Annual report pursuant to Section 13 and 15(d)

SHARE-BASED COMPENSATION

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SHARE-BASED COMPENSATION
12 Months Ended
Dec. 31, 2020
Share-based Payment Arrangement [Abstract]  
Share-Based Compensation SHARE-BASED COMPENSATION
During 2020, 2019 and 2018, the Company had three share-based compensation plans: 2018 Equity Incentive Plan; Earnout Incentive Plan; and 2014 Management Incentive Plan. Total share-based compensation expense, for both equity-classified and liability-classified awards, was approximately $2.4 million, $3.7 million, $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively, which is included in salary and employee benefits in the accompanying consolidated statements of operations. For the years ended December 31, 2020, 2019 and 2018, the Company recognized an income tax benefit of approximately $0.4 million, $0.5 million and $0.1 million, respectively, for share-based compensation expense.

For the years ended December 31, 2020, 2019, and 2018, share-based compensation was recognized by plan as follows:
Year Ended December 31,
(in thousands) 2020 2019 2018
Plan:
2018 Equity Incentive Plan $ 2,430  $ 2,385  $ 187 
Earnout Incentive Plan —  —  — 
2014 Management Incentive Plan —  1,267  1,462 
Total $ 2,430  $ 3,652  $ 1,649 

No share-based compensation has been capitalized. Beginning in 2018, the Company elected to recognize the effects of forfeitures on compensation expense as the forfeitures occur for all plans.


2018 Equity Incentive Plan

The 2018 Equity Incentive Plan ("2018 Plan") was approved by the Company's board of directors and shareholders in July 2018. The 2018 Plan provides for the issuance of up to 6,685,696 of the Company's common stock, and these shares were registered on a Form S-8 during 2018. Under the 2018 Plan, the Company's compensation committee may grant awards of non-qualified stock options, incentive stock options, stock appreciation rights ("SARs"), restricted stock awards, restricted stock units RSU), other share-based awards (including cash bonus awards) or any combination of the foregoing. Any current or prospective employees, officers, consultants or advisors that the Company's compensation committee (or, in the case of non-employee directors, the Company's board of directors) selects, from time to time, are eligible to receive awards under the 2018 Plan. If any award granted under the 2018 Plan expires, terminates, or is canceled or forfeited without being settled or exercised, or if a SAR is settled in cash or otherwise without the issuance of shares, shares of the Company's common stock subject to such award will again be made available for future grants. In addition, if any shares are surrendered or tendered to pay the exercise price of an award or to satisfy withholding taxes owed, such shares will again be available for grants under the 2018 Plan.
A summary of the activity in stock units for the 2018 Plan that occurred during the years ended December 31, 2020, 2019 and 2018 is as follows:
6,685,696  Common stock authorized for the 2018 Plan
(2,044,815) Stock options granted in December 2018
7,558  Stock option grants forfeited in 2018
(202,200) RSUs granted in 2018
4,446,239  Common stock available for issuance under the 2018 Plan at December 31, 2018
326,173  Stock option grants forfeited in 2019
(36,657) RSUs granted in 2019
60,421  RSUs forfeited in 2019
4,796,176  Common stock available for issuance under the 2018 Plan at December 31, 2019
(15,000) Stock options granted in 2020
220,045  Stock option grants forfeited in 2020
(1,031,740) RSUs granted in 2020
(128,624) RSU granted in 2020 with performance goals that have not been determined
21,277  RSUs forfeited in 2020
3,862,134  Common stock available for issuance under the 2018 Plan at December 31, 2020

    
The above table does not reflect a liability-classified award with an estimated fair value of $0.8 million included in accounts payable and accrued expenses in the consolidated balance sheet at December 31, 2020.

    
Stock Options

Substantially all stock options grants were granted in December 2018 when the Company issued stock option grants to substantially all of the Company's employees at the time, excluding the Company's executive officers. The stock options issued in December 2018 vest as follows: 50% on July 27, 2019; 25% on July 27, 2020; and 25% on July 27, 2021. If a participant terminates employment with the Company, vested options may be exercised for a short period of time while unvested options are forfeited. However, in any event, a stock option will expire ten years from date of grant.
Details about the time-based equity-classified stock options granted under the plan are as follows:
Weighted-
Options for average Weighted-average Aggregate
number of exercise remaining intrinsic value
shares price contractual terms (in thousands)
Outstanding, January 1, 2018 —  — 
Granted in 2018 2,044,815  $ 6.95 
Exercised in 2018 —  — 
Forfeited in 2018 (7,558) $ 6.95 
Expired in 2018 —  — 
Outstanding, December 31, 2018 2,037,257  $ 6.95  9.6 years $ 2,139 
Granted in 2019 —  — 
Exercised in 2019 —  — 
Forfeited or expired in 2019 (326,173) $ 6.95 
Outstanding, December 31, 2019 1,711,084  $ 6.95  8.6 years $ — 
Granted in 2020 15,000  $ 2.47 
Exercised in 2020 —  — 
Forfeited or expired in 2020 (220,045) $ 6.95 
Outstanding, December 31, 2020 1,506,039  $ 6.91  7.8 years $ 203 
Vested and Expected to Vest 1,506,039  $ 6.91  7.8 years $ 203 
Exercisable at December 31, 2020 1,125,755  $ 6.95  7.8 years $ 101 


