# Priority Technology Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Priority Technology Holdings, Inc.](/companies/prth.md) (CIK 1653558)
- Form: 10-Q
- Filed: 2018-11-14
- Accepted by EDGAR: Nov 14, 2018, 17:10 ET
- Period: 2018-09-30
- Accession: 0001628280-18-014379
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1653558/000162828018014379/prioritytechnology-930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1653558/000162828018014379/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $103.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $323.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $3.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $14.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $3.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $14.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $7.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $21.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | −$991.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | −$991.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$2.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$11.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 64,544,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 60,339,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $24.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $8.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $7.1m | us-gaap:PaymentsOfDividends |
| Current assets | at 2018-09-30 | $84.4m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $327.3m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $60.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $409.7m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $342.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-09-30 | $2.7m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-09-30 | −$82.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,257 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements as of and for the quarter and three quarters ended September 30, 2018 (the “2018 period”) and September 30, 2017 (the “2017 period”) and related notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis should also be read together with our audited consolidated financial statements and related notes for the years ended December 31, 2017, 2016 and 2015 and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Priority,” included in the Company's Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 31, 2018 (the "Form 8-K").*

#### Forward-Looking Statements

*This discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements. See the section entitled “Special Note Regarding Forward-Looking Statements” in the Form 8-K. Our future results and financial condition may also differ materially from those we currently anticipate as a result of the factors described in the sections entitled “Risk Factors” in the Form 8-K and in Part II, Item 1A here. Throughout this section, unless otherwise noted, “we,” “us,” “our” and the “Company” refer to Priority Technology Holdings, Inc. and our consolidated subsidiaries. Capitalized terms used and not otherwise defined herein have meanings assigned to them in the Form 8-K. Certain amounts in this section may not foot due to rounding.*

### Business Overview

Headquartered near Atlanta in Alpharetta, Georgia, we began operations in 2005 with a mission to build a merchant inspired payments platform that would advance the goals of our customers and partners. Today, we are 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. We operate 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. We have grown from the 38th largest U.S. merchant acquirer to become the 13th largest as of the end of 2017, measured by Visa and MasterCard purchase volume provided by The Nilson Report. As of the end of 2017, we were also the 6th largest non-bank merchant acquirer in the United States. In 2017, we processed over 439.0 million bankcard transactions and over $34.0 billion in bankcard processing dollar value across approximately 174,000 merchants. For the quarter and three quarters ended September 30, 2018, we processed over 120.9 million and 351.3 million in bankcard transactions, respectively, and over $9.6 billion and $28.5 billion in bankcard processing dollar value, respectively, across 178,000 merchants. We are headquartered near Atlanta in Alpharetta, GA. As of September 30, 2018, we had 553 employees led by an experienced group of payments executives.

We provide our services through two reportable segments: (1) Consumer Payments and (2) Commercial Payments and Managed Services.

#### Consumer Payments

Our Consumer Payments segment provides full-service merchant acquiring and payment processing solutions mainly to SMBs. Our technology platform, MX Merchant, provides end users with a customizable virtual terminal with proprietary business management tools and add-on applications (“apps”) that create an integrated merchant experience. MX Merchant’s add-on apps include invoicing, customer engagement, and data analytics focused primarily on targeted marketing, website development, inventory management, and customer engagement. MX Merchant can be deployed on hardware from a variety of vendors and can operate either as a standalone product or integrated with third-party software. Our Consumer Payments segment partners with a diverse reseller community, including independent service organizations (“ISO”), financial institutions, independent software vendors (“ISV”), value-added resellers, and other referral partners. Through our MX Connect platform, we leverage and provide resellers with value-added tools and resources, including marketing resources, automated onboarding, merchant underwriting, and merchant activity monitoring and reporting. We believe MX Connect enables resellers to manage their merchant base and accelerate the growth of their businesses. We offer ISVs and value-added resellers a technology “agnostic” and feature-rich application processing interface (“API”) that provides developers with the ability to integrate electronic payment acceptance into their software and improve onboarding efficiency for their merchant base.

Through resellers and acquisition of merchant portfolios, we become a party to arrangements with merchants and sponsoring banks for the processing of merchant card transactions. Pursuant to each arrangement and with respect to each card transaction, the sponsoring bank receives payment from card associations (e.g., Visa, MasterCard) and we earn transaction fee revenue from the processing and related services that we provide to merchants. We receive these revenues net of interchange fees due to the issuing bank, card association fees and assessments, and processing and related fees due to payment processers (e.g., First Data, Total System Services). Our transaction fee revenues are based primarily on the number and a percentage of the dollar volume of payment transactions processed by a merchant customer and, to a lesser extent, from MX Merchant monthly subscription costs. Our Consumer Payments segment accounted for $95.8 million and $302.5 million in revenue, respectively, and $3.7 million and $15.1 million of operating income, respectively, for the quarter and three quarters ended September 30, 2018. All of our shared corporate services expenses, including executive compensation and technology support services, have been allocated to our Consumer Payments segment for all periods discussed in this Quarterly Report.

#### Commercial Payments and Managed Services

Our Commercial Payments and Managed Services segment provides curated managed services and a robust suite of integrated automated payment solutions to leading financial institutions and card networks, including Citibank, MasterCard, Visa and American Express (“AMEX”). This segment supports a direct sales model that provides turnkey merchant development, product sales and supplier enablement programs. Through our Commercial Payments Exchange (“CPX”) platform, we provide our clients a seamless bridge for supplier payments by integrating a single payment instruction file to resolve account payables via virtual card, purchase card, ACH +, dynamic discounting, or check.

This segment’s revenues are generated primarily through outsourced arrangements provided by our in-house sales force to financial institution customers on a cost-plus fee basis. As a partner to these financial institutions, we originate merchant financing arrangements, including AMEX buyer initiated payments (“BIP”) and AMEX merchant financing loans with the financial institutions’ merchant customers. Revenue is recognized primarily based on billable rates and hours worked, plus material and other billable items. In addition, through our CPX platform, we generate revenue from interchange fees based on a variable percentage of dollars transacted at on-boarded merchant locations, as well as subscription fees. Although CPX was only recently rolled out to customers, we believe it represents a high-growth opportunity for us since the commercial payments volume in the United States is over twice the size of consumer payments and has substantial additional opportunities for growth using electronic payments. Our Commercial Payments and Managed Services segment accounted for $7.8 million and 21.4 million in revenue, respectively, and incurred $0.1 million and $0.4 million of operating loss, respectively, for the quarter and three quarters ended September 30, 2018.

