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UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
☐       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                  
Commission file number: 001-37872
Priority Technology Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
47-4257046
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2001 Westside Parkway
Suite 155
Alpharetta, GA 30004
(Address of principal executive offices)
 
(800) 935-5961
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days.   Yes  X     No  ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  X     No  ☐
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer  
X
Smaller reporting company
(Do not check if smaller reporting company)
 Emerging Growth Company
X
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  X
 
As of November 9, 2018, 67,038,304 shares of common stock, par value $0.001 per share, were issued and outstanding.



 
  Priority Technology Holdings, Inc.
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Priority Technology Holdings, Inc.


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 2018 and December 31, 2017
(in thousands)
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash
$
17,203

 
$
27,966

Restricted cash
18,274

 
16,193

Accounts receivable, net of allowance for doubtful accounts of $295 and $484, respectively
40,433

 
47,433

Due from related parties
269

 
197

Prepaid expenses and other current assets
3,209

 
3,550

Current portion of notes receivable
2,247

 
3,442

Settlement assets
2,774

 
7,207

Total current assets
84,409

 
105,988

 
 
 
 
Notes receivable, less current portion
786

 
3,807

Property, equipment, and software, net
17,011

 
11,943

Goodwill
109,366

 
101,532

Intangible assets, net
65,579

 
42,062

Deferred income taxes, net
48,469

 

Other assets
1,686

 
1,375

Total assets
$
327,306

 
$
266,707

 
 
 
 
LIABILITIES AND EQUITY (DEFICIT)
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
26,614

 
$
18,603

Accrued residual commissions
17,466

 
23,470

Customer deposits
1,798

 
4,853

Current portion of long-term debt
2,682

 
7,582

Settlement obligations
11,805

 
10,474

Current portion of common unit repurchase obligation

 
1,500

Total current liabilities
60,365

 
66,482

 
 
 
 
Long-term debt, net of discounts and deferred financing costs
342,293

 
267,939

Warrant liability

 
8,701

Common unit repurchase obligation

 
7,690

Other liabilities
7,040

 
6,050

Total long term liabilities
349,333

 
290,380

 
 
 
 
Total liabilities
409,698

 
356,862

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Equity (deficit)
(82,392
)
 
(90,155
)
 
 
 
 
Total liabilities and equity (deficit)
$
327,306

 
$
266,707

 
See Notes to Unaudited Condensed Consolidated Financial Statements

- 3 -


Priority Technology Holdings, Inc.


Unaudited Condensed Consolidated Statements of Operations
For the quarter and three quarters ended September 30, 2018 and 2017
 
Quarter ended
September 30,
 
Three quarters ended September 30,
(in thousands, except per share amounts)
2018
 
2017
 
2018

2017
REVENUE:
 
 
 
 
 
 
 
Merchant card fees revenue
$
94,915

 
$
103,985

 
$
299,661

 
$
286,208

Outsourced services revenue
6,264

 
6,094

 
18,426

 
17,135

Other revenues
2,412

 
867

 
5,862

 
2,306

Total revenue
103,591

 
110,946

 
323,949

 
305,649

 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
Costs of merchant card fees
71,876

 
80,247

 
230,276

 
219,507

Other costs of services
4,475

 
3,997

 
13,518

 
11,285

Salary and employee benefits
9,992

 
8,120

 
28,406

 
24,356

Depreciation and amortization
4,899

 
3,602

 
12,679

 
11,254

Selling, general and administrative
3,725

 
3,002

 
13,978

 
7,214

Change in fair value of contingent consideration

 

 

 
(410
)
Other operating expenses
5,064

 
2,512

 
10,449

 
8,143

Total operating expenses
100,031

 
101,480

 
309,306

 
281,349

 
 
 
 
 
 
 
 
Income from operations
3,560

 
9,466

 
14,643

 
24,300

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
Interest income
153

 
201

 
530

 
448

Interest expense
(7,334
)
 
(6,418
)
 
(21,893
)
 
(18,600
)
  Debt modification and extinguishment expenses

 

 
(1,323
)
 
(1,753
)
Change in fair value of warrant liability
72

 
(928
)
 
(3,458
)
 
(1,455
)
Equity in loss and impairment of unconsolidated entities
(4
)
 
(63
)
 
(857
)
 
(221
)
Total other expenses
(7,113
)
 
(7,208
)
 
(27,001
)
 
(21,581
)
 
 
 
 
 
 
 
 
Net (loss) income before income taxes
(3,553
)
 
2,258

 
(12,358
)
 
2,719

 
 
 
 
 
 
 
 
Income tax benefit
(991
)
 

 
(991
)
 

 
 
 
 
 
 
 
 
Net (loss) income
$
(2,562
)
 
$
2,258

 
(11,367
)
 
$
2,719

 
 
 
 
 
 
 
 
(Loss) income per common share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.04
)
 
$
0.03

 
$
(0.19
)
 
$
0.04

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRO FORMA (C-corporation basis) (Note 8):
 
 
 
 
 
 
 
Income tax expense (benefit)
$
2,350

 
917

 
$
(1,618
)
 
$
1,104

Net (loss) income
$
(5,903
)
 
$
1,341

 
$
(10,740
)
 
$
1,615

 
 
 
 
 
 
 
 
(Loss) income per common share:
 
 
 
 
 
 
 
     Basic and diluted
$
(0.09
)
 
$
0.02

 
$
(0.18
)
 
$
0.02


See Notes to Unaudited Condensed Consolidated Financial Statements

- 4 -


Priority Technology Holdings, Inc.


Unaudited Condensed Consolidated Statement of Changes in Equity (Deficit)
For the three quarters ended September 30, 2018
 
 
 
 
 
 
Total Members' Equity (Deficit)
 
 
 
 
 
 
 
 
 
Additional Paid-In Capital (Deficit)
 
Accumulated Deficit
 
 
 
 
Common Units
 
 
Common Stock
 
Preferred Stock
 
 
 
Equity (Deficit)
 
 
Units
 
Amount
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017, as originally reported
 
5,551

 
$
(90,155
)
 
$
(90,155
)
 

 
$

 

 
$

 
$

 
$

 
$

Conversion of units to common stock and reclassification of members' equity (deficit)
 
(5,551
)
 
90,155

 
90,155

 
73,110

 
73

 

 

 

 
(90,228
)
 
(90,155
)
December 31, 2017, as recasted
 

 
$

 
$

 
73,110

 
73

 

 

 

 
(90,228
)
 
(90,155
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash distributions to members in 2018 prior to July 25
 
 
 
 
 
 
 

 

 

 

 
(7,075
)
 

 
(7,075
)
Member redemptions in 2018 prior to July 25
 
 
 
 
 
 
 
(12,565
)
 
(13
)
 

 

 
(36,548
)
 
(28,342
)
 
(64,903
)
Conversion of MI Acquisitions shares
 
 
 
 
 
 
 
6,676

 
7

 

 

 
49,382

 

 
49,389

Pro-rata adjustment
 
 
 
 
 
 
 
(724
)
 

 

 

 

 

 

Effects of Founders' Share Agreement
 
 
 
 
 
 
 
(175
)
 

 

 

 
(2,118
)
 

 
(2,118
)
Equity-based compensation arrangements
 
 
 
 
 
 
 
250

 

 

 

 
1,063

 

 
1,063

Recapitalization costs
 
 
 
 
 
 
 

 

 

 

 
(9,704
)
 

 
(9,704
)
Net deferred income taxes related to loss of partnership status
 
 
 
 
 
 
 

 

 

 

 

 
47,478

 
47,478

Common stock issued for business acquisitions
 
 
 
 
 
 
 
475

 
(a)

 

 

 
5,000

 

 
5,000

Net loss
 
 
 
 
 
 
 

 

 

 

 

 
(11,367
)
 
(11,367
)
September 30, 2018
 
 
 
 
 
 
 
67,047

 
$
67

 

 
$

 
$

 
$
(82,459
)
 
$
(82,392
)

(a) Par value of 475,195 common shares issued rounds to less than one thousand dollars


See Notes to Unaudited Condensed Consolidated Financial Statements


- 5 -


Priority Technology Holdings, Inc.


