Attached files
| file | filename |
|---|---|
| EX-99.3 - EXHIBIT 99.3 - Newtek Business Services Corp. | upsofwillcandsubsidiary2014.htm |
| EX-99.1 - EXHIBIT 99.1 - Newtek Business Services Corp. | upsofwillcfs12312016.htm |
| EX-32.2 - EXHIBIT 32.2 - Newtek Business Services Corp. | newt-123116xexh322.htm |
| EX-32.1 - EXHIBIT 32.1 - Newtek Business Services Corp. | newt-123116xexh321.htm |
| EX-31.2 - EXHIBIT 31.2 - Newtek Business Services Corp. | newt-123116xexh312.htm |
| EX-31.1 - EXHIBIT 31.1 - Newtek Business Services Corp. | newt-123116xexh311.htm |
| EX-21 - EXHIBIT 21 - Newtek Business Services Corp. | listofsubsidiaries-123116x.htm |
| 10-K - 10-K - Newtek Business Services Corp. | newt-123116x10k.htm |
Universal Processing Services of
Wisconsin, LLC (A Limited Liability
Company) and Subsidiary
Consolidated Financial Report
and Independent Auditor’s Report
Year Ended December 31, 2015
Universal Processing Services of Wisconsin, LLC and Subsidiary
Index
Year Ended December 31, 2015
Pages
Independent Auditor’s Report ................................................................................................................... 1
Financial Statements
Consolidated Balance Sheet .......................................................................................................................... 2
Consolidated Statement of Income ............................................................................................................... 3
Consolidated Statement of Changes in Member’s Deficit ............................................................................ 4
Consolidated Statement of Cash Flows ........................................................................................................ 5
Notes to Consolidated Financial Statements ............................................................................................ 6-12
Independent Auditor's Report
To the Board of Directors and Member of
Universal Processing Services of Wisconsin, LLC
We have audited the accompanying consolidated financial statements of Universal Processing Services
of Wisconsin, LLC and Subsidiary, which comprise the consolidated balance sheet as of December 31,
2015, and the related consolidated statements of income, changes in member’s deficit and cash flows for
the year then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Universal Processing Services of Wisconsin, LLC and Subsidiary as of
December 31, 2015, and the results of their operations and their cash flows for the year then ended in
accordance with accounting principles generally accepted in the United States of America.
C
Jericho, New York
March 2, 2016
Universal Processing Services of Wisconsin, LLC and Subsidiary
Consolidated Balance Sheet
December 31, 2015
See notes to consolidated financial statements.
2
Assets
Current Assets:
Cash 3,210,066$
Accounts receivable 2,545,411
Prepaid expenses and other current assets 83,348
Inventory 287,475
Total current assets 6,126,300
Fixed assets, net 396,483
Customer merchant accounts, net 1,640,588
Deferred financing costs, net 824,397
Restricted cash 492,715
Due from related parties 378,188
Notes receivable - related party 5,646,749
Goodwill 1,908,495
Total assets 17,413,915$
Liabilities and Member's Deficit
Liabilities:
Current Liabilities:
Accounts payable and accrued expenses 2,231,648$
Residuals payable 809,843
Due to related parties 264,778
Chargeback reserves 604,926
Total current liabilities 3,911,195
Bank note payable 16,998,694
Total liabilities 20,909,889
Commitments and contingencies
Member's deficit (3,495,974)
Total liabilities and member's deficit 17,413,915$
Universal Processing Services of Wisconsin, LLC and Subsidiary
Consolidated Statement of Income
Year Ended December 31, 2015
See notes to consolidated financial statements.
3
Revenue:
Electronic payment processing 98,474,937$
Expenses:
Electronic payment processing costs 82,505,282
Salaries and benefits 5,070,083
Professional fees 1,682,895
Depreciation and amortization 318,262
Other general and administrative costs 1,041,980
Total expenses 90,618,502
Income from operations 7,856,435
Interest expense, net (811,383)
Inter st income - related party 484,222
Net income 7,529,274$
Universal Processing Services of Wisconsin, LLC and Subsidiary
Consolidated Statement of Changes in Member’s Deficit
Year Ended December 31, 2015
See notes to consolidated financial statements.
