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EX-32.1 - EXHIBIT - iPayment, Inc.exhibit321063014.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission file number: 333-177233-19 and 000-50280
 
 
iPayment Holdings, Inc.
iPayment, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
Delaware
 
20-4777880
62-1847043
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
126 East 56th Street, 33rd Floor
New York, New York
 
10022
(Address of principal executive offices)
 
(Zip Code)
Registrants’ telephone number, including area code: (212) 802-7200
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iPayment Holdings, Inc.
 
Yes  þ    No  ¨
 
 
iPayment, Inc.
 
Yes  þ    No  ¨
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
iPayment Holdings, Inc.
 
Yes  þ    No  ¨
 
 
iPayment, Inc.
 
Yes  þ    No  ¨
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
iPayment Holdings, Inc.
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
iPayment, Inc.
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



iPayment Holdings, Inc.
 
Yes  ¨    No  þ
 
 
iPayment, Inc.
 
Yes  ¨    No  þ
 
 
Title of each class
 
Shares Outstanding at August 13, 2014
iPayment Holdings, Inc. (Common stock, $0.01 par value)
 
4,875,000
iPayment, Inc. (Common stock, $0.01 par value)
 
100
 



  
Page
PART I—FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II—OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 

3




Forwarding-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, without limitation, estimates, projections and other statements regarding our operating, growth and acquisition strategies, cost savings initiatives, industry dynamics, economic conditions, regulatory environment, debt compliance, liquidity and capital resources, and operating results, and the assumptions upon which those statements are based.
Forward-looking statements may be included or incorporated by reference throughout this Quarterly Report, including, without limitation, in the sections under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2014 (our “2013 Annual Report”).
Presentation of Information
As used in this Quarterly Report, the terms “we,” “us,” “our,” “the Company,” “our Company” or similar terms refer to iPayment Holdings, Inc. and its subsidiaries, unless otherwise stated or required by the context. The term “iPayment” refers to iPayment, Inc. and “Holdings” refers to iPayment Holdings, Inc., in each case, without their subsidiaries. Holdings is a holding company that does not have any operations or material assets other than the direct and indirect ownership of all of the capital stock of iPayment and its subsidiaries, respectively.
This report includes financial information for Holdings and its consolidated subsidiaries and iPayment and its consolidated subsidiaries. Except as otherwise indicated, the results of operations of Holdings and its consolidated subsidiaries and iPayment and its consolidated subsidiaries are the same.



4


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
 
iPAYMENT, INC.
 
iPAYMENT HOLDINGS, INC.
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
(Dollars in thousands)
 
(Unaudited)
 
(Audited)
 
(Unaudited)
 
(Audited)
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
680

 
$
8,005

 
$
680

 
$
8,005

Accounts receivable, net of allowance for doubtful accounts of $453 and $453 at June 30, 2014, and December 31, 2013, respectively
26,323

 
27,495

 
26,323

 
27,495

Income tax receivable

 

 
2,211

 
2,646

Prepaid expenses and other current assets
4,580

 
5,050

 
3,975

 
4,472

Total current assets
31,583

 
40,550

 
33,189

 
42,618

Restricted cash
803

 
825

 
803

 
825

Property and equipment, net
6,882

 
6,902

 
6,882

 
6,902

Merchant portfolio and other intangible assets, net of accumulated amortization of $162,205 and $143,533 at June 30, 2014, and December 31, 2013, respectively
168,576

 
184,799

 
168,576

 
184,799

Goodwill
679,751

 
678,704

 
680,551

 
679,504

Investment in 15.00%/15.00% Holdings notes, held to maturity
26,469

 
24,661

 

 

Other assets, net
21,627

 
24,161

 
23,571

 
26,252

Total assets
$
935,691

 
$
960,602

 
$
913,572

 
$
940,900

LIABILITIES and STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
4,906

 
$
4,187

 
$
4,906

 
$
4,187

Income taxes payable, net
6,427

 
5,992

 

 

Accrued interest
6,999

 
7,028

 
9,810

 
9,711

Accrued liabilities and other
21,346

 
24,078

 
21,384

 
24,078

Deferred tax liabilities
2,839

 
2,839

 
2,185

 
2,185

Total current liabilities
42,517

 
44,124

 
38,285

 
40,161

Deferred tax liabilities, net
26,796

 
24,627

 
27,451

 
25,282

Long-term debt
776,512

 
785,357

 
908,124

 
910,893

Other liabilities
3,367

 
3,062

 
3,367

 
3,062

Total liabilities
849,192

 
857,170

 
977,227

 
979,398

Commitments and contingencies (Note 9)

