JTPY Jetpay Corp. (delisted)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K/A

CURRENT REPORT

 

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): November 7, 2014

 

JETPAY CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

Delaware		001-35170		90-0632274
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

1175 Lancaster Avenue, Suite 200, Berwyn, PA 19312

(Address of Principal Executive Offices) (Zip Code)

 

(484) 324-7980

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e 4(c))

 

  

EXPLANATORY NOTE

 

This Form 8-K/A amends and supplements the Current Report on Form 8-K filed by JetPay Corporation (the “Company”) with the Securities and Exchange Commission on November 12, 2014, to include the financial statements and pro forma financial statements required by Items 9.01(a) and (b).

 

Item 9.01

Financial Statements and Exhibits.

 

(a)

Financial Statements of Business Acquired

 

The audited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of December 31, 2013 and 2012 and the related statements of income and members’ equity, and cash flows for the years ended December 31, 2013 and 2012 and notes thereto, are attached hereto as Exhibit 99.1 and are incorporated herein by reference.

 

The unaudited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of June 30, 2014 and 2013, and the related statements of income and members’ equity and cash flows for the six-month periods ended June 30, 2014 and 2013 and the notes thereto, are attached hereto as Exhibit 99.2 and are incorporated herein by reference.

 

(b)

Pro Forma Financial Information

 

The unaudited pro forma combined financial statements of JetPay Corporation, including the balance sheet as of June 30, 2014, and the related unaudited pro forma statements of operations for the six-month period ended June 30, 2014 and the year ended December 31, 2013, and the notes thereto, are attached hereto as Exhibit 99.3 and are incorporated herein by reference.

 

(d)

Exhibits

 

Exhibit Number		Description
23.1		Consent of Independent Certified Public Accounting Firm.
99.1		The audited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of December 31, 2013 and 2012 and the related statements of income and members’ equity, and cash flows for the years ended December 31, 2013 and 2012 and notes thereto.
99.2		The unaudited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of June 30, 2014 and 2013, and the related statements of income and members’ equity and cash flows for the six-month periods ended June 30, 2014 and 2013 and the notes thereto.
99.3		The unaudited pro forma combined financial statements of JetPay Corporation, including the balance sheet as of June 30, 2014, and the related unaudited pro forma statements of operations for the six-month period ended June 30, 2014 and the year ended December 31, 2013, and the notes thereto.

 

  

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Dated: January 20, 2015
	JETPAY CORPORATION
	By:	/s/ Gregory M. Krzemien
		Name: Gregory M. Krzemien
		Title: Chief Financial Officer

 

  

EXHIBIT INDEX

 

Exhibit Number		Description
23.1		Consent of Independent Certified Public Accounting Firm.
99.1		The audited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of December 31, 2013 and 2012 and the related statements of income and members’ equity, and cash flows for the years ended December 31, 2013 and 2012 and notes thereto.
99.2		The unaudited financial statements of ACI Merchant Systems, LLC, including the balance sheets as of June 30, 2014 and 2013, and the related statements of income and members’ equity and cash flows for the six-month periods ended June 30, 2014 and 2013 and the notes thereto.
99.3		The unaudited pro forma combined financial statements of JetPay Corporation, including the balance sheet as of June 30, 2014, and the related unaudited pro forma statements of operations for the six-month period ended June 30, 2014 and the year ended December 31, 2013, and the notes thereto.

 

 

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM

 

We consent to the inclusion in this Current Report on Form 8-K (Amendment No. 1) and the incorporation by reference in the Registration Statement on Form S-3 (No. 333-187339), of our report dated August 12, 2014 relating to the audited financial statements of ACI Merchant Systems, LLC.

 

/s/ Wouch Maloney & Co., LLP

Horsham, PA
January 20, 2015

 

Exhibit 99.1

 

ACI MERCHANT SYSTEMS, LLC

 

FINANCIAL STATEMENTS

 

DECEMBER 31, 2013 AND DECEMBER 31, 2012

 

 

ACI Merchant Systems, LLC

Financial Statements

December 31, 2013 and December 31, 2012

 

Table of Contents

 

	Page
Independent Auditor’s Report	1-2
Financial Statements:
Balance Sheets	3
Statements of Income and Members’ Equity	4
Statements of Cash Flows	5
Notes to Financial Statements	6-8
Supplementary Information:
Independent Auditors’ Report on Supplementary Information	9
Schedule 1 – Cost of Sales	10
Schedule 2 – Selling, General and Administrative Expenses	11

 

 

  

Independent Auditor’s Report

 

To the Members

ACI Merchant Systems, LLC

Langhorne, Pennsylvania

 

We have audited the accompanying financial statements of ACI Merchant Systems, LLC, which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of income and members’ equity and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the 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 entity’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 financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ACI Merchant Systems, LLC as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Wouch Maloney & C0., LLP

 

Horsham, Pennsylvania

August 12, 2014

 

 

ACI Merchant Systems, LLC

Balance Sheets

December 31, 2013 and December 31, 2012

 

		2013				2012
Assets
Current Assets
Cash		$	602,970			$	583,621
Accounts Receivable			415,663				431,219
Inventory			16,324				27,709
Total Current Assets			1,034,957				1,042,549
Property and Equipment
Office Equipment			54,110				51,385
Computer Software			33,147				33,147
			87,257				84,532
Less: Accumulated Depreciation			77,244				72,757
Property and Equipment - Net of Accumulated Depreciation			10,013				11,775
Total		$	1,044,970			$	1,054,324
Liabilities and Members' Equity
Current Liabilities
Accounts Payable		$	191,117			$	199,405
Accrued Expenses			25,141				12,955
Total Current Liabilities			216,258				212,360
Commitments and Contingencies
Members' Equity			828,712				841,964
Total		$	1,044,970			$	1,054,324

 

The Accompanying Notes are an Integral Part of These Financial Statements. 

