Report of Independent Auditors

To the Board of Directors of FAPS Holdings, Inc.

We have audited the accompanying consolidated financial statements of FAPS Holdings, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

PricewaterhouseCoopers LLP, 2121 North Pearl Street, Suite 2000, Dallas, Texas 75201

T: (214) 999 1400, F: (214) 754 7991, www.pwc.com/us

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FAPS Holdings, Inc. and its subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2019. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas 

April 20, 2021, except for additional disclosures made in preparation for an SEC filing discussed in Note 2 to the consolidated financial statements, as to which the date is July 22, 2021.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

FAPS Holdings, Inc.

Funds Held for Merchants

Funds held for merchants represents cash received by the Company from credit card networks and internet transaction processing which the Company collects on behalf of certain merchants. Upon receiving the cash, the Company recognizes an offsetting liability reflected as funds owed to merchants until the funds are settled with the merchants. The cash is settled to merchants within three to five business days.

Expected Merchant Funds

The expected merchant funds represent amounts due to the Company from credit card networks which the Company collects on behalf of certain merchants. Upon recording the expected funds, the Company recognizes an offsetting liability reflected as funds owed to merchants until the funds are settled with the merchants.

Leases

The Company provides noncancelable sales-type leases to certain customers. Unearned income from these leases is the difference between the revenue recognized on each of the leases, which includes the present value of future minimum lease payments and an estimated residual value, and the total of the future lease payments.

Amortization of unearned income is recorded using the effective interest method. The Company’s investment in leases is reduced by the allowance for lease payments that are expected to be uncollectible. The Company establishes an allowance for doubtful accounts based on historical trends, specific customer identification, and other information.

The Company provides noncancelable operating leases to certain customers. Operating leases recognize rental income upon collection of monthly rental payments. When the lease is executed, an initial direct cost is incurred and recorded in other assets and amortized over the life of the lease. Additionally, the equipment is recorded and depreciated over the life of the lease. Accumulated depreciation related to the equipment was $211,568 and $252,730 at December 31, 2020 and 2019, respectively.

Inventory

Inventory consists of credit card authorization equipment and is stated at the lower of cost or market, with cost being determined by the weighted average cost method. Inventory balances are net of reserve allowances of $214,979 and $125,857 at December 31, 2020 and 2019, respectively.

Notes Receivable

Notes receivable consist of loans made to certain ISOs. The majority of the loans bear interest at the prime rate plus an applicable margin of 5% to 6.75% with an interest rate of 10% at July 6, 2020, which is the date the last loan was paid in full, and an interest rate equal to 11.5% at December 31, 2019. The loans are collateralized primarily by the ISOs’ assets, including the rights they have to receive residuals.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful life of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term. When property and equipment are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in other income or expense.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on management’s estimate of undiscounted future cash flows over the remaining estimated useful life of the asset group as compared to the net carrying value of the asset group. In the event that long-lived asset groups are found to be carried at amounts which are in excess of estimated future cash flows, the asset group is adjusted for impairment to a level commensurate with the fair value of the underlying asset groups. No impairment was recorded for the year ended December 31, 2020 and impairment expense of $36,000 was recorded for the year ended December 31, 2019.

Capitalized Computer Software Costs

Capitalized computer software costs consist of costs to purchase, license and develop software. The Company capitalizes internally developed software based on a project-by-project analysis of each project’s significance to the Company and its estimated useful life. Unamortized computer software cost included in property and equipment was $19,704,982 and $18,370,302 at December 31, 2020 and 2019, respectively. All capitalized software costs are amortized over the estimated useful lives of the assets. Amortization expense related to capitalized computer software costs was $4,487,661 and $4,223,425 for the years ended December 31, 2020 and 2019, respectively.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Other Assets

Other assets are comprised of deferred contract acquisition costs, initial direct costs for noncancelable operating leases and residual assets for noncancelable sales-type leases. Deferred contract acquisition costs are expensed over the expected period of benefit. Initial direct costs are capitalized and amortized over the term of the noncancelable operating lease. Residual assets are recorded at the inception of each noncancelable sales-type lease for the estimated future value of the equipment at the end of the lease term.

