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 March 31, 2016 and 2015. The results
of operations for the three months ended March 31, 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 (“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
JetPay 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 traditional retailers and service providers;
and the JetPay 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, and services under the Patient Protection
and Affordable Care Act (the “Affordable Care Act”). The Company, through its business unit, JetPay Card Services,
provides low-cost money management and payment services to un-banked and under-banked employees of its business customers as well
as other consumers. The activity within JetPay Card Services was not material for the year ended December 31, 2015 and the three
months ended March 31, 2016. 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 AD Computer Corporation
(“ADC” or “JetPay Payroll Services”) on December 28, 2012 (the “Completed Transactions”). 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.
The Company believes that the investments made in its technology,
infrastructure, and sales staff will help generate cash flows sufficient to cover its working capital needs. The Company may, from
time to time, determine that additional investments are prudent to maintain and increase stockholder value. In addition to funding
ongoing working capital needs, the Company’s cash requirements for the next twelve months ending March 31, 2017 include,
but are not limited to: principal and interest payments on long-term debt and capital lease obligations of approximately $4.2 million,
and $1.2 million of deferred consideration paid to the unitholders of ACI on April 10, 2016. In addition to the long-term debt
noted above, on January 15, 2016, the Company entered into unsecured promissory notes with each of Bipin C. Shah, the Company’s
Chief Executive Officer, Jonathan Lubert, a Director of the Company, and an affiliate of Flexpoint Ford, LLC (“Flexpoint”),
in the amounts of $400,000, $500,000, and $1,050,000, respectively (the “Promissory Notes”), with the proceeds used
as cash collateral to replace a maturing letter of credit in favor of Wells Fargo Bank, N.A., the Company’s debit and credit
card processing operations primary sponsoring bank. The Company is currently working to replace this cash collateral with a new
letter of credit and pay off the Promissory Notes, which as amended have a maturity date of July 31, 2016.
The Company expects to fund its cash needs, including capital
required for acquisitions and capital expenditures, with cash flow from its operating activities, equity investments, and borrowings.
As disclosed in
Note 8. Redeemable Convertible Preferred Stock
, from October 11, 2013 to December 31, 2014, the Company
sold 91,333 shares of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), to affiliates
of Flexpoint for an aggregate of $27.4 million, less certain costs, and has an agreement to potentially sell an additional $12.6
million of Series A Preferred to Flexpoint. Additionally, 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 Series A-1 Preferred to
Wellington. This additional combined $13.45 million of convertible preferred stock, if sold, will be principally used as partial
consideration for future acquisitions. 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. If the Company is unable to raise additional capital through additional equity
investments or borrowing, it may need to limit its level of capital expenditures and future growth plans.
Note 3. Business Acquisition
On February 22, 2016, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with CollectorSolutions, Inc., a Florida corporation (“CSI”),
CSI Acquisition Sub One, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (“Merger Sub
One”), CSI Acquisition Sub Two, LLC, a Delaware limited liability company and wholly-owned subsidiary of Merger Sub One (“Merger
Sub Two”), and Gene M. Valentino, an individual, in his capacity as Representative. Pursuant to the terms of the Merger Agreement,
the Company has agreed to acquire CSI through a statutory merger of Merger Sub Two with and into CSI, with CSI continuing as the
surviving entity (the “First Step Merger”) and, as part of the same overall transaction, the surviving entity of the
First Step Merger will merge with and into Merger Sub One, with Merger Sub One continuing as the surviving entity (collectively,
the “Transaction”). The acquisition of CSI would provide 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,
as well as provide a base operation to sell its payroll and related Human Resource and payroll tax processing and payment services
to its clients.
As consideration for the acquisition, the Company will issue
3.25 million shares of common stock to the stockholders of CSI and assume or pay off up to $1.5 million of CSI indebtedness. Of
the 3.25 million shares of common stock, (i) 587,500 shares will be placed in escrow at closing as partial security for the indemnification
obligations of the stockholders of CSI and (ii) 500,000 shares will be placed in escrow at closing and released or cancelled based
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 common stock, each with a strike price of $4.00 per share and a 10-year term
from its date of issuance, based upon CSI achieving certain gross profit performance targets in 2018 and 2019.
The Transaction is subject to a number of closing conditions, including the approval of the Company’s stockholders
of the issuance of shares of common stock to the stockholders of CSI pursuant to the terms of the Merger Agreement.