 

 

ACI Merchant Systems, LLC

Statements of Income and Members' Equity

For the Years Ended December 31, 2013 and December 31, 2012

 

		2013				2012
Sales		$	6,627,067			$	6,186,861
Cost of Sales			3,725,037				3,576,057
Gross Profit			2,902,030				2,610,804
Selling, General and Administrative Expenses
(Including Depreciation Expense of $4,485 and $3,847, Respectively)			769,524				833,125
Income From Operations			2,132,506				1,777,679
Other Income
Proceeds From Contract Buyout			0				500,000
Interest Income			1,464				2,414
Total Other Income			1,464				502,414
Net Income		$	2,133,970			$	2,280,093
Members' Equity - Beginning of Year as Originally Stated		$	841,964			$	395,107
Prior Period Adjustment:
Correction of an Error in Accruals			0				194,264
Members' Equity - Beginning of Year as Restated			841,964				589,371
Net Income			2,133,970				2,280,093
Less: Distributions to Members			(2,147,222	)			(2,027,500	)
Members' Equity - End of Year		$	828,712			$	841,964

 

The Accompanying Notes are an Integral Part of These Financial Statements. 

 

 

ACI Merchant Systems, LLC

Statements of Cash Flows

For the Years Ended December 31, 2013 and December 31, 2012

 

Increase (Decrease) in Cash

 

		2013				2012
Net Income		$	2,133,970			$	2,280,093
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation			4,485				3,847
(Increase) Decrease in:
Accounts Receivable			15,557				1,563
Inventory			11,385				12,144
Loan to Employees			0				18,000
Increase (Decrease) in:
Accounts Payable			(8,288	)			(36,831	)
Accrued Expenses			12,186				(15,708	)
Net Cash Provided by Operating Activities			2,169,295				2,263,108
Cash Flows From Investing Activities
Capital Expenditures			(2,724	)			(3,901	)
Cash Flows From Financing Activities
Distributions to Members			(2,147,222	)			(2,027,500	)
Net Increase in Cash			19,349				231,707
Cash - Beginning of Year			583,621				351,914
Cash  - End of Year		$	602,970			$	583,621

 

The Accompanying Notes are an Integral Part of These Financial Statements. 

 

 

ACI Merchant Systems, LLC

Notes to Financial Statements

December 31, 2013 and December 31, 2012

 

A.

Nature of Operations and Summary of Significant Accounting Policies

 

Nature of Operations

The Company, a Pennsylvania limited liability company, principally acting in an agency capacity, is engaged in national credit and debit card merchant processing services, check guaranty processing services and other related business programs to financial institutions. The Company also provides setup services and technical support for credit card terminals issued to customers of financial institutions. The Company is based in Langhorne, Pennsylvania and services customers throughout the United States of America.

 

Prior Period Adjustment

Prior to the issuance of the accompanying financial statements, the Company recorded its service fees and any related direct expenses one month in arrears. These financial statements correct this error through a prior period adjustment that increases the Company’s January 1, 2012 retained earnings by $194,264; the amount by which the Company’s net assets would have increased had the December 31, 2011 accounts receivable and accounts payable been recorded on a timely basis. The accompanying 2013 and 2012 financial statements reflect Company revenues when earned and the related expenses when incurred.

 

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts Receivable

The Company carries its accounts receivable at their estimated realizable amounts based upon the Company’s collection history and management’s periodic valuation of the accounts receivables.

 

Inventory

Inventory, consisting principally of credit card processing equipment, is valued at the lower of cost, determined by the first-in, first-out method, or market.

 

Property and Equipment

Property and equipment are valued at cost. Maintenance and repairs are charged to operations when incurred. Improvements and renewals are capitalized. Provision for depreciation is made over the estimated useful lives of the respective assets using the straight-line method.

 

The Company uses the following estimated useful lives:

 

Office Equipment	5-7 Years
Computer Software	3 Years

 

 

ACI Merchant Systems, LLC

Notes to Financial Statements

December 31, 2013 and December 31, 2012

 

A.

Nature of Operations and Summary of Significant Accounting Policies (continued)

 

Income Taxes

The Company has elected "S" status for both federal and Pennsylvania income tax purposes. Under these elections, all income or loss of the Company flows through to the members in proportion to their ownership interests. Accordingly, the Company provides only for state capital stock tax and other state and local income taxes.

 

The Company recognizes the potential income tax and any related penalties and interest arising from uncertain tax positions. Potential interest and penalties are recognized as a component of the provision for income taxes. The Company has concluded that there are no taxes, penalties or interest resulting from uncertain positions that would materially impact the Company’s financial statements at either December 31, 2013 or 2012.

 

The Company files federal and Pennsylvania income tax returns. Generally, the Company is no longer subject to income tax examinations in any jurisdiction for tax years before 2010.

 

Advertising Costs

The Company expenses advertising as incurred. For the years ended December 31, 2013 and 2012, advertising expense was $5,477 and $12,105, respectively.

 

B.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of accounts receivable and cash.

 

The Company's customers are principally banks and other providers of consumer credit. Approximately 99% of all the Company’s collections and 80% of its fee payments are made through a single merchant credit card processing services provider. At December 31, 2013 and 2012, approximately 98.8% and 98.5%, respectively, of accounts receivable were due from the single processing services provider. The Company bears credit risk of both non-collection of merchant fees and chargebacks for banks that do not hold liability. The Company generally does not require collateral.

 

The Company maintains cash accounts in an area bank. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to an aggregate of $250,000. From time to time the balance of the Company's funds held by the institution may exceed the insured amount.

 

C.

Pension Plan

The Company sponsors pension and profit sharing plans under section 401(k) of the Internal Revenue Code, available to all employees who have completed one year of service and who have attained 21 years of age. Company contributions to the plan are discretionary and are recognized in the year incurred. For the years ended December 31, 2013 and 2012, Company contributions to the pension plan were $18,840 and $19,556, respectively. For the years ended December 31, 2013 and 2012, the Company’s profit sharing contributions were $0 and $5,298, respectively.

 

 

ACI Merchant Systems, LLC

Notes to Financial Statements

December 31, 2013 and December 31, 2012

 

D.

