisition of Finxera in September 2021. Total current liabilities of $569.2 million at September 30, 2021 increased by $420.4 million from $148.8 million at December 31, 2020 due primarily to the following factors: Accounts payable and accrued expenses Accounts payable and accrued expenses of $42.1 million increased by $12.3 million in the first nine months of 2021, as a result of the acquisition of Finxera and an increase in operations. Settlement and customer account obligations Settlement and customer account obligations of $489.3 million at September 30, 2021 increased by $416.4 million from $72.9 million at December 31, 2020 largely attributable to obligations related to customer account balances of $479.5 million from the Finxera acquisition offset by a decrease in 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. The increase in customer account obligations is directly correlated with the increase in customer account balances. - 43 - Table of Contents Current portion of long-term debt Current portion of long-term debt of $6.2 million at September 30, 2021 decreased by $13.2 million from $19.4 million at December 31, 2020 due to the April 2021 debt refinancing, which resulted in an updated repayment schedule. The April 2021 debt refinancing is discussed below in the subsequent section for Liquidity and Capital Resources. Total liabilities of $1,203.3 million at September 30, 2021 increased by $686.9 million from $516.4 million at December 31, 2020 due primarily to the $420.4 million increase in current liabilities and the following changes in long-term liabilities: Long-term debt, net of current portion, discounts and debt issuance costs Long-term debt of $620.0 million, including borrowings under the revolving credit facility of $30.0 million at September 30, 2021 increased by $262.1 million from $357.9 million at December 31, 2020 due largely to the April 2021 debt refinancing and additional borrowings for the funding of the Finxera and the C&H Financial Services, Inc. acquisitions. Redeemable senior preferred stock Redeemable senior preferred stock of $205.3 million at September 30, 2021 increased by $205.3 million due to the issuance and sale Redeemable Senior Preferred Stock. The issuance of redeemable senior preferred stock is discussed below in the subsequent section for Liquidity and Capital Resources. The Company issued 150.0 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 in April 2021. In September 2021, an additional $75.0 million of redeemable senior preferred stock was issued as part of the September 17, 2021 Finxera acquisition. The Company received a commitment from the investors to purchase up to an additional $25.0 million of redeemable senior preferred stock to provide financing for other permitted acquisitions. Proceeds from the issuance of the redeemable senior preferred stock of $211.0 million (net of discount of $5.9 million and issuance costs of $7.4 million) were allocated to the redeemable senior preferred stock $199.6 million and to the warrants $11.4 million. Stockholders' deficit Stockholders' deficit of $73.4 million at September 30, 2021 decreased by $25.2 million from a deficit of $98.6 million at December 31, 2020. Accumulated deficit of $114.7 million increased $12.7 million in the first nine months of 2021 due to the net loss of $12.7 million for nine months ended September 30, 2021. Additional paid-in capital of $44.6 million increased by $38.8 million in the first nine months of 2021. The increase was primarily driven by a $34.4 million in proceeds from the issuance of 7,551,354 common shares from the Finxera merger, $11.4 million from the issuance of detachable warrants, $10.0 million from the issuance of common stock in redemptions of non-controlling interest preferred units, $2.2 million from stock-based compensation and $1.2 million from stock option exercises. These increases were offset by a decrease of $10.8 million related to non-controlling interest preferred unit redemptions and a decrease of $9.7 million for dividends to redeemable senior preferred stockholders, including $1.0 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 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. - 44 - Table of Contents 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 $11.5 million at September 30, 2021 and $(13.0) million December 31, 2020, respectively. At September 30, 2021, we had $30.0 million outstanding under the $40.0 million revolving credit facility of our Senior Credit Agreement. The following tables and narrative reflect our changes in cash flows for the comparative nine month periods ended September 30, 2021 and 2020: (dollars in thousands) Nine Months Ended September 30, 2021 2020 Net cash (used in) provided by: Operating activities $ (2,567) $ 10,431 Investing activities (462,878) 168,990 Financing activities 871,010 (171,056) Net increase in cash and cash equivalents, and restricted cash $ 405,565 $ 8,365 Cash (Used In) Provided By Operating Activities Net cash used in operating activities was $2.6 million in the first nine months of 2021 compared to net cash provided by operating activities of $10.4 million in the first nine months of 2020. The decrease is primarily driven by the payment of PIK interest and changes in operating assets and liabilities. Cash (Used In) Provided by Investing Activities Net cash used in investing activities was $462.9 million in the first nine months 2021 compared to net cash provided by investing activities of $169.0 million in the first nine months of 2020. Cash used to acquire intangible portfolio assets amounted to $48.2 million in the first nine months of 2021 compared to $4.4 million in the first nine months of 2020. Cash used to acquire businesses in the first nine months of 2021 amounted to $407.1 million. Cash used to acquire property, equipment and software amounted to $7.5 million in the first nine months of 2021 and $6.0 million in the first half of 2020. Cash Provided By (Used In) Financing Activities Net cash provided by financing activities was $871.0 million in the first nine months compared to net cash used in financing activities of $171.1 million in the first nine months of 2020. In the first nine months of 2021, total debt principal