Intangible Assets

The Company’s amortizable intangible assets are comprised of merchant relationships, partner relationships, technology, trade names, agent exclusivity agreements, and merchant portfolio agent residuals. Merchant relationships and partner relationships are being amortized over the future economic benefit ranging from approximately five to fourteen years. Amortization expense recognized during each period for these intangibles is calculated based on the expected cash flows realized during the period as a percentage of total expected cash flows, as used in determining the acquisition-date fair value of these intangibles, multiplied by the initial acquisition-date fair value of each respective intangible asset. Technology is amortized on a straight-line basis over twelve years. The trade names are being amortized on a straight-line basis over eleven years. The agent exclusivity agreements are amortized on a straight-line basis over the term of the agreement ranging from two to five years. Merchant portfolio agent residuals are obtained through lump sum payments to ISOs for the acquisition of the ISOs’ residuals and are recorded at cost. The merchant portfolio agent residuals are being amortized based on a weighted average attrition method over their estimated useful lives of five years.

Goodwill

Purchase price in excess of the fair value of tangible and other intangible assets acquired and liabilities assumed in a business combination are recorded as goodwill. The Company performs its annual goodwill impairment test as of December 31, or whenever events or changes in circumstances occur, indicating the carrying value of its assets may not be fully recoverable. The Company has the option of performing a qualitative assessment of impairment on its reporting unit to determine whether any further quantitative assessment for impairment is necessary. The option whether to perform a qualitative assessment on its reporting unit is made annually. Factors considered in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the reporting unit, events or changes affecting the composition or carrying amount of the net assets, sustained decrease in its share price, and other relevant entity-specific events. If the Company elects to bypass the qualitative assessment or if it is determined, on the basis of qualitative factors, that the fair value is more likely than not less than the carrying amount, a quantitative test would be required. The Company elected to perform a qualitative assessment of impairment on its single reporting unit. It was determined on the basis of qualitative factors that it is more likely than not that the fair value of the Company exceeds its carrying value. There were no impairment charges recorded for the years ended December 31, 2020 and 2019.

Funds Owed to Merchants

Funds owed to merchants represent amounts owed to certain merchants for cash received by the Company from credit card networks and internet transaction processing and are recorded in funds held for merchants. In addition, funds owed to merchants includes outstanding amounts due from credit card networks and are reflected in expected merchant funds.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Reserve for Chargebacks and Merchant Loss

Disputes between a cardholder and a merchant periodically arise as a result of cardholder dissatisfaction with the merchandise quality or merchant services and the disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged-back” to the merchant by the Company and the purchase price is refunded to the card issuer for the cardholder. If the merchant is unable to refund the chargeback, the Company or, under limited circumstances, the Company and the processing bank, must bear the credit risk for the full amount of the transaction. The Company evaluates its risks and estimates its potential for losses from chargebacks based on historical experience. A provision for estimated losses is provided in the same period as the related revenues. Such losses have not historically exceeded the Company’s expectations.

The processing bank holds certain merchant funds pending supporting documentation. In the event the merchant does not provide the requested documentation in accordance with the terms of the merchant agreement, or the card issuer does not request funds by properly filing a chargeback in accordance with applicable card association rules, the Company records these funds as operating cash with a corresponding reduction to the provision for estimated losses from chargebacks. The Company recorded $2,085,213 and $1,903,746 for the years ended December 31, 2020 and 2019, respectively.

Health Self-Insurance Plan

The Company elected to establish an ERISA health and welfare benefit plan for the period from June 1, 2018 to May 31, 2019 and has continued to renew the plan each year. The plan is partially self-insured up to specified limits for medical and pharmacy benefits covered under the plan. The plan is protected with a specific stop loss policy per claimant and an aggregate stop loss policy. The Company’s policy is to establish incurred, but not reported, claim reserves with the assistance of third-party experts using actuarial techniques based upon a number of factors. These factors include, but are not limited to, known claims, estimated incurred but not reported claims, past experience of claims, historical information and certain assumptions about future events. Any adjustments resulting from the reserve analysis are reflected in current operations. The Company recorded accrued liabilities for the partially self-funded plan on an undiscounted basis of $975,412 and $1,160,289 for the years ended December 31, 2020 and 2019, respectively, which is included in accrued expenses and other liabilities.