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 (“FIs”). 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 merchant contracts or contracts with Third Parties for whom it 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 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 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. 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 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 from 1 to 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is included
in total revenue 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, JetPay, LLC must bear the credit risk for the full amount of the transaction. JetPay, LLC evaluates the risk
for such transactions and estimates the potential loss for chargebacks based primarily on historical experience and records a loss
reserve accordingly. JetPay, LLC 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 $339,000 and $306,000 were
recorded as of March 31, 2016 and December 31, 2015.
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 and 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 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.
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 – 5 to 15 years; and furniture and fixtures – 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 is 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. 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.
Convertible Preferred Stock
The Company accounts for the redemption premium, beneficial
conversion feature and issuance costs on 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 Flexpoint Series A Preferred and the Wellington Series A-1 Preferred of 9,448,241 and 616,500 shares of common stock, respectively,
at March 31, 2016, and the effect of 813,744 exercisable stock options granted under the Company’s 2013 Stock Incentive Plan
at March 31, 2016 have been excluded from the loss per share calculation for the three months ended March 31, 2016 in that the
assumed conversion of these options would be anti-dilutive. For the three months ended March 31, 2015, the dilutive effect of the
conversion option in the Flexpoint Series A Preferred and the Wellington Series A-1 Preferred of 9,133,300 and 616,500 shares of
common stock, respectively, and the effect of 498,324 exercisable stock options granted under the Company’s 2013 Stock Incentive
Plan at March 31, 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 the convertible debt it issues 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 March 31, 2016
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
1,156
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,156
|
|
|
|
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):
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,296
|
|
|
$
|
1,240
|
|
Change in fair value of JetPay contingent cash consideration
|
|
|
36
|
|
|
|
11
|
|
Change in fair value of ACI contingent cash consideration
|
|
|
10
|
|
|
|
-
|
|
Payment of ACI contingent cash consideration
|
|
|
(186
|
)
|
|
|
-
|
|
Totals
|
|
$
|
1,156
|
|
|
$
|
1,251
|
|
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 and ACI 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.
The Level 3 financial liabilities are the result of recording
the Completed Transactions, the ACI acquisition and related debt instruments as more fully described below.
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 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 March 31, 2016 as a result of this component being recorded as equity. The fair value at March 31, 2016 of the cash-based
contingent consideration, valued at $36,000, was determined using a binomial option pricing model. The following assumptions were
utilized in the March 31, 2016 calculations: risk free interest rate: 0.70%; dividend yield: 0%; term of contingency of 1.75 years;
and volatility: 52.7%.
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 $280,000 at March 31, 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 March 31, 2016 amount excludes $186,000 which was paid to the previous
unitholders of ACI in February 2016. 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.
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 March 31, 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
months ended March 31, 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 Updated (“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 period 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 March 2016, the FASB issued ASU 2016-03,
Derivatives and
Hedging
(Topic 815): Contingent Put and Call Options in Debt Instruments
, which clarifies the requirements for assessing
whether contingent call or put options that can accelerate the repayment of principal on debt instruments are clearly and closely
related to their debt hosts. This guidance will be effective for annual reporting periods beginning after December 15, 2016, including
interim periods within those annual reporting periods, and early adoption is permitted. This new guidance is not expected to have
a material impact on the Company’s consolidated financial statements.
Note 5. Property and Equipment, net of Accumulated
Depreciation
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
417
|
|
|
$
|
410
|
|
Equipment
|
|
|
1,231
|
|
|
|
1,194
|
|
Furniture and fixtures
|
|
|
281
|
|
|
|
280
|
|
Computer software
|
|
|
601
|
|
|
|
601
|
|
Vehicles
|
|
|
245
|
|
|
|
245
|
|
Assets in progress
|
|
|
520
|
|
|
|
422
|
|
Total property and equipment
|
|
|
3,295
|
|
|
|
3,152
|
|
Less: accumulated depreciation
|
|
|
(1,352
|
)
|
|
|
(1,173
|
)
|
Property and equipment, net
|
|
$
|
1,943
|
|
|
$
|
1,979
|
|
Property and equipment included $476,090 and $520,851 of computer
equipment as of March 31, 2016 and December 31, 2015, respectively, net of accumulated depreciation of $115,487 and $70,726 as
of March 31, 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 $179,000 and $109,000 for the three
months ended March 31, 2016 and 2015, respectively.