repayments were $359.9 million; proceeds from the issuance of long-term debt, net of deferred discounts and debt issuance costs, were $598.2 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 $211.0 million cash portion of dividend paid to redeemable senior preferred stockholder was $4.0 million; cash portion of preferred unit redemption to non-controlling interests was $0.8 million, proceeds from exercise of stock options was $1.2 million and the Company repurchased 162,715 shares of its common stock at a cost of $1.0 million under its share repurchase program. In the first nine months of 2020, senior debt principal repayments of $109.5 million, debt modification costs of $2.7 million , $0.5 million of net repayments under the revolving credit facility, redemption of redeemable non-controlling interests of $5.7 million and profit distributions to non-controlling interests of $45.3 million. In the first nine months of 2021, cash provided by financing activities included balances in customer accounts of $396.3 million resulting from the acquisition of Finxera. - 45 - Table of Contents Long-Term Debt at September 30, 2021 On April 27, 2021, the Company refinanced its previous credit facilities by entering into a new Credit and Guaranty Agreement ("the 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 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 September 30, 2021, we had outstanding debt obligations, including current portion and net of unamortized debt discount of $626.2 million, compared to $377.3 million at December 31, 2020, resulting in an increase of $248.9 million. The debt balance at September 30, 2021 consisted of $596.2 million outstanding under the 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 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 September 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. - 46 - Table of Contents Consolidated Adjusted EBITDA is a non-GAAP liquidity measure. For determining the Total Net Leverage Ratio at September 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 September 30, 2021 Consolidated Net Income (GAAP) $ (13,709) Applicable Adjustments: Interest expense (clause (i)(b)) 33,992 Depreciation and amortization (clause (i)(d)) 42,012 Income tax expense (clause (i)(c)) (1,971) Non-cash stock-based compensation (clause (i)(j)) 3,153 Acquisition transition services (clause (i)(k)) (50) Debt extinguishment and modification expenses (clause (i)(h)) 8,322 Impairment of intangible asset (clause (i)(f)) 773 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)) 4,778 Litigation settlement recoveries (clause (i)(k)) 3 Professional, accounting and consulting fees (clause (i)(k)) 2,404 Other professional and consulting fees (clause (i)(h)) 1,693 Other adjustments (clause (i)(k)) 965 Pro forma impact of disposal 99 Pro forma impact of acquisitions and transactions 65,274 Consolidated Adjusted EBITDA (non-GAAP) $ 147,845 At September 30, 2021, the Total Net Leverage Ratio was 4.27:1.00, calculated as follows: (in thousands, except ratio) September 30, 2021 Consolidated Total Debt: Current portion of long-term debt $ 6,200 Long-term debt, net of discounts and deferred financing costs 619,957 Unamortized debt discounts and deferred financing costs 22,293 648,450 Less unrestricted cash (16,974) Consolidated Net Debt $ 631,476 Total Net Leverage Ratio 4.27x 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 - 47 - Table of Contents $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 on September 17, 2021 the Company issued an additional 75,000 shares of Redeemable Senior Preferred Stock, upon the consummation of the Company's acquisition of Finxera for a purchase price of $75.0 million, or $100 per share, less a discount of $0.9 million. The Company may also issue and sell to the Investors up to an additional 25,000 shares of Redeemable Senior Preferred Stock, at a purchase price of $1,000 per share, less a discount of $0.3 million, within 18 months after September 17, 2021, upon the completion of a permitted acquisition and satisfaction of certain customary closing conditions. Proceeds from the sale of the Redeemable Senior Preferred Stock were used to repay subordinated debt, pay certain fees and expenses relating to the debt refinancing and the Securities Purchase Agreement, fund an April 2021 asset acquisition and fund the Finxera acquisition in September 2021. 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 accumulated portion at 7.0%. The dividend is subject to a 2.0% increase if the Company elects the cash portion to be added to accumulated. There are scheduled dividend rate increases after the fifth anniversary of issuance. In the first nine months of 2021, the Company's Board of Directors declared and authorized the second and third quarter 2021 dividends with a 6.0% cash portion of $1.6 million and $2.4 million, respectively, and a 7.0% accumulated portion of $1.8 million and $2.9 million respectively. The Company paid the dividend on June 30, 2021 and September 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 to $4.5 million of profits earned by PHOT, plus a preferred yield (6.0% per year) 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. - 48 - Table of Contents 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 2. Acquisitions and Note 1 2 . Commitments and Contingencies , to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for disclosure information about potential contingent payments that we may be required to make in future periods that are not required to be recognized in our consolidated balance sheets as of September 30, 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 1 2 . Commitments and Contingencies . For an updated schedule of debt repayments under the Credit and Guaranty Agreement executed on April 27, 2021 and amended on September 17, 2021, see Note 9 . 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 September 30, 2021, the only change in the amounts accrued was for the required payments made in 2021. - 49 - Table of Contents 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 September 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. - 50 - Table of Contents 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.