4
Member's Equity
(Deficit)
Balance, December 31, 2014 3,537,404$
Net income 7,529,274
Member distributions (14,562,652)
Balance, December 31, 2015 (3,495,974)$
Universal Processing Services of Wisconsin, LLC and Subsidiary
Consolidated Statement of Cash Flows
Year Ended December 31, 2015
See notes to consolidated financial statements.
5
Cash flows from operating activities:
Net income 7,529,274$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 318,262
Amortization of deferred financing costs 140,493
Changes in operating assets and liabilities:
Restricted cash 209,304
Accounts receivable 1,115,267
Prepaid expenses and other current assets 36,330
Inventory (78,002)
Accounts payable, accrued expenses and other current liabilities (1,777,781)
Due to/from related parties (957,313)
Net cash provided by operating activities 6,535,834
Cash flows from investing activities:
Purchase of customer merchant accounts (1,524,853)
Net advances under related party note (5,646,749)
Purchase of fixed assets (263,761)
Net cash used in investing activities (7,435,363)
Cash flows used in financing activities:
Distributions to member (14,562,652)
Proceeds from term loan 16,998,694
Deferred financing costs paid (964,890)
Net cash provided by financing activities 1,471,152
Net increase in cash 571,623
Cash, beginning of year 2,638,443
Cash, end of year 3,210,066$
Supplemental disclosure of cash flow information
Interest paid 680,281$
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
6
1. Organization, Basis of Presentation and Description of Business
Universal Processing Services of Wisconsin, LLC (“UPS-WI”), was organized as a limited liability
company (“LLC”) under the laws of the State of Wisconsin and is a wholly-owned subsidiary of
Newtek Business Services Holdco 1, Inc. (“Holdco”). As a limited liability company, the liability
of Holdco is limited to its capital account. Prior to being a wholly-owned subsidiary of Holdco,
UPS-WI was a wholly-owned subsidiary of The Whitestone Group, LLC (“The Whitestone
Group”). In 2015, the Whitestone Group transferred all of its membership interest in UPS-WI to
Holdco.
UPS-WI, and its wholly-owned subsidiary, Solar Processing Services, LLC (“Solar”), are
hereinafter referred to as the “Company”. The Company markets credit and debit card processing
services, check approval services and ancillary processing equipment and software to merchants
who accept credit cards, debit cards, checks and other non-cash forms of payment.
The accompanying consolidated financial statements include the accounts of UPS-WI and Solar.
All significant intercompany accounts and transactions have been eliminated in consolidation.
2. Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates, by their nature, are based on
judgment and available information. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the near term relate to the
determination of the reserve for chargeback losses.
Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable,
residuals payable, notes receivable from a related party and a bank note payable.
The carrying amounts of cash, accounts receivable, accounts payable and residuals payable
approximate fair value due to their short term maturities.
The carrying amounts of notes receivable from a related party and bank note payable approximate
fair value due to the variable interest rate they carry.
Cash
The Company considers all highly liquid investments with maturities of three months or less when
purchased to be cash equivalents. Invested cash is held exclusively at financial institutions of high
credit quality. As of December 31, 2015, cash deposits in excess of insured amounts totaled
approximately $2,648,000.
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
7
Restricted Cash
Under the terms of the processing agreement between UPS-WI and its processing banks, UPS-WI
maintains cash accounts as reserves against chargeback losses. As the Company receives fees from
the processing bank, a certain percentage is allocated to the cash reserve account.
Inventory
Inventory consists primarily of equipment to be installed in merchant locations to enable them to
process electronic transactions. Inventory is stated at the lower of cost or market, which is
determined on a FIFO (first in-first out) basis.
Fixed Assets
Fixed assets, which are comprised of telephone systems, software, website, computer equipment
and leasehold improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation of fixed assets is provided on a straight-line basis using estimated useful lives of the
related assets. Amortization of leasehold improvements is provided on a straight-line basis using
the lesser of the useful life of the asset, which generally is three to five years, or lease term.
Goodwill and Customer Merchant Accounts
Goodwill is not amortized but is instead subject to impairment testing, at least annually. Customer
merchant accounts with finite lives are amortized over 66 months as discussed in Note 5.