Note 6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Trade accounts payable
|
|
$
|
1,661
|
|
|
$
|
1,801
|
|
ACH clearing liability
|
|
|
1,324
|
|
|
|
1,735
|
|
Accrued compensation
|
|
|
1,392
|
|
|
|
980
|
|
Accrued agent commissions
|
|
|
1,013
|
|
|
|
861
|
|
Related party payables
|
|
|
73
|
|
|
|
82
|
|
Other
|
|
|
3,871
|
|
|
|
3,202
|
|
Total
|
|
$
|
9,334
|
|
|
$
|
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:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Term loan payable to First National Bank (or “FNB”), formerly Metro Bank, 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 AD Computer Corporation (“ADC”) and Payroll Tax Filing Services, Inc. (“PTFS”).
|
|
$
|
4,818
|
|
|
$
|
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 Merchant Systems, LLC (“ACI”).
|
|
|
6,979
|
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
Revolving note payable to FNB, interest rate of Wall Street Journal Prime rate plus 1.00% (4.50% as of March 31, 2016), interest payable monthly, collateralized by all assets of ADC, PTFS, and ACI, a pledge by the Company of its ownership interest in ADC and ACI, as well as a $1.0 million negative pledge on the stock of JetPay, LLC, maturing on May 6, 2017.
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
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 $340,240 and $384,611 at March 31, 2016 and December 31, 2015, respectively. See
Note 12. Related Party Transactions.
|
|
|
1,991
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable to stockholder, interest rate of 4% payable at maturity, note principal due September 30, 2016. 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 on May 6, 2016 and 2017. See
Note 12. Related Party Transactions.
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory notes payable to related parties, interest rate of 12% payable at maturity, note principal due July 31, 2016, as extended. See
Note 12. Related Party Transactions.
|
|
|
1,950
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 maturing in May 2017 through December 2018, collateralized by equipment.
|
|
|
412
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
Various other debt instruments related to vehicles at ADC.
|
|
|
-
|
|
|
|
2
|
|
|
|
|
17,992
|
|
|
|
16,697
|
|
Less current portion
|
|
|
(5,341
|
)
|
|
|
(3,411
|
)
|
|
|
$
|
12,651
|
|
|
$
|
13,286
|
|
The First National Bank 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 March 31, 2016.
Maturities of long-term debt and capital lease obligations,
excluding fair value and conversion option debt discounts, are as follows for the twelve months ending March 31: 2017 – $5.3
million; 2018 – $6.2 million; 2019 – $2.6 million; 2020 – $2.2 million; 2021 – $1.3 million; and $0.7 million
thereafter.
Note 8. Redeemable Convertible Preferred
Stock
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 a Securities Purchase Agreement (the “Flexpoint Securities Purchase Agreement”) entered
into on August 22, 2013. 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; and 33,333 shares on December 28, 2014 for
$10.0 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 $1.4 million investment
were used to satisfy a portion of the EarlyBirdCapital, Inc. Award (the “EBC Award”). As a result of the EBC Award,
the Company was not able to satisfy one of the conditions to closing of the $1.4 million Series A Preferred purchase. Although
Flexpoint agreed to waive this condition at the closing, for any subsequent closing of the Series A Preferred, the Company will
need to seek a waiver of the failure of this condition from Flexpoint. The November 7, 2014 $6.0 million proceeds were used as
partial consideration for the acquisition of ACI and the proceeds of the December 28, 2014 $10.0 million investment were used to
redeem the Notes that matured on December 31, 2014.
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, initially $3.00. Under the Flexpoint Securities Purchase Agreement, Flexpoint is provided
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.
Under the Flexpoint Securities Purchase Agreement, 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. The Company’s obligation to issue and sell,
and Flexpoint’s obligation to purchase, the Series A Preferred is divided into three separate tranches: Tranche A, Tranche
B and Tranche C. Tranche A consisted of $10.0 million of shares of Series A Preferred that was issued on October 11, 2013.
Tranche B consisted of up to $10.0 million of shares of Series A Preferred, which Flexpoint was obligated to purchase, subject
to satisfaction or waiver of certain conditions, from the Company if the Company was able to consummate a redemption any time after
December 1, 2014 and prior to December 29, 2014 of the Notes. The Series A Preferred under Tranche B was issued on December
28, 2014. Tranche C consists of up to $20.0 million of shares of Series A Preferred ($12.6 million remaining available at March
31, 2016), which Flexpoint has the option to purchase at any time until the third anniversary of the Initial Closing. The shares
of Series A Preferred issuable with respect to Tranche A, Tranche B and Tranche C all have a purchase price of $300 per share.