Unaudited Condensed Consolidated Statements of Cash Flows
For the three quarters ended September 30, 2018 and 2017

 
Three quarters ended September 30,
(in thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(11,367
)
 
$
2,719

Adjustment to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,679

 
11,254

Equity-based compensation
1,063

 
726

Amortization of debt issuance costs
606

 
538

Amortization of debt discount
446

 
373

Equity in loss and impairment of unconsolidated entities
857

 
221

Provision for deferred income taxes
(991
)
 

Change in fair value of warrant liability
3,458

 
1,455

Change in fair value of contingent consideration

 
(410
)
Loss on debt extinguishment
541

 
1,753

Payment in kind interest
3,623

 
3,795

Change in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
7,357

 
(7,387
)
Settlement assets
4,434

 
938

Prepaid expenses and other current assets
412

 
3,657

Notes receivable
3,661

 
(1,315
)
Accounts payable, accrued expenses and accrued residual commissions
434

 
9,499

Settlement obligations
1,330

 
2,382

Customer deposits
(3,055
)
 
(1,206
)
Other assets and liabilities
(652
)
 
(13
)
Net cash provided by operating activities
24,836

 
28,979

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of businesses
(7,508
)
 

Additions to property and equipment
(8,406
)
 
(4,866
)
Acquisitions of merchant portfolios
(26,431
)
 
(2,484
)
Net cash used in investing activities
(42,345
)
 
(7,350
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long term debt
67,113

 
276,290

Repayment of long term debt
(2,011
)
 
(90,196
)
Debt issuance costs
(322
)
 
(4,570
)
Distributions to members
(7,075
)
 
(3,399
)
Redemption of membership interest
(74,093
)
 
(203,000
)
Recapitalization proceeds
49,389

 

Founders shares redemptions
(2,118
)
 

Redemption of warrants
(12,701
)
 

Recapitalization costs
(9,355
)
 

Net cash provided by (used in) financing activities
8,827

 
(24,875
)
 
 
 
 

- 6 -


Priority Technology Holdings, Inc.


Change in cash and restricted cash:
 
 
 
Net decrease in cash and restricted cash
(8,682
)
 
(3,246
)
Cash and restricted cash at the beginning of year
44,159

 
41,702

Cash and restricted cash at September 30
$
35,477

 
$
38,456

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
16,537

 
$
13,708

   Recognition of initial net deferred income tax asset
$
47,478

 
$

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Notes receivable from sellers used as partial consideration for business acquisitions
$
560

 
$

Purchase of property and equipment through accounts payable
$
119

 
$
115

  Cash consideration payable for business acquisition
$
184

 
$

  Recapitalization costs remaining in accounts payable
$
349

 
$

  Common stock issued as partial consideration in business acquisitions
$
5,000

 
$

Common unit repurchase obligation
$

 
$
9,190

 
See Notes to Unaudited Condensed Consolidated Financial Statements

- 7 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 
1.    THE COMPANY AND BASIS OF PRESENTATION


Nature of Business

Headquartered near Atlanta in Alpharetta, Georgia, Priority Technology Holdings, Inc. and subsidiaries (the "Company") began operations in 2005 with a mission to build a merchant inspired payments platform that would advance the goals of its customers and partners. Today, the Company is a leading provider of merchant acquiring and commercial payment solutions, offering unique product capabilities to small and medium size businesses ("SMBs") and enterprises and distribution partners in the United States. The Company operates from a purpose-built business platform that includes tailored customer service offerings and bespoke technology development, allowing the Company to provide end-to-end solutions for payment and payment-adjacent needs.

Priority provides:

Consumer payments processing solutions for business-to-consumer ("B2C") transactions through independent sales organizations ("ISOs"), financial institutions, independent software vendors ("ISVs"), and other referral partners. Priority's proprietary MX platform for B2C payments provides merchants a fully customizable suite of business management solutions.
Commercial payments solutions such as automated vendor payments and professionally curated managed services to industry leading financial institutions and networks. The Company's proprietary business-to-business ("B2B") Commercial Payment Exchange (CPX) platform was developed to be a best-in-class solution for buyer/supplier payment enablement.
Institutional services solutions that provide audience-specific programs for institutional partners and other third parties looking to leverage the Company's professionally trained and managed call center teams for customer onboarding, assistance, and support, including marketing and direct-sales resources.
Integrated partners solutions for ISVs and other third-parties that allow them to leverage the Company's core payments engine via robust application program interfaces ("APIs") resources and high-utility embeddable code.
Consulting and development solutions focused on the increasing demand for integrated payments solutions for transitioning to the digital economy.

To provide many of its services, the Company enters into agreements with payment processors which in turn have agreements with multiple card associations. These card associations comprise an alliance aligned with insured financial institutions (“member banks”) that work in conjunction with various local, state, territory, and federal government agencies to make the rules and guidelines regarding the use and acceptance of credit and debit cards. Card association rules require that vendors and processors be sponsored by a member bank and register with the card associations. The Company has multiple sponsorship bank agreements and is itself a registered ISO with Visa®. The Company is also a registered member service provider with MasterCard®. The Company’s sponsorship agreements allow the capture and processing of electronic data in a format to allow such data to flow through networks for clearing and fund settlement of merchant transactions.


Corporate History and Recapitalization

M I Acquisitions, Inc. ("MI" or "MI Acquisitions") was incorporated under the laws of the state of Delaware as a special purpose acquisition company ("SPAC") whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities. MI Acquisitions completed an initial public offering ("IPO") in September 2016, and MI Acquisitions' common shares began trading then on Nasdaq Stock Market, LLC ("Nasdaq") under the symbol MACQ. In addition, MI Acquisitions completed a private placement to certain initial stockholders of MI. MI Acquisitions received gross proceeds of approximately $54.0 million from the IPO and private placement.

On July 25, 2018, MI Acquisitions acquired all of the outstanding member equity interests of Priority Holdings, LLC ("Priority") in exchange for the issuance of MI Acquisitions' common shares (the "Business Combination") from a private placement. As a result, Priority, which was previously a privately owned company, became a wholly-owned subsidiary of MI Acquisitions.

- 8 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Simultaneously with the Business Combination, MI Acquisitions changed its name to Priority Technology Holdings, Inc. and the symbol for its common stock on Nasdaq became PRTH.

As a SPAC, MI Acquisitions had substantially no business operations prior to July 25, 2018. For financial accounting and reporting purposes under accounting principles generally accepted in the United States ("U.S. GAAP"), the acquisition was accounted for as a "reverse merger," with no recognition of goodwill or other intangible assets. Under this method of accounting, MI Acquisitions was treated as the acquired entity whereby Priority was deemed to have issued common stock for the net assets and equity of MI Acquisitions consisting mainly of cash of $49.4 million, accompanied by a simultaneous equity recapitalization (the "Recapitalization") of Priority. The net assets of MI Acquisitions are stated at historical cost, and accordingly the equity and net assets of the Company have not been adjusted to fair value. As of July 25, 2018, the consolidated financial statements of the Company include the combined operations, cash flows, and financial positions of both MI Acquisitions and Priority. Prior to July 25, 2018, the results of operations, cash flows, and financial positions are those of Priority. The units and corresponding capital amounts and earnings per unit of Priority prior to the Recapitalization have been retroactively restated as shares reflecting the exchange ratio established in the Recapitalization.