### Equity and Ownership Structure

On July 25, 2018, MI Acquisitions, Inc. ("MI" or "MI Acquisitions") consummated a business combination (the "Business Combination") which provided for the acquisition of 100% of the issued and outstanding equity securities of Priority Holdings, LLC (“Priority”) by MI Acquisitions, which resulted in Priority becoming a wholly-owned subsidiary of MI Acquisitions. MI Acquisitions was originally incorporated as a special purpose acquisition company (“SPAC”) formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination. Simultaneously with the Business Combination and Recapitalization (as defined below), we changed our name to “Priority Technology Holdings, Inc.” (the "Company"). Unless the context otherwise requires, the “Company” or "we" refers to Priority Technology Holdings, Inc. and its subsidiaries after July 25, 2018, and “Priority” refers to the business of Priority Holdings, LLC before July 25, 2018.

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 of Priority (the "Recapitalization"). The net assets of MI Acquisitions are stated at historical cost, and accordingly the equity and net assets of the combined 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.

### Highlights of Consolidated Results of Operations

- Consolidated revenues decreased by 6.6% to $103.6 million for the quarter ended September 30, 2018, from $110.9 million from the corresponding prior year period, due mainly to the loss of business from the temporary suspension in boarding higher-margin subscription e-commerce merchants (in connections with risk management efforts related to card association network requirements), the impact of which was partially offset by a 10.5% increase in merchant bankcard processing dollar value and a 6.8% increase in bankcard transactions in our Consumer Payments segment. Consolidated revenues for the three quarters ended September 30, 2018 increased by 6.0% to $323.9 million from $305.6 million for the corresponding prior year period, primarily due to an 11.4% increase in merchant bankcard processing dollar value and a 7.4% increase in bankcard transactions in our Consumer Payments segment.
- Consolidated operating income was $3.6 million and $14.6 million, respectively, for the quarter and three quarters ended September 30, 2018, compared to $9.5 million and $24.3 million, respectively, for the corresponding prior year periods. Our consolidated operating margin for the quarter and three quarters ended September 30, 2018 was 3.4% and 4.5%, respectively, compared to 8.5% and 8.0%, respectively, for the corresponding prior-year periods. Consolidated operating income was negatively impacted by the loss of business from certain subscription e-commerce merchants, one-time costs related to the public-company transaction, as well as investment in our high-growth initiatives in the Commercial Payments and Managed Services segment.
- Consolidated net loss was $2.6 million and $11.4 million, respectively, for the quarter and three quarters ended September 30, 2018, compared to net income of $2.3 million and $2.7 million, respectively, for the corresponding prior year periods. An income tax benefit of $1.0 million was recognized for the quarter and three quarters ended September 30, 2018. No income tax expense or benefit was recognized prior to the third quarter of 2018. See Note 8, *Income Taxes*, to the unaudited condensed consolidated financial statements contained herein.
- Consolidated Adjusted EBITDA (a non-GAAP measure) was $12.7 million and $40.4 million, respectively, for the quarter and three quarters ended September 30, 2018, compared to $15.6 million and $40.8 million, respectively, for the corresponding prior year periods. For a reconciliation of our Adjusted EBITDA to our net income (loss) under GAAP, see below under “Certain Non-GAAP Measures.”

### Factors Affecting the Comparability of Our Results

The comparability of our results for the periods discussed herein has been impacted and may, for future periods, be further impacted by the following factors:

#### The Business Combination

On July 25, 2018, MI Acquisitions consummated its business combination (the "Business Combination") with Priority Holdings, LLC ("Priority"). Simultaneously with the Business Combination, MI Acquisitions changed its name to Priority Technology Holdings, Inc. (the "Company") and its common stock trades on Nasdaq under the symbol "PRTH." Our results of operations presented in this Quarterly Report reflect, for all periods after July 25, 2018, our status as Priority Technology Holdings, Inc., a "C-Corporation" for income tax purposes, including the recognition of income tax expense or benefit in our consolidated statements of operations. Consequently, our results of operations are not directly comparable with Priority’s results of operations presented in the Form 8-K or in our other SEC reports covering periods prior to July 25, 2018. As a public company, we also incur higher legal, accounting and other costs than those of Priority.

#### Debt Upsizing and Warrant Redemption

On January 11, 2018, our credit facility with SunTrust Bank (as administrative agent) (the “Senior Secured Credit Facility”) was increased from $200.0 million to $267.5 million. The proceeds of the debt upsizing were used mainly to redeem previously-issued equity interests in Priority. As a result of the increase in debt, our interest expense increased to $7.3 million and $21.9 million for the quarter and three quarters ended September 30, 2018, respectively, from $6.4 million and $18.6 million for the quarter and three quarters ended September 30, 2017, respectively.

In addition, on July 25, 2018, Priority and Goldman Sachs (“GS”) agreed to redeem the GS warrant in exchange for $12.7 million. The fair value of the GS warrant immediately prior to the redemption was $12.8 million, which resulted in a gain of $0.1 million.

#### Acquisitions of Businesses

In the ordinary course of our business, we acquire new businesses, and merchant relationships through contracts and relationships with ISOs and other resellers, as well as residual rights to commissions payable to such resellers.

In April 2018, we purchased the majority of the operating assets and certain operating liabilities of PayRight, in which we previously owned a non-controlling interest and accounted for using the equity method. As a result, our consolidated financial statements now includes the financial position, results of operations, and cash flows of PayRight (within our Commercial Payments and Managed Services segment).

We consummated three business acquisitions in the third quarter of 2018, as follows:

- In July 2018, we acquired, in related asset purchase transactions, through our newly formed subsidiary, Priority Real Estate Technology, LLC (“PRET”), two businesses (RadPad and Landlord) that will operate under the “RadPad” name, providing a holistic marketplace model for the rental real estate industry, including lead generation and conversion, facilitation of tenant screening and other value added services such as rent payment processing. PRET is reported in our Commercial Payments and Managed Services segment.
- In July 2018, we acquired, in an asset purchase transaction, Priority Payment Systems Northeast, Inc. (“PPS Northeast”), previously an independent brand-licensed office of the Company that provided expertise in software-integrated payment services designed to manage turnkey installations of point-of-sale and supporting systems and marketing programs emphasizing online ordering systems and digital marketing campaigns. PPS Northeast is reported in our Consumer Payments segment.
- In August 2018, we acquired, in an asset purchase transaction, M.Y. Capital, Inc. and Payments In Kind, Inc., collectively doing business as Priority Payment Systems Tech Partners (“PPS Tech”), previously an independent brand-licensed office of the Company that developed a track record and extensive network in the integrated payments and B2B marketplaces. PPS Tech is also reported in our Consumer Payments segment.