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 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.
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 1,350 shares of Series A-1 Preferred to Wellington on November 20, 2014 for $405,000, and 2,250 shares 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. The Series A-1 Preferred will be 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 (“Series A-2 Preferred”
and together with the Series A Preferred and the Series A-1 Preferred, the “Convertible Preferred Stock”). The 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 will be $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 will have 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.
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 owned
by Flexpoint 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. 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 issuances of Series A Preferred to Flexpoint 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 $1.4 million and $1.2 million for the three months ended March 31, 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 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 Securities 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 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.
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 March 31, 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 “Meeting”), the Company’s stockholders approved the adoption of the Company’s 2013 Stock
Incentive Plan (the “Plan”). The Company granted options to purchase 0 and 200,000 shares of common stock under the
Plan during the three months ended March 31, 2016 and 2015, respectively, all at an exercise price of $3.00 per share. The grant
date fair value of the options granted during the three months ended March 31, 2016 and 2015 were determined to be approximately
$0 and $232,300, respectively, using the Black-Scholes option pricing model. Aggregated stock-based compensation expense for the
three months ended March 31, 2016 and 2015 was $72,000 and $78,000, respectively. Unrecognized compensation expense as of March
31, 2016 relating to non-vested common stock options was approximately $638,000 and is expected to be recognized through 2019.
During the three months ended March 31, 2016, no options have been exercised and 156,667 options have been 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 March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected term (years)
|
|
|
-
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
-
|
|
|
|
1.56%
|
|
Volatility
|
|
|
-
|
|
|
|
44.8%
|
|
Dividend yield
|
|
|
-
|
|
|
|
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 of 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 three months ended
March 31, 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
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(156,667
|
)
|
|
$
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at March 31, 2016
|
|
|
1,560,415
|
|
|
$
|
3.02
|
|
Exercisable at March 31, 2016
|
|
|
813,744
|
|
|
$
|
3.04
|
|
The weighted average remaining life of options outstanding at
March 31, 2016 was 8.27 years. The aggregate intrinsic value of the exercisable options at March 31, 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 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 March 31, 2016, an aggregate of 300,000 shares of common
stock were reserved for issuance under the Purchase Plan, of which 0 shares of common stock have been issued.
Note 10. Income Taxes
The Company recorded income tax expense of $53,000 and $58,000
for the three months ended March 31, 2016 and 2015, respectively. Income tax expense reflects the recording of state income taxes.
The effective tax rates were approximately (5.6)% and (35.8)% for the three months ended March 31, 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.
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 significant uncertainty exists with respect to future realization of the deferred tax assets, and has,
therefore, adjusted its valuation allowance against deferred tax assets by $380,000 in the three months ended March 31, 2016, with
a total valuation allowance of $7.4 million at March 31, 2016, representing the amount of its deferred income tax assets in excess
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 Bank (“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 June 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. JetPay, LLC has received correspondence from Merrick of its intention to seek recovery for all
unrecovered chargebacks and related costs, but JetPay, LLC is currently not a party to any litigation from Merrick regarding this
matter. Merrick and JetPay, LLC have entered into a forbearance agreement pertaining to the Direct Air chargeback issue. The Direct
Air situation has also caused other unexpected expenses, such as higher professional fees. Additionally, pursuant to the terms
of its agreement with Merrick, Merrick has forced JetPay, LLC to maintain increased cash reserves in order to provide additional
security for any obligations arising from the Direct Air situation. Merrick continues to hold approximately $4.4 million of total
reserves related to the Direct Air matter as of March 31, 2016. The cash reserve balance was reduced by approximately $600,000
during the year ended December 31, 2014 to settle a lawsuit involving the Company and Merrick with MSC Cruise Lines, including
certain legal fees claimed and deducted from the reserve by Merrick in connection with settling the matter, as more fully described
below. These reserves are recorded in Other assets.
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 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 $4.3 million.
The Company does not believe it has a responsibility to reimburse Merrick for these legal fees and intends to vigorously dispute
these charges. Accordingly, the Company has not recorded an accrual for these legal fees as of March 31, 2016.