 

 

 

Equity
 
 
 
 
 
 
 
Common stock of iPayment, Inc., $0.01 par value; 1,000 shares authorized, 100 shares issued and outstanding at June 30, 2014, and December 31, 2013
165,764

 
165,764

 

 

Common stock of iPayment Holdings, Inc., $0.01 par value; 8,000,000 shares authorized, 4,875,000 shares issued and outstanding at June 30, 2014, and December 31, 2013

 

 
45,268

 
45,268

Additional paid-in capital
8,756

 
8,032

 
8,756

 
8,032

Accumulated deficit
(88,021
)
 
(70,364
)
 
(117,679
)
 
(91,798
)
Total stockholder’s equity (deficit)
86,499

 
103,432

 
(63,655
)
 
(38,498
)
Total liabilities and stockholder’s equity
$
935,691

 
$
960,602

 
$
913,572

 
$
940,900

See accompanying notes to consolidated financial statements.

5


iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenues
$
182,875

 
$
173,939

 
$
340,982

 
$
329,889

Operating expenses:
 
 
 
 
 
 
 
Interchange
97,335

 
90,602

 
183,341

 
172,443

Other costs of services
63,215

 
62,069

 
121,891

 
121,765

Selling, general and administrative
6,822

 
13,855

 
13,237

 
19,722

Embezzlement recoveries
(156
)
 
(458
)
 
(272
)
 
(2,777
)
Total operating expenses
167,216

 
166,068

 
318,197

 
311,153

Income from operations
15,659

 
7,871

 
22,785

 
18,736

Other expense:
 
 
 
 
 
 
 
Interest expense, net
16,497

 
15,485

 
32,947

 
30,854

Other expense, net
(155
)
 
189

 
(68
)
 
2,726

Loss before income taxes
(683
)
 
(7,803
)
 
(10,094
)
 
(14,844
)
Income tax provision (benefit)
(374
)
 
13,779

 
1,762

 
10,405

Net and comprehensive loss
$
(309
)
 
$
(21,582
)
 
$
(11,856
)
 
$
(25,249
)
See accompanying notes to consolidated financial statements.

6


iPAYMENT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenues
$
182,875

 
$
173,939

 
$
340,982

 
$
329,889

Operating expenses:
 
 
 
 
 
 
 
Interchange
97,335

 
90,602

 
183,341

 
172,443

Other costs of services
63,215

 
62,092

 
121,891

 
121,811

Selling, general and administrative
6,868

 
13,869

 
13,321

 
19,750

Embezzlement recoveries
(156
)
 
(458
)
 
(272
)
 
(2,777
)
Total operating expenses
167,262

 
166,105

 
318,281

 
311,227

Income from operations
15,613

 
7,834

 
22,701

 
18,662

Other expense:
 
 
 
 
 
 
 
Interest expense, net
23,548

 
21,978

 
46,888

 
44,052

Other expense, net
(155
)
 
189

 
(68
)
 
2,726

Loss before income taxes
(7,780
)
 
(14,333
)
 
(24,119
)
 
(28,116
)
Income tax provision (benefit)
(374
)
 
13,615

 
1,762

 
10,975

Net and comprehensive loss
$
(7,406
)
 
$
(27,948
)
 
$
(25,881
)
 
$
(39,091
)
See accompanying notes to consolidated financial statements.


7


iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
 
 
 
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(11,856
)
 
$
(25,249
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
20,149

 
25,043

Share-based compensation
 
724

 
4,756

Noncash interest and other expense
 
1,028

 
(3,378
)
Loss on disposal of property and equipment
 
176

 
460

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
1,172

 
7,148

Prepaid expenses and other current assets
 
470

 
(3,941
)
Other assets
 
(760
)
 
2,492

Accounts payable and income taxes payable
 
1,154

 
(2,108
)
Accrued interest
 
(29
)
 
(64
)
Deferred tax liabilities, net
 
2,169

 
12,548

Accrued liabilities and other
 
(2,427
)
 
860

Net cash provided by operating activities
 
11,970

 
18,567

Cash flows from investing activities
 
 
 
 
Change in restricted cash
 
22

 
4

Expenditures for property and equipment
 
(2,042
)
 