Income Taxes

Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and their respective amounts used for income tax purposes. These tax effects are measured based on provisions of enacted tax laws. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

If interest or penalties are paid related to income taxes, they are recorded as tax expense. Interest and penalties paid during the years ended December 31, 2020 and 2019 were immaterial. The years ended 2017, 2018 and 2019 remain subject to examination by the Internal Revenue Service.

Share-Based Compensation

Share-based compensation expense is recognized as an operating expense for all stock option awards granted based on the grant date fair value. The resulting compensation expense is recognized on a straight line basis over the requisite service period. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on historical experience and future expectations. See Note 9 “Employee Stock Option Plan” for further discussion.

FAPS Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2020 and 2019

Advertising Costs

Advertising costs included in selling, general and administrative expenses were $483,151 and $644,200 for the years ended December 31, 2020 and 2019, respectively.

Foreign Currency

The consolidated financial statements of the Company are prepared in United States dollars as this is the currency of the primary economic environment in which the Company operates, and the majority of the Company’s revenue is received and expenses are disbursed in United States dollars. The functional currency of the Company’s foreign operations is also the United States dollar. Transactions in foreign currencies are recorded at the rates of exchange prevailing at the dates of the transactions for monetary items or historical rates for nonmonetary assets. The unsettled balances on foreign currency receivables and liabilities are valued at the rates of exchange prevailing at year end. Foreign exchange gains and losses are recorded in the consolidated statements of comprehensive income and were $4,449 in realized losses and $20,889 in unrealized gains during 2020. During 2019, realized gains were $16,607 and unrealized gains were $26,874.

Recent Accounting Pronouncements

In February 2016, the FASB issued updated guidance regarding lease accounting. The update includes a lessee accounting model with two types of leases: finance leases and operating leases. The guidance requires that most leases be recognized on the balance sheet as a right of use asset with an associated lease liability at the lease commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. Lessor accounting will remain substantially the same as the current model. The updates to lessor accounting focus on conforming to certain changes made to the lessee model and the new revenue recognition standard. The guidance requires new disclosures with the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing key information about the leasing arrangements recorded in the financial statements. The new guidance will be effective for fiscal years beginning after December 15, 2021. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective are either not applicable to the Company at this time or will not have a material impact on the Company’s consolidated financial statements upon adoption.

Additional Disclosures Made in Preparation for an SEC Filing

Subsequent to the original issuance of the consolidated financial statements and in connection with acquisition of the Company, which is discussed in Note 14 to the consolidated financial statements, certain footnote disclosures have been either updated or added in order to conform to the requirements for these consolidated financial statements to be included in an SEC filing. Specifically, the Company has expanded its disaggregation of revenue and contract liability disclosures within the ‘Revenue Recognition’ sub-section in Note 2, added an effective tax rate reconciliation in tabular format in Note 8, expanded its disclosures relating to stock-based compensation in Note 9, and added a redeemable preferred stock rollforward in tabular format in Note 11. Finally, as discussed within the ‘Recently Adopted Accounting Pronouncements’ sub-section in Note 2, the Company adopted Accounting Standards Update (“ASU”) 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, on January 1, 2020.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

The Company leases credit card processing equipment under noncancelable sales-type leases. The lease terms range from one to five years, and payments are collected monthly. The leases are collateralized by the underlying leased asset. The lessee is responsible for the payment of insurance, taxes and maintenance costs related to the leased equipment.

The components of the lease payments receivable are as follows at December 31:

At December 31, 2020, minimum lease payments receivable are due as follows:

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Property and equipment consists of the following at December 31:

Depreciation and amortization expense for property and equipment for the years ended December 31, 2020 and 2019, was $6,873,283 and $6,968,159, respectively.

Intangible assets consist of the following at December 31:

Amortization expense for intangible assets for the years ended December 31, 2020 and 2019, was $17,393,340 and $19,596,716, respectively.