The common shares issued in the private placement, including the common shares issued to the sellers of Priority, are restricted shares, meaning that there are certain regulatory restrictions on the holders' abilities to sell, transfer, pledge or otherwise dispose of the private placement shares. Common shares of the Company issued to certain non-affiliates in the private placement may become unrestricted common shares in the future due to the lapse of certain regulatory restrictions on the holders' ability to sell, transfer, pledge, or dispose of the unregistered shares.

The Company's Executive Chairman controls a majority of the voting power of the Company's outstanding common stock. As a result, the Company is a “controlled company” within the meaning of Nasdaq's corporate governance standards.

For more information on the Company's equity structure, see Note 11, Equity, to these unaudited condensed consolidated financial statements.
 
Prior to July 25, 2018, Priority was a "pass-through" entity for income tax purposes and had no material income tax accounting reflected in its financial statements for financial reporting purposes since taxable income and deductions were "passed through" to Priority's unconsolidated owners. MI Acquisitions is a taxable "C Corp" for income tax purposes. As a result of Priority's acquisition by MI Acquisitions, the combined Company is now a taxable "C Corp" that reports all of Priority's income and deductions for income tax purposes. Accordingly, the consolidated financial statements of the Company now account for income taxes in accordance with Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC 740"). See Note 8, Income Taxes, to these unaudited condensed consolidated financial statements.

The Company operates in two reportable segments, Consumer Payments and Commercial Payments and Managed Services. For more information about the Company’s segments, refer to Note 14, Segment Information, to these unaudited condensed consolidated financial statements. The Business Combination did not impact the Company's reportable segments as MI was a SPAC with substantially no business operations.


Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its controlled subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. Investments in unconsolidated affiliated companies are accounted for under the equity method and are included in “Other assets” in the accompanying unaudited condensed consolidated balance sheets. The Company generally utilizes the equity method of accounting when it has an ownership interest of between 20% and 50% in an entity, provided the Company is able to exercise significant influence over the investee’s operations.

These unaudited condensed consolidated financial statements: 1) have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") and 2) should be read in connection with Priority's audited consolidated financial statements and related notes as of and for the year ended December 31, 2017 included as Exhibit 99.2 to the Company's Current Report on Form 8-K filed July 31, 2018 (the "Form 8-K"). The accompanying unaudited condensed consolidated financial statements are unaudited; however, in the opinion of management

- 9 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

they include all normal and recurring adjustments necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements for the periods presented. The accompanying unaudited condensed consolidated balance sheet and related footnote disclosures as of December 31, 2017 were derived from Priority's audited consolidated financial statements and accompanying footnotes as of and for the year ended December 31, 2017 included in the Form 8-K. Results of operations reported for interim periods are not necessarily indicative of results for the entire year due to seasonal fluctuations in the Company’s revenue as a result of consumer spending patterns. All intercompany balances and transactions have been eliminated.
 
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates.

The Company is an “emerging growth company" (EGC), as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). The Company may remain an EGC until December 31, 2021. However, if the Company's non-convertible debt issued within a rolling three-year period exceeds $1.0 billion, the Company would cease to be an EGC immediately, or if its revenues for any fiscal year exceed $1.07 billion, or the market value of its common stock that is held by non-affiliates exceeds $700.0 million on the last day of the second quarter of any given year, the Company would cease to be an EGC as of the beginning of the following year. As an EGC, the Company is not required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act. Additionally, the Company as an EGC may continue to elect to delay the adoption of any new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, the Company’s financial statements may not be comparable to companies that comply with public company effective dates.


Comprehensive Income (Loss)

Comprehensive income (loss) represents the sum of net income (loss) and other amounts that are not included in the unaudited condensed consolidated statement of operations as the amounts have not been realized. For the quarters and three quarters ended September 30, 2018 and 2017, there were no differences between the Company’s net income (loss) and comprehensive income (loss). Therefore, no separate Statement of Other Comprehensive Income (Loss) is included in the financial statements for the reporting periods.


Accounting Policies

Since MI Acquisitions had substantially no business operations as a SPAC, its limited accounting policies were not in conflict with those of Priority. Accordingly, the combined Company uses the accounting policies of Priority as described in Note 1 to Priority's audited consolidated financial statements as of and for the year ended December 31, 2017 included in the Form 8-K. There have been no material changes to these accounting policies, except as noted below for the: 1) new accounting pronouncement adopted in the first three quarters of 2018; 2) adoption of an accounting policy for income taxes for the Company during the third quarter of 2018; 3) updated accounting policy for earnings per share; and 4) updated fair value accounting policy for contingent consideration associated with business combinations. Accounting policies, as previously disclosed in Note 1 to Priority's audited consolidated financial statements as of and for the year ended December 31, 2017 contained in the Form 8-K, are presented below for revenue recognition and cost of services.

Revenue Recognition

The Company recognizes revenue when (1) it is realized or realizable and earned, (2) there is persuasive evidence of an arrangement, (3) delivery and performance has occurred, (4) there is a fixed or determinable sales price and (5) collection is reasonably assured.

The Company generates revenue primarily for fees charged to merchants for the processing of card-based transactions. The Company’s reporting segments are organized by services the Company provides and distinct business units. Set forth below is a description of the Company’s revenue by segment. See Note 14, Segment Information, to Priority's audited consolidated financial statements as of and for the year ended December 31, 2017 for further discussion of the Company’s reportable segments.


- 10 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Consumer Payments

The Company’s Consumer Payments segment represents merchant card fee revenues, which are based on the electronic transaction processing of credit, debit and electronic benefit transaction card processing authorized and captured through third-party networks, check conversion and guarantee, and electronic gift certificate processing. Merchants are charged rates which are based on various factors, including the type of bank card, card brand, merchant charge volume, the merchants industry and the merchant’s risk profile. Typically, revenues generated from these transactions are based on a variable percentage of the dollar amount of each transaction and in some instances, additional fees are charged for each transaction. The Company’s contracts in most instances involve three parties: the Company, the merchant and the sponsoring bank. The Company’s sponsoring banks collect the gross revenue from the merchants, pay the interchange fees and assessments to the credit card associations, retain their fees and pay to the Company a net residual payment representing the Company’s fee for the services provided. Merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, and monthly minimum fees, fees for handling chargebacks, gateway fees and fees for other miscellaneous services.

The determination of whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in the evaluation. The Company recognizes merchant card fee revenues net of interchange fees, which are assessed to the Company’s merchant customers on all transactions processed by third parties. Interchange fees and rates are not controlled by the Company, which effectively acts as a clearing house collecting and remitting interchange fee settlement on behalf of issuing banks, debit networks, credit card associations and its processing customers. All other revenue is reported on a gross basis, as the Company contracts directly with the merchant, assumes the risk of loss and has pricing flexibility.

Commercial Payments and Managed Services

The Company’s Commercial Payments and Managed Services segment represents outsourced services revenue, which is primarily derived from providing an outsourced sales force to certain enterprise customers. These services may be provided in areas related to supplier / management campaigns, merchant development programs, and receivable finance management. Commercial Payments and Managed Services are provided on a cost-plus fee arrangement. Revenue is recognized to the extent of billable rates times hours worked and other reimbursable costs incurred.

Other revenue

Other revenue is comprised of fees for services not specifically described above, which are generally transaction-based fees that are recognized at the time the transactions are processed, and revenue generated from the sale of point of sale devices (“terminals”) when the following four criteria are met: evidence of an agreement exists, delivery has occurred, the selling price is fixed and determinable, and collection of the selling price is reasonably assured.

Costs of Services

Costs of Merchant Card Fees

Cost of merchant card fees primarily consist of residual payments to agents and ISOs and other third-party costs directly attributable to payment processing. The residual payments represent commissions paid to agents and ISOs based upon a percentage of the net revenues generated from merchant transactions.