As partial protection against any potential losses related to
Direct Air, the Company required that, upon closing of the Completed Transactions, 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 JPMorgan Chase (“Chase”)
as the trustee. The Escrow Agreement for the account names Merrick, the Company, and WLES as parties. If JetPay, LLC suffers any
liability as a result of the Direct Air matter, these shares are to be used in partial or full payment for any such liability,
with any remaining shares delivered to WLES. If JetPay, LLC is found to have any liability because of this issue, and these shares
do not have sufficient value to fully cover such liability, the Company may be responsible for this JetPay, LLC liability which
could have a materially adverse effect on its business, financial condition and results of operations. On February 3, 2014, the
Company received notice that Merrick had requested Chase to release the 3,333,333 shares in the escrow account to Merrick. Both
JetPay and WLES informed Chase that they did not agree to the release, and the shares remain in escrow.
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 basis of the suit regarding JetPay, LLC is groundless and intends to defend it vigorously.
In December 2012, BCC Merchant Solutions, a former customer
of JetPay, LLC filed a suit against JetPay, LLC, Merrick Bank, 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. While
the Company believes that the basis of the suit regarding JetPay, LLC is groundless and while it intends to defend it vigorously,
the Company maintains an accrual of $200,000 for any potential loss settlement related to this matter as of March 31, 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 basis of the suit regarding JetPay, ADC, and PTFS is groundless and has turned the matter over to
the Company’s insurance carrier who intends to defend the suit vigorously. 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 March 31,
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 approximately $45,163 per month with annual 4% increases, on a net basis.
The office lease has an initial 10-year term expiring May 31, 2016. Rent expense under this lease was $129,140 for each of the
three months ended March 31, 2016 and 2015. We are currently evaluating our future space needs and reviewing several alternatives,
including a possible extension or amendment to our expiring 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 $23,000 and $9,000 for the three months ended March 31, 2016 and 2015, respectively.
The above transactions with respect to JetPay Payroll Services
and JetPay Payment Services were approved prior to the Completed Transactions. Going forward, all related party transactions with
respect to such entities will be reviewed and approved by the Company’s Audit Committee to ensure that the terms of such
transactions are no less favorable to the Company than those that would be available with respect to such transactions from unaffiliated
third parties.
In connection with the closing of the JetPay, LLC acquisition,
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
agreed to issue a promissory note in the amount of $2,331,369 in favor of WLES. Interest accrues on amounts due under the note
at a rate of 5% per annum, and is payable quarterly. Interest expense was $29,000 for each of the three months ended March 31,
2016 and 2015. The note can be prepaid in full or in part at any time without penalty. As partial consideration for offering the
note, the Company and JP Merger Sub, LLC agreed to waive certain specified indemnity claims against WLES and Mr. Voigt to the extent
the losses under such claims do not exceed $2,331,369. 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 $105,000 for the three months ended March 31, 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, 2016,
as extended, and bears interest at an annual rate of 4% with interest expense of $4,850 recorded for each of the three months ended
March 31, 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 Completed Transactions and prior to the consummation of the Completed Transactions, respectively, each
of the parties will share in any proceeds received pro rata.
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 $3,600 for the three months ended March 31, 2016. 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 a Securities
Purchase Agreement (the “Insider Common Stock SPAs”) with each of certain investors, including Bipin C. Shah, its Chairman
and 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 entered into unsecured promissory
notes with each of Bipin C. Shah, the Company’s Chief Executive Officer, Jonathan Lubert, a Director of the Company, and
an affiliate of Flexpoint, in the amounts of $400,000, $500,000, and $1,050,000, respectively (the “Promissory Notes”).
Amounts outstanding under the Promissory Notes accrue interest at a rate of 12% per annum and carry 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 $49,000 for the three months ended March 31, 2016. The notes
mature on the earlier of July 31, 2016, as extended, or the occurrence of an event of a default that is not properly cured or waived.
The proceeds of $1.9 million from the Promissory Notes were used as cash collateral to replace a maturing letter of credit in favor
of Wells Fargo Bank, N.A., the Company’s debit and credit card processing operations primary sponsoring bank.
On April 11, 2016, the Company entered into Consent to Amendment
of Promissory Note letter agreements with each of Messrs. Bipin C. Shah, Jonathan Lubert, and an affiliate of Flexpoint to extend
until July 31, 2016 the maturity dates of the Promissory Notes.