(1,945
)
Acquisitions of businesses and portfolios
 
(3,022
)
 
(5,184
)
Payments on notes receivable
 
548

 

Payments for prepaid residual expenses
 

 
(4,574
)
Net cash used in investing activities
 
(4,494
)
 
(11,699
)
Cash flows from financing activities
 
 
 
 
Net repayments on line of credit
 
(9,000
)
 
(1,000
)
Repayments of debt
 

 
(5,000
)
Dividends paid to parent company
 
(5,801
)
 
(5,319
)
Net cash used in financing activities
 
(14,801
)
 
(11,319
)
Net decrease in cash and cash equivalents
 
(7,325
)
 
(4,451
)
Cash and cash equivalents, beginning of period
 
8,005

 
6,572

Cash and cash equivalents, end of period
 
$
680

 
$
2,121

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid (refunds received) during the period for income taxes, net
 
$
(1,506
)
 
$
301

Cash paid during the period for interest
 
$
33,524

 
$
36,925

See accompanying notes to consolidated financial statements.

8


iPAYMENT HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
Net loss
 
$
(25,881
)
 
$
(39,091
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
20,149

 
25,043

Share-based compensation
 
724

 
4,756

Noncash interest and other expense
 
9,060

 
3,469

Loss on disposal of property and equipment
 
176

 
460

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
1,172

 
7,148

Prepaid expenses and other current assets
 
497

 
(3,856
)
Other assets
 
(760
)
 
3,108

Accounts payable and income taxes payable
 
1,154

 
(2,108
)
Accrued interest
 
98

 
341

Deferred tax liabilities, net
 
2,169

 
13,118

Accrued liabilities and other
 
(2,389
)
 
860

Net cash provided by operating activities
 
6,169

 
13,248

Cash flows from investing activities
 
 
 
 
Change in restricted cash
 
22

 
4

Expenditures for property and equipment
 
(2,042
)
 
(1,945
)
Acquisitions of businesses and portfolios
 
(3,022
)
 
(5,184
)
Payments on notes receivable
 
548

 

Payments for prepaid residual expenses
 

 
(4,574
)
Net cash used in investing activities
 
(4,494
)
 
(11,699
)
Cash flows from financing activities
 
 
 
 
Net repayments on line of credit
 
(9,000
)
 
(1,000
)
Repayments of debt
 

 
(5,000
)
Net cash used in financing activities
 
(9,000
)
 
(6,000
)
Net decrease in cash and cash equivalents
 
(7,325
)
 
(4,451
)
Cash and cash equivalents, beginning of period
 
8,005

 
6,572

Cash and cash equivalents, end of period
 
$
680

 
$
2,121

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid (refunds received) during the period for income taxes, net
 
$
(1,506
)
 
$
301

Cash paid during the period for interest
 
$
39,278

 
$
36,925

See accompanying notes to consolidated financial statements.

9


Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization, Business and Basis of Presentation
Organization
We are a provider of credit and debit card payment processing services to small merchants across the United States. We conduct all of our operations through our operating company, iPayment, Inc. (“iPayment”), and its subsidiaries. iPayment and its direct parent, iPayment Holdings, Inc. (“Holdings”), are incorporated in Delaware. Holdings is a holding company that does not have any operations or material assets other than the direct and indirect ownership of all of the capital stock of iPayment and its subsidiaries, respectively. All of the issued and outstanding capital stock of Holdings is owned by Carl A. Grimstad, iPayment's Chairman and Chief Executive Officer, Harold H. Stream, III, and certain entities and family trusts affiliated with Mr. Grimstad or Mr. Stream.
As used in these notes to the consolidated financial statements, the terms “we,” “us,” “our,” “the Company,” “our Company” or similar terms refer to iPayment Holdings, Inc. and its subsidiaries, unless otherwise stated or required by the context. The term “iPayment” refers to iPayment, Inc. and “Holdings” refers to iPayment Holdings, Inc., in each case, without their subsidiaries.
Business
Our payment processing services enable our merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards and loyalty programs in traditional card-present, or swipe transactions, as well as card-not-present transactions, such as those conducted over the phone or through the internet. We market and sell our services to merchants throughout the United States through various channels, including a network of ISGs, which are non-employee, external sales organizations with which we have contractual relationships, and directly to merchants through our employee sales force, partnerships with various associations and agents banks, through the use of electronic media, telemarketing and other programs utilizing partnerships with other companies that market products and services to small businesses. In addition, we partner with banks such as Wells Fargo to sponsor us for membership in the Visa and MasterCard associations and to settle transactions with merchants. We perform core functions for small merchants such as application processing, underwriting, account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment, and chargeback services primarily from our operating facility in Westlake Village, California.
Basis of Presentation
The accompanying consolidated financial statements of iPayment and Holdings have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and reflect all adjustments, which are of a normal and recurring nature, that are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the related periods. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated results of operations for any interim periods are not necessarily indicative of results to be expected for the full year.
Use of Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and Cost Recognition
Substantially all of our revenues are generated from fees charged to merchants for card-based payment processing services. We typically charge these merchants a rate primarily based upon each merchant’s charge volume and risk profile as well as certain fixed charges for various products and services on a monthly or annual basis. Our fees principally consist of discount fees, which are a percentage of the dollar amount of each transaction. We recognize discount fees and other fees related to payment transactions at the time the merchant's transactions are processed. Related interchange and assessment costs are also recognized at that time. We derive the balance of our revenues from a variety of fixed transaction or service fees, including fees for monthly minimum charge volume requirements, statement fees, annual fees, payment card industry compliance fees, ancillary products and fees for other miscellaneous services, such as handling chargebacks. We recognize revenues derived from service fees at the time the service is performed.