Estimated amortization expense for intangible assets as of December 31, 2020 for the next five years is as follows:

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Long-term debt and revolving credit facility consist of the following at December 31:

Maturity requirements on long-term debt as of December 31, 2020 are as follows:

Previous Term Loan First Lien and Previous Term Loan Second Lien

On January 6, 2017, the Company entered into a first lien syndicated loan agreement (the “Previous First Lien”) and a second lien syndicated loan agreement (the “Previous Second Lien”) with various financial institutions.

Previous First Lien

The Previous First Lien consists of a $240,000,000 term loan, with an original issue discount of $2,400,000, and a $40,000,000 previous revolving credit facility. All borrowings under the Previous First Lien bear interest at a Base Rate plus an Applicable Rate of 4.75% or an Adjusted Eurodollar Rate plus an Applicable Rate of 5.75%. The Base Rate is equal to the greater of prime rate, the Federal Funds Effective Rate plus 0.5%, the Adjusted Eurodollar Rate as calculated in respect of a proposed Eurodollar loan with a one or more month interest period plus 1%, or 1% for the previous revolving credit facility and 2% with respect to the term loan, per annum. The Adjusted Eurodollar Rate is equal to the greater of LIBOR or 0.0% for the previous revolving credit facility and 1% with respect to the term loan. Quarterly payments of $600,000 are due on the term loan through December 31, 2023, with the remaining principal due on January 5, 2024. During 2017, the Company made all the contractually required quarterly payments due through December 31, 2023. Balances on the previous revolving credit facility are due on January 5, 2022. Additionally, the Company pays a commitment fee on the unused portion of its previous revolving credit facility of 0.5% or .375% based on the Previous First Lien net leverage ratio. The Previous First Lien may be prepaid at any time. The Previous First Lien also requires additional principal payments based upon annual calculation of excess cash flow as defined in the agreement. An additional principal payment was not required for the year ended December 31, 2019.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Borrowings under the Previous First Lien are collateralized on a first priority basis by a security interest in substantially all assets of the Company. Under the terms of the Previous First Lien, the Company is required to maintain certain financial ratios and comply with certain covenants. The Company was in compliance with all of its financial covenants during 2019 under the Previous First Lien.

Previous Second Lien

The Previous Second Lien consists of an $80,000,000 term loan, with an original issue discount of $2,400,000. All borrowings under the Previous Second Lien bear interest at a Base Rate plus an Applicable Rate of 9.5% or an Adjusted Eurodollar Rate plus an Applicable Rate of 10.5%. The Base Rate is equal to the greater of prime rate, the Federal Funds Effective Rate plus 0.5%, the Adjusted Eurodollar Rate as calculated in respect of a proposed Eurodollar loan with a one or more month interest period plus 1%, or 1% per annum. The Adjusted Eurodollar Rate is equal to the greater of LIBOR or 1.0%. As of December 31, 2019, the interest rate for the term loan was 12.56%. Unpaid principal is due July 5, 2024. The Previous Second Lien may be prepaid at any time. In the event the Previous Second Lien is prepaid between January 6, 2018, and January 5, 2019, a prepayment penalty of 4% would be incurred. In the event the Previous Second Lien is prepaid between January 6, 2019, and January 5, 2020, a prepayment penalty of 2% would be incurred. There are no prepayment penalties after January 6, 2020.

Borrowings under the Previous Second Lien are collateralized on a second priority basis by a security interest in substantially all assets of the Company subordinated to the Previous First Lien. Under the terms of the Previous Second Lien, the Company is required to maintain certain financial ratios and comply with certain covenants. The Company was in compliance with all of its financial covenants during 2019 under the Previous Second Lien.

Previous First Lien Amendment

In February 2018, the Company entered into an agreement (the “Previous First Amendment”) to amend the Previous First Lien effective February 22, 2018, which effectively repriced the interest rate on the term loan. As of February 22, 2018, the Previous First Lien included a term loan of $215,000,000 and the previous revolving credit facility. The previous revolving credit facility terms were not amended. The Previous First Lien under the Previous First Amendment bears interest at a Base Rate plus an Applicable Rate of 3.75%, or an Adjusted Eurodollar Rate plus an Applicable Rate of 4.75%. Other than these changes, the Previous First Amendment has substantially the same terms, including the maturity date, as the Previous First Lien. The Company was in compliance with all of its financial covenants under the Previous First Amendment for 2019.