Other Costs of Services

Other costs of services include salaries directly related to outsourced services revenue, merchant supplies, and other service expenses.

Earnings Per Share
 
The Company follows the two class method when computing net income (loss) per common share due to the existence of contingent share arrangements that meet the definition of participating securities. The two-class method determines net income (loss) per common share for each class of common shares and participating securities according to dividends declared or accumulated and

- 11 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

participation rights in undistributed earnings. The two class method requires income available to common shareholders for the period to be allocated between common shares and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The warrants are participating securities because they have a contractual right to participate in nonforfeitable dividends on a one-for-one basis with the Company's common shares.


Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings.
 
The Company recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.

Fair Value of Contingent Consideration in Business Acquisitions

The fair values of the Company’s contingent consideration in business acquisitions are primarily based on Level 3 inputs and are generally estimated based on discounted cash flow analysis from the Company’s most recent cash flow projections and growth rates.


New Accounting Standards (Adopted and Pending Adoption)

Prior to July 25, 2018, Priority was defined as a non-public entity for purposes of applying transition guidance related to new or revised accounting standards under U.S. GAAP, and as such was typically required to adopt new or revised accounting standards subsequent to the required adoption dates that applied to public companies. MI Acquisitions is classified as an EGC. Subsequent to the July 25, 2018 Business Combination, the Company retains EGC status until no later than December 31, 2021. The Company will maintain the election available to an EGC to use any extended transition period applicable to non-public companies when complying with a new or revised accounting standards. Therefore, as long as the Company retains EGC status, before December 31, 2021 the Company can continue to elect to adopt any new or revised accounting standards on the adoption date (including early adoption) required for a private company.


Accounting Standards Adopted in the First Three Quarters of 2018

Modifications to Share-Based Compensation Awards (ASU 2017-09)

As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-09, Compensation-Stock Compensation Topic 718 - Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies when changes to the terms and conditions of share-based payment awards must be accounted for as modifications. Entities apply the modification accounting guidance if the value, vesting conditions, or classification of an award changes. The Company has not modified any share-based payment awards since the adoption of ASU 2017-09. Should the Company modify share-based payment awards in the future, it will apply the provisions of ASU 2017-09.


Balance Sheet Classification of Deferred Income Taxes (ASU 2015-17)


- 12 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

In connection with the Business Combination and Recapitalization, the Company prospectively adopted the provisions of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), during the third quarter of 2018. ASU 2015-17 simplifies the balance sheet presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities for each tax-paying jurisdiction as non-current on the balance sheet. Prior guidance required the deferred taxes for each tax-paying jurisdiction to be presented as a net current asset or liability and net non-current asset or liability. The Company's prospective adoption of ASU 2015-17 impacts the classification of deferred tax assets and liabilities on any balance sheet that reports the Company's financial position for any date after June 30, 2018. Balance sheets for prior periods have not been adjusted. The adoption of ASU 2015-17 had no impact on the Company's results of operations or cash flows.


Recently Issued Standards Not Yet Adopted

Accounting for Share-Based Payments to Employees (ASU 2016-09)

In March 2016, the FASB issued ASU 2016­-09, Improvements to Employee Share­-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. This new ASU has the following effects:

Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations. This change is required to be applied prospectively upon adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption.

Consolidated Statement of Cash Flows - ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments, such as excess income tax benefits, are to be reported as operating activities on the statement of cash flows, a change from the prior requirement to present windfall income tax benefits as an inflow from financing activities and an offsetting outflow from operating activities.

Additionally, ASU 2016-09 clarifies that:

all cash payments made to taxing authorities on the employees' behalf for withheld shares at settlement are presented as financing activities on the statement of cash flows. This change must be applied retrospectively.

entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share­based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. Estimates of forfeitures will still be required in certain circumstances, such as at the time of modification of an award or issuance of a replacement award in a business combination. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings.

As an EGC, this ASU is effective for the Company for annual reporting periods beginning 2018 and interim periods beginning first quarter 2019. The adoption of the ASU is not expected to have a material effect on the Company's financial position, results of operations, or cash flows. Its impact on periods after adoption will depend on future grants of share-based compensation that the Company may make under its 2018 Equity Incentive Plan. See Note 12, Equity-Based Compensation.


Share-Based Payments to Non-Employees (ASU 2018-07)

In June 2018, the FASB issued ASU 2018-07, Share-based Payments to Non-Employees, to simplify the accounting for share-based payments to non-employees by aligning it with the accounting for share-based payments to employees, with certain exceptions. As an EGC, the ASU is effective for annual reporting periods beginning in 2020 and interim periods within annual periods beginning first quarter 2021. The Company is evaluating the impact this ASU will have on its consolidated financial statements.


- 13 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements


Implementation Costs Incurred in Cloud Computing Arrangements (ASU 2018-15)

In August 2018, the FASB issued ASU 2018-15, Implementation Costs Incurred in Cloud Computing Arrangements ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As an EGC, this ASU is effective for the Company for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact this ASU will have on its consolidated financial statements.


Definition of a Business (ASU 2017-01)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This guidance will assist entities in determining if acquired assets constitute the acquisition of a business or the acquisition of assets for accounting and reporting purposes. In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a business. Under ASU 2017-01, requiring entities to further assess the substance of the processes they acquire will likely reduce the number of transactions accounted for as business acquisitions. As an EGC, this ASU is effective for the Company for annual reporting periods beginning after December 15, 2018 and interim periods within years beginning after December 15, 2019. The impact that ASU 2017-01 may have on the Company's financial position, results of operations or cash flows will depend on the nature of any acquisition commencing after the Company's adoption of the ASU.

Disclosures for Fair Value Measurements (ASU 2018-13)

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. For all entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. As disclosure guidance, the adoption of this ASU will not have an effect on the Company's financial position, results of operations or cash flows.


Statement of Cash Flows (ASU 2016-15)
 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This ASU represents a consensus of the FASB’s Emerging Issues Task Force on eight separate issues that each impact classifications on the statement of cash flows. In particular, issue number three addresses the classification of contingent consideration payments made after a business combination. Under ASU 2016-15, cash payments made soon after an acquisition’s consummation date (i.e., approximately three months or less) will be classified as cash outflows from investing activities. Payments made thereafter will be classified as cash outflows from financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities. As an EGC, this ASU is effective for the Company for years beginning after December 15, 2018 and interim periods within years beginning after December 15, 2019. The Company is evaluating the effect this ASU will have on its consolidated statement of cash flows.


Goodwill Impairment Testing (ASU 2017-04)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, the ASU will be applied prospectively. As an EGC, this ASU will be effective for annual and interim impairment tests performed in periods beginning after December 15, 2021 (i.e., for any impairment test performed in 2022). The impact that ASU 2017-04 may have on the Company’s financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.


Revenue Recognition (ASC 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which since has been codified and amended in ASC 606, Revenue from Contracts with Customers. This guidance clarifies the principles for recognizing revenue and will be applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance will require improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Since its original issuance, the FASB has issued several updates to this guidance, and additional updates are possible. The new standard could change the amount and timing of revenue and costs for certain significant revenue streams, increase areas of judgment and related internal controls requirements, change the presentation of revenue for certain contract arrangements and possibly require changes to the Company’s software systems to assist in both internally capturing accounting differences and externally reporting such differences through enhanced disclosure requirements. As an EGC, the standard is effective for the Company's 2019 annual reporting period and for interim periods after 2019. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that the standard may have on its consolidated financial statements and disclosures.


Leases (ASU 2016-02)

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. As an EGC, this standard is effective for the Company's annual reporting period beginning in 2020 and interim reporting periods beginning first quarter of 2021. The new standard requires a modified retrospective basis. The adoption of ASC 842 will require the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.