10


We follow the requirements included in the Revenue Recognition Topic of ASC 605, Reporting Revenue Gross as a Principal Versus Net as an Agent. Generally, where we have ultimate responsibility for the merchant, as evidenced by our liability for merchant losses or credit risk, or portability with respect to such merchant, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange paid to card issuing banks and assessments paid to payment card associations pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Interchange fees are recognized at the time transactions are processed. Revenues generated from merchant contracts where we do not have liability for merchant losses or rights of portability, such as certain portfolios we acquired from First Data Merchant Services ("FDMS") and certain of our other portfolios and merchant contracts, are reported net of interchange, as required by ASC Topic 605.
Other Costs of Services
Other costs of services include costs directly attributable to our provision of payment processing and related services to our merchants. The primary components of other costs of services includes residual payments to ISGs, which are commissions we pay to our ISGs based upon a percentage of the net revenues we generate from their merchant referrals, and assessment fees payable to card associations, which are a percentage of the charge volume we generate from Visa and MasterCard. In addition, other costs of services include telecommunications costs, personnel costs, occupancy costs, losses due to merchant defaults, other miscellaneous merchant supplies and services expenses, bank sponsorship costs and other third-party processing costs. Other costs of services also include depreciation expense, which is recognized generally on a straight-line basis over the estimated useful life of the assets, and amortization expense, the substantial majority of which is recognized using an accelerated method over a 15-year period.
Intangible Assets
Purchased merchant processing portfolios are recorded at cost and are evaluated by management for impairment at the end of each fiscal quarter through review of actual attrition and cash flows generated by the portfolios in relation to the expected attrition and cash flows and the recorded amortization expense. Amortization of intangible assets results from our acquisitions of portfolios of merchant contracts from third parties, buyouts of residual payment obligations related to our merchant portfolios, or residual buyouts or acquisitions of any business where we allocated a portion of the purchase price to such business' existing merchant processing portfolios and other intangible assets. The estimated useful lives of our merchant processing portfolios are assessed by evaluating each portfolio to ensure that the recognition of the costs of revenues, represented by amortization of the intangible assets, approximate the distribution of the expected revenues from each processing portfolio. If, upon review, the actual costs of revenues differ from the expected costs of revenues, we will adjust amortization expense accordingly. Historically, we have experienced an average monthly volume attrition of approximately 1.5% to 2.2% of our total charge volume.
We utilize an accelerated method of amortization over a 15-year period, which we believe approximates the distribution of actual cash flows generated by our merchant portfolios. All other intangible assets are amortized using the straight-line method over an estimated life of three to seven years. For the three and six months ended June 30, 2014, amortization expense related to our merchant portfolios and other intangible assets was $9.0 million and $18.7 million, respectively. For the three and six months ended June 30, 2013, amortization expense related to our merchant portfolios and other intangible assets was $11.3 million and $23.9 million, respectively.
In addition, we have implemented both quarterly and annual procedures to determine whether a significant change in the trend of the current attrition rates being used has occurred on a portfolio-by-portfolio basis. In reviewing the current attrition rate trends, we consider relevant benchmarks such as charge volume, revenues, number of merchant accounts, gross profit and future expectations of the aforementioned factors compared to historical amounts and rates. If we identify any significant changes or trends in the attrition rate of any portfolio, we will adjust our current and prospective estimated attrition rates so that the amortization expense better approximates the distribution of actual cash flows generated by the merchant processing portfolios. Any adjustments made to the amortization schedules would be treated as a change in estimate and accounted for prospectively. There were no related adjustments to amortization expense for the three and six months ended June 30, 2014 and 2013.
Our intangible assets are amortized over their estimated lives, except our trade name intangibles, which were determined to have indefinite lives as there are no legal, regulatory, contractual, economic or other factors that limit the useful life to us of such intangible assets, and we have no plans to cease using such names. We believe our trade names have an inherent value due to brand strength.
We engage, on a periodic basis, an independent third party to aid management in determining the fair value of our goodwill. We also periodically evaluate the carrying value of long-lived assets in relation to the respective projected future undiscounted cash