For more information on these acquisitions, and our preliminary purchase price allocations, see Note 2, *Acquisition of Businesses*, to our unaudited condensed consolidated financial statements included in this Quarterly Report.

We intend to continue to use our common stock as currency to fund, in whole or in part, future acquisitions. In August 2018, we received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating Nasdaq’s intention to suspend our common stock and warrants from trading on the exchange based on our failure to have at least 400 round lot holders of the common stock and warrants. Following a hearing at which we demonstrated our compliance with the 400 round lot holders rule in respect of our common stock and presented a plan with respect to the warrants, Nasdaq withdrew its objection to the listing of our common stock and extended the listing compliance deadline for our warrants.

#### Seasonality

We expect to experience, seasonal fluctuations in our revenues as a result of consumer spending patterns and the recognition of non-transaction based fees. We expect revenues to be lower in our first quarter and higher in our fourth quarter, primarily due to the seasonal shopping and buying patterns experienced by our merchant customers. Some variability may also result from seasonal events (such as retail sales events) and the number of processing days in a month or quarter. Our quarterly operating expenses, other than cost of services (which trend in the direction of revenues), should not fluctuate seasonally.

### Components of Revenue and Expenses

#### Revenues

#### Merchant card fees revenue

Merchant card fees revenue consists mainly of fees for processing electronic payments, including credit, debit and electronic benefit transaction card processing (authorized and captured through third-party networks integrated into Priority’s solutions). The fees are generally based on a variable percentage of the dollar amount of each transaction and, in some cases, additional fees for each transaction. In addition, merchant customers may also be charged miscellaneous fees, including statement fees, annual fees, monthly minimum fees, fees for handling chargebacks, gateway fees, and fees for other miscellaneous services. Merchant card fees revenue is attributable primarily to our Consumer Payments segment.

#### Outsourced services revenue

Outsourced services revenue consists mainly of cost-plus fees related to business-to-business (“B2B”) services, merchant financing and buyer initiated payment programs sold on behalf of certain enterprise customers, originated through our in-house sales force, including incentives for meeting sales targets. Outsourced services revenue are attributable primarily to our Commercial Payments and Managed Services segment.

#### Other revenue

Other revenue is comprised of fees for products and services not specifically described above, mainly revenue from the sale of equipment (primarily point of sale terminals) and processing of ACH transactions.

#### Operating Expenses

#### Costs of merchant card fees

Costs of merchant card fees is comprised mainly of residual payments to agents and ISOs and processing fees paid to third parties attributable to merchant acquisition and providing transaction processing and related services to our merchants.

#### Other costs of services

Other costs of services consist of salaries directly related to outsourced services revenue, the cost of equipment (point of sale terminals) sold and third-party fees and commissions related to our ACH processing activities.

#### Salary and employee benefits

Salary and employee benefits includes expenses for salaries, wages, commissions and bonuses, as well as expenses related to unit-based compensation rewards using the estimated grant date fair value. We amortize unit-based compensation for awards granted on a straight line basis over the requisite service (vesting) period.

#### Depreciation and amortization

Depreciation and amortization consists primarily of amortization of intangible assets, mainly including merchant portfolios, customer relationships and internally developed technology (software), and to a lesser extent depreciation on our investments in property, equipment and software, mainly computer software. Merchant portfolios are amortized over their estimated useful lives using either a straight-line or an accelerated method that most accurately reflects the pattern in which the economic benefits of the respective asset is consumed. Customer relationships and internally developed technology are amortized on a straight-line basis over their estimated useful lives. Property, equipment and software depreciation expense is recognized on a straight-line basis over the estimated useful life of the asset.

#### Selling, general and administrative (SG&A)

Selling, general and administrative expenses include mainly professional services, advertising, rent, and expenses related to the Business Combination.

#### Other operating expenses

Other operating expenses consist of additional operating costs not covered above, including office supplies, software licenses, utilities, state and local franchise and sales taxes, litigation settlements, executive travel and insurance, among others.

#### Other Income (Expense)

#### Interest income

Interest income consists mainly of interest received pursuant to notes receivable from independent sales agents.

#### Interest expense

Interest expense consists of interest on outstanding debt, amortization of deferred financing fees, and original issue discounts.

#### Debt Modification and Extinguishment Expense

Certain costs related to debt modification and extinguishment, including the write-off of unamortized deferred financing fees and original issue discount relating to the extinguished debt.

#### Change in fair value of warrant liability

Changes in fair value of warrants issued to Goldman Sachs.

#### Equity in loss and impairment of unconsolidated entities

Equity in loss and impairment of unconsolidated entities consists of the Company’s share of the income or loss of its equity method investment as well as any impairment charges related to such investments.

### Results of Operations

The following table presents the components of our consolidated statement of operations, including income from operations, for the quarters ended September 30, 2018 and September 30, 2017.