Previous First Lien Second Amendment

In December 2018, the Company entered into an agreement (the “Previous Second Amendment”) to amend the Previous First Lien effective December 18, 2018, which effectively repriced the interest rate on the previous revolving credit facility. The previous revolving credit facility under the Previous Second Amendment bears interest at a Base Rate plus 3.75% or an Adjusted Eurodollar Rate plus an Applicable Rate of 4.75%. Other than this change, the Previous Second Amendment has substantially the same terms, including the maturity date, as the Previous First Lien. The Company was in compliance with all of its financial covenants under the Previous Second Amendment for 2019. As of December 31, 2019, the interest rate for the Previous First Lien term loan was 6.81% and the previous revolving credit facility was 8.50%.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

On March 4, 2020, the Company entered into a syndicated loan agreement (the “New Term Loan”) with various financial institutions paying off the Previous First Lien and the Previous Second Lien.

New Term Loan

The New Term Loan consists of a $275,000,000 term loan, including an original issue discount of $2,750,000, and a $40,000,000 new revolving credit facility. All borrowings under the New Term Loan bear interest at a Base Rate plus an Applicable Rate of 4.0% or 3.75% or an Adjusted LIBO Rate plus an Applicable Rate of 5.0% or 4.75% for the term loan and new revolving credit facility, respectively. The Base Rate is equal to the greater of prime rate, the NYFRB Rate plus .5%, the Adjusted LIBO Rate as calculated in respect of a proposed Eurodollar loan based on the LIBO Screen Rate plus 1.0%, or 1%, per annum. After June 30, 2020, all new revolving credit facility borrowings under the New Term Loan bear interest at a Base Rate plus an Applicable Rate of 3.75% or 3.5% or an Adjusted LIBO Rate plus an Applicable Rate of 4.75% or 4.5% based on the New Term Loan leverage ratio. As of December 31, 2020, the interest rate for the term loan was 5.23% and the new revolving credit facility was 7.00%. Quarterly payments of $687,500 are due on the term loan through December 31, 2026, with the remaining principal due on March 4, 2027. During 2020, the Company made all the contractually required quarterly payments due through December 31, 2026. Balances on the new revolving credit facility are due on March 4, 2025. Additionally, the Company pays a commitment fee on the unused portion of its new revolving credit facility of 0.5% or .375% based on the New Term Loan net leverage ratio. The New Term Loan may be prepaid at any time. The New Term Loan also requires additional principal payments based upon annual calculation of excess cash flow as defined in the agreement. An additional principal payment was not required for the year ended December 31, 2020.

Borrowings under the New Term Loan are collateralized on a first priority basis by a security interest in substantially all assets of the Company. Under the terms of the New Term Loan, the Company is required to maintain certain financial ratios and comply with certain covenants. The Company was in compliance with all of its financial covenants during 2020 under the New Term Loan.

In connection with the New Term Loan, the Company incurred fees of $7,470,502 of which $6,798,241 was deferred and recognized as debt issuance costs and $672,260 was recorded to selling, general and administrative expenses. Deferred debt issuance costs at the time of the event was $4,021,250 of which $762,064 was recorded as deferred debt issuance costs and the remaining $3,259,187 was recognized as a loss on extinguishment and recorded to interest expense. The debt issuance costs for the term loan are amortized and netted against the outstanding debt balance and will be amortized over the life of the New Term Loan under the effective interest method. The debt issuance costs for the new revolving credit facility will be amortized over the life of the new revolving credit facility under the New Term Loan using the straight-line method. The charge to interest expense related to debt issuance costs was $1,210,874 and $1,191,633 for the years ended December 31, 2020 and 2019, respectively.

Leases

The Company leases office space for its headquarters, operations and sales offices. These leases expire at various times and some of the leases have renewal, escalation and abatement period clauses. The total amount of the minimum rent is expensed on a straight-line basis over the term of the lease.

Rent expense for all operating leases for the years ended December 31, 2020 and 2019, was $4,792,774 and $4,820,990, respectively.