Credit Losses (ASU 2016-13)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current “incurred loss” model with an “expected loss” model. Under the “incurred loss” model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been “incurred”). Under the “expected loss” model, an entity will recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The “incurred loss” model considers past events and current conditions, while the “expected loss” model includes expectations for the future which have yet to occur. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable. As an EGC, the ASU is effective for annual periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021.




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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Concentrations

The Company’s revenue is substantially derived from processing Visa® and MasterCard® bank card transactions. Because the Company is not a member bank, in order to process these bank card transactions, the Company maintains sponsorship agreements with member banks which require, among other things, that the Company abide by the by-laws and regulations of the card associations.

Substantially all of the Company’s revenues and receivables are attributable to merchant customer transactions, which are processed primarily by third-party payment processors.

A majority of the Company’s cash and restricted cash is held in certain financial institutions, substantially all of which is in excess of federal deposit insurance corporation limits. The Company does not believe it is exposed to any significant credit risk from these transactions.

Reclassification

Certain prior year amounts in these unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation, with no net effect on the Company's equity or net income (loss) for any period. For additional information about the Company's Recapitalization in July 2018, see Note 11, Equity, to these unaudited condensed consolidated financial statements. For information about the Company's conversion from a "pass-through" LLC to a taxable "C Corporation" for income tax purposes, see Note 8, Income Taxes, to these unaudited condensed consolidated financial statements.

2.    ACQUISITIONS OF BUSINESSES BY PRIORITY

The Company did not consummate any business acquisitions during 2017 or the first quarter of 2018.

Based on their purchase prices and pre-acquisition operating results and assets, none of the businesses acquired by the Company in the second and third quarters of 2018, as described below, met the materiality requirements for pro forma disclosures.


Business Acquisition in the Second Quarter of 2018

PayRight

In April 2018, Priority PayRight Health Solutions, LLC (“PPRHS”), a subsidiary of the Company, purchased the majority of the operating assets and certain operating liabilities of PayRight Health Solutions (“PayRight”). This purchase allowed PPRHS to gain control over the PayRight business and therefore the Company’s consolidated financial statements include the financial position, results of operations, and cash flows of PayRight from the date of acquisition. PayRight utilizes technology assets to deliver customized payment solutions to the healthcare industry. The results of the acquired business and goodwill of $0.3 million from the transaction are being reported by the Company as part of the Commercial Payments and Managed Services reportable segment. Additionally, the acquisition resulted in the recognition of intangible and net tangible assets with a fair value of $0.6 million. The Company transferred total consideration with a fair value of $0.9 million consisting of: $0.5 million in cash and forgiveness of amounts owed to the Company by PayRight; $0.3 million fair value of the Company’s previous equity method investment described in the following paragraph; and non-controlling equity interests in the form of profit and distribution rights that were deemed to have minimal fair value as equity instruments at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the LLC agreement for PPRHS. However, due to other contractual rights, the profit and distributions rights were assigned a value of $0.1 million, which was recorded as a liability. The measurement period, as defined by ASC 805, Business Combination ("ASC 805"), is still open for the PayRight purchase since the Company is awaiting information to determine the acquisition-date fair value of certain acquired assets and assumed liabilities.

Previously, in October 2015, the Company purchased a non-controlling interest in the equity of PayRight, and prior to April 2018 the Company accounted for this investment using the equity method of accounting. Immediately prior to PPRHS’s April 2018 purchase of substantially all of PayRight’s business assets, the Company’s existing non-controlling investment in PayRight had a carrying value of approximately $1.1 million with an estimated fair value on the acquisition date of approximately $0.3 million.

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

The Company recorded an impairment loss of $0.8 million during the second quarter of 2018 for the difference between the carrying value and the fair value of the non-controlling equity method investment in PayRight. The loss is reported as equity in loss and impairment of unconsolidated entities in the Company’s unaudited condensed consolidated statement of operations for the three quarters ended September 30, 2018.


Business Acquisitions in the Third Quarter of 2018

The Company consumated three business acquisitions in the third quarter of 2018 that were accounted for under the provisions of ASC 805, Business Combinations. The measurement periods, as defined by ASC 805, are still open for all of these business acquisitions since the Company is awaiting information to determine the acquisition-date fair values of certain acquired assets and assumed liabilities.

RadPad and Landlord Station

In July 2018, the Company acquired substantially all of the net operating assets of RadPad Holdings, Inc. ("RadPad") and Landlord Station, LLC ("Landlord Station"). These related asset purchases were deemed to be a business under ASC 805, and the Company formed a new entity, Priority Real Estate Technology, LLC ("PRET"), to acquire and operate these businesses. Due to the related nature of the two sets of business assets, same acquisition dates, and how the Company intends to operate them under the "RadPad" name and operating platform within PRET, the Company deemed them to be one business for accounting and reporting purposes. PRET is reported within the Company's Commercial Payments and Managed Services reportable segment.

RadPad is a marketplace for the rental real estate market. Landlord Station offers a complementary toolset that focuses on facilitation of tenant screening and other services to the fast-growing independent landlord market. The Company's existing proprietary payments platform, combined with consumer and commercial payments expertise, allow RadPad and Landlord Station, operating primarily on the merged RadPad platform, to monetize core business and other ancillary revenue stream.

Total consideration paid for RadPad and Landlord Station was $4.3 million consisting of $3.9 million plus forgiveness of pre-existing debt owed by the sellers to the Company of $0.4 million. Additionally, the Company paid and expensed $0.1 million for transaction costs. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.1 million were acquired along with goodwill with an initial value of $2.2 million. Non-controlling equity interests in PRET were issued to certain sellers in the form of residual profit interests and distribution rights, however the fair value of these non-controlling interests were deemed to be immaterial at time of acquisition due to the nature of the profit-sharing and liquidations provisions contained in the LLC agreement for PRET.


Priority Payment Systems Northeast

In July 2018, the Company acquired substantially all of the net operating assets of Priority Payment Systems Northeast, Inc. ("PPS Northeast"). This purchase of these net assets was deemed to be a business under ASC 805. Prior to this acquisition, PPS Northeast was an independent brand-licensed office of the Company where it developed expertise in software-integrated payment services designed to manage turnkey installations of point-of-sale and supporting systems, as well as marketing programs that place emphasis on online ordering systems and digital marketing campaigns. PPS Northeast is reported within the Company's Consumer Payments reportable segment.

Initial consideration of $3.5 million consisted of $500,000 plus 285,117 common shares of the Company with a fair value of approximately of $3.0 million. In addition, contingent consideration in an amount up to $0.5 million was deemed to have a fair value of $0.4 million at acquisition date. If earned, the seller can receive this contingent consideration in either cash or additional shares of the Company's common stock, as mutually agreed by the Company and seller. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.0 million were acquired along with goodwill with an initial value of $1.9 million, including the $0.4 million estimated fair value of the contingent consideration due to the seller. Any gain or loss associated with the termination of a pre-existing relationship was not deemed material. At September 30, 2018, the fair value of the contingent consideration still approximated the original $0.4 million fair value assigned on date of acquisition.



- 17 -


Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Priority Payment Systems Tech Partners

In August 2018, the Company acquired substantially all of the net operating assets of M.Y. Capital, Inc. and Payments In Kind, Inc., collectively doing business as Priority Payment Systems Tech Partners ("PPS Tech"). These related asset purchases were deemed to be a business under ASC 805. Due to the related nature of the two sets of business assets and how the Company intends to operate them, the Company deemed them to be one business for accounting and reporting purposes. Prior to this acquisition, PPS Tech was an independent brand-licensed office of the Company where it developed a track record and extensive network in the integrated payments and B2B marketplaces. PPS Tech is reported within the Company's Consumer Payments reportable segment.