*(dollars in thousands)*

| REVENUE: | Quarter ended September 30, 2018 | % of Revenue | Quarter ended September 30, 2017 | % of Revenue | Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Merchant card fees revenue | $94,915 | 91.7% | $103,985 | 93.7% | $(9,070) | (8.7)% |
| Outsourced services revenue | 6,264 | 6.0% | 6,094 | 5.5% | 170 | 2.8% |
| Other revenue | 2,412 | 2.3% | 867 | 0.8% | 1,545 | 178.2% |
| **Total revenue** | **103,591** | **100.0%** | **110,946** | **100.0%** | **(7,355)** | **(6.6)%** |
| **OPERATING EXPENSES:** |  |  |  |  |  |  |
| Costs of merchant card fees | 71,876 | 69.4% | 80,247 | 72.3% | (8,371) | (10.4)% |
| Other costs of services | 4,475 | 4.3% | 3,997 | 3.6% | 478 | 12.0% |
| Salary and employee benefits | 9,992 | 9.6% | 8,120 | 7.3% | 1,872 | 23.1% |
| Depreciation and amortization | 4,899 | 4.7% | 3,602 | 3.2% | 1,297 | 36.0% |
| Selling, general and administrative | 3,725 | 3.6% | 3,002 | 2.7% | 723 | 24.1% |
| Other operating expenses | 5,064 | 4.9% | 2,512 | 2.3% | 2,552 | 101.6% |
| Total operating expenses | 100,031 | 96.5% | 101,480 | 91.5% | (1,449) | (1.4)% |
| **Income from operations** | **3,560** | **3.4%** | **9,466** | **8.5%** | **(5,906)** | **(62.4)%** |
| **OTHER INCOME (EXPENSES):** |  |  |  |  |  |  |
| Interest income | 153 | 0.1% | 201 | 0.2% | (48) | (23.9)% |
| Interest expense | (7,334) | (7.1)% | (6,418) | (5.8)% | (916) | 14.3% |
| Change in fair value of warrant liability | 72 | 0.1% | (928) | (0.8)% | 1,000 | (107.8)% |
| Equity in loss and impairment of unconsolidated entities | (4) | —% | (63) | (0.1)% | 59 | (93.7)% |
| Total other expenses | (7,113) | (6.9)% | (7,208) | (7.4)% | 95 | (1.3)% |
| **(Loss) income before income taxes** | **(3,553)** | **(3.4)%** | **2,258** | **2.0%** | **(5,811)** | **(257.4)%** |
| Income tax (benefit) expense | (991) | **(1.0)%** | — | **—%** | **$(991)** | nm |
| **Net (loss) income** | **$(2,562)** | **(2.5)%** | **$2,258** | **2.0%** | **$(4,820)** | **(213.5)%** |

- 40 -

The following table presents the components of our consolidated statement of operations, including income from operations, for the three quarters ended September 30, 2018 and September 30, 2017.

*(dollars in thousands)*

| REVENUE: | Three Quarters Ended September 30, 2018 | % of Revenue | Three Quarters Ended September 30, 2017 | % of Revenue | Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Merchant card fees revenue | $299,661 | 92.5% | $286,208 | 93.6% | $13,453 | 4.7% |
| Outsourced services revenue | 18,426 | 5.7% | 17,135 | 5.6% | 1,291 | 7.5% |
| Other revenue | 5,862 | 1.8% | 2,306 | 0.8% | 3,556 | 154.2% |
| **Total revenue** | **323,949** | **100.0%** | **305,649** | **100.0%** | **18,300** | **6.0%** |
| **OPERATING EXPENSES:** |  |  |  |  |  |  |
| Costs of merchant card fees | 230,276 | 71.1% | 219,507 | 71.8% | 10,769 | 4.9% |
| Other costs of services | 13,518 | 4.2% | 11,285 | 3.7% | 2,233 | 19.8% |
| Salary and employee benefits | 28,406 | 8.8% | 24,356 | 8.0% | 4,050 | 16.6% |
| Depreciation and amortization | 12,679 | 3.9% | 11,254 | 3.7% | 1,425 | 12.7% |
| Selling, general and administrative | 13,978 | 4.3% | 7,214 | 2.4% | 6,764 | 93.8% |
| Change in fair value of contingent consideration | — | —% | (410) | (0.1)% | 410 | nm |
| Other operating expenses | 10,449 | 3.2% | 8,143 | 2.7% | 2,306 | 28.3% |
| Total operating expenses | 309,306 | 95.5% | 281,349 | 92.0% | 27,957 | 9.9% |
| **Income from operations** | **14,643** | **4.5%** | **24,300** | **8.0%** | **(9,657)** | **(39.7)%** |
| **OTHER INCOME (EXPENSES):** |  |  |  |  |  |  |
| Interest income | 530 | 0.2% | 448 | 0.1% | 82 | 18.3% |
| Interest expense | (21,893) | (6.8)% | (18,600) | (6.1)% | (3,293) | 17.7% |
| Debt modification and extinguishment expenses | (1,323) | (0.4)% | (1,753) | (0.6)% | 430 | (24.5)% |
| Change in fair value of warrant liability | (3,458) | (1.1)% | (1,455) | (0.5)% | (2,003) | 137.7% |
| Equity in loss and impairment of unconsolidated entities | (857) | (0.3)% | (221) | (0.1)% | (636) | 287.8% |
| Total other expenses | (27,001) | (8.3)% | (21,581) | (7.1)% | (5,420) | 25.1% |
| **(Loss) income before income taxes** | **(12,358)** | **(3.8)%** | **2,719** | **0.9%** | **(15,077)** | **(554.5)%** |
| Income tax (benefit) expense | (991) | **(0.3)%** | — | **—%** | **$(991)** | nm |
| **Net (loss) income** | **$(11,367)** | **(3.5)%** | **$2,719** | **0.9%** | **$(14,086)** | **(518.1)%** |

n.m. = not meaningful

The following table presents our segment operating income (loss) and selected performance measures for the periods indicated:

*(dollars and transaction volumes in thousands)*

| Consumer Payments: | Quarter Ended September 30, 2018 | 2017 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Segment revenue | $95,801 | $104,334 | $(8,533) | (8.2)% |
| Segment operating expense | $(92,139) | $(95,564) | $3,425 | (3.6)% |
| Segment operating income | $3,662 | $8,770 | $(5,108) | (58.2)% |
| Segment operating margin | 3.8% | 8.4% |  |  |
| Key Indicators: |  |  |  |  |
| Merchant bankcard processing dollar value (1) | $9,644,000 | $8,725,000 | $919,000 | 10.5% |
| Merchant bankcard transaction volume (1) | 120,879 | 113,138 | 7,741 | 6.8% |
| **Commercial Payments and Managed Services:** |  |  |  |  |
| Segment revenue | $7,790 | $6,612 | $1,178 | 17.8% |
| Segment operating expense | $(7,892) | $(5,916) | $(1,976) | 33.4% |
| Segment operating (loss) income | $(102) | $696 | $(798) | (114.7)% |
| Segment operating margin | (1.3)% | 10.5% |  |  |

(1) Bankcard processing dollar values and transaction volumes presented in this table exclude data attributable to our Commercial Payments and Managed Services segment, related mainly to our CPX business.