Operating Lease

The Company leases its operating facilities on a month-to-month basis. For the years ended December 31, 2013 and 2012 rent expense under this agreement was $28,320 and $27,320, respectively. The Company anticipates continuing its lease arrangement under comparable terms.

 

E.

Proceeds From Contract Buyout

During the year ended December 31, 2012, a financial institution bought out its credit card processing contract for $500,000.

 

F.

Commitments and Contingencies

The Company employs proprietary software developed for the Company by one of the Company members and a software engineer. The software facilitates calculation of fees due to agents and financial institutions with which the Company has processing contracts. The Company currently pays the software engineer for time and materials, plus other incentives.

 

G.

Subsequent Events

Subsequent events have been evaluated through August 12, 2014, which is the date the financial statements were available to be issued.

 

 

SUPPLEMENTARY INFORMATION

 

  

Independent Auditors’ Report on Supplementary Information

 

To the Members

ACI Merchant Systems, LLC

Langhorne, Pennsylvania

 

We have audited the financial statements of ACI Merchant Systems, LLC as of and for the years ended December 31, 2013 and 2012 and our report thereon dated August 7, 2014 which expressed an unqualified opinion of those financial statements, appears on pages 1 and 2. Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information included in Schedules 1 and 2 is presented for the purposes of additional analysis of the financial statements and it is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements and other procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.

 

/s/ Wouch Maloney & C0., LLP

 

Horsham, Pennsylvania

August 12, 2014

 

 

ACI Merchant Systems, LLC

Supplementary Information

For the Years Ended December 31, 2013 and December 31, 2012

 

Schedule 1

 

Cost of Sales

 

		2013				2012
Agent/Referral Bank Payouts		$	2,507,853			$	2,496,798
Bank Card Processing			573,122				468,960
Breach Insurance			17,721				15,147
Compliance Fees			38,087				35,918
Credit Card Equipment			88,866				95,685
Direct Labor, Taxes and Benefits			362,925				355,521
Freight Charges			1,076				3,203
Gift Cards			6,229				6,290
Processing			9,288				3,162
Real Time Processing			107,702				83,402
Start Up Fees			3,035				2,276
Supplies			9,133				9,695
Total Cost of Sales		$	3,725,037			$	3,576,057

  

 

ACI Merchant Systems, LLC

Supplementary Information

For the Years Ended December 31, 2013 and December 31, 2012

 

Schedule 2

 

Selling, General and Administrative Expenses

 

		2013				2012
Automobile Expense		$	19,765			$	16,218
Bad Debt Expenses			5,213				21,553
Business Insurance Expense			6,753				6,612
Computer Services and Processing			160,492				145,540
Contributions			625				600
Credit Bureau Expense			1,819				1,661
Depreciation Expense			4,485				3,847
Dues and Membership Expense			16,161				14,575
Employee Benefits			34,000				34,000
Freight Supplies Expense			21,971				21,608
Legal and Accounting Expenses			19,786				34,283
Meals and Entertainment			2,240				3,175
Network Access Expense			24,370				77,706
Office Cleaning Expense			2,600				2,550
Office Supply Expense			19,415				20,825
Payroll Services Expense			2,126				2,192
Payroll Taxes			23,552				22,269
Pennsylvania Corporate Tax			12,859				8,493
Rent Expense			28,320				27,320
Repairs and Maintenance Expense			8,328				954
Salaries and Wages			297,500				297,500
Selling Expenses			5,477				12,105
Telephone and Utilities Expense			29,304				31,307
Terminal Maintenance and Repair Expense			8,809				10,631
Travel			11,004				13,238
Workers Compensation Expense			2,550				2,363
Total Selling, General and Administrative Expenses		$	769,524			$	833,125

  

 

Exhibit 99.2

 

ACI MERCHANT SYSTEMS, LLC

 

FINANCIAL STATEMENTS

 

JUNE 30, 2014 AND JUNE 30, 2013

 

 

ACI Merchant Systems, LLC

Financial Statements and Supplementary Information

June 30, 2014 and June 30, 2013

 

Table of Contents

 

	Page
Independent Accountants' Review Report	1
Financial Statements:
Balance Sheets	2
Statements of Income and Members’ Equity	3
Statements of Cash Flows	4
Notes to Financial Statements	5-7
Supplementary Information:
Schedule 1 – Cost of Sales	8
Schedule 2 – Selling, General and Administrative Expenses	9

  

 

Independent Accountants' Review Report

 

To the Members

ACI Merchant Systems, LLC

Langhorne, Pennsylvania

 

We have reviewed the accompanying balance sheets of ACI Merchant Systems, LLC as of June 30, 2014 and 2013, and the related statements of income and members’ equity and cash flows for the six months then ended. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of Company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.

 

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

 

Our responsibility is to conduct our reviews in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. We believe that the results of our procedures provide a reasonable basis for our report.

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

 

Our reviews were made primarily for the purpose of expressing a conclusion that there are no material modifications that should be made to the financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. The supplementary information included in the accompanying Schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we did not become aware of any material modifications that should be made to such information.

 

/s/ Wouch Maloney & C0., LLP

 

Horsham, Pennsylvania

September 8, 2014

 

 

ACI Merchant Systems, LLC

Balance Sheets

June 30, 2014 and June 30, 2013

 

		2014				2013
Assets
Current Assets
Cash		$	603,523			$	863,222
Accounts Receivable			562,646				467,518
Inventory			27,334				16,330
Total Current Assets			1,193,503				1,347,070
Property and Equipment
Office Equipment			54,110				53,908
Computer Software			33,147				33,147
			87,257				87,055
Less: Accumulated Depreciation			79,649				75,000
Property and Equipment - Net of Accumulated Depreciation			7,608				12,055
Total		$	1,201,111			$	1,359,125
Liabilities and Members' Equity
Current Liabilities
Accounts Payable		$	256,714			$	282,280
Accrued Expenses			135,302				126,799
Total Current Liabilities			392,016				409,079
Members' Equity			809,095				950,046
Total		$	1,201,111			$	1,359,125

 

See Accompanying Notes and Independent Accountants' Review Report.