Initial consideration of $5.0 million consisted of $3.0 million plus 190,078 common shares of the Company with a fair value of approximately $2.0 million. In addition, contingent consideration in an amount up to $1.0 million was deemed to have a fair value of $0.6 million at acquisition date. If earned, the seller will receive half of any contingent consideration in cash and the other half in a number of common shares of the Company equal to the portion of the earned contingent consideration payable in common shares of the Company. Net tangible and separately-identifiable intangible assets with an initial fair value of $2.2 million were acquired along with goodwill with an initial value of $3.4 million, including the $0.6 million estimated fair value of the contingent consideration due to the seller. Any gain or loss associated with the termination of a pre-existing relationship was not deemed material. At September 30, 2018, the fair value of the contingent consideration still approximated the original $0.6 million fair value assigned on date of acquisition.


3.    SETTLEMENT ASSETS AND OBLIGATIONS

The principal components of the Company’s settlement assets and obligations at September 30, 2018 and December 31, 2017 were as follows:
(in thousands)
 
 
 
Settlement Assets:
September 30, 2018
 
December 31, 2017
Due from card processors
$
2,774

 
$
7,207

Settlement Obligations:
 
 
 
Due to ACH payees
11,805

 
10,474

Total settlement obligations, net
$
(9,031
)
 
$
(3,267
)


Amounts due to ACH payees are offset by restricted cash.

4.    GOODWILL AND INTANGIBLE ASSETS

The Company records goodwill when an acquisition is made and the purchase price is greater than the fair value assigned to the underlying tangible and intangible assets acquired and the liabilities assumed. The Company’s goodwill is allocated to reporting units as follows:
(in thousands)
September 30, 2018
 
December 31, 2017
Consumer Payments
$
106,832

 
$
101,532

Commercial Payments and Managed Services
2,534

 

 
$
109,366

 
$
101,532



The Company’s intangible assets primarily include merchant portfolios and other intangible assets such as non-compete agreements, trade names, acquired technology (developed internally by acquired companies prior to acquisition by the Company) and customer relationships.


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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the changes in the carrying amount of goodwill for the three quarters ended September 30, 2018:
(in thousands)
Total
Balance at December 31, 2017
$
101,532

Goodwill acquired from business combinations:
 
  PayRight
298

  RadPad/Landlord Station
2,236

  PPS Northeast
1,920

  PPS Tech
3,380

Balance at September 30, 2018
$
109,366



As of September 30, 2018 and December 31, 2017 intangible assets consisted of the following:
(in thousands)
September 30, 2018
 
December 31, 2017
Other intangible assets:
 
 
 
Merchant portfolios
$
77,998

 
$
46,716

Non-compete agreements
3,390

 
3,390

Tradename
2,870

 
2,580

Acquired technology
14,390

 
13,200

Customer relationships
51,090

 
51,090

 
149,738

 
116,976

Less accumulated amortization:
 
 
 
Merchant portfolios
(44,888
)
 
(41,915
)
Non-compete agreements
(3,390
)
 
(3,243
)
Trade names
(953
)
 
(776
)
Acquired technology
(9,642
)
 
(7,928
)
Customer relationships
(25,286
)
 
(21,052
)
 
(84,159
)
 
(74,914
)
 
$
65,579

 
$
42,062


 
Amortization expense for finite-lived intangible assets was $3.8 million and $9.3 million for the quarter and three quarters ended September 30, 2018, respectively, and $2.5 million and $8.0 million for the comparable periods in 2017, respectively. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives, and other relevant events or circumstances.

The Company tests goodwill for impairment for each of its reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company will perform its annual goodwill impairment test as of November 30, 2018 using market data and discounted cash flow analysis. The Company concluded there were no indicators of impairment as of September 30, 2018 or December 31, 2017. As such, there was no accumulated impairment loss as of September 30, 2018 and December 31, 2017.


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


- 19 -


A summary of property, equipment, and software as of September 30, 2018 and December 31, 2017 follows:
(in thousands)
September 30, 2018
 
December 31, 2017
 
Useful Life
Furniture and fixtures
$
2,092

 
$
1,871

 
2-7 years
Equipment
8,107

 
6,256

 
3-7 years
Computer software
25,922

 
20,443

 
3-5 years
Leasehold improvements
5,880

 
4,965

 
5-10 years
 
42,001

 
33,535

 
 
Less accumulated depreciation
(24,990
)
 
(21,592
)
 
 
Property, equipment, and software, net
$
17,011

 
$
11,943

 
 


Depreciation expense totaled $1.1 million and $1.1 million for the quarters ended September 30, 2018 and 2017, respectively. Depreciation expense totaled $3.4 million and $3.2 million for the three quarters ended September 30, 2018 and 2017, respectively.




Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

6.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The Company accrues for certain expenses that have been incurred, which are classified within accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

Accounts payable and accrued expenses as of September 30, 2018 and December 31, 2017 consists of the following:
(in thousands)
September 30, 2018
 
December 31, 2017
Accounts payable
$
9,693

 
$
8,751

Accrued compensation
14,961

 
6,136

Other accrued expenses
1,960

 
3,716

 
$
26,614

 
$
18,603



7.    LONG-TERM DEBT AND WARRANT LIABILITY

Long-term debt as of September 30, 2018 and December 31, 2017 consists of the following:
(in thousands)
September 30, 2018
 
December 31, 2017
Term Loan - Senior, matures January 3, 2023 and bears interest at LIBOR plus 5.0% for September 30, 2018 and 6.0% for December 31, 2017 (actual rate of 7.1% at September 30, 2018 and 7.4% at December 31, 2017)
$
263,488

 
$
198,000

Term Loan - Subordinated, matures July 3, 2023 and bears interest at 5.0% plus payment-in-kind interest (actual rate of 10.5% at September 30, 2018 and 11.3% at December 31, 2017)
88,742

 
85,118

Total Debt
352,230

 
283,118

Less: current portion of long-term debt
(2,682
)
 
(7,582
)
Less: unamortized debt discounts
(3,154
)
 
(3,212
)
Less: deferred financing costs
(4,101
)
 
(4,385
)
Total long-term debt
$
342,293

 
$
267,939



Debt Restructuring

On January 3, 2017, the Company restructured its long-term debt by entering into a Credit and Guaranty Agreement with a syndicate of lenders (the “Credit Agreement”). As a result, the syndicate of lenders became senior lenders and Goldman Sachs became a subordinated lender to the Company. The Credit Agreement had a maximum borrowing amount of $225.0 million, consisting of a $200.0 million Term Loan and a $25.0 million revolving credit facility. In addition, on January 3, 2017, the Company entered into a Credit and Guaranty Agreement with Goldman Sachs Specialty Lending Group, L.P. (“GS”) (the “GS Credit Agreement”) for an $80.0 million term loan, the proceeds of which were used to refinance the amounts previously outstanding with GS. The term loans under the Credit Agreement and GS Credit Agreement were issued at a discount of $3.7 million, which is being amortized to interest expense over the lives of the term loans using the effective interest method. The Company determined that the 2017 debt restructuring should be accounted for as a debt extinguishment. The Company recorded an extinguishment loss of approximately $1.8 million, which consisted primarily of lender fees incurred in connection with the refinancing and the write-off of unamortized deferred financing fees and original issue discount associated with the previous debt.