The following table presents our segment operating income (loss) and selected performance measures for the periods indicated:

*(dollars and transaction volumes in thousands)*

| Consumer Payments: | Three Quarters Ended September 30, 2018 | 2017 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Segment revenue | $302,514 | $287,129 | $15,385 | 5.4% |
| Segment operating expense | $(287,444) | $(264,672) | $(22,772) | 8.6% |
| Segment operating income | $15,070 | $22,457 | $(7,387) | (32.9)% |
| Segment operating margin | 5.0% | 7.8% |  |  |
| Key Indicators: |  |  |  |  |
| Merchant bankcard processing dollar value (1) | $28,548,000 | $25,632,000 | $2,916,000 | 11.4% |
| Merchant bankcard transaction volume (1) | 351,305 | 327,015 | 24,290 | 7.4% |
| **Commercial Payments and Managed Services:** |  |  |  |  |
| Segment revenue | $21,435 | $18,520 | $2,915 | 15.7% |
| Segment operating expense | $(21,862) | $(16,677) | $(5,185) | 31.1% |
| Segment operating (loss) income | $(427) | $1,843 | $(2,270) | (123.2)% |
| Segment operating margin | (2.0)% | 10.0% |  |  |

(1) Bankcard processing dollar values and transaction volumes presented in this table exclude data attributable to our Commercial Payments and Managed Services segment, related mainly to our CPX business.

#### Revenue

For the quarter ended September 30, 2018, our consolidated revenue decreased by $7.4 million, or 6.6%, from the corresponding prior year period, to $103.6 million. Revenue from our Consumer Payments segment decreased by $8.5 million, or 8.2%, to $95.8 million, while revenue from our Commercial Payments and Managed Services segment increased by $1.2 million, or 17.8%, to $7.8 million. For the three quarters ended September 30, 2018, our consolidated revenue increased by $18.3 million, or 6.0%, from the corresponding prior year period, to $323.9 million. This increase was driven primarily by a $15.4 million, or 5.4%, increase in revenue from our Consumer Payments segment to $302.5 million. Commercial Payments and Managed Services segment revenue increased by $2.9 million, or 15.7%.

For the quarter ended September 30, 2018, the decrease in Consumer Payments revenue was primarily attributable to the change in merchant mix resulting from the closure of certain higher-margin accounts with e-commerce merchants, the impact of which was partially offset by increases of 10.5% and 6.8% in merchant bankcard processing dollar value and merchant bankcard transactions, respectively, from the corresponding prior year period. We are engaged in efforts to restore the lost high-margin business with merchants in the e-commerce channel. For the three quarters ended September 30, 2018, the increase in Consumer Payments revenue was primarily attributable to an increase in merchant bankcard processing dollar value and merchant bankcard transactions of 11.4% and 7.4%, respectively, compared to the corresponding prior year period, mainly due to the continuation of higher consumer spending trends in 2018 and positive net onboarding of new merchants.

The increase in Commercial Payments and Managed Services revenue for the quarter and three quarters ended September 30, 2018 was attributable primarily to an increase in headcount in our in-house sales force dedicated to selling merchant financing products on behalf of our financial institution partners, for which we record revenue on a cost-plus basis. CPX merchant bankcard processing dollar value and the number of merchant bankcard transactions increased 28.9% and 34.7%, respectively, for the quarter ended September 30, 2018 and 125.0% and 64.8%, respectively, for the three quarters ended September 30, 2018, in each case compared to the corresponding prior year period.

#### Operating expenses

For the quarter ended September 30, 2018, our consolidated operating expenses decreased $1.4 million, or (1.4)%, from the corresponding prior year period to $100.0 million, mainly reflecting lower costs of merchant card fees, which decreased by $8.4 million, or 10.4%, in line with the $9.1 million decrease in merchant card fees revenue. Costs of merchant card fees as a percentage of merchant card fees revenue decreased to 75.7% for the quarter ended September 30, 2018 from 77.2% for the quarter ended September 30, 2017. Other operating expenses for the quarter increased $2.6 million, or 101.6%, primarily as a result of a legal settlement (refer to Note 9, *Commitments and Contingencies*, to our unaudited condensed consolidated financial statements included in this Quarterly Report). Salary and employee benefits increased $1.9 million, or 23.1%, as corporate headcount increased, driven by business acquisitions and expansion of our information technology resources, and hiring related to the continued ramp up of our CPX business. Depreciation and amortization expenses increased $1.3 million, or 36.0%, due primarily to increased amortization expense from capitalized software resulting from the development of the MX Connect and CPX platform and acquired merchant portfolios. SG&A expenses increased by $0.7 million, or 24.1%, primarily due to higher professional fees, while other costs of services increased by $0.5 million driven by the expansion of our in-house sales force.

Our consolidated operating expenses increased $28.0 million, or 9.9%, from $281.3 million for the three quarters ended September 30, 2017 to $309.3 million for the three quarters ended September 30, 2018, driven primarily by a $10.8 million, or 4.9%, increase in costs of merchant card fees, attributable primarily to growth in processing volume. Costs of merchant card fees as a percentage of merchant card fee revenue changed little from 76.8% for the three quarters ended September 30, 2018 to 76.7%% for the three quarters ended September 30, 2017. Salary and employee benefits increased $4.1 million, or 16.6%, related to the aforementioned increases in corporate headcount and increases in headcount from business acquisitions in 2018. SG&A expenses increased by $6.8 million, or 93.8%, primarily due to overall growth in our business operations and $3.6 million (and none for the corresponding prior year period) due to legal, accounting and other advisory and consulting expenses related to the Business Combination. Other operating expenses increased by $2.3 million due mainly to the aforementioned legal settlement. Other costs of services increased by $2.2 million due to the aforementioned in-house sales force expansion. Depreciation and amortization increased $1.4 million, or 12.7%, attributable to the internally developed software for the MX Connect and CPX platform and acquired merchant portfolios.

#### Income from operations

Consolidated income from operations decreased $5.9 million, or 62.4%, for the quarter ended September 30, 2018 and $9.7 million, or 39.7%, for the three quarters ended September 30, 2018, in each case compared to the corresponding prior year period. Our consolidated operating margin for the quarter and three quarters ended September 30, 2018 was 3.4% and 4.5%, respectively, compared to 8.5% and 8.0%, respectively, for the corresponding prior year periods. The margin decreases were due mainly to the change in merchant mix, increases in Business Combination expenses and other non-recurring operating expenses, and continued CPX business ramp up, each as described above.