  

 

ACI Merchant Systems, LLC

Statements of Income and Members' Equity

For the Six Months Ended June 30, 2014 and June 30, 2013

 

		2014				2013
Sales		$	3,205,213			$	3,155,143
Cost of Sales			1,830,183				1,846,122
Gross Profit			1,375,030				1,309,021
Selling, General and Administrative Expenses
(Including Depreciation Expense of $2,406 and $2,243, Respectively)			333,112				356,738
Income From Operations			1,041,918				952,283
Other Income
Interest Income			465				799
Net Income			1,042,383				953,082
Members' Equity - Beginning of Period			828,712				841,964
Less: Distributions to Members			(1,062,000	)			(845,000	)
Members' Equity - End of Period		$	809,095			$	950,046

 

See Accompanying Notes and Independent Accountants' Review Report.

  

 

ACI Merchant Systems, LLC

Statements of Cash Flows

For the Six Months Ended June 30, 2014 and June 30, 2013

 

Increase (Decrease) in Cash

 

		2014				2013
Net Income		$	1,042,383			$	953,082
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation			2,406				2,243
(Increase) Decrease in:
Accounts Receivable			(146,984	)			(36,299	)
Inventory			(11,010	)			11,379
Increase (Decrease) in:
Accounts Payable			65,597				82,875
Accrued Expenses			110,161				113,844
Net Cash Provided by Operating Activities			1,062,553				1,127,124
Cash Flows From Investing Activities
Capital Expenditures			0				(2,523	)
Cash Flows From Financing Activities
Distributions to Members			(1,062,000	)			(845,000	)
Net Increase in Cash			553				279,601
Cash - Beginning of Period			602,970				583,621
Cash  - End of Period		$	603,523			$	863,222

 

See Accompanying Notes and Independent Accountants' Review Report.

  

 

ACI Merchant Systems, LLC

Notes to Financial Statements

June 30, 2014 and June 30, 2013

 

A.

Nature of Operations and Summary of Significant Accounting Policies

 

Nature of Operations

The Company, a Pennsylvania limited liability company, principally acting in an agency capacity, is engaged in national credit and debit card merchant processing services, check guaranty processing services and other related business programs to financial institutions. The Company also provides setup services and technical support for credit card terminals issued to customers of financial institutions. The Company is based in Langhorne, Pennsylvania and services customers throughout the United States of America.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts Receivable

The Company carries its accounts receivable at their estimated realizable amounts based upon the Company’s collection history and management’s periodic valuation of the accounts receivables.

 

Inventory

Inventory, consisting principally of credit card processing equipment, is valued at the lower of cost, determined by the first-in, first-out method, or market.

 

Property and Equipment

Property and equipment are valued at cost. Maintenance and repairs are charged to operations when incurred. Improvements and renewals are capitalized. Provision for depreciation is made over the estimated useful lives of the respective assets using the straight-line method.

 

The Company uses the following estimated useful lives:

 

Office Equipment	5-7 Years
Computer Software	3 Years

 

Income Taxes

The Company has elected "S" status for both federal and Pennsylvania income tax purposes. Under these elections, all income or loss of the Company flows through to the stockholders in proportion to their holdings. Accordingly, the Company provides only for state capital stock tax and other state and local income taxes.

 

See Independent Accountants’ Review Report.

 

 

ACI Merchant Systems, LLC

Notes to Financial Statements

June 30, 2014 and June 30, 2013

 

A.

Nature of Operations and Summary of Significant Accounting Policies (continued)

 

Income Taxes (continued)

The Company recognizes the potential income tax and any related penalties and interest arising from uncertain tax positions. Potential interest and penalties are recognized as a component of the provision for income taxes. The Company has concluded that there are no taxes, penalties or interest resulting from uncertain positions that would materially impact the Company’s financial statements at June 30, 2014 or 2013.

 

The Company files federal as well as various state income tax returns. Generally, the Company is no longer subject to income tax examinations in any jurisdiction for tax years before 2011.

 

Advertising Costs

The Company expenses advertising as incurred. For the six months ended June 30, 2014 and 2013, advertising expense was $2,879 and $4,377, respectively.

 

B.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of accounts receivable and cash.

 

The Company's customers are principally banks and other providers of consumer credit. Approximately 99% of all the Company’s collections and 80% of its fee payments are made through a single merchant credit card processing services provider. At June 30, 2014 and 2013, approximately 98.2% and 98.5%, respectively, of accounts receivable were due from the single processing services provider. The Company bears credit risk of both non-collection of merchant fees and chargebacks for banks that do not hold liability. The Company generally does not require collateral.

 

The Company maintains cash accounts in an area bank. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to an aggregate of $250,000. From time to time the balance of the Company's funds held by the institution may exceed the insured amount.

 

C.

Pension Plan

The Company sponsors pension and profit sharing plans under section 401(k) of the Internal Revenue Code, available to all employees who have completed one year of service and who have attained 21 years of age. Company contributions to the plan are discretionary and are recognized in the year incurred. For the six months ended June 30, 2014 and 2013, the Company’s matching contributions were $5,257 and $4,894, respectively. There were no profit sharing contributions for the six months ended June 30, 2014 or 2013.

 

See Independent Accountants’ Review Report.

 

 

ACI Merchant Systems, LLC

Notes to Financial Statements

June 30, 2014 and June 30, 2013

 

D.

Operating Lease

The Company leases its operating facilities on a month-to-month basis. For both the six months ended June 30, 2014 and 2013, rent expense under this agreement was $14,160. The Company anticipates continuing its lease arrangement under comparable terms.

 

E.

Commitments and Contingencies

The Company employs proprietary software developed for the Company by one of the Company members and a software engineer. The software facilitates calculation of fees due to agents and financial institutions with which the Company has processing contracts. The Company currently pays the software engineer for time and materials, plus other incentives.

 

F.