No stock options have been exercised as of December 31, 2020. For the years ended December 31, 2020, 2019 and 2018, compensation expense of $0.8 million, $2.0 million and $0.2 million was recognized for stock option grants. As of December 31, 2020, there was approximately $0.4 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a remaining weighted-average period of 0.7 years.

The table below presents the assumptions used to calculate the fair value of the stock options issued in 2020 and 2018:
2020 2018
Expected volatility 94  % 30  %
Risk-free interest rate 0.5  % 2.4  %
Expected term (years) 7.5 4.3
Dividend yield —  % —  %
Exercise price $2.47 $6.95

No stock options were granted in 2019.
Equity-Classified Restricted Stock Units

Underlying Weighted-average (in thousands)
Common Grant-date Aggregate
Shares Fair Value Fair Value
Service-based vesting:
Unvested at January 1, 2018 — 
Granted in 2018 107,142  $ 7.00  $ 750 
Unvested at December 31, 2018 107,142 
Granted in 2019 36,657  $ 6.82  $ 250 
Vested in 2019 (53,571) $ 171 
Forfeited in 2019 (36,657) $ 6.82 
Unvested at December 31, 2019 53,571 
Granted in 2020 892,142  $ 2.93  $ 2,617 
Forfeited in 2020 (21,277) $ 2.35 
Vested in 2020 (328,035) $ 1,150 
Unvested at December 31, 2020 596,401 
Performance-based vesting:
Unvested at January 1, 2018 — 
Granted in 2018 95,057  $ 10.52  $ 1,000 
Unvested at December 31, 2018 95,057 
Forfeited in 2019 (23,674) $ 10.52 
Unvested at December 31, 2019 71,383 
Granted in 2020 (a) (b) 139,598  $ 2.56  $ 358 
Forfeited in 2020 (71,383) $ 10.52 
Unvested at December 31, 2020 139,598 

(a) Includes only the portions of grants for which the performance goals have been determined and communicated to the grant recipient. For the portions of any grants for which the required performance goals have not been determined and communicated to the grant recipient, a grant has not yet occurred for accounting purposes.

(b) Does not include a liability-classified performance-based RSU award with an estimated fair value of $0.8 million.


As of December 31, 2020, there was approximately $1.6 million and $0.2 million of unrecognized compensation cost for equity-classified service-based RSUs and performance-based RSUs, respectively, and these costs are expected to be recognized over a weighted-average period of 2.2 years and 2.6 years, respectively.


Liability-Classified Share-Based Arrangement
In March 2020, the compensation committee of the Company's board of directors provided performance goals and achievement criteria to its CEO and Chairman. If these performance goals are met, the Company has committed to issue an RSU grant with a target fair value of $0.8 million on the future grant date, which occurred in the first quarter of 2021. The Company began accruing compensation expense in 2020 and through December 31, 2020 has accrued an aggregate of $0.3 million for this liability-classified award.

Earnout Incentive Plan

The Company's Earnout Incentive Plan (the "EIP") expired on December 31, 2019. No shares were issued under the EIP. During the fourth quarter of 2019, a total of 95,057 RSUs expired under the EIP with a grant-date fair value of $10.52 each (these grants were in addition to the 95,057 RSUs issued under the 2018 Plan, as previously noted above). Prior to December 31, 2019, it was not probable that the performance metrics would be achieved, thus no compensation expense was recognized for these RSUs for any reporting period.

2014 Management Incentive Plan
The Priority Holdings Management Incentive Plan (the "MIP") was established in 2014 to issue share-based compensation awards to selected employees. Simultaneously with the Business Combination and Recapitalization (see Note 14, Stockholders' Deficit), the fair value of the outstanding equity awards under the MIP were exchanged for approximately 3.0 million shares of common stock of Priority Technology Holdings, Inc. having approximately the same fair value. As such, this exchange was not deemed to be a modification for accounting purposes. During the year ended December 31, 2019, the Company elected to accelerate vesting for all remaining unvested awards under the MIP, resulting in accelerated compensation expense. Compensation expense under the MIP was approximately $1.3 million and $1.5 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2020 and 2019, there was no unrecognized compensation cost for the MIP and no grants remain outstanding under this plan.