Our Consumer Payments segment contributed $3.7 million and $15.1 million, respectively, in segment operating income for the quarter and three quarters ended September 30, 2018, decreases of $5.1 million and $7.4 million, respectively, from $8.8 million and $22.5 million segment operating income for the quarter and three quarters ended September 30, 2017, reflecting the change in merchant mix and increases in Business Combination expenses and other non-recurring operating expenses described above.

Our Commercial Payments and Managed Services segment incurred a $0.1 million and $0.4 million segment operating loss for the quarter and three quarters ended September 30, 2018, compared to $0.7 million and $1.8 million in segment operating income for the quarter and three quarters ended September 30, 2017. The swing to loss was principally the result of increased headcount related to the CPX ramp up, as we commenced hiring management and staff for that segment in the middle of 2017.

#### Other (expenses) income

Other expenses decreased less than $0.1 million, or 1.3%, and increased $5.4 million, or 25.1%, from $7.2 million and $21.6 million for the quarter and three quarters ended September 30, 2017 to $7.1 million and $27.0 million for the quarter and three quarters ended September 30, 2018. The primary component of our other expenses is interest expense. Interest expense on outstanding debt increased by $0.9 million and $3.3 million, respectively, for the quarter and three quarters ended September 30, 2018 compared to the corresponding prior year periods, primarily due to higher outstanding borrowings attributable to the January 2018 debt upsizing. The fair value of the GS warrant, which was redeemed for $12.7 million in July 2018, decreased $0.1 million (resulting in a gain of the same amount) in the quarter ended September 30, 2018, compared to a $0.9 million increase (resulting in a loss in the same amount) in fair value in the quarter ended September 30, 2017. The change in fair value of the GS warrant increased other expenses by $3.5 million and $1.5 million, respectively, for the three quarters ended September 30, 2018 and September 30, 2017, respectively.

#### Income tax expense (benefit)

As discussed in Note 8, *Income Taxes*, to the unaudited condensed consolidated financial statements contained herein, we became part of a "C-corporation" reporting tax group on July 25, 2018 in connection with the Business Combination and Recapitalization. As a result, periods after July 25, 2018 reflect applicable federal and state income tax rates for all of our operations.

On July 25, 2018, we recognized a net deferred income tax asset of $47.5 million, which also resulted in a credit to our additional paid-in capital within our consolidated equity. The net deferred tax asset is the result of the difference between the initial tax bases in the assets and liabilities, generally substituted tax basis, and their respective carrying amounts for financial statement purposes. For 2018, we estimate that our effective income tax rate will be approximately 8.0%. This anticipated effective income tax rate for 2018 may not be indicative of our effective tax rates for future periods.

#### Net loss (income)

Our consolidated net loss for the quarter and three quarters ended September 30, 2018 was $2.6 million and $11.4 million, respectively, compared to net income of $2.3 million and $2.7 million, respectively, for the quarter and three quarters ended September 30, 2017 for the aforementioned reasons.

### Certain Non-GAAP Measures

We periodically review the following key non-GAAP measures to evaluate our business and trends, measure our performance, prepare financial projections and make strategic decisions.

#### EBITDA, Adjusted EBITDA and Earnout Adjusted EBITDA

Included in this presentation are discussions and reconciliations of earnings before interest, income tax and depreciation and amortization (“EBITDA”) and EBITDA adjusted for certain non-cash, non-recurring or non-core expenses (“Adjusted EBITDA”) to net income in accordance with GAAP. Adjusted EBITDA excludes certain non-cash and other expenses, litigation settlement costs, certain legal services costs, professional and consulting fees and expenses, severance, separation and employee settlements, share-based compensation and one-time Business Combination expenses and certain adjustments. We believe these non-GAAP measures illustrate the underlying financial and business trends relating to our results of operations and comparability between current and prior periods. We also use these non-GAAP measures to establish and monitor operational goals.

In addition, our financial covenants under our debt agreements and the earnout incentive plan pursuant to the Business Combination and Recapitalization, are based on a measure similar to Adjusted EBITDA (“Earnout Adjusted EBITDA”). The calculations of Earnout Adjusted EBITDA under our debt agreements and the earnout incentive plan include adjustments for, among other things, pro forma effects related to acquired merchant portfolios and residual streams and run rate adjustments for certain contracted savings on an annualized basis, which are not included as adjustments to Adjusted EBITDA.

These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures, particularly Adjusted EBITDA or Earnout Adjusted EBITDA, to analyze our performance would have material limitations because their calculations are based on subjective determination regarding the nature and classification of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of our operating results. Although other companies may report measures entitled “Adjusted EBITDA” or similar in nature, numerous methods may exist for calculating a company’s Adjusted EBITDA or similar measures. As a result, the methods we use to calculate Adjusted EBITDA and Earnout Adjusted EBITDA may differ from the methods used by other companies to calculate their non-GAAP measures.

The reconciliations of EBITDA, Adjusted EBITDA and Earnout Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, are shown in the table below:

*(dollars in thousands)*

|  | Quarter Ended September 30, 2018 | 2017 | Three Quarters Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| **Net (loss) income (GAAP)** | $(2,562) | $2,258 | $(11,367) | $2,719 |
| Adjusted for: |  |  |  |  |
| Add: Interest expense (1) | 7,334 | 6,418 | 21,893 | 18,600 |
| Add: Depreciation and amortization | 4,899 | 3,602 | 12,679 | 11,254 |
| Less: Corporate income tax benefit | (991) | — | (991) | — |
| **EBITDA (non-GAAP)** | **8,680** | **12,278** | **22,214** | **32,573** |
| Further adjusted for: |  |  |  |  |
| Add: Non-cash and certain other expense (2) | (71) | 986 | 5,644 | 3,010 |
| Add: Litigation settlement costs | 1,596 | — | 1,596 | 5 |
| Add: Certain legal services (3) | 718 | 1,780 | 3,901 | 3,286 |
| Add: Professional and consulting fees and expenses (4) | 1,453 | 388 | 5,681 | 1,063 |
| Add: Severance, separation and employee settlements | 81 | — | 222 | 139 |
| Add: Equity-based compensation | 268 | 195 | 1,063 | 726 |
| Add: Other non-recurring expenses and adjustments | — | — | 55 | — |
| **Adjusted EBITDA (non-GAAP)** | **12,725** | **15,627** | **40,376** | **40,802** |
| Further adjusted for: |  |  |  |  |
| Add: Other tax expense | — | (7) | 146 | 150 |
| Add: Pro-forma impacts for acquisitions | 820 | 300 | 7,633 | 1,003 |
| Add: Contracted revenue and savings | 273 | — | 2,924 | 1,743 |
| **Earnout Adjusted EBITDA (non-GAAP)** | **$13,818** | **$15,920** | **$51,079** | **$43,698** |

(1) Interest expense consists of interest on outstanding debt and amortization of deferred financing fees and original issue discounts.