Subsequent Events

Subsequent events have been evaluated through September 8, 2014, which is the date the financial statements were available to be issued.

 

See Independent Accountants’ Review Report.

 

 

SUPPLEMENTARY INFORMATION

 

  

ACI Merchant Systems, LLC

Supplementary Information

For the Six Months Ended June 30, 2014 and June 30, 2013

 

Schedule 1

 

Cost of Sales

 

		2014				2013
Agent/Referral Bank Payouts		$	1,137,307			$	1,256,685
Bank Card Processing			360,630				264,243
Breach Insurance			7,611				8,970
Compliance Fees			14,219				11,187
Credit Card Equipment			56,960				60,988
Direct Labor, Taxes and Benefits			181,963				181,963
Freight Charges			1,086				661
Gift Cards			4,676				5,105
Real Time Processing			60,931				51,760
Supplies			4,800				4,560
Total Cost of Sales		$	1,830,183			$	1,846,122

 

See Independent Accountants' Review Report.

 

 

ACI Merchant Systems, LLC

Supplementary Information

For the Six Months Ended June 30, 2014 and June 30, 2013

 

Schedule 2

 

Selling, General and Administrative Expenses

 

		2014				2013
Automobile Expense		$	9,076			$	8,062
Bad Debt Expenses			2,637				2,806
Business Insurance Expense			6,559				6,469
Computer Services and Processing			35,170				32,456
Contributions			500				525
Credit Bureau Expense			829				939
Depreciation Expense			2,406				2,243
Dues and Membership Expense			2,000				7,710
Employee Benefits			18,015				18,015
Freight Supplies Expense			11,643				10,831
Legal and Accounting Expenses			32,931				13,626
Meals and Entertainment			838				1,876
Network Access Expense			1,800				21,170
Office Cleaning Expense			1,300				1,300
Office Supply Expense			6,425				9,934
Payroll Services Expense			1,135				1,137
Payroll Taxes			11,454				11,454
Pennsylvania Corporate Tax			2,006				9,721
Rent Expense			14,160				14,160
Repairs and Maintenance Expense			321				6,266
Salaries and Wages			148,750				148,750
Selling Expenses			2,879				4,377
Telephone and Utilities Expense			14,613				14,686
Terminal Maintenance and Repair Expense			3,372				4,023
Travel Expense			0				2,029
Workers Compensation Expense			2,293				2,173
Total Selling, General and Administrative Expenses		$	333,112			$	356,738

 

See Independent Accountants' Review Report.

 

 

 

Exhibit 99.3

 

Unaudited Pro Forma Combined Financial Statements of JetPay Corporation.

 

On November 7, 2014, JetPay Corporation (“JetPay” or the “Company”) entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with ACI Merchant Systems, LLC (“ACI” or “Borrower”) and Michael Collester and Cathy Smith, pursuant to which the Company acquired all of the outstanding equity interests of ACI from Michael Collester and Cathy Smith. ACI is an independent sales organization specializing in relationships with banks, credit unions, and other financial institutions, as well as industry association relationships.

 

In connection with the closing, the Company paid an aggregate of $11.1 million in cash, subject to adjustment as set forth herein, and issued 2.0 million shares of its common stock, par value $0.001 per share (“Common Stock”), to the members of ACI with a value of approximately $3.7 million on the date of acquisition. The ACI unitholders are entitled to receive additional cash consideration of $1.2 million on April 10, 2015 and a further cash payment of $1.2 million on April 10, 2016. The $2.4 million of deferred consideration will be recorded at the estimated fair value of these future payments utilizing an appropriate discount rate. Additionally, ACI’s unitholders are entitled to earn up to an additional $500,000 based on the achievement of certain net revenue targets for ACI for the twelve month periods ending October 31, 2015 and 2016.

 

On November 7, 2014, ACI, entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Metro Bank as the lender for a term loan with a principal amount of $7.5 million. The proceeds of the loan were used as partial consideration for the acquisition. Amounts outstanding under the term loan will accrue interest at a rate of 5.25% per annum. The loan matures on November 7, 2021 and amortizes in equal monthly installments over six years beginning in the month following the first anniversary of the Loan and Security Agreement. The term loan is guaranteed by the Company and AD Computer Corporation (“ADC”), dba JetPay Payroll, and is secured by all the assets of ACI, an assignment of an equity interest in ACI’s merchant residual contracts, as well as a pledge by JetPay of its equity interest in ACI.

 

On November 7, 2014, pursuant to a Securities Purchase Agreement with Flexpoint Fund II, L.P. (“Flexpoint”) dated August 22, 2013; the Company issued 20,000 shares of Series A Convertible Preferred Stock, par value $0.001 (“Series A Preferred”) to Flexpoint for an aggregate of $6.0 million. As previously disclosed, the Company entered into the Securities Purchase Agreement with Flexpoint pursuant to which the Company agreed to sell to Flexpoint, and Flexpoint agreed to purchase, upon the satisfaction or waiver of certain conditions, up to 133,333 shares of Series A Preferred for an aggregate purchase price of up to $40 million. The Series A Preferred is convertible into shares of Common Stock. Any holder of Series A Preferred may at any time convert such holder’s shares of Series A Preferred into that number of shares of Common Stock equal to the number of shares of Series A Preferred being converted multiplied by $300 and divided by the then-applicable conversion price, which initially will be $3.00. A portion of the $6 million proceeds from the November 7, 2014 issuance of Series A Preferred was used as consideration for the acquisition of ACI.

 

The acquisition has been accounted for as a business combination (in accordance with Accounting Standards Codification (“ASC”) 805 Business Combinations), and as such, the ACI assets acquired and liabilities assumed have been recorded at their respective fair values. The determination of fair value for the identifiable tangible and intangible assets acquired and liabilities assumed requires extensive use of accounting estimates and judgments. Significant estimates and assumptions include, but are not limited to estimating future cash flows and determining the appropriate discount rate. The estimated fair values of the assets acquired and liabilities assumed at the acquisition date included in the unaudited pro forma combined financial statements are provisional.