11


flows to assess recoverability. An impairment loss is recognized if the sum of the expected net cash flows is less than the carrying amount of the long-lived assets being evaluated. The difference between the carrying amount of the long-lived assets being evaluated and their fair value, calculated as the sum of the expected cash flows discounted at a market rate, represents the impairment loss.
We performed a qualitative assessment of goodwill and trade name as of May 31, 2014. We determined based on relevant events and circumstances in our qualitative assessment that it is more likely than not that the fair value of the reporting unit is at least equal to its carrying value; therefore, the goodwill of the reporting unit is not impaired and no further testing was performed.
During the quarter ended June 30, 2014, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible assets impairment testing from May 31 to October 1. This voluntary change is preferable under the circumstances as it provides the Company with appropriate time to complete its annual goodwill and indefinite-lived intangible asset impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.
Financial Instruments
ASC 820, Fair Value Measurement and Disclosures, establishes a framework for measuring fair value and a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Observable quoted prices in active markets for identical assets and liabilities.
Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash-flow models and similar techniques.
We believe the carrying amounts of financial instruments at June 30, 2014 approximate fair value. Due to the short maturities of the cash and cash equivalents and accounts receivable, carrying amounts approximate their respective fair values. At June 30, 2014, the carrying value of the term facility under the Senior Secured Credit Facilities, net of a discount of $1.0 million, was $346.5 million and the carrying value of the revolving facility was $30.0 million. We estimate the fair value of the term facility to be approximately $344.0 million, considering executed trades occurring around June 30, 2014, and we believe that the fair value of the revolver facility approximates carrying value due to its short maturities. The carrying value of the 10.25% Notes was $400.0 million as of June 30, 2014. We estimate their fair value to be approximately $362.0 million based on consideration of executed trades occurring around June 30, 2014. The carrying value of the 15.00%/15.00% Notes, net of discount of $0.7 million was $131.6 million as of June 30, 2014. We estimate their fair value to be approximately $46.3 million, considering executed trades occurring around June 30, 2014. The fair value of the Senior Secured Credit Facilities, the 10.25% Notes, and the 15.00%/15.00% Notes are estimated using direct and indirect observable market information and are classified within Level 2 of the fair value hierarchy, as defined by ASC 820. We are contractually obligated to repay our borrowings in full and there can be no certainty that the creditors under our borrowing arrangements would be willing to settle these instruments with us at the estimated fair values indicated herein.
Common Stock
iPayment and Holdings had 100 and 4,875,000 shares of common stock, respectively, issued and outstanding at June 30, 2014. The Company has elected not to present earnings per share data as management believes such presentation would not be meaningful. There is no established public trading market for Holdings common stock or for the Warrants. No Warrants were exercised as of June 30, 2014.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date estimated fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award, which generally equals the vesting period. For the three and six months ended June