On January 11, 2018, the Company modified its long-term debt by amending the GS Credit Agreement and the Credit Agreement (collectively, the “2018 Amendment”). The 2018 Amendment increased the Credit Agreement term loans by $67.5 million and lowered the applicable margin under the Credit Agreement. The $67.5 million in additional borrowings under the Credit Agreement was issued at a discount of $0.4 million, which is being amortized to interest expense over the lives of the term loans using the effective interest method. Borrowings under the Credit Agreement were subject to an applicable margin, or percentage per annum, equal to: (i) with respect to Initial Term Loans, (a) for LIBOR Rate Loans, 6.00% per annum and (b) for Base Rate Loans, 5.00% per annum; and (ii) with respect to Revolving Loans (a) for LIBOR Rate Loans and Letter of Credit fees, 6.00%, (b) for Base Rate Loans, 5.00% and (c) for unused commitment fees, 0.50%. As a result of the 2018 Amendment, borrowings under the Credit Agreement are subject to an applicable margin, or percentage per annum, equal to: (i) with respect to Initial Term Loans, (a) for

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

LIBOR Rate Loans, 5.00% per annum and (b) for Base Rate Loans, 4.00% per annum; and (ii) with respect to Revolving Loans (a) for LIBOR Rate Loans and Letter of Credit fees, 5.00%, (b) for Base Rate Loans, 4.00% and (c) for unused commitment fees, 0.50%.

The Company determined that the 2018 Amendment should be accounted for as a debt modification. Therefore, all previously deferred fees and costs continue to be amortized to interest expense using the effective interest method over the respective terms of the amended loans. During the first quarter of 2018, the Company incurred $0.8 million in issuance costs related to the 2018 Amendment, which were expensed as incurred and recorded as a component of Debt Modification and Extinguishment Expenses in the accompanying unaudited condensed consolidated statement of operations for the three quarters ended September 30, 2018. In connection with the new lenders to the Credit Agreement as a result of the 2018 Amendment, the Company capitalized incremental deferred financing costs of $0.3 million and fees paid to lenders of $0.4 million during the first quarter of 2018. The Company is amortizing these amounts to interest and other expense using the effective interest method over the terms of the Credit Agreement.

As a result of the 2018 Amendment, the Credit Agreement has a maximum borrowing amount of $292.5 million, consisting of a $267.5 million Term Loan and a $25.0 million revolving credit facility. The Credit Agreement matures on January 3, 2023, with the exception of the revolving credit facility which expires on January 2, 2022. Any amounts outstanding under the revolving credit facility must be paid in full before the maturity date of January 2, 2022. There were no amounts outstanding under the revolving credit facility as of September 30, 2018 or December 31, 2017. The Company recorded $0.1 million of interest expense for the three quarters ended September 30, 2018 as a penalty for not drawing on the revolving credit facility.

The Credit Agreement, as amended, 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, 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. Substantially all of the Company’s assets are pledged as collateral under the Credit Agreement and GS Credit Agreement. The financial covenant consists of an amended Total Net Leverage Ratio, as defined in the Amended SunTrust Term Loan Agreement and GS Credit Agreement. As of September 30, 2018 and December 31, 2017, the Company was in compliance with the financial covenant.

The terms of the GS Credit Agreement were amended to allow for the increase in borrowings under the Credit Agreement but otherwise the terms of the GS Credit Agreement were not substantively changed by the 2018 Amendment. The borrowing amount under the GS Credit Agreement is $80.0 million and was not changed in the 2018 Amendment. The GS Credit Agreement matures on July 3, 2023.

Under the credit agreement the Company is required to make quarterly principal payments of $0.7 million. As of December 31, 2017, the Company was obligated to make certain additional mandatory prepayments based on Excess Cash Flow, as defined in the Credit Agreement. As of December 31, 2017, the mandatory prepayment based on Excess Cash Flow was $5.6 million, which was included in current portion of long-term debt. On April 30, 2018, the Company entered into a Limited Waiver and Consent and is no longer obligated to make the 2017 mandatory prepayment based on Excess Cash Flow, as defined in the Credit Agreement. As of September 30, 2018, the amount of the excess cash flow payment previously classified as current portion of long-term debt has been classified as long-term debt as the amount is no longer callable by the creditor as of the date of the issuance of the quarterly financial statements.

Principal contractual maturities on long-term debt at September 30, 2018 are as follows:
(in thousands)
 
 
Year ending September 30,
 
Maturities
2019
 
$
2,682

2020
 
2,682

2021
 
2,682

2022
 
2,682

2023
 
341,502

 
 
$
352,230


 

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the quarter and three quarters ended September 30, 2018, the payment-in-kind (PIK) interest added $1.2 million and $3.6 million, respectively, to the principal amount of the subordinated debt, which totaled $88.7 million as of September 30, 2018.

For the quarters ended September 30, 2018 and 2017, the Company recorded interest expense, including amortization of deferred financing costs and debt discounts, of $7.3 million and $6.4 million, respectively. For the three quarters ended September 30, 2018 and 2017, these amounts were $21.9 million and $18.6 million, respectively.


Goldman Sachs Warrants

In connection with the prior GS Credit Agreement, Priority issued a warrant to GS to purchase 1.0% of Priority's outstanding Class A Common units. As part of the 2017 debt restructuring, the 1.0% warrant with GS was extinguished and Priority issued a new warrant to GS to purchase 1.8% of Priority's outstanding Class A Common units.

On January 11, 2018, the 1.8% warrant was amended to provide GS with a warrant to purchase 2.2% of Priority's outstanding Class A Common units. The change in the warrant percentage was the result of anti-dilution provisions in the warrant agreement, which were triggered by the Class A Priority Common unit redemption that occurred during the first quarter of 2018. The warrant had a term of 7 years, an exercise price of $0 and could be exercised at any time prior to expiration date. Since the obligation was based solely on the fact that the 2.2% interest in equity of Priority was fixed and known at inception as well as the fact that GS could exercise the warrant with a settlement in cash any time prior to the expiration date of December 31, 2023, the warrant was recorded as a liability in the historical financial statements of Priority.

As of December 31, 2017, the warrant had a fair value of $8.7 million and is presented as a warrant liability in the accompanying unaudited condensed consolidated balance sheet. On July 25, 2018, Priority and GS agreed to redeem the warrant in exchange for $12.7 million in cash.

Deferred Financing Costs

Capitalized deferred financing costs related to the Company’s credit facilities totaled $4.1 million and $4.4 million at September 30, 2018 and December 31, 2017, respectively. Deferred financing costs are being amortized using the effective interest method over the remaining term of the respective debt and are recorded as a component of interest expense. Interest expense related to amortization of deferred finance costs was $0.2 million and $0.2 million for the quarters ended September 30, 2018 and 2017, respectively, and $0.6 million and $0.5 million for the three quarters ended September 30, 2018 and 2017, respectively. Deferred financing costs are included in long-term debt in the Company's unaudited condensed consolidated balance sheets.


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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

8.    INCOME TAXES

In connection with the Business Combination and Recapitalization that occurred on July 25, 2018, the tax partnership status of Priority was terminated. For federal income tax purposes, Priority became a disregarded subsidiary of MI Acquisitions, which simultaneously changed its name to Priority Technology Holdings, Inc. (the "Company"), whereby its operations became subject to federal and state income taxes. For all periods subsequent to July 25, 2018, income tax expense or benefit reflects the taxable status of the Company as a taxable "C-corporation." The initial deferred tax assets and deferred tax liabilities recognized by the Company on July 25, 2018 were the result of the difference between initial tax basis, generally substituted tax basis, and the respective carrying amounts of the assets and liabilities for financial reporting purposes. The net deferred tax assets as of July 25, 2018 was approximately $47.5 million, which has been recorded as an adjustment to Additional Paid-In Capital in the Company's consolidated financial statements. The Company's unaudited condensed consolidated statements of operations also present pro-forma income tax expense or benefit for periods prior to July 25, 2018.

The Company's effective income tax rate was 27.89% and 8.02% for the quarter and three quarters ended September 30, 2018, respectively. These rates differ from the statutory federal rate of 21% in 2018 primarily due to certain nondeductible permanent items and the partnership status of Priority from January 1, 2018 to July 25, 2018.