 

  

The following unaudited pro forma combined financial information is based on the historical consolidated financial information of the Company, which is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, and the financial information of ACI, which is included in Exhibits 99.1 and 99.2 to this Current Report on Form 8-K/A. The Unaudited Pro Forma Combined Balance Sheet as of June 30, 2014 gives effect to the ACI acquisition as if it had been consummated on June 30, 2014 and includes historical data as reported by the separate companies as well as adjustments that give effect to events that are directly attributable to the ACI acquisition and that are factually supportable. The Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 2013 and for the six months ended June 30, 2014 give effect to the ACI acquisition as if it had been consummated on January 1 of each respective period, and includes historical data as reported by the separate companies as well as adjustments that give effect to events that are directly attributable to the ACI acquisition, are expected to have a continuing impact, and that are factually supportable.

 

The pro forma adjustments reflecting the consummation of the ACI acquisition are based upon the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and upon the assumptions set forth in the notes included in this section. The pro forma financial statements have been prepared based on available information, using estimates and assumptions that our management believes are reasonable. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are preliminary and have been made solely for purposes of developing this unaudited pro forma combined financial information. The Unaudited Pro Forma Combined Balance Sheet has been adjusted to reflect the allocation of the purchase price to identifiable net assets acquired and of the excess purchase price to goodwill.

 

The Statements do not purport to represent the actual results of operations that would have occurred if the acquisition had taken place on the date specified. The Statements are not necessarily indicative of the results of operations that may be achieved in the future. The Statements do not reflect any adjustments for the effect of non-recurring items or operating synergies that we may realize as a result of the acquisition. The Statements include certain reclassifications to conform the historical financial information of ACI to our presentation.

 

The assumptions used and adjustments made in preparing the Statements are described in the Notes, which should be read in conjunction with the Statements. The Statements and related Notes contained herein should be read in conjunction with the combined financial statements and related notes included in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q. The Statements and related Notes contained herein should be read in conjunction with the financial statements and related notes included in ACI financial statements for the year ended December 31, 2013 and 2012, and ACI financial statements for the six months ended June 30, 2014 and 2013, filed as Exhibit 99.1 and 99.2, respectively, in this Form 8-K/A.

 

  

JetPay Corporation

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

(In thousands, except share and par value information)

June 30, 2014

 

		JetPay				ACI				Combined Before Acquisition Adjustments				Pro Forma Acquisition Adjustments				Note #		Pro Forma Combined
ASSETS
Current Assets:
Cash and cash equivalents		$	4,117			$	604			$	4,721			$	7,500			A		$	6,620
															6,000			B
															(11,098	)		D
															(503	)		E
Restricted cash			169				-				169				-						169
Accounts receivable, less allowance for doubtful accounts			1,320				563				1,883				-						1,883
Settlement processing assets			13,171				-				13,171				-						13,171
Prepaid expenses and other current assets			697				27				724				-						724
Current assets before funds held for clients			19,474				1,194				20,668				1,899						22,567
Funds held for clients			48,112				-				48,112				-						48,112
Total current assets			67,586				1,194				68,780				1,899						70,679
Property and equipment, net			1,086				7				1,093				19			E			1,112
Goodwill			31,166				-				31,166				12,397			F			43,563
Identifiable intangible assets			21,691				-				21,691				4,467			F			26,158
Deferred financing costs			1,210				-				1,210				-						1,210
Other assets			4,906				-				4,906				-						4,906
Total assets		$	127,645			$	1,201			$	128,846			$	18,782					$	147,628
LIABILITIES
Current liabilities:
Current portion of long-term debt and capital lease obligation		$	11,259			$	-			$	11,259			$	-					$	11,259
Accounts payable and accrued expenses			8,898				392				9,290				231			G			9,521
Settlement processing liabilities			12,301				-				12,301				-						12,301
Deferred revenue			290				-				290				-						290
Derivative liability			320				-				320				-						320
Other current liabilities			1,857				-				1,857				-						1,857
Current liabilities before client fund obligations			34,925				392				35,317				231						35,548
Client fund obligations			48,112				-				48,112				-						48,112
Total current liabilities			83,037				392				83,429				231						83,660
Long-term debt and capital lease obligation, net of current portion			7,582				-				7,582				7,500			A			15,082
Deferred income taxes			239				-				239				-						239
Other liabilities			22				-				22				2,431			D			2,453
Total liabilities			90,880				392				91,272				10,162						101,434
Commitments and Contingencies
Redeemable Convertible Preferred Stock:
Redeemable convertible Series A and Series A-1 preferred stock			11,394				-				11,394				6,000			B			17,394
Stockholders’ Equity
Preferred stock, $0.001 par value
Authorized 1,000,000 shares, none issues			-				-				-				-						-
Common stock, $0.001 par value
Authorized 100,000,000 shares; 11,863,823 issued and outstanding at June 30, 2014			12				-				12				2			C			14
Additional paid-in capital			41,432				-				41,432				3,658			C			45,090
Accumulated deficit			(16,073	)			809				(15,264	)			(809	)		E			(16,304	)
															(231	)		G
Total Stockholders’ Equity			25,371				809				26,180				2,620						28,800
Total Liabilities and Stockholders’ Equity		$	127,645			$	1,201			$	128,846			$	18,782					$	147,628

 

  

JetPay Corporation

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(In thousands, except share and per share information)

For the year ended December 31, 2013

 