12


30, 2014 we recognized $0.4 million and $0.7 million, respectively, in expense related to vested service units. For the three and six months ended June 30, 2013 we recognized $4.3 million and $4.8 million, respectively, in expense related to vested service units. For performance stock units, we re-assess the probability of vesting at each reporting period and if the target is not attained, we do not recognize any expense. The performance condition is not considered in determining the grant date fair value. For the three and six months ended June 30, 2014 and 2013, we did not recognize any expense for performance-based phantom stock units.
(2) Restatement of Consolidated Financial Statements
In August 2012, as disclosed in the Company's Current Reports on Form 8-K filed on September 12, 2012 and November 5, 2012 and in the Company's amended 2011 Annual Report on Form 10-K/A filed on January 29, 2013, the Company and Holdings were presented with accusations from one of the Company's employees that certain of the Company's employees and outside contractors had engaged in financial misconduct. Following an initial inquiry into these accusations by the Company, the Board of Directors of the Company and management conducted an internal investigation of the alleged misconduct. During the course of the Company's investigation, certain executives of the Company and Holdings were terminated or resigned.
The Company's internal investigation revealed financial misconduct by certain former officers and employees of the Company and certain of its outside contractors. Such financial misconduct occurred in three principal areas: (i) creation of false obligations to make residual and other payments (which resulted in the Company making such payments in respect of merchant accounts that were not subject to legitimate payment obligations); (ii) overstatement of certain vendor invoices, principally in the information technology area; and (iii) falsification of certain employee expense reimbursements and other payments. Factors contributing to the ability of the individuals to engage in the misconduct were: (i) the failure to maintain an adequate control environment that set a proper ethical culture and (ii) the posting of manual journal entries without sufficient supporting documentation or adequate review and approval. The Company believes that the foregoing activities, which generally occurred over a period from the third quarter of 2008 through September 2012, involved a total loss of funds to the Company of approximately $12.1 million.
Based on the results of the Company's internal investigation, and the financial impact thereof on prior financial periods, on November 1, 2012, the Boards of Directors of the Company and Holdings determined that the Company's financial statements (i) for the fiscal years ended December 31, 2009, 2010, and 2011, included in the Company's Annual Reports on Form 10-K for the years then ended and Ernst & Young LLP's reports thereon, (ii) for the interim periods within such fiscal years included in the Company's Quarterly Reports on Form 10-Q, and (iii) for the quarters ended March 31, 2012, and June 30, 2012, included in the Company's Quarterly Reports on Form 10-Q (the “Affected Financial Statements”), should no longer be relied upon. As a result, the Company restated the Affected Financial Statements to reflect the effect of such financial misconduct on the Affected Financial Statements. On January 29, 2013, the Company filed Amendment No. 1 to Form 10-K for the year ended December 31, 2011 and on January 31, 2013, the Company filed Amendment No. 1 to Form 10-Q for the period ended March 31, 2012 and Amendment No. 1 to Form 10-Q for the period ended June 30, 2012 with such restated financial statements.
As disclosed in the Company's 2013 Annual Report, the Company has entered into cooperation and restitution and/or settlement agreements with all the material participants in the misconduct. Under the terms of the various agreements, the participants in the misconduct have agreed to certain restrictive covenants and, collectively, to repay to the Company $8.4 million. Of this amount, the Company had collected $5.6 million as of June 30, 2014, including $0.3 million during the six months ended June 30, 2014. Of the remaining $2.8 million, substantially all of which is secured by liens on real property owned by various participants in the misconduct, approximately $1.0 million is scheduled to be repaid to the Company by no later than July 1, 2016. There can be no assurance, however, that we will be able to recover all or a material portion of the remaining amounts described above. In addition, on May 1, 2013, the Company recovered $3 million under its crime insurance policy in connection with the misconduct described above.
(3) Acquisitions
On April 1, 2014 the Company acquired the business assets of an independent sales group for total consideration of $3.0 million. This acquisition resulted in increases to goodwill of $1.0 million and merchant portfolios and other intangible assets of $2.0 million.
In June 2013, iPayment entered into a purchase agreement pursuant to which it acquired a portfolio of merchant accounts for cash consideration of $4.9 million.
(4) Other Intangibles
Payments for Prepaid Residual Expenses

13


We made no material payments for prepaid residual expenses during the three and six months ended June 30, 2014. For the six months ended June 30, 2013, we made payments totaling $4.6 million to several ISGs in exchange for contract modifications which, among other provisions, lowered our obligations for future payments of residuals to them. These payments were assigned to intangible assets in the accompanying consolidated balance sheets and are amortized over their expected useful lives.