Payment Processing Agreements

The Company has agreements with several third-party processors to provide payment processing, transmittal, transaction authorization and data capture services, and access to various reporting tools. These third-party processors include Worldpay, TSYS Acquiring Solutions, First Data Corporation, and Chase Paymentech Solutions. Agreements with certain third-party processors require the Company to submit a minimum monthly number of transactions or volume for processing. If the Company submits a number of transactions or volume that is lower than the minimum, the Company is required to pay the processor the fees that they would have received if the Company had submitted the required minimum transactions or volume. The agreement expiration dates with these third-party processors range from yearly renewal options to seven years.

The future minimum commitments required to be paid at December 31, 2020 are summarized below:

Bank Processing Agreement

In connection with the Company’s credit card processing services, VISA and MasterCard require merchants accepting VISA and MasterCard credit cards to contract directly with a processing bank that is a member bank of the VISA and MasterCard associations. The Company is dependent upon the contractual arrangement with its processing bank to continue to service merchant portfolios. The Company has a contractual right to receive revenue derived from the discount rate and fees earned on its merchant portfolios, as long as the merchant continues to process transactions on the processing bank’s systems and the Company remains in compliance under its agreement with the processing bank.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

In accordance with the Company’s contract with its processing bank, all of the funds collected and all disbursement functions are performed on behalf of the Company by the processing bank. Disbursements for the interchange fee paid to the card issuing financial institutions are made daily.

Shortly after each month-end, the processing bank disburses to the Company the remainder of the funds collected from the merchants less the processing bank’s fees and credit card network fees.

Litigation

From time to time the Company is involved in certain legal proceedings and claims which arise in the ordinary course of business. It is the Company’s policy to accrue for amounts related to these legal proceedings if it is probable that a liability has been incurred and the amount is reasonably estimable. In the opinion of the Company, based on consultations with counsel, the results of any of these legal proceedings individually and in the aggregate, are not expected to have a material effect on its results of operations, financial condition or cash flows.

Severance

Certain officers of the Company have entered into employee agreements under which they are entitled to severance pay equal to their base salary for 12 to 24 months in the event they are terminated by the Company other than for cause.

Data Breach

The Company collects and stores sensitive data about its merchant customers and bank cardholders. If the Company’s network security is breached or sensitive merchant or cardholder data is misappropriated, the Company could be exposed to assessments, fines or litigation costs.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law making changes to the Internal Revenue Code. Changes include, but are not limited to, the ability to elect to increase the interest deduction limitation from 30% to 50% of adjusted taxable income for 2019 and 2020, and temporarily suspends the 80% taxable income limitation to allow net operating losses to fully offset taxable income for years before 2021. The CARES Act also made a retroactive technical correction that provides a 15-year recovery period for qualified improvement property (“QIP”). In April 2020, the Company qualified for a $3,213,672 refund of federal taxes due to the CARES Act. The refund was related to additional deductions of $5,158,079 for QIP and $8,206,750 in interest deductions. The CARES Act provides a payment extension of employer payroll taxes during 2020 after the date of enactment. The Company elected to defer $1,624,332 of employer payroll taxes otherwise due in 2020 which was extended with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022. Accordingly, payroll tax deferral liabilities of $812,166 were recorded in accrued expenses and other liabilities and $812,166 were recorded to other long-term liabilities at December 31, 2020.

The tax effects of temporary differences that gave rise to the total deferred tax liability, net were as follows at December 31:

The Company had no carryforward NOL for the years ended December 31, 2020 and December 31, 2019.

The Company utilizes a recognition threshold and a related measurement model for accounting for its uncertain tax positions. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The Company’s policy is to record any impact to income tax expense. At December 31, 2020 and 2019, there were no uncertain tax positions recorded in the consolidated financial statements.

In connection with the Acquisition on August 18, 2014, the Board of Directors approved the 2014 FAPS Holdings, Inc. Stock Option Plan (the “Plan”), which provides grants of stock options to certain Company employees. A total of 916,464 shares of Class A common stock have been reserved for issuance under the Plan. As of December 31, 2020 and 2019, 107,439 and 135,526 options, respectively, of Class A common stock remained available for stock option grants under the Plan.