Note 13. Segments
The Company currently operates in two business segments, the
JetPay 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 JetPay 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 March 31, 2016 and 2015, and accordingly was included in Corporate in the tables below.
|
|
For the Three Months Ended March 31, 2016
|
|
|
|
JetPay
Payment
Processing
|
|
|
JetPay HR
and Payroll
|
|
|
General/
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
7,333
|
|
|
$
|
4,295
|
|
|
$
|
15
|
|
|
$
|
11,643
|
|
Cost of processing revenues
|
|
|
5,291
|
|
|
|
2,070
|
|
|
|
39
|
|
|
|
7,400
|
|
Selling, general and administrative expenses
|
|
|
1,703
|
|
|
|
1,319
|
|
|
|
785
|
|
|
|
3,807
|
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
Amortization of intangibles and depreciation
|
|
|
571
|
|
|
|
339
|
|
|
|
2
|
|
|
|
912
|
|
Other expenses
|
|
|
151
|
|
|
|
73
|
|
|
|
206
|
|
|
|
430
|
|
(Loss) income before income taxes
|
|
$
|
(383
|
)
|
|
$
|
494
|
|
|
$
|
(1,063
|
)
|
|
$
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
1,398
|
|
|
$
|
512
|
|
|
$
|
33
|
|
|
$
|
1,943
|
|
Property and equipment additions
|
|
$
|
119
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
143
|
|
Intangible assets and goodwill
|
|
$
|
47,383
|
|
|
$
|
17,474
|
|
|
$
|
-
|
|
|
$
|
64,857
|
|
Total segment assets
|
|
$
|
78,250
|
|
|
$
|
90,252
|
|
|
$
|
1,017
|
|
|
$
|
169,519
|
|
|
|
For the Three Months Ended March 31, 2015
|
|
|
|
JetPay
Payment
Processing
|
|
|
JetPay HR
and Payroll
|
|
|
General/
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing revenues
|
|
$
|
7,088
|
|
|
$
|
3,747
|
|
|
$
|
9
|
|
|
$
|
10,844
|
|
Cost of processing revenues
|
|
|
4,529
|
|
|
|
1,897
|
|
|
|
30
|
|
|
|
6,456
|
|
Selling, general and administrative expenses
|
|
|
1,752
|
|
|
|
1,147
|
|
|
|
483
|
|
|
|
3,382
|
|
Change in fair value of contingent consideration liability
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
Amortization of intangibles and depreciation
|
|
|
531
|
|
|
|
345
|
|
|
|
1
|
|
|
|
877
|
|
Other expenses
|
|
|
99
|
|
|
|
63
|
|
|
|
118
|
|
|
|
280
|
|
Income (loss) before income taxes
|
|
$
|
177
|
|
|
$
|
295
|
|
|
$
|
(634
|
)
|
|
$
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
640
|
|
|
$
|
548
|
|
|
$
|
37
|
|
|
$
|
1,225
|
|
Property and equipment additions
|
|
$
|
75
|
|
|
$
|
39
|
|
|
$
|
1
|
|
|
$
|
115
|
|
Intangible assets and goodwill
|
|
$
|
49,310
|
|
|
$
|
18,574
|
|
|
$
|
-
|
|
|
$
|
67,884
|
|
Total segment assets
|
|
$
|
74,457
|
|
|
$
|
80,202
|
|
|
$
|
2,506
|
|
|
$
|
157,165
|
|
Note 14. Subsequent Events
On April 11, 2016, the Company entered into Consent to Amendment
of Promissory Note letter agreements with each of Messrs. Bipin C. Shah, Jonathan Lubert, and an affiliate of Flexpoint to extend
until July 31, 2016 the maturity dates of the Promissory Notes.
On May 5, 2016, Diane (Vogt) Faro was
elected by the Board of Directors (“Board”) to replace Bipin C. Shah as Chief Executive Officer of the Company, effective
immediately. Mr. Shah agreed to continue to serve as the Chairman and a member of the Board. Commencing on May 5, 2016, Ms. Faro
entered into an executive employment agreement (the “Agreement”) which has an initial term of two years and contains
an obligation to make certain payments to Ms. Faro for a one year period should her employment be terminated by the Company other
than for cause as defined in the Agreement during the term of the agreement. The Agreement also provides Ms. Faro an initial base
salary of $400,000 (increasing to $450,000 on the first anniversary of her employment); eligibility to receive an annual cash
bonus of up to 50% of her base salary as of the end of the calendar year to which such bonus relates (which shall be pro-rated
for the 2016 calendar year), as determined in the sole discretion of the Board; a grant of 250,000 options as per the terms of
the Company’s 2013 Stock Incentive Plan to purchase shares of the Company’s common stock at an exercise price of $2.48
per share vesting ratably on a daily basis over a two year period; and eligibility to participate in all Company employee benefit
plans on the same terms as similarly situated employees of the Company.