The components of the deferred tax assets and liabilities at September 30, 2018 were as follows:
(in thousands)
September 30, 2018
Deferred Tax Assets:
 
Accruals and reserves
$
1,114

Goodwill
47,203

Intangible assets
6,575

Net operating loss carryforwards
51

Business transaction costs
860

Other
1,019

Gross deferred tax assets
56,822

     Valuation allowance
(911
)
     Total deferred tax assets
55,911

 
 
Deferred Tax Liabilities:
 
Prepaid assets
(687
)
Investment in partnership
(3,517
)
Property, plant, and equipment
(3,238
)
Total deferred tax liabilities
(7,442
)
 
 
Net deferred tax assets
$
48,469




In accordance with the provisions of ASC 740, Income Taxes ("ASC 740"), the Company will provide a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. As of September 30, 2018, the Company has recorded a valuation allowance of approximately $0.9 million against certain deferred income tax assets related to business transaction costs, and MI Acquisitions' net operating loss carryforwards.

Tax periods for 2015 and all years thereafter remain open to examination by the federal and state taxing jurisdictions and tax periods for 2014 and all years thereafter remain open for certain state taxing jurisdictions to which the Company is subject.

Certain transactions involving the MI Acquisitions' beneficial ownership occurred concurrent with the Business Combination and Recapitalization on July 25, 2018, likely causing a stock ownership change for purposes of Section 382 of the Internal Revenue

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Code. The Company is still preparing a detailed analysis for MI Acquisitions to determine if the potential ownership change will have any effect on the available federal and state net operating losses.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted. The Tax Act includes a number of changes to existing U.S. tax laws that may impact the Company. The most notable provisions of the Tax Act that may impact the Company include a reduction of the U.S. corporate income tax rate from 35% to 21% and the potential limitations on interest deductibility, both effective January 1, 2018, as well as immediate expensing for certain assets placed into service after September 27, 2017. The Company does not anticipate material impacts of the provisions of the Tax Act as of September 30, 2018, other than the impact of the reduction of the U.S. corporate rate from 35% to 21%.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") on December 22, 2017, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Accordingly, the Company elects to follow the guidance in SAB 118. As of September 30, 2018, the Company has not completed the accounting for the income tax effects of all elements of the Tax Act. Where reasonable estimates of the effects of the Tax Act are not yet complete, the Company recorded provisional adjustments. If the Company is not yet able to make reasonable estimates of the impact of certain elements of the Tax Act, the Company has not made any adjustments related to those elements and has continued accounting for them in accordance with ASC 740 based on the tax laws in effect before the Tax Act.

9.    COMMITMENTS AND CONTINGENCIES

The Company is involved in certain legal proceedings and claims, which arise in the ordinary course of business. In the opinion of the Company, based on consultations with inside and outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on its results of operations, financial condition, or cash flows, except as discussed below for a settlement reached in October 2018. As more information becomes available, if the Company should determine that an unfavorable outcome is probable on a claim and that the amount of probable loss that it will incur on that claim is reasonably estimable, it will record an accrued expense for the claim in question. If and when the Company records such an accrual, it could be material and could adversely impact its financial condition, results of operations, and cash flows.

During October 2018, the Company settled a legal matter for $1.6 million, which was recorded as other operating expenses in the accompanying unaudited condensed consolidated statement of operations for the quarter and three quarters ended September 30, 2018.


10.    RELATED PARTY TRANSACTIONS

Priority Holdings, LLC has a management services agreement and an annual bonus payout with PSD Partners LP, which is owned by a member of Priority Investment Holdings, LLC, which, until July 25, 2018, was a member owner of Priority Holdings, LLC. For the three quarters ended September 30, 2018 and 2017, the Company incurred a total of $0.9 million and $0.6 million, respectively, for costs related to management service fees, annual bonus payout, and occupancy fees, which are recorded in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations. For the quarters ended September 30, 2018 and 2017, these expenses were $0.3 million and $0.2 million, respectively.


11.    EQUITY

As disclosed in Note 1, The Company and Basis of Presentation, on July 25, 2018 the Company accounted for a "reverse merger" between Priority and MI Acquisitions and the resulting Recapitalization.
Common and Preferred Stock


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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For comparative periods prior to July 25, 2018, equity is presented based on the historical equity of the accounting acquirer (Priority) prior to the Recapitalization, retroactively restated to reflect the number of shares received as a result of the Recapitalization. MI Acquisitions' equity-related activities are consolidated with Priority beginning on July 25, 2018.
The equity structure of the Company is as follows as of September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
(in thousands)
 
Authorized
 
Issued
 
Authorized
 
Issued
Common Shares, par value $0.001
 
1,000,000

 
67,047

 
1,000,000

 
73,110

Preferred Shares
 
100,000

 

 

 



In connection with the July 25, 2018 Business Combination and Recapitalization, the following occurred:

In exchange for the 4.6 million common units of Priority, 60.1 million common shares were issued in a private placement that resulted in Priority receiving approximately $49.4 million. The 60.1 million shares excludes 0.5 million shares issued as partial consideration in two business acquisitions (see Note 2, Acquisitions of Businesses) and includes 3.0 million shares issued in connection with a Priority equity incentive plan (see Note 12, Equity-Based Compensation).
In exchange for the publicly-traded shares of MI Acquisitions that originated from MI Acquisition's 2016 IPO, approximately 4.9 million shares of common stock was issued through share conversion.
$2.1 million was paid to the MI Acquisition's founding shareholders (the “MI Founders”) for 421,107 MI Acquisitions' private placement units and 453,210 MI Acquisitions' common shares held by MI Founders. Each unit consisted of one share and one warrant.
MI Founders forfeited 174,863 of the founders' common shares.


At September 30, 2018, the Company had 67,047,044 shares of common stock outstanding, of which: 1) 60,071,200 shares were issued in the Recapitalization through the private placement; 2) 874,317 shares issued to the sellers of Priority that were purchased from the MI Founders; 3) 4,926,878 shares were issued to holders of common stock of MI Acquisitions originating from MI Acquisitions' 2016 initial public offering; 4) 699,454 shares were issued to the MI Founders; and 5) 475,195 shares were issued as partial consideration for two business acquisitions. Certain holders of common shares from the private placement may be subject to holding period restrictions under applicable securities laws.

Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of the Company's common stock possess all voting power for the election of members of the Company's board of directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of the Company's stockholders. Holders of the Company's common stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of the Company's common stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the Company's board of directors in its discretion. The holders of the Company's common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

The Company is authorized to issue 100,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. As of September 30, 2018, the Company has not issued any shares of preferred stock.

Earn-Out Consideration

Subsequent to July 25, 2018, an additional 9.8 million private placement common shares may be issued as earn-out consideration to the sellers of Priority, or at their election, to members of Priority’s management or other service providers, pursuant to the Company's Earn-Out Incentive Plan. For the first earn-out of up to 4.9 million common shares, Consolidated Adjusted EBITDA (as defined in the Earn-Out Incentive Plan) of the Company must be no less than $82.5 million for the year ending December 31, 2018 and the Company’s stock price must have traded in excess of $12.00 for any 20 trading days within any consecutive 30-day

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Priority Technology Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

trading period at any time on or before December 31, 2019. For the second earn-out of up to 4.9 million common shares, Consolidated Adjusted EBITDA of the Company must be no less than $91.5 million for the year ending December 31, 2019 and the Company’s stock price must have traded in excess of $14.00 for any 20 trading days within any consecutive 30-day trading period at any time between January 1, 2019 and December 31, 2020. In the event that the first earn-out targets are not met, the entire 9.8 million shares may be issued if the second earn-out targets are met. As of September 30, 2018, none of the 9.8