The Company considers the following to be some examples of indicators that may trigger an
impairment review outside its annual impairment review: (i) significant under-performance or loss
of key contracts acquired in an acquisition relative to expected historical or projected future
operating results; (ii) significant changes in the manner or use of the acquired assets or in the
Company’s overall strategy with respect to the manner or use of the acquired assets or changes in
the Company’s overall business strategy; (iii) significant negative industry or economic trends;
(iv) increased competitive pressures; (v) a significant decline in the Company’s fair market value
for a sustained period of time; and (vi) regulatory changes. In assessing the recoverability of the
Company’s goodwill and customer merchant accounts, the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair value of the respective
assets. These include estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of growth for the Company, the period over which cash flows will
occur, and determination of the Company’s cost of capital. Changes in these estimates and
assumptions could materially affect the determination of fair value and conclusions on goodwill
impairment.
Revenue Recognition
Electronic Payment Processing
Electronic payment processing and fee income is derived from the electronic processing of credit
and debit card transactions that are authorized and captured through third-party networks.
Typically, merchants are charged for these processing services as a percentage of each transaction
dollar plus a flat fee per transaction. Certain merchant customers are charged miscellaneous fees,
including fees for handling charge-backs or returns, monthly minimum fees, statement fees and
fees for other miscellaneous services. Revenues derived from the electronic processing of
MasterCard®, Visa® and Discover® sourced credit and debit card transactions are reported gross of
amounts paid to sponsor banks.
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
8
Interest Income
Interest income is recorded on an accrual basis, when earned, based on the current lending rate in
place.
Reserve for Losses on Merchant Accounts
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 acquiring bank
and charged to the merchant. If the merchant has inadequate funds, the Company or, under limited
circumstances, the Company and the acquiring bank, must bear the credit risk for the full amount
of the transaction. The Company evaluates its risk for such transactions and estimates its potential
loss for charge-backs based primarily on historical experience and other relevant factors.
The Company records reserves for charge-backs and contingent liabilities when such amounts are
deemed to be probable and estimable. The required reserves may change in the future due to new
developments, including, but not limited to, changes in litigation or increased charge-back
exposure as the result of merchant insolvency, liquidation, or other reasons. The required reserves
are reviewed periodically to determine if adjustments are required.
Electronic Payment Processing Costs
Electronic payment processing costs consist principally of costs directly related to the processing of
merchant sales volume, including interchange fees, Visa®, MasterCard® and Discover® dues and
assessments, bank processing fees and costs paid to third-party processing networks. Such costs
are recognized at the time the merchant transactions are processed or when the services are
performed. Two of the most significant components of electronic processing expenses include
interchange and assessment costs, which are set by the credit card associations. Interchange costs
are passed on to the entity issuing the credit card used in the transaction and assessment costs are
retained by the credit card associations. Interchange and assessment fees are billed primarily as a
percentage of dollar volume processed and, to a lesser extent, as a per transaction fee. In addition
to costs directly related to the processing of merchant sales volume, electronic payment processing
costs also include residual expenses. Residual expenses represent fees paid to third-party sales
referral sources. Residual expenses are paid in accordance with contracted terms. These are
generally linked to revenues derived from merchants successfully referred to the Company and that
begin using the Company for merchant processing services. Such residual expenses are
recognized in the Company’s consolidated statement of income. During the year ended December
31, 2015, the Company partnered with two sponsor banks for substantially all merchant
transactions. Substantially all merchant transactions were processed by one merchant processor.
Income Taxes
The Company is a limited liability company (“LLC”) and therefore pays no corporate taxes. The
Company’s income, instead, passes through to its member. Accordingly, no liability for Federal,
State and/or local income taxes has been recorded in the accompanying consolidated financial
statements. As a wholly-owned subsidiary of Holdco, the Company evaluated its tax positions at
year end, and based on its analysis, determined that there were no uncertain tax positions.
The Company’s U.S. Federal and State income tax returns prior to fiscal 2012 are closed and
management continually evaluates expiring statutes of limitations, audits, proposed settlements,
changes in tax law and new authoritative rulings.
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
9
Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure through
March 2, 2016, the date these consolidated financial statements were available to be issued.
3. Fixed Assets
The Company’s fixed assets are comprised of the following at December 31, 2015:
Accumulated
Depreciation Net Book
Cost and Amortization Value
Telephone systems 273,549$ 88,423$ 185,126$
Software 398,256 222,590 175,666
Leasehold improvements 63,644 41,546 22,098
Computer equipment 86,157 72,648 13,509
Website 5,202 5,118 84
Totals 826,808$ 430,325$ 396,483$
Depreciation expense related to fixed assets for the year ended December 31, 2015 was
approximately $166,000.
4. Goodwill
The carrying value of goodwill at December 31, 2015 is approximately $1,908,000. The Company
performed a qualitative assessment to determine if it is more likely than not that the Company’s
fair value is less than its carrying amount. Based on its qualitative assessment, the Company
determined that goodwill was not impaired at December 31, 2015 and no further assessment was
required.
5. Customer Merchant Accounts
The net carrying value of customer merchant accounts is approximately $1,641,000 which consists
of approximately $2,593,000 of gross costs, net of accumulated amortization of approximately
$952,000 at December 31, 2015. Customer merchant accounts are being amortized over 66 months.
Total amortization expense of customer merchant accounts using the sum of the year’s digits is
included in depreciation and amortization in the accompanying consolidated statement of income
was approximately $152,000.
In 2015, the Company purchased approximately $1,525,000 of customer merchant accounts of
which approximately $1,515,000 was purchased from three separate related parties. The purchase
price was based on the present value of the merchant accounts future cash flows. These merchant
accounts are being amortized over 66 months.
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
10
Total expected amortization expense for the next five fiscal years and thereafter is as follows:
Year Ending December 31,
2016 566,393$
2017 442,921
2018 322,317
2019 203,943
2020 94,739
Thereafter 10,275
1,640,588$
6. Bank Note Payable
In 2015, the Company, CrystalTech Web Hosting, Inc. (“CrystalTech”) and Premier Payments
LLC (“Premier”), all subsidiaries of Holdco, collectively as “Borrowers” entered into a Credit and
Guarantee Agreement (the “Agreement”) with Goldman Sachs Bank USA which extended a multi
draw term loan facility (the “Facility”) up to an aggregate principal amount of $38,000,000. The
total outstanding balance under the Facility as of December 31, 2015 was $22,000,000. The
Borrowers are collectively liable for the outstanding balance under the Facility. All assets of the
Borrowers are pledged as collateral under the Agreement. The Facility provides for monthly
interest only payments with total principal due at maturity. The Facility matures in June 2019.
Borrowings under the facility are classified either as a “Base Rate Loan” or “LIBOR Rate Loan” at
the Company’s election. Each LIBOR Rate Loan shall bear interest on the outstanding balance at a
rate equal to (a) the greater of LIBOR or 50 basis points plus (b) 7% and each Base Rate Loan shall
bear interest on the outstanding balance at a rate equal to (y) the greater of the Prime Rate or 350
basis points, plus (z) 6%. The effective interest rate at December 31, 2015 was 7.5%. The
Company may make principal payments within 24 months of the closing date and pay a
prepayment premium based on a percentage of the principal outstanding as defined in the
Agreement. After 24 months, principal may be repaid under no penalty. The Agreement requires
certain restrictive covenants for which the Company is in compliance with as of December 31,
2015. During the year ended December 31, 2015, the Company borrowed approximately
$16,999,000 of the $22,000,000 total borrowings under the Facility all of which is outstanding as
of December 31, 2015. Interest expense for the year ended December 31, 2015 was approximately
$680,000.
Deferred financing costs incurred by the Company related to the Facility were $965,000.
Amortization of deferred financing costs for the year ended December 31, 2015 was approximately
$140,000 and included in interest expense on the consolidated income statement. Deferred
financing costs are amortized over the term of the Facility under the effective interest method.
7. Notes Receivable – Related Party
In June 2015, the Company and CrystalTech entered into a revolving line of credit agreement with
Newtek Business Services Corp. (“Newtek”) and Holdco as borrowers. The line of credit bears
interest at a rate of 7.5% and matures in June 2019. Maximum borrowings under the line of credit
are $38,000,000. At December 31, 2015, net advances to Newtek and Holdco are approximately
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
11
$5,647,000. The Company recorded related interest income of approximately $484,000 during the
year ended December 31, 2015.
8. Related Party Transactions
The Company generated management fees of $11,000 each from Summit Systems, LLC
(“Summit”) and Business Connect, LLC (“Business Connect”), both affiliates of the Company. At
December 31, 2015, the total amount due from related parties was approximately $378,000.
The Company incurred residual expenses totaling approximately $1,971,000 from several related
parties. In addition, the Company incurred gateway fees of approximately $129,000 from Secure
Cyber Gateway Services, LLC, and breach insurance costs of approximately $270,000 from
Newtek Insurance Agency, LLC, which are included in electronic payment processing costs on the
consolidated statement of income. Salaries and overhead costs of approximately $352,000 and
$42,000 charged from Business Connect and CrystalTech, respectively, are included in salaries and
benefits. Payroll processing costs of approximately $15,000 from PMTWorks Payroll, LLC,
overhead expenses from Business Connect of approximately $53,000, and managed technology
services of approximately $15,000 from CrystalTech are included in other general and
administrative costs. At December 31, 2015 total amounts due to related parties are approximately
$265,000.
Included in salaries and benefits are charges from Newtek related to salaries for management and
certain other employees that perform services for the Company. Total amounts allocated to the
Company for the year ended December 31, 2015 were approximately $590,000.
In 2015, the Company purchased approximately $1,515,000 of customer merchant accounts from
three related parties. See Note 5.
In June 2015, the Company and CrystalTech provided Newtek and Holdco with a revolving line of
credit facility. See Note 7.
The Company’s parent, Holdco, and Newtek are both guarantors of the Facility with Goldman
Sachs Bank USA.
9. Commitments and Contingencies
Operating Commitments
The Company entered into noncancellable operating leases for office facilities with future rentals
as follows:
Year Ending December 31,
2016 176,917$
2017 181,067
357,984$
Universal Processing Services of Wisconsin, LLC and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2015
12
Total rent expense for the year ended December 31, 2015 was approximately $161,000.
Under the amended terms of a Service Agreement and amended terms of Merchant Program
Processing Agreement, UPS-WI is required to pay minimum fees of $1,000,000 in total under these
agreements during each processing year. The Company’s fee payments for the 12-month period
ended December 31, 2015, exceeded the minimum required amount under these agreements. The
term of the service agreement was extended to March 2016. The Merchant Program Processing
Agreement initial term ends December 2015 and renews automatically each year.
Under the terms of an Independent Sales Organization Agreement and Member Services Provider
Agreement between UPS and one of their sponsoring banks, UPS-WI is required to pay monthly
minimum fees of $10,000 during the term of the agreement. The Company exceeded the monthly
minimum required amount under the agreement for the year ended December 31, 2015. The
agreement renews automatically annually.
Under the amended terms of a Processing Services Agreement between UPS-WI and one of their
front-end processors, UPS-WI is required to pay a quarterly minimum of $68,000 during the term
of the amended agreement. The Company’s fee payments for the 12-month period ended December
31, 2015, exceeded the minimum required amount under these agreements. The agreement expires
July 2016.
Litigation
In 2013, the Federal Trade Commission (the “FTC”) amended an existing complaint in the matter
Federal Trade Commission v. WV Universal Management, LLC et al., pending in the United States
District Court for the Middle District of Florida (the “Court”), to add UPS-WI, as an additional
defendant on one count of providing substantial assistance in violation of the Telemarketing Sales
Rule. On November 18, 2014, the Court issued an Order granting the FTC’s motion for summary
judgment against UPS-WI on the single count. Subsequently, the FTC filed motions for a
permanent injunction and equitable monetary relief against UPS-WI and the other remaining
defendants. Prior to the Court hearing on the motions, UPS-WI and the FTC reached a settlement
on the FTC’s motion for a permanent injunction. The Court granted the FTC’s motion for
equitable relief against UPS-WI and the other remaining defendants, ordering that the remaining
defendants pay approximately $1,735,000 in equitable monetary relief. This amount has been
deposited with the Court pending the outcome of an appeal of the judgement.
In January 2014, NCMIC Finance Corporation (“NCMIC”) filed a complaint against the Company
in the United States District Court for the Southern District of Iowa. The complaint asserts claims
against the Company for breach of the UPS-WI and NCMIC agreement for the processing of credit
card transactions, and seeks monetary relief. The Company believes that the claims asserted in the
complaint are wholly without merit and intends to vigorously defend the action. Trial is currently
set for March 2016. The Company does not expect this matter to have a material impact on its
operations.
In October 2015, the Company filed an action against NCMIC and NCMIC related entities seeking,
among other things, indemnification in connection with the claims asserted by NCMIC against the
Company, as well as for monetary damages for breach of contract and fraud.