		JetPay				ACI				Combined Before Acquisition Adjustments				Pro Forma Acquisition Adjustments				Note #		Pro Forma Combined
Processing revenues		$	30,905			$	6,627			$	37,532				-					$	37,532
Cost of processing revenues			18,417				3,725				22,142				-						22,142
Gross profit			12,488				2,902				15,390				-						15,390
Selling, general and administrative expenses			11,745				765				12,510				-						12,510
Change in fair value of contingent consideration liability			(690	)			-				(690	)			-						(690	)
Amortization of intangibles			2,241				-				2,241				635			H			2,876
Depreciation			388				4				392				12			I			404
Operating (loss) income			(1,196	)			2,133				937				(647	)					290
Other expenses (income)
Interest expense			2,215				-				2,215				399			A			2,614
Amortization of deferred financing costs			2,058				-				2,058				3			A			2,061
Amortization of debt discounts and conversion options			1,510				-				1,510				212			J			1,722
Change in fair value of derivative liability			(2,050	)			-				(2,050	)			-						(2,050	)
Other income			(10	)			(1	)			(11	)			-						(11	)
(Loss) income before income taxes			(4,919	)			2,134				(2,785	)			(1,261	)					(4,046	)
Income tax expense			39				-				39				87			K			126
Net (loss) income			(4,958	)			2,134				(2,824	)			(1,348	)					(4,172	)
Accretion of convertible preferred stock			(360	)			-				(360	)			(892	)		B			(1,252	)
Net loss applicable to common stockholders		$	(5,318	)		$	2,134			$	(3,184	)		$	(2,240	)				$	(5,424	)
Loss per share applicable to common stockholders (basic and diluted)		$	(0.46	)																$	(0.40	)
Weighted average shares outstanding:
Basic and diluted			11,525,943												2,000,000			L			13,525,943

 

 

JetPay Corporation

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

(In thousands, except share and per share information)

For the six months ended June 30, 2014

 

		JetPay				ACI				Combined Before Acquisition Adjustments				Pro Forma Acquisition Adjustments				Note #		Pro Forma Combined
Processing revenues		$	15,895			$	3,205			$	19,100				-					$	19,100
Cost of processing revenues			9,421				1,830				11,251				-						11,251
Gross profit			6,474				1,375				7,849				-						7,849
Selling, general and administrative expenses			6,183				331				6,514				-						6,514
Change in fair value of contingent consideration liability			(8	)			-				(8	)			-						(8	)
Amortization of intangibles			1,120				-				1,120				278			H			1,398
Depreciation			206				2				208				3			I			211
Operating (loss) income			(1,027	)			1,042				15				(281	)					(266	)
Other expenses (income)
Interest expense			815				-				815				189			A			1,004
Amortization of deferred financing costs			1,125				-				1,125				1			A			1,126
Amortization of debt discounts and conversion options			750				-				750				103			J			853
Change in fair value of derivative liability			(60	)			-				(60	)			-						(60	)
Other income			(4	)			-				(4	)			-						(4	)
(Loss) income before income taxes			(3,653	)			1,042				(2,611	)			(574	)					(3,185	)
Income tax expense			104				-				104				47			K			151
Net (loss) income			(3,757	)			1,042				(2,715	)			(621	)					(3,336	)
Accretion of convertible preferred stock			(1,047	)			-				(1,047	)			(495	)		B			(1,542	)
Net loss applicable to common stockholders		$	(4,804	)		$	1,042			$	(3,762	)		$	(1,116	)				$	(4,878	)
Loss per share applicable to common stockholders (basic and diluted)		$	(0.41	)																$	(0.36	)
Weighted average shares outstanding:
Basic and diluted			11,692,329												2,000,000			L			13,692,329

 

  

JETPAY CORPPORATION

Notes to Unaudited Pro Forma Combined Financial Statements

 

Note 1: Organization and basis of pro forma presentation

 

The Company was incorporated in Delaware on November 12, 2010 as a blank check company whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, plan of arrangement, recapitalization, reorganization or other similar business combination, one or more operating businesses. Until December 28, 2012, the Company’s efforts were limited to organizational activities, its initial public offering (the “Offering”) and the search for suitable business acquisition transactions.

 

The Company currently operates in two business segments, the Payment Processing Segment, which is an end-to-end processor of credit and debit card and ACH payment transactions for businesses with a focus on those processing internet transactions and recurring billings and the Payroll Processing Segment, which is a full-service payroll and related payroll tax payment processor. The Company also initiated operations for JetPay Card Services in the fourth quarter of 2013, a division that is focused on providing low-cost money management and payment services to un-banked and under-banked employees of its business customers and other consumers. The Company entered the payment processing and the payroll processing businesses upon consummation of the acquisitions of JetPay, LLC (“JetPay Payment Services”), AD Computer Corporation (“ADC” or “JetPay Payroll Services”) on December 28, 2012 and ACI Merchant Systems LLC (“ACI”) on November 7, 2014. Assets acquired and liabilities assumed in these transactions were recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such date. The results of operations of businesses acquired by the Company have been included in the statements of operations since their date of acquisition. The excess of the purchase price over the estimated fair values of the underlying identifiable assets acquired and liabilities assumed was allocated to goodwill.

 

The pro forma adjustments reflecting the consummation of the ACI acquisition are based upon the acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the notes included in this section. The Statements have been prepared based on available information, using estimates and assumptions that our management believes are reasonable. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are preliminary and have been made solely for purposes of developing this unaudited pro forma combined financial information. The unaudited pro forma combined balance sheet has been adjusted to reflect the allocation of the purchase price to identifiable net assets acquired and of the excess purchase price to goodwill.

 

The Statements do not purport to represent the actual results of operations that would have occurred if the acquisition had taken place on the date specified. The Statements are not necessarily indicative of the results of operations that may be achieved in the future. The Statements do not reflect any adjustments for the effect of non-recurring items or operating synergies that we may realize as a result of the acquisition. The Statements include certain reclassifications to conform the historical financial information of ACI to our presentation.

 

  

Note 2: Pro Forma Adjustments

 

Note A	JetPay assumed a $7,500,000 bank loan obtained by ACI, and guaranteed by JetPay.  The interest rate on the loan is 5.25% per annum with a term of 7 years.  The loan will be amortized over the last 6 years based upon equal monthly installments.  To secure the funding, JetPay incurred commitment fees of $18,750 which are being amortized over 7 years.
Note B	In order to finance a portion of the proceeds paid to the ACI unitholders, the Company issued 20,000 shares of Series A Preferred to Flexpoint for an aggregate of $6.0 million.  The Series A Preferred hold a 200% liquidation preference which is amortized over 5 years against additional paid in capital.
Note C	In accordance with US GAAP, the 2.0 million shares of JetPay common stock issued to the sellers of ACI have been valued at fair value, the best measure of which is the closing market price of the Common Stock on November 7, 2014, which was $1.83 per share.
Note D	Represents the pro forma entries to record the acquisition of ACI, recording the Common Stock issued and the purchase price of the acquisition in excess of the fair value of acquired assets.   The combination constitutes an acquisition method transaction under US GAAP, with JetPay acquiring ACI. The cash and stock issued to the stockholders of ACI is shown in the following table.   Of the deferred consideration due the sellers in the future, $2,400,000 is guaranteed to be paid and has been recorded in the Pro Forma Balance Sheet as of June 30, 2014 at its estimated present value of $2,158,058. The balance of deferred consideration due the sellers in the future, of $500,000 in cash, is contingent upon ACI achieving certain revenue growth. Management believes there is a high probability the additional cash will be paid and has been recorded in the Pro Forma Balance Sheet at June 30, 2014 at $272,882, its estimated present value based on a 75% probability occurrence rate.

 

Schedule of Consideration

Cash consideration at closing		$	10,900,000
Adjustments to cash consideration at closing:
Working capital adjustment			197,964
			11,097,964
Common stock consideration issued at closing
Shares issued			2,000,000
Fair value at November 7, 2014		$	1.83
Total common stock consideration issued		$	3,660,000
Total consideration paid or issued at closing		$	14,757,964
Deferred consideration guaranteed to be paid in the future		$	2,158,058
Deferred consideration contingent upon future performance			272,882
Total consideration to sellers		$	17,188,904

 

  

Note E

The following table illustrates the net assets of ACI acquired and certain other purchase accounting entries. These entries include an estimated distribution of cash and cash equivalents of $503,000 to the sellers prior to the sale of ACI, an adjustment in basis from net book value to fair market value for certain property plant and equipment of $19,000, and the elimination of historic Members’ Equity of ACI of $809,000.

 

Calculation of purchase price in excess of net assets acquired

Total consideration to sellers		$	17,188,904
Total assets acquired, June 30, 2014			716,549
Total liabilities assumed, June 30, 2014			(392,016	)
Net book value of net assets acquired, as adjusted, June 30, 2014		$	324,533
Excess of purchase price over net book value of net assets acquired before reallocation to identifiable intangibles		$	16,864,371

 

Note F

Management believes the technology inherent to and not recognized on the financial statements of ACI has unrecognized value. The initial determination is based on the estimate of replacement cost of the scalable technology being acquired combined with an estimate of its remaining useful life.   In addition, Management has made an initial determination that the value of customer relationships based on the nature of the contracts with customers and expected future revenue streams and related non-compete covenants. The analysis was based on the estimated future gross profit generated by existing customer and relationships, after applying historical attrition rate of customer and clients and applying an estimate of organic growth from remaining customers and discounting the results by 18%, which Management believes is a fair representation of the risk structure of the business acquired.   The initial values to be attributed to the identified intangibles are subject to formal appraisal and valuation subsequent to the closing of the transaction and are subject to change. These initial values and corresponding goodwill appear in the table below.

 

Schedule of Estimated Identifiable Intangible Assets and Goodwill

Excess of purchase price over net book value of assets acquired before reallocation to identifiable intangibles		$	16,864,371
Less estimated identifiable intangible assets:
Customer relationships and related covenants			4,200,000
Software and technology			147,000
Trade name			120,000
Total identifiable intangible assets			4,467,000
Unidentified excess of purchase price over fair value of assets acquired (goodwill)		$	12,397,371

 

  

Note G

To record estimated costs of completing the acquisition, including legal, accounting, consultants, proxy solicitation and financial advisory services as shown in the following table:

 

Schedule of Estimated Costs of Closing Transaction

Accounting and auditing fees		$	42,000
Consulting fees			20,000
Legal fees			159,000
Other consulting, advisory and miscellaneous fees			10,000
Total estimated closing costs to be paid at or subsequent to closing		$	231,000
Less: amounts accrued but unpaid at June 30, 2014			-
Estimated costs to be expensed at closing		$	231,000
Amount of the above accrued but not paid		$	231,000

 

Note H

The estimated life and annual amortization of the intangibles are shown below:

 

						Amortization for the
		Estimated				Six months ended				Year ended
		Life (Years)				June 30, 2014				December 31, 2013
Customer and supplier relationships			8.5			$	247,000			$	494,000
Software and technology			1 - 3				11,000				101,000
Trade name			3				20,000				40,000
Total amortization of identifiable intangible assets						$	278,000			$	635,000

 

Note I

The estimated life and annual depreciation are shown below:

 

				Amortization for the
		Estimated		Six months ended				Year ended
		Life (Years)		June 30, 2014				December 31, 2013
Equipment		2		$	1,400			$	8,800
Furniture and fixtures		5			1,400				2,800
Total depreciation				$	2,800			$	11,600

 

  

Note J	Based upon the terms of the Unit Purchase Agreement, the ACI unitholders are entitled to receive an additional $1.2 million on each of April 10, 2015 and April 10, 2016.  These deferred consideration payments have been recorded at their estimated fair value of $2,158,058 using a 16.0% discount rate for the April 10, 2016 payment. The balance of deferred consideration due the sellers in the future of $500,000 in cash, is contingent upon ACI achieving certain revenue growth. Management believes there is a high probability the additional cash consideration will be earned and accordingly, has been recorded in the Pro Forma Balance Sheet at June 30, 2014 based on a 75% probability rate and a discounted rate of 16.0%.
Note K	Adjusts income tax expense based upon an estimated state income tax rate of 9.99%.
Note L	Pro forma loss per share applicable to common stockholders (basic and diluted) was calculated by dividing pro forma net loss applicable to common stockholders by pro forma weighted average shares outstanding, which has been adjusted for the 2,000,000 shares of JetPay common stock consideration issued at closing.