(2) Primarily non-cash fair value and other adjustments, including change in fair value of warrants, debt modification/extinguishment expenses, change in fair value of earnout obligations, equity in loss and impairment of unconsolidated entities and, to a lesser extent, certain non-recurring Business Combination and integration-related expenses.

(3) Legal services relates to acquisitions, legal settlements and other litigation expenses.

(4) Primarily Business Combination related, capital markets, accounting advisory, IT consulting and sponsor management fees and expenses, as well as a consulting arrangement with a non-independent director.

### Liquidity and Capital Resources

Liquidity and capital resource management is a process focused on providing the funding we need to meet our short-term and long-term cash and working capital needs. We have used our funding sources to build our merchant portfolio, technology solutions, and to make acquisitions with the expectation that such investments will generate cash flows sufficient to cover our working capital needs and other anticipated needs, including for our acquisition strategy. We anticipate that cash on hand, funds generated from operations and available borrowings under our revolving credit agreement are sufficient to meet our working capital requirements for at least the next twelve months.

Our principal uses of cash are to pay commissions to our distribution partners and internal sales staff, merchant portfolio, other asset and business acquisitions and distribution partner advances, operating expenses, interest expense and investments in technology infrastructure.

Our working capital, defined as current assets less current liabilities, was $24.0 million at September 30, 2018 and $39.5 million at December 31, 2017. As of September 30, 2018, we had cash totaling $17.2 million compared to $28.0 million at December 31, 2017. These balances do not include restricted cash, which reflects cash accounts holding reserves for potential losses and customer settlement funds, of $18.3 million at September 30, 2018 and $16.2 million at December 31, 2017.

The following table reflects our cash flows for the comparative interim periods.

*(dollars in thousands)*

| Net cash provided by (used in): | Three Quarters Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | $24,836 | $28,979 |
| Investing activities | (42,345) | (7,350) |
| Financing activities | 8,827 | (24,875) |
| Net decrease in cash and restricted cash | $(8,682) | $(3,246) |

#### Cash Provided By Operating Activities

Net cash provided by operating activities was $24.8 million and $29.0 million for the three quarters ended September 30, 2018 and 2017, respectively. The $4.1 million, or 14.3%, decrease was principally the result of our swing to a net loss, reflecting a $14.1 million change in net (loss) income, partially offset by changes in operating working capital. Changes in operating working capital increased by $6.2 million for the three quarters ended September 30, 2018 compared to the same period in 2017, mainly reflecting decreases in accounts receivable and notes receivable compared to the corresponding prior year period, partially offset by a substantially lower increase in accounts payable compared to the corresponding prior year period.

#### Cash Used In Investing Activities

Net cash used in investing activities was $42.3 million and $7.4 million for the three quarters ended September 30, 2018 and 2017, respectively. Cash flow used in investing activities includes the acquisitions of merchant portfolios, purchases of property, equipment and software and current period acquisitions. For the three quarters ended September 30, 2018, we invested $26.4 million in merchant portfolio asset acquisitions, a $23.9 million increase from the three quarters ended September 30, 2017. We used $7.5 million for business acquisitions in the three quarters ended September 30, 2018, compared to zero in the corresponding prior year period. Cash used for purchases of property, plant and equipment for the three quarters ended September 30, 2018 was $8.4 million, an increase of $3.5 million from the three quarters ended September 30, 2017. The increase in purchases was driven primarily by equipment purchases for MX Connect and CPX, capitalization of internally developed software and improvements to the legal and CPX office space.

#### Cash Provided By (Used In) Financing Activities

Net cash from financing activities was $8.8 million in the three quarters ended September 30, 2018 compared to net cash used in financing activities of $24.9 million in the corresponding prior year period. Cash flow from financing activities for the three quarters ended September 30, 2018 reflected primarily proceeds from the January 2018 debt upsizing and proceeds from the Recapitalization, offset in part by cash used in equity redemptions, the redemption of the GS warrant, and distributions to members prior to July

25, 2018. Cash flows used in financing activities for the three quarters ended September 30, 2017 reflected primarily equity redemptions partially offset by a net increase in long term debt.

#### Long-Term Debt

As of September 30, 2018, we had outstanding long-term debt of $352.2 million (compared to $283.1 million at December 31, 2017), an increase of $69.1 million, consisting of outstanding debt of $263.5 million under the Senior Secured Credit Facility (including $2.7 million in current portion of long-term debt) and $88.7 million under the GS subordinated term loan (including accrued payment-in-kind (“PIK”) interest through September 30, 2018). We have a $25.0 million revolving credit facility with SunTrust Bank, which was undrawn as of September 30, 2018 and December 31, 2017. We drew $8.0 million on our revolving credit facility in October 2018 to partially finance a merchant portfolio acquisition.

Outstanding borrowings under the Senior Secured Credit Facility bear interest at the London Interbank Offered Rate (LIBOR) with a floor of 1.0%, plus an applicable margin. The margin stood at 5.0% as of September 30, 2018, which was a reduction from 6% as of December 31, 2017, due to amendments made in connection with the January 2018 debt upsizing. The Senior Secured Credit Facility is secured by a pledge of substantially all of our assets, all of the capital stock of our subsidiaries, and 65% of our outstanding voting equity interests and all of our outstanding non-voting equity interests in Priority. The Subordinated Term Loan provides for cash and PIK interest components. Cash interest is payable at an annual rate of 5.0% while PIK interest resets on a quarterly basis based on our Total Net Leverage Ratio, as defined in the credit agreement relating to the Subordinated Term Loan, with a floor of 5.0%. The Subordinated Term Loan is secured by a subordinate pledge of substantially all of our assets. As of September 30, 2018, the outstanding amount on the Subordinated Term Loan totaled $88.7 million, a $3.6 million increase from December 31, 2017 attributable to the accrual of PIK interest. The outstanding principal amounts under the Senior Secured Credit Facility and the Subordinated Term Loan mature in January 2023 and July 2023, respectively. Refer to Note 7, *Long-Term Debt and Warrant Liability*, to our unaudited condensed consolidated financial statements included herein. The $25 million revolving credit facility expires in January 2022. The PIK interest payable on the Subordinated Term Loan decreased from 6.25% as of December 31, 2017 to 5.5% in January 2018 (which remained the applicable PIK rate as of September 30, 2018) due to our improved Total Net Leverage Ratio, as defined in the credit agreement.