Options issued pursuant to the Plan are granted at an exercise price not less than the fair value of the Company’s Class A common stock at the date of grant. Options vest in increments of 20% per year over a five year period on the anniversary date of each grant. Options expire ten years from the date of grant. Options not yet vested terminate when the employee ceases to be employed by the Company. The Company recorded share-based compensation expense of $258,502 and $500,848 for the years ended December 31, 2020 and 2019, respectively.

During the years ended December 31, 2020 and 2019, the Company granted 64,925 options and 42,245 options to employees with a weighted-average grant date fair value of $9.60 and $6.40, respectively.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019 

The grant date fair value is calculated using the Black-Scholes option valuation model. The fair value of options granted during the year ended December 31, 2020, was calculated using the following estimated weighted average assumptions:

Risk-free interest rate – The market yield on U.S. Treasury securities for the expected life of each option type is used as the risk-free interest rate.

Expected life – The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. An election was made in 2018 to adopt the simplified method of estimating the expected term, which is the midpoint of the vesting period and the contractual term.

Expected volatility – The Company’s stock is not publicly traded. Therefore, the calculation of volatility for the Company is based on the historical stock price volatility of a peer group of similar, publicly traded companies, using adjusted closing monthly stock prices for the expected life of each option type.

Expected dividend yield – The Company intends to retain any earnings to finance future growth, and therefore, does not anticipate paying any cash dividends on its Class A common stock in the foreseeable future.

Stock option activity for the years ended December 31, 2020 and 2019, is detailed as follows:

For the year ended December 31, 2020, total unrecognized share-based compensation expense related to the nonvested stock options was $604,109, which will be recognized over a weighted average period of 3.69 years. The fair value of stock options vested in 2020 and 2019 was $95,012 and $787,567, respectively. The total number of vested stock options at December 31, 2020, is 654,847 with a weighted average remaining contractual life of 3.85 years. There were 35,377 options settled during the year ended December 31, 2020 and 7,952 options exercised during the year ended December 31, 2019. The aggregate intrinsic value of options exercised or settled during the years ended December 31, 2020 and 2019 was $543,391 and $122,143, respectively.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

The Company formed the First American Payment Systems, L.P. 401(k) Retirement Plan on January 1, 1998. Following the initial enrollment, employees become eligible for participation in the plan on the quarterly enrollment dates following the employee completing 90 days of employment. The Company contributes an amount equal to 50% of employee voluntary contributions, which vests to the employee over four years, up to a maximum of 6% of the employee’s annual compensation. The Company contributed $921,588 and $812,531 for the years ended December 31, 2020 and 2019, respectively.

In December 2015, to raise additional capital for subsequent acquisitions, the Board authorized the Company to issue 500,000 shares of preferred stock as one or more series. The Company designated 100,000 of those authorized shares as 12% Series A Preferred Stock (“Series A”). The Series A shares are not redeemable by their terms. However, per the stockholders’ agreement, the Company has the right to repurchase any Series A shares held by an employee whose employment with the Company terminates. The Series A are classified on the balance sheet as mezzanine equity. Each share of Series A has an original issue price of $1,000, and shareholders of the Series A are not entitled to any voting rights. The Series A ranks senior with respect to dividend payments, redemption payments, and distribution of assets to the Class A, Class B, and Class C common stock shareholders. Cumulative dividends on the Series A accrue at a rate of 12% per year. The Series A is also convertible at any time at the option of the shareholder into shares of Class A common stock equal to the original issue price plus all accrued and accumulated dividends on the date of conversion divided by $16. The Company is required to keep sufficient shares of Class A common stock available for issuance to permit the conversion of the Series A. Dividends continue to accrue on the Series A until the liquidation, dissolution, or winding up of the Company, or the shareholder exercises the conversion feature. The Company also amended the Employee Stock Plan to permit 1,000 shares of Series A to be issued subject to the Plan terms and conditions as discussed in Note 12 “Shareholders’ Equity”. There were 10,039 shares of Series A outstanding with an aggregate value of $10,039,000 at December 31, 2020 and 2019. The Company accrued a dividend of $2,021,674 and $1,796,231 for the years ended December 31, 2020 and 2019, respectively.

FAPS Holdings, Inc.

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Redeemable preferred stock activity for the years ended December 31, 2020 and 2019 is detailed as follows: