Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal
recurring items) which are considered necessary for fair presentation of the consolidated financial statements of JetPay Corporation
and its subsidiaries (collectively, the “Company” or “JetPay”) as of September 30, 2016. The results of
operations for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the operating results
for the full year. It is recommended that these consolidated financial statements be read in conjunction with the consolidated
financial statements and related disclosures for the year ended December 31, 2015 included in the Company’s Annual Report
on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2016.
Note 2. Organization and Business Operations
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.
Effective August 2, 2013, Universal Business Payment Solutions
Acquisition Corporation changed its name to JetPay Corporation with the filing of its Amended and Restated Certificate of Incorporation.
The Company’s ticker symbol on the Nasdaq Capital Market (“NASDAQ”) changed from “UBPS” to “JTPY”
effective August 12, 2013.
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, with a focus on those processing internet transactions and recurring billings as well as for traditional
retailers and service providers, and the HR and Payroll Segment, which provides human capital management (“HCM”)
services, including full-service payroll and related payroll tax payment processing, time and attendance, HR services,
low-cost money management and payment services to unbanked and underbanked employees through prepaid debit cards, and
services under the Patient Protection and Affordable Care Act (the “Affordable Care Act”). The Company entered
the payment processing and the payroll processing businesses upon consummation of the acquisitions of JetPay, LLC
(“JetPay, LLC” or “JetPay Payment Services”), and A. D. Computer Corporation (“ADC” or
“JetPay Payroll Services”) on December 28, 2012 (the “Initial Acquisitions”). Additionally, on
November 7, 2014, the Company acquired ACI Merchant Systems, LLC (“ACI” or “JetPay Strategic
Partners”), an independent sales organization specializing in relationships with banks, credit unions and other
financial institutions.
Finally, on June 2, 2016, the Company acquired CollectorSolutions, Inc. (referred to
herein as “CSI”), a payment processor specializing in the processing of payments in the government and
utilities channels.
The Company believes that the investments made in its technology,
infrastructure, and sales staff will help generate cash flows in the future sufficient to cover its working capital needs. In addition
to funding ongoing working capital needs and, after giving effect to the payoff of $5.75 million of long-term debt on October 21,
2016, the Company’s cash requirements for the twelve months ending September 30, 2017 include, but are not limited to principal
and interest payments on long-term debt and capital lease obligations of approximately $4.3 million. See
Note 14. Subsequent
Events
. The Company also has a requirement as part of the Settlement Agreement and Release, dated July 26, 2016, by and among
Merrick Bank Corporation (“Merrick”), the Company, certain of the Company’s subsidiaries and WLES, L.P. (the
“Merrick Settlement Agreement”) to pay Merrick $5.0 million under a note agreement, including through the sale of the
escrowed shares (as defined below). There is no assurance that the Company will be able to sell the escrowed shares at a price
great enough to satisfy this $5.0 million note to Merrick on or prior to its maturity on January 11, 2017. In addition to the long-term
debt noted above, as of September 30, 2016, the Company maintained unsecured promissory notes with each of Jonathan Lubert, a Director
of the Company, and an affiliate of Flexpoint Ford, LLC, a private equity fund (“Flexpoint”), in the amounts of $500,000
and $1,400,000, respectively (the “Promissory Notes”). The Promissory Notes were paid in full on October 21, 2016.
See
Item 14. Subsequent Events
.
The Company expects to fund its cash needs for the next
twelve months, including debt service requirements, capital expenditures and possible future acquisitions, with cash flow from
its operating activities, equity investments, including the recent sale of preferred stock and borrowings (see below). As disclosed
in
Note 8. Redeemable Convertible Preferred Stock
, from October 11, 2013 to August 9, 2016, the Company sold 99,666 shares
of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), to Flexpoint for an aggregate
of $29.9 million, less certain costs.
Additionally, on October 18, 2016, the Company sold 33,667
shares of Series A Preferred to Sundara Investment Partners, LLC under an Amended and Restated Securities Purchase Agreement (the
“A&R Purchase Agreement”) for $10.1 million, less certain costs. In connection with the sale of shares of Series
A Preferred to Sundara Investment Partners, LLC, the Company also entered into a Loan and Security Agreement with an affiliate
of Sundara Investment Partners, LLC, LHLJ, Inc., for a term loan in the principal amount of $9.5 million, with $5.175 million
of the proceeds used to simultaneously satisfy the remaining balances of a term loan and a revolving credit note payable to First
National Bank of Pennsylvania (f/k/a Metro Bank) (“FNB”) (the “Prior ADC Credit Facility”). See
Note
14. Subsequent Events
. These two transactions provided approximately $14.0 million of net working capital which the Company
expects to use for general working capital needs, the payment of other debt instruments, and for future capital needs, including
a portion of the cost of potential future acquisitions. Finally, from May 5, 2014 to December 31, 2014, the Company sold 6,165
shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Preferred”), to affiliates
of Wellington Capital Management, LLP (“Wellington”) for an aggregate of $1.85 million, and it has an agreement to
potentially sell an additional $850,000 of shares of Series A-1 Preferred to Wellington. Additionally, as disclosed in
Note
9. Stockholders’ Equity,
from December 22, 2015 to January 22, 2016, the Company sold to certain accredited investors,
including Bipin C. Shah, Robert B. Palmer, and Jonathan M. Lubert, an aggregate of 517,037 shares of the Company’s common
stock at a purchase price of $2.70 per share for aggregate consideration of $1,396,000, prior to issuance costs.
In the past, the Company has been successful in obtaining loans
and equity investments. To fund the Company’s current debt service needs, expand its technology platforms for new business
initiatives, and pursue possible future acquisitions, the Company may need to raise additional capital through loans or additional
equity investments. The Company continues to investigate the capital markets for sources of funding, which could take the form
of additional debt, the restructuring of our current debt, or additional equity financing. While successful in the past, the Company
cannot provide any assurance that it will be successful in securing new financing or restructuring its current debt, or that it
will secure such future financing with commercially acceptable terms. If the Company is unable to raise additional capital, it
may need to delay certain technology capital improvements, limit its planned level of capital expenditures and future growth plans
or dispose of operating assets to generate cash to sustain operations and fund ongoing capital investments.
Note 3. Business Acquisition
On June 2, 2016, JetPay completed its acquisition of CSI
pursuant to the terms of the Agreement and Plan of Merger, dated February 22, 2016 (the “Merger Agreement”), by and
among JetPay, CSI Acquisition Sub One, LLC, a Delaware limited liability company and wholly-owned subsidiary of JetPay (“Merger
Sub One”), CSI Acquisition Sub Two, LLC, a Delaware limited liability company and wholly-owned subsidiary of Merger Sub
One (“Merger Sub Two”), CSI and Gene M. Valentino, an individual, in his capacity as representative of the shareholders
of CSI. Pursuant to the terms of the Merger Agreement, CSI first merged with and into Merger Sub Two, with CollectorSolutions,
Inc. surviving the merger as the indirect, wholly-owned subsidiary of JetPay. CollectorSolutions, Inc. then merged with and into
Merger Sub One, with Merger Sub One surviving the merger as CollectorSolutions, LLC. The acquisition of CSI provided the Company
with additional expertise in selling debit and credit card processing services in the government and utilities channels through
CSI’s highly configurable payment gateway, secured debit, credit, and e-check processing volumes, as well as provided a
base operation to sell the Company’s payroll, HCM, processing and prepaid card services to CSI’s customer base.
As consideration for the acquisition, the Company issued
3.25 million shares of its common stock to the stockholders of CSI and assumed approximately $1.0 million of CSI’s indebtedness.
The 3.25 million shares of common stock, valued at $8.3 million at the date of acquisition, included: (i) 587,500 shares placed
in escrow at closing as partial security for the indemnification obligations of the stockholders of CSI and (ii) 500,000 shares
placed in escrow at closing which will be released or cancelled contingent upon CSI achieving certain gross profit performance
targets in 2016 and 2017. CSI’s stockholders will also be entitled to receive warrants to purchase up to 500,000 shares
of the Company’s common stock, each with a strike price of $4.00 per share and a 10-year term from its date of issuance,
contingent upon CSI achieving certain gross profit performance targets in 2018 and 2019. This contingent stock and warrant consideration,
recorded as a liability, was valued at $1,975,000 at the date of acquisition utilizing a Monte Carlo simulation model. The fair
value of the contingent consideration was $2,083,000 at September 30, 2016. See
Note 4
.
Summary of Critical Accounting
Policies
. Additionally, in connection with the acquisition, certain executives of CSI were provided the right to purchase
through a private placement, within twelve months after closing, up to 300,000 shares of common stock in the aggregate at a price
equal to the higher of $3.00 per share and the volume-weighted average closing price of the stock of the Company for the twenty
consecutive trading days ending three trading days prior to closing. This stock purchase right was valued at $152,000 utilizing
a Black-Sholes option pricing model and is recorded as Additional Paid-In Capital at the date of acquisition.
In addition, the Company granted to each CSI shareholder
a right to require the Company to repurchase up to 50% of the shares of common stock issued in connection with the acquisition
and continuously held by each CSI shareholder if Flexpoint exercises in full its right to have the Company redeem its entire investment
in shares of Series A Preferred. In a buyback of up to 50% of the shares issued to CSI shareholders, the Company would purchase
each share of common stock issued for $4.00 per share. The Company accounts for its common stock subject to possible redemption
in accordance with the guidance in ASC 480
“Distinguishing Liabilities from Equity”.
Conditionally redeemable
common stock (including common stock that features redemption rights that are either within the control of the holder or subject
to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary
equity. At all other times, common stock is classified as stockholders’ equity. The common stock issued to CSI’s previous
shareholders features certain redemption rights that are considered to be outside of the Company’s control and subject to
the occurrence of uncertain future events. Accordingly, at September 30, 2016, 50% of the estimated fair value of the common stock
issued in connection with the acquisition, or $3.52 million, is presented as temporary equity, outside of the stockholders’
equity section of the Consolidated Balance Sheet.
The fair value of the identifiable assets acquired and liabilities
assumed in the CSI acquisition as of the acquisition date includes: (i) $519,000 of cash, (ii) $537,000 for accounts receivable;
(iii) $119,000 for prepaid expenses and other assets; (iv) $10.6 million for settlement processing assets; (v) $93,000 for fixed
assets; (vi) the assumption of $14.7 million of liabilities, including $9.95 million of settlement processing obligations and
approximately $1.0 million of long term debt; and (vii) approximately $12.0 million allocated to goodwill and other identifiable
intangible assets. Within the $12.0 million of acquired intangible assets, $7.2 million was assigned to goodwill, which is not
subject to amortization under U.S. GAAP. The Company does not expect to deduct for tax purposes the goodwill related to the CSI
acquisition. The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) the multiple paid
by market participants for businesses in the merchant card processing business; (ii) levels of CSI’s current and future
projected cash flows; and (iii) the Company’s strategic business plan, which includes cross-marketing the Company’s
payroll, HCM, processing and prepaid card services to CSI’s customer base as well as offering merchant credit card processing
services to the Company’s payroll and HCM customer base. The remaining intangible assets were assigned to customer relationships
for $4.1 million, software costs of $710,000, and tradename for $70,000. The Company determined that the fair value of non-compete
agreements with certain employees of CSI was immaterial. Customer relationships, software costs, and trade name were assigned
a life of 12 years, 19 months, and 7 months, respectively.
Assets acquired and liabilities assumed in the CSI acquisition
were recorded on the Company’s Consolidated Balance Sheets as of the acquisition date based upon their estimated fair values
at such date. The results of operations of the business acquired by the Company have been included in the Statements of Operations
since the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying identifiable assets
acquired and liabilities assumed were allocated to goodwill.
The allocation of the CSI purchase price and the estimated fair
market values of the CSI assets acquired and liabilities assumed are shown below (in thousands):
|
|
|
|
Cash
|
|
$
|
519
|
|
Accounts receivable
|
|
|
537
|
|
Settlement processing assets
|
|
|
10,587
|
|
Prepaid expenses and other assets
|
|
|
119
|
|
Property and equipment, net
|
|
|
93
|
|
Goodwill
|
|
|
7,234
|
|
Identifiable intangible assets
|
|
|
4,880
|
|
Total assets acquired
|
|
|
23,969
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,794
|
|
Settlement processing obligations
|
|
|
9,951
|
|
Long term debt
|
|
|
1,049
|
|
Long term deferred tax liability
|
|
|
1,864
|
|
Total liabilities assumed
|
|
|
14,658
|
|
Net assets acquired
|
|
$
|
9,311
|
|
Unaudited pro forma results of operations for the three and
nine months ended September 30, 2016 and 2015, as if the Company and CSI had been combined on January 1, 2015, follow. The pro
forma results include estimates and assumptions which management believes are reasonable. The pro forma results do not include
any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative
of the results that would have occurred if the business combination had been in effect on the date indicated, or which may result
in the future.
|
|
Unaudited Pro Forma Results of Operations
|
|
|
|
(In thousands,
except per share information)
|
|
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,214
|
|
|
$
|
14,143
|
|
|
$
|
46,743
|
|
|
$
|
43,698
|
|
Operating (loss) income
|
|
|
(899
|
)
|
|
|
279
|
|
|
|
(7,941
|
)
|
|
|
874
|
|
Net (loss) income
|
|
|
(1,301
|
)
|
|
|
(95
|
)
|
|
|
(7,659
|
)
|
|
|
1,379
|
|
Net loss applicable to common stockholders
|
|
|
(2,858
|
)
|
|
|
(1,411
|
)
|
|
|
(12,083
|
)
|
|
|
(2,402
|
)
|
Net loss per share applicable to common stockholders
|
|
$
|
(0.16
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.14
|
)
|
Note 4. Summary of Significant Accounting
Policies
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in materially different results under different assumptions
and conditions. The Company’s significant accounting policies are described below.
Use of Estimates
The accompanying financial statements have been prepared in
accordance with U.S. GAAP and pursuant to the accounting and disclosure rules and regulations of the SEC. The preparation of these
financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial
statements. Such estimates include, but are not limited to, the value of purchase consideration of acquisitions; valuation of accounts
receivable, reserves for chargebacks, goodwill, intangible assets, and other long-lived assets; legal contingencies; and assumptions
used in the calculation of stock-based compensation and in the calculation of income taxes. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue in general when the following
criteria have been met: persuasive evidence of an arrangement exists, a customer contract or purchase order exists and the fees
are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured. Allowances
for chargebacks, discounts and other allowances are estimated and recorded concurrent with the recognition of revenue and are primarily
based on historic rates.
Revenues from the Company’s credit and debit card
processing operations are recognized in the period services are rendered as the Company processes credit and debit card transactions
for its merchant customers or for merchant customers of its Third Party clients. Third Party clients include Independent Sales
Organizations (“ISOs”), Value Added Resellers (“VARs”), Independent Software Vendors (“ISVs”),
and Financial Institutions. The majority of the Company’s revenue within its credit and debit card processing business is
comprised of transaction-based fees, which typically constitute a percentage of dollar volume processed, or a fee per transaction
processed. In the case where the Company is only the processor of transactions, it charges transaction fees only and records these
fees as revenues. In the case of contracts pursuant to which the Company processes credit and debit card transactions for the
Third Parties’ merchant customers, revenues are primarily comprised of fees charged to the merchant, as well as a percentage
of the processed sale transaction. The Company’s contracts in most instances involve three parties: the Company, the merchant,
and the sponsoring bank. Under certain of these sales arrangements, the Company’s sponsoring bank collects the gross revenue
from the merchants, pays the interchange fees and assessments to the credit card associations, collects their fees and pays to
the Company a net residual payment representing the Company’s fee for the services provided. Accordingly, under these arrangements,
the Company records the revenue net of interchange, credit card association assessments and fees and the sponsoring bank’s
fees. Under the majority of the Company’s sales arrangements, the Company is billed directly for certain fees by the credit
card associations and the processing bank. In this instance, revenues and cost of revenues include the credit card association
fees and assessments and the sponsoring bank’s fees which are billed to the Company and for which it assumes credit risk.
In all of the above instances, the Company recognizes processing revenues net of interchange fees, which are assessed to its merchant
and Third Party merchant customers on all processed transactions. Interchange rates and fees are not controlled by the Company.
The Company effectively functions as a clearing house collecting and remitting interchange fee settlement on behalf of issuing
banks, debit networks, credit card associations and their processing customers.
CSI functions as the merchant of record and has the primary
responsibility for providing end-to-end payment processing services for its clients. CSI’s clients contract with CSI for
all credit card processing services including transaction authorization, settlement, dispute resolution, security and risk management
solutions, reporting and other value-added services. As such, CSI is the primary obligor in these transactions and is solely responsible
for all processing costs, including interchange fees. Further, CSI sets prices as it deems reasonable for each merchant. The gross
fees CSI collects are intended to cover the interchange, assessments, and other processing fees and include CSI’s margin
on the transactions processed. For these reasons, CSI is the principal obligor in the contractual relationship with its customers
and therefore CSI records its revenues, including interchange and assessments, on a gross basis. Revenues reported by CSI include
interchange fees of $1.98 million and $2.71 million for the three and nine months ended September 30, 2016, respectively. Other
fees assessed by CSI to certain customers and remitted to partner entities for web and IVR supporting services provided by CSI’s
partner entities are presented on a net basis. The Company follows the guidance provided in ASC Topic 605-45, Revenue Recognition
- Principal Agent Considerations. ASC 605-45 states that whether a company should recognize revenue based on the gross amount
billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement
and that certain factors are considered in the evaluation.
Additionally, the Company’s direct merchant customers
have the liability for any charges properly reversed by the cardholder. In the event, however, that the Company is not able to
collect such amount from the merchants due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for
any such reversed charges. The Company requires cash deposits, guarantees, letters of credit and other types of collateral from
certain merchants to minimize any such contingent liability, and it also utilizes a number of systems and procedures to manage
merchant risk.
Revenues from the Company’s payroll and HCM processing
operations are recognized in the period services are rendered and earned under service arrangements with clients where service
fees are fixed or determinable and collectability is reasonably assured. Certain processing services are provided under annual
service arrangements with revenue recognized over the service period based on when the efforts and costs are expended. The Company’s
service revenues are largely attributable to payroll-related processing services where the fees are based on a fixed amount per
processing period or a fixed amount per processing period plus a fee per employee or transaction processed. The revenues earned
from delivery service for the distribution of certain client payroll checks and reports is included in processing revenues, and
the costs for delivery are included in selling, general, and administrative expenses on the Consolidated Statements of Operations.
Interest on funds held for clients is earned primarily on funds
that are collected from clients before due dates for payroll tax administration services and for employee payment services, and
invested until remittance to the applicable tax or regulatory agencies or client employee. These collections from clients are typically
remitted between one (1) and 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is
included in total revenues on the Consolidated Statements of Operations because the collecting, holding, and remitting of these
funds are critical components of providing these services.
Reserve for Chargeback Losses
Disputes between a cardholder and a merchant periodically arise
as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant services. Such disputes may
not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which
means the purchase price is refunded to the customer through the merchant’s bank and charged to the merchant. If the merchant
has inadequate funds, the Company must bear the credit risk for the full amount of the transaction. The Company evaluates the risk
for such transactions and estimates the potential loss for chargebacks based primarily on historical experience and records a loss
reserve accordingly. The Company believes its reserve for chargeback losses is adequate to cover both the known probable losses
and the incurred but not yet reported losses at the balance sheet dates. Chargeback reserves totaling $320,000 and $306,000 were
recorded as of September 30, 2016 and December 31, 2015, respectively.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash
and cash equivalents, restricted cash, settlement processing assets and liabilities, accounts receivable, prepaid expenses and
other current assets, funds held for clients, other assets, accounts payable and accrued expenses, deferred revenue, other current
liabilities and client fund obligations, approximated fair value as of the balance sheet dates presented, because of the relatively
short maturity dates on these instruments. The carrying amounts of the financing arrangements approximate fair value as of the
balance sheet dates presented, because interest rates on these instruments approximate market interest rates after consideration
of stated interest rates, anti-dilution protection and associated warrants.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, settlement processing assets
and funds held for clients. The Company’s cash and cash equivalents are deposited with major financial institutions. At times,
such deposits may be in excess of the Federal Deposit Insurance Corporation insurable amount.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable
The Company’s accounts receivable are due from its merchant
credit card and its payroll customers. Credit is extended based on the evaluation of customers’ financial condition and,
generally, collateral is not required. Payment terms vary but are typically collected via Automated Clearing House (“ACH”)
payments originated by us 2-3 days
following month end. Amounts due from customers are stated in the financial statements
net of an allowance for doubtful accounts. Accounts which are outstanding longer than the payment terms are considered past due.
The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable
are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as a whole. The Company writes off accounts receivables when they are
deemed uncollectible.
Settlement Processing Assets and Obligations
Funds settlement refers to the process of transferring funds
for sales and credits between card issuers and merchants. Depending on the type of transaction, either the credit card interchange
system or the debit network is used to transfer the information and funds between the sponsoring bank and card issuing bank to
complete the link between merchants and card issuers. In certain of our processing arrangements, merchant funding primarily occurs
after the sponsoring bank receives the funds from the card issuer through the card networks, creating a net settlement obligation
on the Company’s Consolidated Balance Sheet. In a limited number of other arrangements, the sponsoring bank funds the merchants
before it receives the net settlement funds from the card networks, creating a net settlement asset on the Company’s Consolidated
Balance Sheet. Additionally, certain of the Company’s sponsoring banks collect the gross revenue from the merchants, pay
the interchange fees and assessments to the credit card associations, collect their fees for processing and pay the Company a net
residual payment representing the Company’s fees for the services. In these instances, the Company does not reflect the related
settlement processing assets and obligations in its Consolidated Balance Sheet.
Timing differences in processing credit and debit card and ACH
transactions, as described above, interchange expense collection, merchant reserves, sponsoring bank reserves, and exception items
result in settlement processing assets and obligations. Settlement processing assets consist primarily of our portion of settlement
assets due from customers and receivable from merchants for the portion of the discount fee related to reimbursement of the interchange
expense, our receivable from the processing bank for transactions we have funded merchants in advance of receipt of card association
funding, merchant reserves held, sponsoring bank reserves and exception items, such as customer chargeback amounts receivable from
merchants. Settlement processing obligations consist primarily of merchant reserves, our liability to the processing bank for transactions
for which we have received funding from the members but have not funded merchants and exception items.
Settlement assets and obligations resulting from CSI’s
processing services and associated settlement activities include settlement receivables due from credit card associations and debit
networks and certain cash accounts to which CSI does not have legal ownership but has the right to use the accounts to satisfy
the related settlement obligations. CSI’s corresponding settlement obligations are for amounts payable to customers, net
of processing fees earned by CSI. Settlement receivables and payables for credit and debit card transactions are recorded at the
gross transaction amounts. The gross amounts are then processed through CSI’s settlement accounts, and CSI retains its fees
for the transactions upon settlement. Settlement receivables for e-check transactions consist of only CSI’s fees for the
transactions. Settlement receivables are generally collected within four (4) business days. Settlement obligations are generally
paid within three (3) business days, regardless of when the related settlement receivables are collected.
Property and Equipment
Property and equipment acquired in the Company’s business
acquisitions have been recorded at estimated fair value. The Company records all other property and equipment acquired in the normal
course of business at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets,
which are generally as follows: leasehold improvements – shorter of economic life or initial term of the related lease; machinery
and equipment – five (5) to 15 years; and furniture and fixtures – five (5) to 10 years. Significant additions or improvements
extending assets’ useful lives are capitalized; normal maintenance and repair costs are expensed as incurred.
Goodwill
Goodwill represents the premium paid over the fair value of
the net tangible and identifiable intangible assets acquired in the Company’s business combinations. The Company performs
a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires significant judgments,
including estimation of future cash flows, which are dependent on internal forecasts, estimation of the long-term rate of growth
for the businesses, the useful life over which cash flows will occur and determination of the Company’s weighted average
cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions
on goodwill impairment for each reporting unit. The Company conducts its annual goodwill impairment test as of December 31 of each
year or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment
exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators
may include a sustained significant decline in our stock price and market capitalization, a significant adverse change in legal
factors or in the business climate, unanticipated competition and/or slower expected growth rates, adverse actions or assessments
by a regulator, among others. The Company compares the fair value of its reporting unit to its respective carrying value, including
related goodwill. Future changes in the industry could impact the results of future annual impairment tests. The Company’s
annual goodwill impairment testing indicated there was no impairment as of December 31, 2015 or through September 30, 2016. There
can be no assurance that future tests of goodwill impairment will not result in impairment charges.
Identifiable Intangible Assets
Identifiable intangible assets consist primarily of customer
relationships, software costs, and tradenames. Certain tradenames are considered to have indefinite lives, and as such, are not
subject to amortization. These assets are tested for impairment using undiscounted cash flow methodology annually and whenever
there is an impairment indicator. Estimating future cash flows requires significant judgment and projections may vary from cash
flows eventually realized. Several impairment indicators are beyond the Company’s control, and determining whether or not
they will occur cannot be predicted with any certainty. Customer relationships, tradenames, and software costs are amortized on
a straight-line basis over their respective assigned estimated useful lives.
Impairment of Long–Lived Assets
The Company periodically reviews the carrying value of its long-lived
assets held and used at least annually or when events and circumstances warrant such a review. If significant events or changes
in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, the Company performs a test
of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. Cash
flow projections are sometimes based on a group of assets, rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, the Company determines whether impairment has occurred for the group of assets for which it can
identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, it measures
any impairment by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group
is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded.
The Company’s annual testing indicated there was no impairment as of December 31, 2015 or through September 30, 2016.
Convertible Preferred Stock
The Company accounts for the redemption premium, beneficial
conversion feature and issuance costs on or of its convertible preferred stock using the effective interest method, accreting such
amounts to its convertible preferred stock from the date of issuance to the earliest date of redemption.
Share-Based Compensation
The Company expenses employee share-based payments under ASC
Topic 718,
Compensation-Stock Compensation
, which requires compensation cost for the grant-date fair value of share-based
payments to be recognized over the requisite service period. The Company estimates the grant date fair value of the share-based
awards issued in the form of options using the Black-Scholes option pricing model.
Loss Per Share
Basic loss per share is computed by dividing net loss by
the weighted-average number of shares of common stock outstanding during the period. The dilutive effect of the conversion option
in the shares of Series A Preferred and shares of Series A-1 Preferred of 10,310,276 and 616,500 shares of common stock, respectively,
at September 30, 2016, and the effect of 884,429 exercisable stock options granted under the Company’s 2013 Stock Incentive
Plan (as amended and restated, the “2013 Stock Incentive Plan”) at September 30, 2016 have been excluded from the
loss per share calculation for the three and nine months ended September 30, 2016 in that the assumed conversion of these options
would be anti-dilutive. For the three and nine months ended September 30, 2015, the dilutive effect of the conversion option in
the shares of Series A Preferred and Series A-1 Preferred of 9,448,241 and 616,500 shares of common stock, respectively, and the
effect of 554,991 exercisable stock options granted under the Company’s 2013 Stock Incentive Plan at September 30, 2015
have been excluded from the loss per share calculation in that the assumed conversion of these options would be anti-dilutive.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency risks. The Company does review the terms of debt instruments it enters into to determine
whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and
accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one
embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments
are accounted for as a single compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair
value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense.
When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted
for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments.
The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being
recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated
interest on the instrument, is amortized over the life of the instrument through periodic charges recorded within other expenses
(income), using the effective interest method.
Fair Value Measurements
The Company accounts for fair value measurements in accordance
with ASC Topic No. 820,
Fair Value Measurements and Disclosures
(“ASC Topic 820”), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair
value measurements.
ASC Topic 820 establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
Level 2
|
Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
The following table sets forth the Company’s financial
assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC Topic 820, assets and
liabilities are classified in their entirety based on the level of input that is significant to the fair value measurement.
|
|
Fair Value at September 30, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
3,319
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,319
|
|
|
|
Fair Value at December 31, 2015
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
1,296
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,296
|
|
The following table sets forth a summary of the change in fair
value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
2,915
|
|
|
$
|
1,277
|
|
|
$
|
1,296
|
|
|
$
|
1,240
|
|
Addition of CSI contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
1,975
|
|
|
|
-
|
|
Change in fair value of JetPay, LLC contingent cash consideration
|
|
|
36
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
Change in fair value of ACI contingent cash consideration
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
33
|
|
|
|
36
|
|
Change in fair value of CSI contingent consideration
|
|
|
355
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
Payment of ACI contingent cash consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
(186
|
)
|
|
|
-
|
|
Totals
|
|
$
|
3,319
|
|
|
$
|
1,276
|
|
|
$
|
3,319
|
|
|
$
|
1,276
|
|
Level 3 liabilities are valued using unobservable inputs to
the valuation methodology that are significant to the measurement of the fair value of the financial instrument. For fair value
measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which
reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of
the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s
accounting and finance department with support from the Company’s outside consultants which are approved by the Chief Financial
Officer. Level 3 financial liabilities for the relevant periods consist of contingent consideration related to the JetPay, LLC,
ACI and CSI acquisitions for which there are no current markets such that the determination of fair value requires significant
judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy will be analyzed
each period based on changes in estimates or assumptions and recorded as appropriate.
In addition to the consideration paid upon closing of the JetPay,
LLC acquisition, WLES, L.P. (“WLES”), through December 28, 2017, is entitled to receive 833,333 shares of common stock
if the trading price of the common stock is at least $8.00 per share for any 20 trading days out of a 30 trading day period and
$5.0 million in cash if the trading price of the common stock is at least $9.50 per share for any 20 trading days out of a 30
trading day period. This contingent consideration was valued at $1.54 million at the date of acquisition based on utilization
of option pricing models and was recorded as a non-current other liability for $700,000 and as additional paid-in capital for
$840,000 at December 31, 2012. The stock-based component value of $840,000 recorded at December 28, 2012 (the JetPay, LLC acquisition
date), remains unchanged at September 30, 2016 as a result of this component being recorded as equity. The fair value at September
30, 2016 of the cash-based contingent consideration, valued at $93,000, recorded within non-current other liabilities, was determined
using a binomial option pricing model. The following assumptions were utilized in the September 30, 2016 calculations: risk free
interest rate: 0.62%; dividend yield: 0%; term of contingency of 1.24 years; and volatility: 69.3%.
The fair value of the common stock was derived from the per
share price of the common stock at the valuation date. Management determined that the results of its valuation were reasonable.
The expected life represents the remaining contractual term of the derivative. The volatility rate was developed based on analysis
of the historical volatility rates of similarly situated companies (using a number of observations that was at least equal to or
exceeded the number of observations in the life of the derivative financial instrument at issue). The risk free interest rates
were obtained from publicly available U.S. Treasury yield curve rates. The dividend yield is zero because the Company has not paid
dividends and does not expect to pay dividends in the foreseeable future.
In addition to the consideration paid upon closing of the ACI acquisition, the previous unitholders are entitled to receive
up to an additional $500,000 if certain net revenue goals are achieved through October 31, 2016. This contingent consideration
was valued at $400,000 at the date of acquisition, $456,000 at December 31, 2015 and $303,000 at September 30, 2016, recorded
within other current liabilities and net of $186,000 earned and paid to the ACI previous unitholders in February 2016, based
on utilization of a Monte Carlo simulation to estimate the variance and relative risk of achieving future net revenue growth
and discounting the associated cash consideration payments at their present values using a credit-risk adjusted discount rate
of 16.0%. The key assumptions in applying the Monte Carlo simulation included expected net revenue growth rates, the expected
standard deviation and serial correlation of expected net revenue growth rates as well as a normal distribution assumption.
In addition to the consideration paid upon closing of the CSI acquisition, the previous shareholders are entitled to receive
up to an additional 500,000 shares of common stock upon CSI achieving certain gross profit performance targets in 2016 and
2017 and up to 500,000 warrants to purchase shares of common stock, each with a strike price of $4.00 per share and a 10-year
term from its date of issuance, upon CSI achieving certain gross profit performance targets in 2018 and 2019. This contingent
consideration was valued at $1,975,000 at the date of acquisition and $2,083,000 at September 30, 2016, ($769,000 recorded
within other current liabilities and $1.3 million recorded within non-current other liabilities), based on utilization
of a Monte Carlo simulation to estimate the variance and relative risk of achieving future gross profit performance targets.
The key assumptions in applying the Monte Carlo simulation included expected gross profit growth rates, the expected standard
deviation and serial correlation of expected net revenue growth rates as well as a normal distribution assumption.
The Company uses either a binomial option pricing model
or the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates.
These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates,
as well as volatility. A significant decrease in the volatility or a significant decrease in the Company’s stock price,
in isolation, would result in a significantly lower fair value measurement.
As of September 30, 2016, there were no transfers in or out
of Level 3 from other levels in the fair value hierarchy.
In accordance with the provisions of ASC Topic 815,
Derivatives
and Hedging Activities
, the Company presented its derivative liability at fair value on its Consolidated Balance Sheets, with
the corresponding change in fair value recorded in the Company’s Consolidated Statement of Operations for the applicable
reporting periods.
Income Taxes
The Company accounts for income taxes under ASC Topic 740,
Income
Taxes
(“ASC Topic 740”). ASC Topic 740 requires the recognition of deferred tax assets and liabilities for both
the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected
future tax benefit to be derived from tax loss and tax credit carryovers. Deferred income tax expense (benefit) represents the
change during the period in the deferred income tax assets and deferred income tax liabilities. In establishing the provision for
income taxes and determining deferred income tax assets and liabilities, the Company makes judgments and interpretations based
on enacted laws, published tax guidance and estimates of future earnings. ASC Topic 740 additionally requires a valuation allowance
to be established when, based on available evidence, it is more likely than not that some portion or the entire deferred income
tax asset will not be realized.
ASC Topic 740 also clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company is required to file income tax returns in the United States (federal) and in various state
and local jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain
tax positions requiring recognition in the Company’s financial statements. The Company believes that its income tax positions
and deductions would be sustained upon examination and does not anticipate any adjustments that would result in material changes
to its financial position.
The Company’s policy for recording interest and penalties
associated with unrecognized tax benefits is to record such interest and penalties as interest expense and as a component of selling,
general and administrative expense, respectively. There were no amounts accrued for penalties or interest as of or during the three
and nine months ended September 30, 2016 and 2015. Management does not expect any significant changes in its unrecognized tax benefits
in the next year.
Subsequent Events
Management evaluates events that have occurred after the balance
sheet date but before the financial statements are issued. Based upon the review, management did not identify any recognized or
non-recognized subsequent events which would have required an adjustment or disclosure in the financial statements, except as described
in
Note 14. Subsequent Events
.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842)
. The ASU requires that a lessee recognize
the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset
for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by
class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required
to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. JetPay
has not yet determined the effect of the adoption of this standard on JetPay’s consolidated financial position and results
of operations.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from
Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. This ASU
amends the principal versus agent guidance in ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which
was issued in May 2014 (“ASU 2014-09”). Further, in April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing
. This ASU also amends ASU 2014-09 and is related
to the identification of performance obligations and accounting for licenses. The effective date and transition requirements for
both of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. That is, the guidance under these standards
is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted
only for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently
evaluating the provisions of each of these standards and assessing their impact on the Company’s financial statements and
disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU makes targeted amendments to the
accounting for employee share-based payments. This guidance is to be applied using various transition methods such as full retrospective,
modified retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption
is permitted, as long as all of the amendments are adopted in the same period. The Company is currently evaluating the provisions
of this guidance and assessing its impact on the Company’s financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit
Losses (Topic 36): Measurement of Credit Losses on Financial Instruments
, which provides guidance that will change the accounting
for credit impairment. Under the new guidance, companies are required to measure all expected credit losses for financial instruments
held at the reporting date based on historic experience, current conditions and reasonable supportable forecasts. This replaces
the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized
cost and applies to some off-balance sheet credit exposure. This new guidance will be effective for annual reporting periods beginning
after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The
Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements
and disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of
Cash Flows: Clarification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”), which eliminates the diversity
in practice related to classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying
guidance on eight specific cash flow issues. This new guidance will be effective for annual reporting periods beginning after December
15, 2017, and interim periods within those fiscal years and early adoption is permitted, including adoption in an interim period.
The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements
and disclosures.
Note 5. Property and Equipment, net of Accumulated
Depreciation
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
417
|
|
|
$
|
410
|
|
Equipment
|
|
|
1,618
|
|
|
|
1,194
|
|
Furniture and fixtures
|
|
|
325
|
|
|
|
280
|
|
Computer software
|
|
|
637
|
|
|
|
601
|
|
Vehicles
|
|
|
245
|
|
|
|
245
|
|
Assets in progress
|
|
|
672
|
|
|
|
422
|
|
Total property and equipment
|
|
|
3,914
|
|
|
|
3,152
|
|
Less: accumulated depreciation
|
|
|
(1,710
|
)
|
|
|
(1,173
|
)
|
Property and equipment, net
|
|
$
|
2,204
|
|
|
$
|
1,979
|
|
Property and equipment included $475,539 and $520,851 of computer
equipment as of September 30, 2016 and December 31, 2015, respectively, net of accumulated depreciation of $219,358 and $70,726
as of September 30, 2016 and December 31, 2015, respectively, that is subject to capital lease obligations.
Assets in progress consist primarily of computer software for
internal use that will be placed into service upon completion.
Depreciation expense was $173,000 and $123,000 for the three
months ended September 30, 2016 and 2015, respectively, and $540,000 and $347,000 for the nine months ended September 30, 2016
and 2015, respectively.
Note 6. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
Trade accounts payable
|
|
$
|
3,160
|
|
|
$
|
1,801
|
|
ACH clearing liability
|
|
|
1,343
|
|
|
|
1,735
|
|
Accrued compensation
|
|
|
1,522
|
|
|
|
980
|
|
Accrued agent commissions
|
|
|
1,160
|
|
|
|
861
|
|
Related party payables
|
|
|
377
|
|
|
|
82
|
|
Other
|
|
|
3,245
|
|
|
|
3,202
|
|
Total
|
|
$
|
10,807
|
|
|
$
|
8,661
|
|
Note 7. Long-Term Debt, Notes Payable and
Capital Lease Obligations
Long-term debt, notes payable and capital lease obligations
consist of the following:
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
|
|
(in thousands)
|
|
Term loan payable to FNB, interest
rate of 4.0% payable in monthly principal payments of $107,143 plus interest, maturing December 28, 2019, collateralized by
the assets and equity interests of ADC, Payroll Tax Filing Services, Inc. (“PTFS”) and ACI Merchant Systems, LLC
(“ACI”). See
Note 14. Subsequent Events.
|
|
$
|
4,175
|
|
|
$
|
5,140
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to FNB, interest rate of 5.25% payable in monthly principal
payments of $104,167 plus interest beginning on November 30, 2015, maturing November 6, 2021, collateralized by the assets
and equity interests of ACI.
|
|
|
6,354
|
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
Revolving note payable to FNB, interest rate
of Wall Street Journal Prime rate plus 1.00% (4.00% as of September 30, 2016), interest payable monthly, collateralized by
the assets and equity interests of ADC, PTFS, and ACI, as well as a $1.0 million negative pledge on the equity of JetPay,
LLC, maturing on May 6, 2017. See
Note 14. Subsequent Events.
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Term note payable to Fifth Third Bank, interest rate of 4% payable in monthly
payments of $27,317, including principal and interest, beginning on July 1, 2016, maturing November 30, 2019, collateralized
by the assets and equity interests of CSI.
|
|
|
974
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable to Merrick, interest
rate of 8% payable quarterly beginning September 30, 2016 plus principal of $100,000 payable quarterly beginning on December
31, 2016 with a final payment of principal of $3.45 million due on December 27, 2017, collateralized by the 3,333,333 shares
of JetPay common stock issued to WLES and held in escrow. See
Note 11. Commitments and Contingencies
and
Note 14.
Subsequent Events.
|
|
|
3,850
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory note payable to Merrick, interest
rate of 12% beginning October 14, 2016 payable on the promissory note maturity date of January 11, 2017, collateralized by
the 3,333,333 shares of JetPay common stock issued to WLES and held in escrow. See
Note 11. Commitments and Contingencies.
|
|
|
5,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable to WLES,
interest rate of 5.0% payable quarterly, note principal due on December 31, 2017. Note amount excludes unamortized fair value
discount of $0 and $384,611 at September 30, 2016 and December 31, 2015, respectively. See
Note 12. Related Party Transactions.
|
|
|
-
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable to stockholder,
interest rate of 4% payable at maturity, note principal due September 30, 2017, as extended. See
Note 12. Related Party
Transactions.
|
|
|
492
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable to stockholder,
interest rate of 4% payable quarterly, note principal due in two installments of $175,000, the first paid on May 6, 2016,
and the second due on May 6, 2017. See
Note 12. Related Party Transactions.
|
|
|
175
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory notes payable to related
parties, interest rate of 12% payable at maturity, note principal due October 31, 2016, as extended. See
Note 12. Related
Party Transactions
and
Note 14. Subsequent Events
.
|
|
|
1,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations related to computer equipment and software at JetPay,
LLC, interest rates of 5.55% to 8.55%, due in monthly lease payments of $28,844 in the aggregate maturing from May 2017 through
December 2018, collateralized by equipment.
|
|
|
410
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
Various other debt instruments related to vehicles at
ADC.
|
|
|
-
|
|
|
|
2
|
|
|
|
|
24,330
|
|
|
|
16,697
|
|
Less current portion
|
|
|
(10,432
|
)
|
|
|
(3,411
|
)
|
|
|
$
|
13,898
|
|
|
$
|
13,286
|
|
The FNB term loan agreements require the Company to provide
FNB with annual financial statements within 120 days of the Company’s year-end and quarterly financial statements within
60 days after the end of each quarter. The FNB agreements also contain certain annual financial covenants with which the Company
was in compliance as of September 30, 2016.
On June 2, 2016, in connection with the closing of the CSI
transaction, CSI entered into a Credit Agreement with Fifth Third Bank to obtain a $1,068,960 term loan and a revolving line of
credit facility of $500,000, in each case secured by all of CSI’s assets. The term note issued to Fifth Third Bank matures
on November 30, 2019 and bears interest at 4.00%. The revolving note issued to Fifth Third Bank matures on June 2, 2017 and bears
interest at a rate of 2.00% plus the LIBOR Rate for the applicable interest period. The term note and the revolving note are guaranteed
by the Company. The underlying credit agreement with Fifth Third Bank contains certain customary covenants, including a financial
covenant related to CSI’s fixed charge coverage ratio, with which the Company was in compliance as of September 30, 2016.
On July 26, 2016, as part of its settlement of litigation
with Merrick, the Company agreed to issue two promissory notes in favor of Merrick in the amounts of $3,850,000 (the
“$3.85MM Note”) and $5,000,000 (the “$5.00MM Note” and, together with the $3.85MM Note, the
“Notes”). The Notes are secured by the 3,333,333 shares of JetPay’s common stock issued in the name of WLES
and held in escrow pursuant to that certain Escrow Agreement, dated December 28, 2012 (the “Escrow Agreement”),
by and among JetPay, WLES, Trent Voigt, Merrick and JPMorgan Chase (“Chase”). The Merrick Settlement Agreement
provides that if JetPay refinances 50% or more of its outstanding debt prior to the maturity date of the $3.85MM Note, the
$3.85MM Note shall be paid in full before or as part of that refinancing transaction. The $3.85MM Note was paid in full on
October 21, 2016. See
Note 14. Subsequent Events
.
On October 18, 2016, in connection with the sale of shares
of Series A Preferred to Sundara Investment Partners, LLC; the Company entered into an agreement to obtain a term loan in the
principal amount of $9.5 million (the “LHLJ Debt Investment”) from LHLJ, Inc. The term loan, which bears interest
at 8%, matures on October 18, 2021 and is payable in equal monthly installments of principal and interest of $128,677 with a final
payment of $4,750,000 at maturity. The obligations of the Company under the Loan Agreement are guaranteed by the Company and CSI.
The Loan Agreement contains certain customary affirmative and negative covenants, including financial covenants relating to ADC’s
debt coverage ratio and total leverage ratio during the term of the loan. A portion of the proceeds of the LHLJ Debt Investment
was used to simultaneously satisfy our obligations under the Prior ADC Credit Facility, specifically the remaining $4,175,000
balance of the ADC term loan with FNB and the $1 million revolving note payable to FNB. In connection therewith, the Company reclassified
$1.55 million of current portion of long-term debt to long-term debt.
Note 8. Redeemable Convertible Preferred
Stock
Under a Securities Purchase Agreement (as amended, the “Flexpoint
Purchase Agreement”) entered into on August 22, 2013, the Company agreed to sell to Flexpoint, and Flexpoint agreed to purchase,
upon satisfaction of certain conditions, up to 133,333 shares of Series A Preferred for an aggregate purchase price of up to $40.0
million in three tranches. The shares of Series A Preferred had a purchase price of $300 per share.
On October 11, 2013, the Company issued 33,333 shares of
Series A Preferred to Flexpoint for an aggregate of $10.0 million less certain agreed-upon reimbursable expenses of Flexpoint
(the “Initial Closing”) pursuant to the Flexpoint Purchase Agreement. Additionally, the Company issued 4,667 shares
of Series A Preferred to Flexpoint on April 14, 2014 for an aggregate of $1.4 million; 20,000 shares on November 7, 2014 for $6.0
million; 33,333 shares on December 28, 2014 for $10.0 million; and 8,333 shares on August 9, 2016 for $2.5 million. The proceeds
of the initial $10.0 million investment were used to retire the Ten Lords, Ltd. note payable of $5.9 million maturing in December
2013 with the remainder used for general corporate purposes. The proceeds of the April 14, 2014 $1.4 million investment were used
to satisfy a portion of the Company’s liability to EarlyBirdCapital, Inc. arising from a March 3, 2014 arbitration decision
(the “EBC Award”). The proceeds of the November 7, 2014 $6.0 million were used as partial consideration for the acquisition
of ACI. The proceeds of the December 28, 2014 $10.0 million investment were used to redeem certain secured convertible preferred
notes that matured on December 31, 2014. The proceeds of the August 9, 2016 $2.5 million investment will be used for the payment
of certain acquisition expenses related to the CSI acquisition and for general corporate purposes.
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 was initially $3.00. Under the A&R Purchase Agreement, Flexpoint and Sundara
Investment Partners, LLC are provided with certain indemnification rights in the event of the incurrence of certain subsequent
losses and expenses of the Company. In April 2015, Flexpoint tendered to the Company a claim letter regarding an indemnification
claim with respect to the EarlyBirdCapital matter.
On August 6, 2015, in resolution of this claim, Flexpoint and the Company
entered into a Letter Agreement, whereby the conversion price of any of the Series A Preferred held by Flexpoint was reduced from
$3.00 per share to $2.90 per share. The conversion price of the Series A Preferred continues to be subject to downward adjustment
upon the occurrence of certain events.
On October 18, 2016, the Company entered into the A&R
Securities Purchase Agreement by and among the Company, Flexpoint, and Sundara Investment Partners, LLC. The A&R Purchase
Agreement amended the Flexpoint Purchase Agreement to facilitate the Company’s issuance and sale to Sundara Investment Partners,
LLC of the 33,667 shares of Series A Preferred that had not yet been purchased by Flexpoint (the “Remaining Shares”).
Flexpoint’s right to acquire the Remaining Shares was set to expire on October 11, 2016, but was extended until October
25, 2016 by Amendment No. 1 to the Flexpoint Purchase Agreement, dated October 10, 2016, by and between the Company and Flexpoint.
Pursuant to the A&R Purchase Agreement, the Company and Flexpoint provided to Sundara Investment Partners, LLC the sole right
to purchase the Remaining Shares, in a single transaction consummated at the signing of the A&R Purchase Agreement, for a
purchase price of $10,100,100.
The Series A Preferred has an initial liquidation preference
of $600 per share (subject to adjustment for any stock split, stock dividend or other similar proportionate reduction or increase
of the authorized number of shares of common stock) and will rank senior to the common stock with respect to distributions of assets
upon the Company’s liquidation, dissolution or winding up. Holders of Series A Preferred will have the right to request redemption
of any shares of Series A Preferred issued at least five (5) years prior to the date of such request by delivering written notice
to the Company at the then applicable liquidation value per share, unless holders of a majority of the outstanding Series A Preferred
elect to waive such redemption request on behalf of all holders of Series A Preferred, subject to certain exceptions.
On May 5, 2014, the Company issued 2,565 shares of Series
A-1 Preferred to Wellington for an aggregate of $769,500, less certain agreed-upon reimbursable expenses of Wellington, pursuant
to a Securities Purchase Agreement (the “Wellington Securities Purchase Agreement”) dated May 1, 2014. Additionally,
the Company issued to Wellington 1,350 shares of Series A-1 Preferred on November 20, 2014 for $405,000 and 2,250 shares of Series
A-1 Preferred on December 31, 2014 for $675,000.
Under the Wellington Securities Purchase Agreement, the Company agreed
to sell to Wellington, upon the satisfaction of certain conditions, up to 9,000 shares of Series A-1 Preferred at a purchase price
of $300 per share for an aggregate purchase price of up to $2.7 million. The proceeds of the total investment to date of $1.85
million by Wellington have been used for general corporate purposes. Shares of Series A-1 Preferred are convertible into shares
of the Company’s common stock or, in certain circumstances, Series A-2 Convertible Preferred Stock, par value $0.001 per
share.
Shares of Series A-1 Preferred can be converted into that number of shares of common stock equal to the number
of shares of Series A-1 Preferred being converted multiplied by $300 and divided by the then-applicable conversion price, which
initially was $3.00. The conversion price of the Series A-1 Preferred is subject to downward adjustment upon the occurrence of
certain events as defined in the Wellington Securities Purchase Agreement. Additionally, Wellington has the option, but not the
obligation, to purchase up to the number of shares of Series A-1 Preferred equal to 6.75% of the cumulative number of shares of
Series A Preferred purchased by Flexpoint and Sundara Investment Partners, LLC. See
Note 14. Subsequent Events
.
The Series A-1 Preferred has an initial liquidation preference
of $600 per share and ranks senior to the Company’s common stock and
pari passu
with the Series A Preferred with respect
to distributions of assets upon the Company’s liquidation, dissolution or winding up. Notwithstanding the above, no holder
of the Series A-1 Preferred can convert if, as a result of such conversion, such holder would beneficially own 9.9% or more of
the Company’s common stock. If at any time, no shares of Series A Preferred remain outstanding and shares of Series A-1 Preferred
remain outstanding because of the limitation in the preceding sentence, all shares of Series A-1 Preferred shall automatically
convert into shares of Series A-2 Preferred at a 1:1 ratio. Upon the occurrence of an Event of Noncompliance, as defined in the
Wellington Securities Purchase Agreement, the holders of a majority of the Series A-1 Preferred may demand immediate redemption
of all or a portion of the Series A-1 Preferred at the then-applicable liquidation value.
The Company considered the guidance of ASC Topic 480,
Distinguishing
Liabilities from Equity
, and ASC Topic 815,
Derivatives
, in determining the accounting treatment for its convertible
preferred stock instruments. The Company considered the economic characteristics and the risks of the host contract based on the
stated and implied substantive terms and features of the instruments; including, but not limited to, its redemption features, voting
rights, and conversions rights; and determined that the terms of the preferred stock were more akin to an equity instrument than
a debt instrument. Subject to certain exemptions applicable to Sundara Investment Partners, LLC, the shares of Series A Preferred
and Series A-1 Preferred are subject to redemption, at the option of the holder, on or after the fifth anniversary of their original
purchase. Accordingly, the convertible preferred stock has been classified as temporary equity in the Company’s Consolidated
Balance Sheets.
Upon issuance of the 33,333 shares of the Series A Preferred,
the Company recorded as a reduction to the Series A Preferred and as Additional Paid-In Capital a beneficial conversion feature
of $1.5 million. The beneficial conversion feature represents the difference between the effective conversion price and the fair
value of the Series A Preferred as of the commitment date. An additional beneficial conversion feature of $396,600 was recorded
in August 2015 as a result of the change in conversion price per share from $3.00 to $2.90. There was no beneficial conversion
feature upon the 2014, 2015 or 2016 issuances of Series A Preferred to Flexpoint and Sundara Investment Partners, LLC, as applicable,
and Series A-1 Preferred to Wellington as a result of the price of the Company’s common stock at the dates of the closings
being below the effective conversion price of the preferred stock. The Company accounts for the beneficial conversion feature,
the liquidation preference, and the issuance costs related to the Series A Preferred and Series A-1 Preferred using the effective
interest method by accreting such amounts to its Series A Preferred and Series A-1 Preferred from the date of issuance to the
earliest date of redemption as a reduction to its total permanent equity within the Company’s Consolidated Statement of
Changes in Stockholders’ Equity as a charge to Additional Paid-In Capital. Any accretion recorded during the periods presented
are also shown as a reduction to the income available to common stockholders in the Company’s Consolidated Statements of
Operations when presenting basic and dilutive per share information. Accretion was $1.6 million and $1.3 million for the three
months ended September 30, 2016 and 2015, respectively, and $4.4 million and $3.8 million for the nine months ended September
30, 2016 and 2015, respectively.
Upon the occurrence of an Event of Noncompliance, the holders
of a majority of the Series A Preferred may demand immediate redemption of all or a portion of the shares of Series A Preferred
at the then-applicable liquidation value. Such holders may also exercise a right to have the holders of the Series A Preferred
elect a majority of the Board by increasing the size of the Board and filling such vacancies. Such right to control a minimum
majority of the Board would exist for so long as the Event of Noncompliance was continuing. An “Event of Noncompliance”
shall have occurred if: i) the Company fails to make any required redemption payment with respect to the Series A Preferred; ii)
the Company breaches the A&R Purchase Agreement after the Initial Closing, and such breach has not been cured within thirty
days after receipt of notice thereof; iii) the Company or any subsidiary makes an assignment for the benefit of creditors, admits
its insolvency or is the subject of an order, judgment or decree adjudicating such entity as insolvent, among other similar actions;
iv) a final judgment in excess of $5.0 million is rendered against the Company or any subsidiary that is not discharged within
60 days thereafter; or v) an event of default has occurred under the Loan and Security Agreement, dated as of December 28, 2012,
as amended, by and among ADC, PTFS and FNB, or the Loan and Security Agreement dated as of November 7, 2014 by and among ACI and
FNB, and such event of default has not been cured within thirty days after receipt of notice thereof.
Note 9. Stockholders’ Equity
Common Stock
On June 18, 2015, the Company issued 29,167 shares of the Company’s
common stock with a fair market value of approximately $79,000, as compensation to an employee for services rendered.
On December 22, 2015, the Company entered into a Securities
Purchase Agreement (the “Insider Common Stock SPA”) with each of certain investors, including Bipin C. Shah, its Chairman
and then Chief Executive Officer, Robert B. Palmer, Director and Chair of the Audit Committee, and Jonathan M. Lubert, Director.
Pursuant to the Insider Common Stock SPAs, Messrs. Shah, Palmer and Lubert each agreed to purchase 20,000 shares, or an aggregate
of 60,000 shares, of the Company’s common stock, at a purchase price of $2.70 per share (a price greater than the closing
bid price of the common stock on December 21, 2015, which was the last closing bid price preceding the Company’s execution
of each of the Insider Common Stock SPAs), for aggregate consideration of $162,000, prior to issuance costs. In addition to the
three directors, certain other investors purchased an additional 320,000 shares of common stock at a purchase price of $2.70 per
share for aggregate consideration of $864,000, prior to issuance costs. Additionally, on December 23, 2015, the Company sold 100,000
shares of common stock to an additional investor at a purchase price of $2.70 per share for aggregate consideration of $270,000.
Issuance costs related to the December 2015 common stock sales were approximately $27,000. Finally, on January 22, 2016, the Company
sold 37,037 shares of common stock to an additional investor at a purchase price of $2.70 per share for consideration of $100,000
prior to issuance costs of approximately $39,000.
On June 29, 2016, the Board of Directors approved an amendment
and restatement of the JetPay Corporation 2013 Stock Incentive Plan, which was subsequently approved by the Company’s stockholders
at the Company’s 2016 Annual Meeting of Stockholders held on August 2, 2016. As amended and restated, the 2013 Stock Incentive
Plan authorizes the availability of an additional 1,000,000 shares of common stock available for the grant of awards under the
2013 Stock Incentive Plan.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred
stock with a par value of $0.001 per share with such designation, rights and preferences as may be determined from time to time
by the Company’s Board of Directors.
As of September 30, 2016 and December 31, 2015, there were no
shares of preferred stock issued or outstanding other than the Series A Preferred issued to Flexpoint and Series A-1 Preferred
issued to Wellington described above.
Stock-Based Compensation
ASC Topic 718,
Compensation-Stock Compensation
, requires
compensation expense for the grant-date fair value of share-based payments to be recognized over the requisite service period.
At a meeting of the Company’s stockholders held on
July 31, 2013,
the Company’s stockholders approved the adoption of the Company’s 2013 Stock Incentive Plan.
The Company was initially authorized to issue up to 2,000,000 shares of its common stock as awards under the 2013 Stock Incentive
Plan. The Company granted options to purchase 505,000 and 200,000 shares of common stock under the 2013 Stock Incentive Plan during
the nine months ended September 30, 2016 and 2015, respectively, all at an exercise price of $3.00 per share, except for 250,000
options granted at $2.48 per share in May 2016, the closing price of the Company’s common stock on the date of grant. The
grant date fair value of the options granted during the nine months ended September 30, 2016 and 2015 were determined to be approximately
$552,000 and $232,000, respectively, using the Black-Scholes option pricing model. Aggregated stock-based compensation expense
for the three months ended September 30, 2016 and 2015 was $121,000 and $61,000, respectively, and $285,000 and $203,000 for the
nine months ended September 30, 2016 and 2015, respectively. Unrecognized compensation expense as of September 30, 2016 relating
to non-vested common stock options was approximately $1.0 million and is expected to be recognized through 2020. During the nine
months ended September 30, 2016, no options were exercised and 158,334 options were forfeited.
The fair values of the Company’s options were estimated
at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Expected term
(years)
|
|
|
6.25
|
|
|
|
-
|
|
|
|
5.75
to 6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
1.27%
to 1.31%
|
|
|
|
-
|
|
|
|
1.27%
to 1.50%
|
|
|
|
1.56%
|
|
Volatility
|
|
|
59.9%
|
|
|
|
-
|
|
|
|
58.1%
to 59.9%
|
|
|
|
44.8%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
-
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected term: The Company’s expected term is based on
the period the options are expected to remain outstanding. The Company estimated this amount utilizing the “Simplified Method”
in that the Company does not have sufficient historical experience to provide a reasonable basis to estimate an expected term.
Risk-free interest rate: The Company uses the risk-free interest
rate of a U.S. Treasury Note with a similar term on the date of the grant.
Volatility: The Company calculates the volatility of the stock
price based on historical value and corresponding volatility using a weighted average of both the Company’s stock price and
the Company’s peer group stock price for a period consistent with the stock option expected term.
Dividend yield: The Company uses a 0% expected dividend yield
as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
A summary of stock option activity for the nine months ended
September 30, 2016 and the year ended December 31, 2015 are presented below:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at December 31, 2014
|
|
|
1,401,250
|
|
|
$
|
3.02
|
|
Granted
|
|
|
530,000
|
|
|
|
3.00
|
|
Forfeited
|
|
|
(214,168
|
)
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2015
|
|
|
1,717,082
|
|
|
$
|
3.02
|
|
Granted
|
|
|
505,000
|
|
|
|
2.74
|
|
Forfeited
|
|
|
(158,334
|
)
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2016
|
|
|
2,063,748
|
|
|
$
|
2.95
|
|
Exercisable at September 30, 2016
|
|
|
884,429
|
|
|
$
|
3.00
|
|
The weighted average remaining life of options outstanding at
September 30, 2016 was 8.24 years. The aggregate intrinsic value of the exercisable options at September 30, 2016 was $0.
Employee Stock Purchase Plan
On June 29, 2015, the Board of Directors adopted the JetPay
Corporation Employee Stock Purchase Plan (the "Purchase Plan"), which was subsequently approved by the Company’s
stockholders at the Company’s 2015 Annual Meeting of Stockholders. The Purchase Plan allows employees to contribute a percentage
of their cash earnings, subject to certain maximum amounts, to be used to purchase shares of the Company’s common stock on
each of two (2) semi-annual purchase dates. The purchase price is equal to 90% of the market value per share on either: (a) the
date of grant of a purchase right under the Purchase Plan; or (b) the date on which such purchase right is deemed exercised, whichever
is lower.
As of September 30, 2016, an aggregate of 300,000 shares of
common stock were reserved for issuance under the Purchase Plan, of which 22,876 shares of common stock were issued on July 1,
2016.
Note 10. Income Taxes
The Company recorded income tax expense (benefit) of $96,000
and $42,000 for the three months ended September 30, 2016 and 2015, respectively, and $(1.38) million and $143,000 for the nine
months ended September 30, 2016 and 2015, respectively. Income tax expense (benefit) reflects the recording of federal and state
income taxes. The effective tax rates were approximately (7.7)% and (12.3)% for the three months ended September 30, 2016 and 2015,
respectively, and 14.8% and (16.7)% for the nine months ended September 30, 2016 and 2015, respectively. The effective rate differs
from the federal statutory rate for each period, primarily due to state and local income taxes and changes to the valuation allowance.
As of September 30, 2016, due to the acquisition of CSI and
its related identifiable intangibles and the recording of an associated $1.86 million deferred tax liability, management believed
that it was more likely than not that the benefit of a portion of its federal net deferred tax assets would be realized equal to
the future source of taxable income created by the reversal of the book amortization of the CSI fixed assets and identifiable intangible
assets. Accordingly, management believes recording a partial reduction of the valuation allowance against its federal net
deferred tax asset of $1.6 million is appropriate.
JetPay, LLC is subject to and pays the Texas Margin Tax which
is considered to be an income tax in accordance with the provisions of the Income Taxes Topic in FASB, ASC and the associated interpretations.
There are no significant temporary differences associated with the Texas Margin Tax.
As of December 31, 2015, the Company had U.S. federal net operating
loss carryovers (“NOLs”) of approximately $15.1 million available to offset future taxable income. These NOLs, if not
utilized, expire at various times through 2035. In accordance with Section 382 of the Internal Revenue Code, deductibility of the
Company’s NOLs may be subject to an annual limitation in the event of a change in control.
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. After consideration of all of the information available,
management believes that a total valuation allowance of approximately $9.4 million at September 30, 2016 is appropriate, representing
the amount of its deferred income tax assets in excess of certain of the Company’s deferred income tax liabilities. The deferred
tax liability related to goodwill that is amortizable for tax purposes (“Intangibles”) will not reverse until such
time, if any, that the goodwill, which is considered to be an asset with an indefinite life for financial reporting purposes, becomes
impaired or sold. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as future taxable
income for purposes of determining a valuation allowance. Therefore, the deferred tax liability related to tax deductible goodwill
Intangibles cannot be considered when determining the ultimate realization of deferred tax assets.
Note 11. Commitments and Contingencies
On or about March 13, 2012, a merchant of JetPay, LLC, Direct
Air, a charter travel company, abruptly ceased operations and filed for bankruptcy. Under United States Department of Transportation
requirements, all charter travel company customer charges for travel are to be deposited into an escrow account in a bank under
a United States Department of Transportation escrow program, and not released to the charter travel company until the travel has
been completed. In the case of Direct Air, such funds had historically been deposited into such United States Department of Transportation
escrow account at Valley National Bank in New Jersey, and continued to be deposited through the date Direct Air ceased operations.
At the time Direct Air ceased operations, according to Direct Air’s bankruptcy trustee, there should have been in excess
of $31.0 million in the escrow account. Instead there was approximately $1.0 million. As a result, Merrick, JetPay, LLC’s
sponsor bank with respect to this particular merchant, incurred chargebacks in excess of $25.0 million. Merrick maintains insurance
through a Chartis Insurance Policy for chargeback losses that names Merrick as the primary insured. The policy has a limit of
$25.0 million and a deductible of $250,000. Merrick has sued Chartis Insurance (“Chartis”) for payment under the claim.
Under an agreement between Merrick and JetPay, LLC, JetPay, LLC may be obligated to indemnify Merrick for losses realized from
such chargebacks that Merrick is unable to recover from other parties. JetPay, LLC recorded a loss for all chargebacks in excess
of $25.0 million, the $250,000 deductible on the Chartis insurance policy and $487,000 of legal fees charged against JetPay, LLC’s
cash reserve account by Merrick, totaling $1.9 million in 2012, as well as an additional $597,000 in legal fees charged against
JetPay, LLC’s cash reserve account by Merrick through September 30, 2013. In December 2013, Merrick, in addition to its
suit against Chartis, also filed suit against Valley National Bank as escrow agent. In February 2015, JetPay joined that suit,
along with American Express. During 2012 and 2013, Merrick required JetPay, LLC to maintain increased cash reserves in order to
provide additional security for any obligations arising from the Direct Air situation. As of June 30, 2016, Merrick held approximately
$4.4 million of total reserves related to the Direct Air matter, which amount was released in full to Merrick under the Merrick
Settlement Agreement in July 2016, as more fully described below.
On August 7, 2013, JetPay Merchant Services, LLC (“JPMS”),
a wholly owned subsidiary of JetPay, LLC and indirect wholly-owned subsidiary of the Company, together with WLES (collectively,
the “Plaintiffs”), filed suit in the United States District Court for the Northern District of Texas, Dallas Division,
against Merrick, Royal Group Services, LTD, LLC and Gregory Richmond (collectively, the “Defendants”). The suit alleges
that Merrick and Gregory Richmond (an agent of Royal Group Services) represented to JPMS that insurance coverage was arranged
through Chartis Specialty Insurance Company to provide coverage for JPMS against potential chargeback losses related to certain
of JPMS’s merchant customers, including Southern Sky Air Tours, d/b/a Direct Air. The complaint alleges several other causes
of action against the Defendants, including violation of state insurance codes, negligence, fraud, breach of duty and breach of
contract. Also, in August 2013, JPMS, JetPay, LLC, and JetPay ISO Services, LLC (“JetPay ISO”) filed the second amendment
to a previously filed complaint against Merrick in the United States District Court for the District of Utah, adding to its initial
complaint several causes of action related to actions Merrick allegedly took during JetPay, LLC’s transition to a new sponsoring
bank in June 2013. Additionally, subsequent to this transition, Merrick invoiced the Company for legal fees incurred by Merrick
totaling approximately $4.7 million. The Company did not believe it had a responsibility to reimburse Merrick for these legal
fees and disputed these charges. Accordingly, the Company had not recorded an accrual for these legal fees as of June 30, 2016.
These legal fees were eliminated as part of the Merrick Settlement Agreement, as described below.
As partial protection against any potential losses related to
Direct Air, the Company required that, upon closing of the Initial Acquisitions, 3,333,333 shares of common stock that was to be
paid to WLES as part of the JetPay, LLC acquisition be placed into an escrow account with Chase as the trustee. The Escrow Agreement
for the account names Merrick, the Company, and WLES as parties. If JetPay, LLC suffered any liability as a result of the Direct
Air matter, these shares would be used in partial payment for any such liability, with any remaining shares delivered to WLES.
On July 26, 2016, the Company entered into two related settlement
agreements: the Merrick Settlement Agreement and a Settlement Agreement and Release by and among Trent Voigt, WLES and the Company
(the “WLES Settlement Agreement”). In connection with the parties’ entry into the Merrick Settlement Agreement,
the District Court for the District of Utah dismissed the Direct Air matter with prejudice on July 27, 2016.
As part of the Merrick Settlement Agreement, the Company
agreed to release all claims to the $4.4 million held in reserve at Merrick. In addition, the Company issued the Notes to Merrick.
The Notes are secured by the 3,333,333 shares of JetPay’s common stock issued in the name of WLES and held in escrow (the
“escrowed shares”) pursuant to the Escrow Agreement. The Merrick Settlement Agreement provides that if JetPay refinances
50% or more of its outstanding debt prior to the maturity date of the $3.85MM Note, the $3.85MM Note shall be paid in full before
or as part of that refinancing transaction. The $3.85MM Note was paid in full on October 21, 2016. See
Item 14. Subsequent
Events
.
In connection with its entry into the Merrick Settlement
Agreement, JetPay executed three Stipulated and Confessed Judgments in favor of Merrick in the amounts of $32,500,000 (the “First
Judgment”), $28,650,000 (the “Second Judgment”) and $27,500,000 (the “Third Judgment” and, together
with the First Judgment and the Second Judgment, the “Judgments”), none of which shall be of any effect unless and
until JetPay fails to make any payment when due under the Notes. If JetPay fails to make payment when due under the Notes, Merrick,
after a five (5) day cure period, can seek to obtain and/or enforce the applicable Judgments in the Federal District Court for
Utah or in any court of competent jurisdiction. Merrick may seek to obtain or enforce the First Judgment if a payment default
occurs prior to the complete pay-off of either of the Notes (in which case the Second Judgment and Third Judgment shall be of
no force or effect). Merrick may seek to obtain or enforce the Second Judgment if a payment default occurs after payoff of the
$3.85MM Note but prior to the complete payoff of the $5.00MM Note (in which case the First Judgment and Third Judgment shall be
of no force or effect). Merrick may seek to obtain or enforce the Third Judgment if a payment default occurs after payoff of the
$5.00MM Note but prior to the complete payoff of the $3.85MM Note (in which case the First Judgment and Second Judgment shall
be of no force or effect). On October 21, 2016, the Company paid in full the $3.85MM Note. As a result, only the Second Judgment
is available for Merrick’s relief. See
Note 14. Subsequent Eve
nts.
Under the terms of the WLES Settlement Agreement, WLES agreed
to transfer the indebtedness represented by that certain promissory note, dated December 28, 2012 (the “WLES Note”),
in the original principal amount of $2,331,369 issued by JetPay in favor of WLES to Merrick. In addition, WLES agreed to amend
that certain promissory note, dated June 7, 2013, as amended, in the original principal amount of $491,693 issued by JetPay, LLC
in favor of Trent Voigt in order to (a) extend its maturity date from September 30, 2016 to September 30, 2017 and (b) waive all
interest payments for the period from September 30, 2016 to September 30, 2017. This note in favor of Mr. Voigt shall become due
and payable immediately should Mr. Voigt’s employment with JetPay be terminated other than for cause. In addition, pursuant
to the WLES Settlement Agreement, WLES authorized JetPay to arrange a private sale of that number of escrowed shares to the extent
necessary to satisfy JetPay’s obligations to Merrick under the $5.00MM Note (up to a total of 2,200,000 escrowed shares).
As required by the Merrick Settlement Agreement, (a) any net proceeds from the sale of escrowed shares shall be delivered to Merrick
until Merrick has received all principal and interest payments due under the $5.00MM Note, (b) any sale of the escrowed shares
shall be made on an arm’s length basis, (c) if such sale is to an affiliate of JetPay, it shall be at a price and upon other
terms equivalent to those of an arm’s length sale to an unaffiliated third-party and (d) if the purchase price per share
is less than 90% of the most recently listed price per share of JetPay common stock on the NASDAQ Capital Market, then such sale
shall be subject to the prior approval of Merrick. All unsold escrowed shares will remain in escrow until all obligations of the
Company, JPMS, JetPay ISO, JetPay, LLC and WLES under the Merrick Settlement Agreement are fulfilled. Upon consummation of the
sale of more than 1,666,667 of the escrowed shares, JetPay shall issue to WLES fully vested and immediately exercisable warrants
with an expiration date of five (5) years from the date of the WLES Settlement Agreement to purchase that number of shares of
JetPay common stock equal to 50% of the difference between (a) the number of escrowed shares actually sold by WLES and (b) 1,666,666
shares of JetPay common stock, at an exercise price per share equal to the amount per share paid for the sold escrowed shares.
In the event that JetPay defaults on its obligations to Merrick under the Merrick Settlement Agreement and some or all of the
remaining escrowed shares are forfeited to Merrick as a result, JetPay agreed to issue to WLES, for no further consideration,
that number of shares of JetPay common stock equal to the forfeited escrowed shares. The WLES Settlement Agreement also provides
for the allocation of any recoveries by JPMS in connection with the claims brought by JMPS in
American Express Travel Related
Services and JetPay Merchant Services, LLC v. Valley National Bank
, Civil Action No. 2:14-cv-7827 (D. N.J.) between the Company
and WLES.
The Company has recorded a Settlement of Legal Matter
charge of $6.12 million for the nine months ended September 30, 2016 based on the terms of the Merrick Settlement Agreement
and the WLES Settlement Agreement. The loss includes: (i) a charge of $4.4 million related to the Company’s release of
all claims to the $4.4 million held in reserve at Merrick; (ii) a charge of $1.4 million related to the Company’s
issuance of the $3.85MM Note , less WLES’s agreement to transfer the WLES Note (recorded at $2,036,511 at June 30, 2016
net of an unamortized discount of $294,858) and accrued interest on the WLES Note of $414,466; (iii) a charge of $50,000
representing the Company’s issuance of the $5.0MM Note less the estimated value as of July 26, 2016 of the escrowed
shares; and (iv) a charge for $300,000 representing the estimated value of the possible issuance of warrants to WLES as
described in the WLES Settlement Agreement. The ultimate loss may differ depending on, among other things, the results of the
sale of the escrowed shares.
As previously noted, in connection with its entry into the
Merrick Settlement Agreement, the Company also issued two Notes. The $3.85MM Note bears interest at 8% per annum (except that
interest shall accrue at a rate of 15% per annum following the occurrence of any event of default thereunder) until the entire
principal amount of the $3.85MM Note has been paid in full. The $3.85MM Note was paid in full on October 21, 2016. See
Note
14. Subsequent Events
. The $5.00MM Note bears no interest until October 14, 2016, after which time it will bear interest at
rate of 12% per annum (increasing to 15% per annum upon an event of default thereunder) until the entire principal amount of the
$5.00MM Note has been paid in full. JetPay may prepay the $5.00MM Note. All proceeds from any sale of the escrowed shares will
be paid to Merrick as a mandatory prepayment of the $5.00MM Note. The outstanding principal balance of the $5.00MM Note, along
with all unpaid interest accrued thereon and other amounts owed to Merrick under the $5.00MM Note, shall be due and payable on
or before January 11, 2017.
Events of default under the Notes include, but are not limited
to, the failure by JetPay to make payments under the Notes; the failure of JetPay to make timely payments on its other indebtedness;
the breach by JetPay of the Merrick Settlement Agreement; the commencement by or against JetPay of a bankruptcy or corporate reorganization
proceedings; and the entry of a judgment or decree against JetPay which has not been vacated, discharged, stayed or bonded pending
appeal within 30 days.
At the time of the acquisition of JetPay, LLC, the Company
entered into an Amendment, Guarantee, and Waiver Agreement (the “Agreement”) dated December 28, 2012 between the Company,
Ten Lords and Interactive Capital and JetPay, LLC. Under the Agreement, Ten Lords and Interactive Capital agreed to extend payment
of a $6.0 million note remaining outstanding at the date of acquisition for up to twelve months. The note was paid in full in
October 2013 using the proceeds from the initial purchase of Series A Preferred by Flexpoint. See
Note 8. Redeemable Convertible
Preferred Stock
. The terms of the Agreement required that the Company provide Ten Lords with a “true up” payment,
which was meant to put the holders of the note (Ten Lords and Interactive Capital) in the same after-tax economic position as
they would have been had the note been paid in full on December 28, 2012. JetPay calculated this true-up payment to Ten Lords
at $222,310 and paid such amount to Ten Lords in August 2015. Subsequent to the Company’s payment, the Company received
notice that Ten Lords had filed a lawsuit against JetPay, LLC disputing the amount determined and paid by the Company. The Company
believes that the allegations in the suit regarding JetPay, LLC are groundless and intends to defend it.
In December 2012, BCC Merchant Solutions, a former customer
of JetPay, LLC filed a suit against JetPay, LLC, Merrick, and Trent Voigt in the Northern District of Texas, Dallas Division, for
$1.9 million, alleging that the parties by their actions, had cost BCC significant expense and lost customer revenue. The Company
maintained an accrual of $200,000 for any potential loss settlement related to this matter as of March 31, 2016. On May 16, 2016,
the Company settled the lawsuit with BCC and paid $200,000 on June 15, 2016.
In December 2015, Harmony Press Inc. (“Harmony”),
a customer of ADC and PTFS, filed a suit against an employee of Harmony for theft by that employee of over $628,000. JetPay, ADC,
and PTFS as well as several financial institution service providers to Harmony were also named in that suit for alleged negligence.
The Company believes that the allegations in the suit regarding JetPay, ADC, and PTFS are groundless and has turned the matter
over to the Company’s insurance carrier who intends to defend the suit. The Company’s is subject to a $50,000 deductible
under its insurance policy. The Company has not recorded an accrual for any potential loss related to this matter as of September
30, 2016.
The Company is a party to various other legal proceedings related
to its ordinary business activities. In the opinion of the Company’s management, none of these proceedings are material in
relation to our results of operations, liquidity, cash flows, or financial condition.
Note 12. Related Party Transactions
JetPay Payroll Services’ headquarters are located in Center
Valley, Pennsylvania and consist of approximately 22,500 square feet leased from C. Nicholas Antich and Carol A. Antich. Mr. Antich
is the former President of ADC. The rent is currently $45,163 per month. The office lease had an initial 10-year term which expired
on May 31, 2016 and was extended for one year on June 1, 2016. Rent expense under this lease was $135,489 and $129,140 for the
three months ended September 30, 2016 and 2015, respectively, and $395,882 and $387,420 for the nine months ended September 30,
2016 and 2015. The Company is currently evaluating its future space needs and reviewing several alternatives, including a possible
extension or amendment to the current lease.
JetPay Payment Services retains a backup center in Sunnyvale,
Texas consisting of 1,600 square feet, rented from JT Holdings, an entity controlled by Trent Voigt, Chief Executive Officer of
JetPay, LLC. The terms of the lease which expired on January 31, 2016 were commercial. Occupancy continues on a month-to-month
basis. Rent expense was $30,000 and $9,000 for the three months ended September 30, 2016 and 2015, respectively, and $90,000 and
$27,000 for the nine months ended September 30, 2016 and 2015, respectively.
In connection with the closing of the Company’s acquisition
of JetPay, LLC, the Company entered into a Note and Indemnity Side Agreement with JP Merger Sub, LLC, WLES and Trent Voigt (the
“Note and Indemnity Side Agreement”) dated as of December 28, 2012. Pursuant to the Note and Indemnity Side Agreement,
the Company issued a promissory note in the amount of $2,331,369 in favor of WLES. Interest accrued on amounts due under the note
at a rate of 5% per annum, and is payable quarterly. Interest expense was $8,100 and $29,800 for the three months ended September
30, 2016 and 2015, respectively, and $67,000 and $88,400 for the nine months ended September 30, 2016 and 2015, respectively.
Under the terms of the WLES Settlement Agreement, WLES transferred the WLES Note to Merrick. See
Note 11. Commitments and Contingencies
.
On August 22, 2013, JetPay, LLC entered into a Master Service
Agreement with JetPay Solutions, LTD, a United Kingdom based entity 75% owned by WLES, an entity owned by Trent Voigt. See
Note
7. Long-Term Debt, Notes Payable and Capital Lease Obligations.
The Company initiated transaction business under this agreement
beginning in April 2014 with revenue earned from JetPay Solutions, LTD of $5,000 and $15,000 for the three months ended September
30, 2016 and 2015, respectively, and $16,000 and $238,000 for the nine months ended September 30, 2016 and 2015, respectively.
On June 7, 2013, the Company issued an unsecured promissory
note to Trent Voigt, Chief Executive Officer of JetPay, LLC, in the amount of $491,693. The note matures on September 30, 2017,
as extended by the WLES Settlement Agreement dated July 26, 2016, see
Note 11. Commitment and Contingencies
, and bears interest
at an annual rate of 4% with interest expense of $4,900 recorded for each of the three months ended September 30, 2016 and 2015,
and $14,700 recorded for each of the nine months ended September 30, 2016 and 2015. The transaction was approved upon resolution
and review by the Company’s Audit Committee of the terms of the note to ensure that such terms were no less favorable to
the Company than those that would be available with respect to such transactions from unaffiliated third parties. See
Note 7.
Long-Term Debt, Notes Payable and Capital Lease Obligations.
On October 31, 2014, following the unanimous consent of the
Company’s Audit Committee, the Company entered into a letter agreement with WLES, an entity owned by Trent Voigt, that governs
the distribution of any proceeds received in connection with the Direct Air matter. The Letter Agreement provides that subject
to certain exceptions, after each of the Company and WLES receive out-of-pocket expenses and chargeback losses incurred subsequent
to the consummation of the Initial Acquisitions and prior to the consummation of the Initial Acquisitions, respectively, each of
the parties will share in any proceeds received pro rata. This agreement was superseded by the WLES Settlement Agreement. See
Note
11. Commitment and Contingencies.
On May 6, 2015, the Company issued an unsecured promissory note
to C. Nicholas Antich, the then President of ADC, and Carol A. Antich in the amount of $350,000 to satisfy the remaining balance
of the $2.0 million deferred consideration. The promissory note bears interest at an annual rate of 4% and matures on May 6, 2017,
payable in two equal installments of $175,000, with the first paid on May 6, 2016 and the second due on May 6, 2017. Interest expense
related to this promissory note was $1,800 and $3,600 for the three months ended September 30, 2016 and 2015, respectively, and
$7,900 and $5,800 for the nine months ended September 30, 2016 and 2015, respectively. The promissory note was approved upon resolution
and review by the Company’s Audit Committee of the terms of the promissory note to ensure that such terms were no less favorable
to the Company than those that would be available with respect to such transactions from unaffiliated third parties. See
Note
7. Long-Term Debt, Notes Payable and Capital Lease Obligations.
On December 22, 2015, the Company entered into securities purchase
agreements (the “Insider Common Stock SPAs”) with each of certain investors, including Bipin C. Shah, its Chairman
and then Chief Executive Officer, Robert B. Palmer, Director and Chair of the Audit Committee, and Jonathan M. Lubert, Director.
Pursuant to the Insider Common Stock SPAs, Messrs. Shah, Palmer and Lubert each agreed to purchase 20,000 shares, or an aggregate
of 60,000 shares, of the Company’s common stock at a purchase price of $2.70 per share (a price greater than the closing
bid price of the common stock on December 21, 2015, which was the last closing bid price preceding the Company’s execution
of each of the Insider Common Stock SPAs), for aggregate consideration of $162,000, prior to issuance costs. See
Note 9. Stockholders’
Equity.
On January 15, 2016, the Company issued the Promissory Notes
in favor of each of Bipin C. Shah, Jonathan Lubert and Flexpoint. Amounts outstanding under the Promissory Notes accrued interest
at a rate of 12% per annum and carried a default interest rate upon the occurrence of certain events of default, including failure
to make payment under the applicable Promissory Note or a sale of the Company. Interest expense related to the Promissory Notes
was $57,500 and $106,250 for the three and nine months ended September 30, 2016, respectively. The maturity date of the Promissory
Notes was extended to July 31, 2016 through an extension executed on April 11, 2016. On July 26, 2016, Jonathan Lubert and Flexpoint
agreed to further extend their Promissory Notes to September 30, 2016 or the occurrence of an event of a default that is not properly
cured or waived. Additionally, Flexpoint increased the principal amount of its expiring Promissory Note from $1,000,000 to $1,400,000,
the proceeds of which increase were used to pay off the outstanding balance of the promissory note issued to Bipin C. Shah due
on July 31, 2016. Finally, on September 30, 2016, Jonathan Lubert and Flexpoint agreed to further extend their Promissory Notes
to October 31, 2016. The promissory notes in favor of Mr. Lubert and Flexpoint were paid in full on October 21, 2016. See
Note
14. Subsequent Events.
Note 13. Segments
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 to businesses
with a focus on those processing internet transactions and recurring billings, and the HR and Payroll Segment, which is a full-service
payroll and related payroll tax payment processor.
Segment operating results are presented below (in thousands).
The results reflect revenues and expenses directly related to each segment. The activity within JetPay Card Services was not material
through September 30, 2016 and 2015, and accordingly was included in Corporate in the tables below.
|
|
For the Three Months Ended September 30, 2016
|
|
|
|
JetPay
Payment
Processing
|
|
|
JetPay HR and Payroll
|
|
|
General/ Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
11,823
|
|
|
$
|
3,374
|
|
|
$
|
17
|
|
|
$
|
15,214
|
|
Cost of processing revenues
|
|
|
8,300
|
|
|
|
1,878
|
|
|
|
21
|
|
|
|
10,199
|
|
Selling, general and administrative expenses
|
|
|
2,894
|
|
|
|
1,377
|
|
|
|
244
|
|
|
|
4,515
|
|
Settlement of legal matter
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20
|
)
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
|
|
404
|
|
Amortization of intangibles and depreciation
|
|
|
721
|
|
|
|
316
|
|
|
|
1
|
|
|
|
1,038
|
|
Other expenses
|
|
|
165
|
|
|
|
61
|
|
|
|
96
|
|
|
|
322
|
|
Loss before income taxes
|
|
$
|
(237
|
)
|
|
$
|
(258
|
)
|
|
$
|
(749
|
)
|
|
$
|
(1,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
$
|
192
|
|
|
$
|
118
|
|
|
$
|
-
|
|
|
$
|
310
|
|
|
|
For the Three Months Ended September 30, 2015
|
|
|
|
JetPay
Payment
Processing
|
|
|
JetPay HR and Payroll
|
|
|
General/ Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
7,081
|
|
|
$
|
3,215
|
|
|
$
|
12
|
|
|
$
|
10,308
|
|
Cost of processing revenues
|
|
|
4,703
|
|
|
|
1,723
|
|
|
|
30
|
|
|
|
6,456
|
|
Selling, general and administrative expenses
|
|
|
1,665
|
|
|
|
1,142
|
|
|
|
189
|
|
|
|
2,996
|
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of intangibles and depreciation
|
|
|
539
|
|
|
|
351
|
|
|
|
1
|
|
|
|
891
|
|
Other expenses
|
|
|
101
|
|
|
|
82
|
|
|
|
125
|
|
|
|
308
|
|
Income (loss) before income taxes
|
|
$
|
73
|
|
|
$
|
(83
|
)
|
|
$
|
(332
|
)
|
|
$
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
$
|
172
|
|
|
$
|
85
|
|
|
$
|
2
|
|
|
$
|
259
|
|
|
|
For the Nine months ended September 30, 2016
|
|
|
|
JetPay
Payment
Processing
|
|
|
JetPay HR and Payroll
|
|
|
General/ Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
27,986
|
|
|
$
|
11,037
|
|
|
$
|
46
|
|
|
$
|
39,069
|
|
Cost of processing revenues
|
|
|
20,062
|
|
|
|
5,764
|
|
|
|
79
|
|
|
|
25,905
|
|
Selling, general and administrative expenses
|
|
|
6,722
|
|
|
|
3,907
|
|
|
|
1,467
|
|
|
|
12,096
|
|
Settlement of legal matter
|
|
|
6,120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,120
|
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
234
|
|
|
|
234
|
|
Amortization of intangibles and depreciation
|
|
|
1,918
|
|
|
|
995
|
|
|
|
4
|
|
|
|
2,917
|
|
Other expenses
|
|
|
476
|
|
|
|
201
|
|
|
|
409
|
|
|
|
1,086
|
|
(Loss) income before income taxes
|
|
$
|
(7,312
|
)
|
|
$
|
170
|
|
|
$
|
(2,147
|
)
|
|
$
|
(9,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
1,626
|
|
|
$
|
547
|
|
|
$
|
31
|
|
|
$
|
2,204
|
|
Property and equipment additions
|
|
$
|
404
|
|
|
$
|
211
|
|
|
$
|
-
|
|
|
$
|
615
|
|
Intangible assets and goodwill
|
|
$
|
58,724
|
|
|
$
|
16,954
|
|
|
$
|
-
|
|
|
$
|
75,678
|
|
Total segment assets
|
|
$
|
91,742
|
|
|
$
|
64,485
|
|
|
$
|
6,600
|
|
|
$
|
162,827
|
|
|
|
For the Nine months ended September 30, 2015
|
|
|
|
JetPay
Payment Processing
|
|
|
JetPay HR and Payroll
|
|
|
General/ Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
21,614
|
|
|
$
|
10,070
|
|
|
$
|
34
|
|
|
$
|
31,718
|
|
Cost of processing revenues
|
|
|
13,989
|
|
|
|
5,353
|
|
|
|
90
|
|
|
|
19,432
|
|
Selling, general and administrative expenses
|
|
|
5,224
|
|
|
|
3,433
|
|
|
|
915
|
|
|
|
9,572
|
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
36
|
|
Amortization of intangibles and depreciation
|
|
|
1,604
|
|
|
|
1,042
|
|
|
|
4
|
|
|
|
2,650
|
|
Other expenses
|
|
|
300
|
|
|
|
221
|
|
|
|
363
|
|
|
|
884
|
|
Income (loss) before income taxes
|
|
$
|
497
|
|
|
$
|
21
|
|
|
$
|
(1,374
|
)
|
|
$
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
919
|
|
|
$
|
573
|
|
|
$
|
36
|
|
|
$
|
1,528
|
|
Property and equipment additions
|
|
$
|
346
|
|
|
$
|
203
|
|
|
$
|
3
|
|
|
$
|
552
|
|
Intangible assets and goodwill
|
|
$
|
48,336
|
|
|
$
|
18,013
|
|
|
$
|
-
|
|
|
$
|
66,349
|
|
Total segment assets
|
|
$
|
71,941
|
|
|
$
|
56,756
|
|
|
$
|
364
|
|
|
$
|
129,061
|
|
Note 14. Subsequent Events
On October 18, 2016, the Company entered into the
A&R Purchase Agreement by and among the Company, Flexpoint, and Sundara Investment Partners, LLC, an entity controlled by
Laurence L. Stone. The A&R Purchase Agreement amended the Flexpoint Purchase Agreement to facilitate the Company’s
issuance and sale to Sundara Investment Partners, LLC of the Remaining Shares. Since the initial closing under the Flexpoint
Purchase Agreement on October 11, 2013, the Company had previously issued and sold to Flexpoint an aggregate of 99,666 shares
of Series A Preferred for approximately $29,899,900. Flexpoint’s right to purchase the Remaining Shares was set to
expire on October 11, 2016, but was extended until October 25, 2016 by Amendment No. 1 to the Flexpoint Purchase Agreement,
dated October 10, 2016, by and between the Company and Flexpoint. Pursuant to the A&R Purchase Agreement, the Company and
Flexpoint provided Sundara Investment Partners, LLC the sole right to purchase the Remaining Shares, in a single transaction
consummated at the signing of the A&R Purchase Agreement, for a purchase price of $10,100,100. The A&R Purchase
Agreement also reallocated certain rights held by Flexpoint under the Flexpoint Purchase Agreement between Flexpoint and
Sundara Investment Partners, LLC. Sundara Investment Partners, LLC purchased the Remaining Shares on October 18, 2016 (the
“Sundara Closing”). Pursuant to the A&R Securities Purchase Agreement and Certificate of Designation of
Series A Preferred, as amended, Laurence L. Stone was elected as a Preferred Director (as defined in the Certificate of
Designation) on the Company's Board of Directors, effective as of the Sundara Closing.
Additionally, on October 18, 2016, in connection with the
Sundara Closing, ADC and PTFS, as borrowers (the “Borrowers”), entered into a Loan and Security Agreement (the “Loan
Agreement”) with LHLJ, Inc., a Delaware corporation controlled by Laurence L. Stone, as lender, for a term loan in the principal
amount of $9,500,000. The underlying promissory note will accrue interest at a rate of 8% per annum. The loan matures on October
18, 2021 and is payable in equal monthly installments of principal and interest of $128,677 with a final payment of $4,750,000
at maturity. The obligations of the Borrowers under the Loan Agreement are guaranteed by the Company and CSI, and are secured
by all of the assets of ADC, PTFS and CSI, as well as a pledge by the Company of its ownership interests in ADC, PTFS and CSI.
The Loan Agreement contains affirmative and negative covenants, including limitations on the incurrence of indebtedness, liens,
transactions with affiliates and other customary restrictions for loans of this type and size. The Borrowers are also subject
to financial covenants relating to their debt coverage ratio and total leverage ratio during the term of the loan.
A portion of the proceeds of the LHLJ Debt Investment
was used to simultaneously satisfy the remaining balance of the Prior ADC Credit Facility totaling $5.175 million. In
connection with the satisfaction of the Borrowers’ obligations under the Prior ADC Credit Facility, ACI, ADC, the
Company and FNB entered into the Second Amendment to the Loan Agreement and Security Agreement, dated as of November 7, 2014,
as amended (the “ACI Credit Facility”), by and among ACI, the Company and FNB to release ADC’s guaranty of
the obligations of ACI under the ACI Credit Facility and to eliminate provisions relating to the cross-collateralization of
the ACI Credit Facility and the Prior ADC Credit Facility.
Finally, on October 21, 2016, the Company used a portion
of the proceeds of the LHLJ Debt Investment to satisfy in full the $3.85MM Note due to Merrick, the $1.4 million unsecured promissory
note due to Flexpoint, and the $500,000 unsecured promissory note due to Jonathan Lubert.