The Senior Secured Credit Facility and the Subordinated Term Loan contain 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. The financial covenants include requirements to maintain certain leverage and fixed charge coverage ratios.

As of September 30, 2018, financial covenants under the Senior Secured Credit Facility required the Total Net Leverage Ratio, as defined in the agreement, not to exceed 6.25:1.00 and a First Lien Net Leverage Ratio, as defined in the agreement, not to exceed 4.25:1.00. The Net Leverage Ratios are determined using the outstanding debt balance and Earnout Adjusted EBITDA, as defined above. For a reconciliation of Earnout Adjusted EBITDA to net income, see above under “-Certain Non-GAAP Measures.” We are required to make quarterly principal payments under the Senior Secured Credit Facility as well as additional mandatory prepayments based on Excess Cash Flow, as determined and defined in the credit agreement. The Subordinated Term Loan contains financial covenants similar to the Senior Secured Credit Facility. As of September 30, 2018, we were in compliance with our financial covenants.

### Off-Balance Sheet Arrangements

We have not entered into any 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, except those that are included in our unaudited condensed consolidated financial statements included in this Quarterly Report.

### Commitments and Contractual Obligations

There have been no significant changes to our contractual obligations and commitments compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Priority” included in the Form 8-K.

### Related Party Transactions

We have a management services agreement and an annual bonus payout with PSD Partners, which is owned by Tom Priore, our Executive Chairman and a member of Priority Investments Holdings, LLC, which is in turn the member owner of Priority Incentive Equity Holdings, LLC. For the three quarters ended September 30, 2018 and 2017, we 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.

### Critical Accounting Policies

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 are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Priority” in the Form 8-K. Changes to our critical accounting policies from those previously disclosed are included in Note 1, *The Company and Basis of Presentation*, to our unaudited condensed consolidated financial statements included herein.

### 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, *The Company and Basis of Presentation*, to our unaudited condensed consolidated financial statements included herein for a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

## Market risk

As filed, 1,178 characters.

#### Interest rate risk

Our Senior Secured Credit Facility bears interest at a rate based on LIBOR plus a fixed margin that changes periodically. As of September 30, 2018, we had $263.5 million in outstanding borrowings under our Senior Secured Credit Facility. The applicable LIBOR rate stood at 2.1% at September 30, 2018 and the fixed margin stood at 5%, for an interest rate of 7.1%.

A hypothetical 1.0% increase or decrease in the applicable LIBOR rate on Priority’s outstanding indebtedness under the Senior Secured Credit Facility for the three quarters ended September 30, 2018 would have increased or decreased interest expense by approximately $2.0 million. Per annum, a 1% hypothetical increase or decrease in the applicable LIBOR on this debt rate would increase annual interest expense by approximately $2.6 million.

There have been no significant changes to our outstanding indebtedness compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Priority” and "Qualitative and Quantitative Disclosures About Market Risk" included in the Form 8-K.

We currently do not hedge against interest rate risk.

## Controls and procedures

As filed, 4,665 characters.

### Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weaknesses in internal control over financial reporting described below, which are in the process of being remediated.

Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.

### Changes in Internal Control over Financial Reporting

As disclosed in “Risk Factors- Risk Factors Relating to the Business Combination and the Ownership of Our Common Stock” in the Form 8-K, we identified material weaknesses in internal control over financial reporting related to (1) lack of sufficient accounting and financial reporting resources and (2) deficiencies in certain aspects of our financial statement review and close processes. In order to begin to remediate the material weaknesses described above, during the three quarters ended September 30, 2018, we undertook or were engaged in the following measures or activities to address the material weaknesses in internal control over financial reporting:

- recruiting and hiring additional qualified financial reporting personnel;
- retaining outside consultants to assist us in the preparation of our financial statements and SEC disclosures; and
- implementing additional policies and procedures to enhance internal control and provide timely reconciliation and review of the Company's accounting policies and procedures.

As we continue to evaluate and improve our internal control over financial reporting, additional measures to remediate the material weaknesses or modifications to certain of the remediation procedures described above may be necessary.

Management is committed to improving our internal control processes and intends to meet with the Audit Committee on a regular basis to monitor the status of remediation activities. Management believes that the measures described above should remediate the material weakness identified and strengthen our internal control over financial reporting.

Except as set forth above, we have identified no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,572 characters.

*As of September 30, 2018, there have been no material changes from the risk factors previously disclosed in the Form 8-K, with the exception of the items listed below:*

***Nasdaq may delist our warrants from trading on its exchange, which could limit warrant holders' ability to make transaction in our warrants.***

In August 2018, we received a notice from Nasdaq stating Nasdaq's intentions to suspend our common stock and warrants from trading on the exchange based on our failure to have at least 400 round lot holders of the common stock and warrants. Following a hearing in October 2018 at which we presented a plan with respect to the warrants, Nasdaq determined to maintain the listing of our common stock and extended the listing compliance deadline for our warrants.

If Nasdaq delists our warrants from trading on Nasdaq and we are not able to list our securities on another national securities exchange, our warrants could be quoted on an over -the-counter market. However, even if that were to occur, holders of warrants could face significant material adverse consequences, including:

- a limited availability of market quotations for the warrants;
- reduced liquidity for the warrants;
- a determination that our warrants are a "penny stock" which will require brokers trading in our warrants to adhere to more stringent rules and possible result in a reduced level of trading activity in the secondary trading market for our warrants; and
- the risk that market makers that initially make a market in our unexchanged warrants eventually cease to do so.

Filed Nov 14, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-014379. Last ingested by Listed: Nov 15, 2026, 00:36 ET. No prices; not investment advice.