14


(5) Long-Term Debt
Our long-term debt is comprised of the following:
 
 
iPAYMENT, INC.
 
iPAYMENT HOLDINGS, INC.
(Dollars in thousands)
As of June 30, 2014
 
As of December 31, 2013
 
As of June 30, 2014
 
As of December 31, 2013
 
(unaudited)
 
(audited)
 
(unaudited)
 
(audited)
Senior Secured Credit Facilities
 
 
 
 
 
 
 
Term facility
$
347,500

 
$
347,500

 
$
347,500

 
$
347,500

Revolving facility
30,000

 
39,000

 
30,000

 
39,000

Discount on Senior Secured Credit Facilities - Term Facility
(988
)
 
(1,143
)
 
(988
)
 
(1,143
)
10.25% Notes
400,000

 
400,000

 
400,000

 
400,000

15.00%/15.00% Notes

 

 
132,288

 
126,289

Discount on 15.00%/15.00% Notes, net of amortization of $490 as of 6/30/14 and $412 as of 12/31/2013

 

 
(676
)
 
(753
)
 
776,512

 
785,357

 
908,124

 
910,893

Less: Current portion of long-term debt

 

 

 

Total long-term debt
$
776,512

 
$
785,357

 
$
908,124

 
$
910,893

The terms of our long-term debt contain various financial and non-financial covenants as further discussed below. If we fail to comply with these covenants and are unable to obtain a waiver or amendment or otherwise cure the breach, an event of default would result. If an event of default were to occur, the trustee under the indentures governing the Notes or the lenders under the Senior Secured Credit Facilities could, among other things, declare outstanding amounts thereunder immediately due and payable. We currently do not have available cash or other similar liquid resources available to repay all of our debt obligations if they were to become immediately due and payable. As of June 30, 2014, our Senior Secured Leverage Ratio, as defined in the Senior Secured Credit Facilities, was 3.58 to 1.00 compared to the allowed maximum of 3.75 to 1.00. As of June 30, 2014, our Consolidated Interest Coverage Ratio, as defined in the Senior Secured Credit Facilities, was 1.38 to 1.00 compared to the allowed minimum of 1.25 to 1.00.

During the first six months of 2014, we made net repayments of $9.0 million under the revolving facility of the Senior Secured Credit Facilities.
The shares of iPayment’s common stock held by Holdings have been pledged by Holdings to secure the obligations of iPayment under the Senior Secured Credit Facilities.
Senior Secured Credit Facilities
iPayment entered into a Credit Agreement, dated May 6, 2011 (the “Credit Agreement”), with Holdings, the subsidiaries of iPayment identified therein as guarantors, JPMorgan Chase Bank, N.A. and the other lenders party thereto. The Senior Secured Credit Facilities consist of (i) a six-year, $375.0 million term facility and (ii) a five-year, $75.0 million revolving facility, which includes a swing line loan facility and letter of credit facility and is available from time to time until the fifth anniversary of the closing date of the Senior Secured Credit Facilities (or in the case of the letter of credit facility, 5 business days prior to the fifth anniversary). The terms of the Senior Secured Credit Facilities give iPayment the ability, subject to certain conditions, to request an increase in the amount of the revolving facility in an aggregate amount of up to $25.0 million. On July 20, 2012, concurrent with iPayment's purchase of approximately $23.9 million of the outstanding principal amount of the 15.00%/15.00% Notes from a third party for $20.0 million in a privately negotiated transaction, we requested and obtained a $20.0 million increase in the aggregate revolving facility commitment. The aggregate commitment of the lenders under the revolving facility following such increase was $95.0 million.
The interest rates under the Senior Secured Credit Facilities (other than in respect to swing line loans, which will accrue interest at the base rate described below) are calculated, at iPayment’s option, at either the Eurodollar rate (which is the higher of BBA LIBOR, and in respect of the term facility, 1.50%) or the base rate (which is the highest of JPMorgan Chase Bank, N.A.’s prime rate, the Federal Funds effective rate plus 0.50%, the one-month Eurodollar rate plus 1.00%, and in respect of the term facility, 2.50%) plus, in each case, the applicable margin which differs for the term facility and the revolving facility (and, which in the

15


case of the revolving facility is subject to adjustment based on a pricing grid set forth in the Credit Agreement). Overdue principal, interest, fees and other amounts bear interest at a rate that is 2.00% above the rate then borne by such borrowing or the base rate in respect of the term facility, as applicable. iPayment also pays a quarterly commitment fee equal to 0.625% on the unused portion of the revolving facility which can decline to 0.375% of such unused portion based upon our consolidated leverage ratio as determined in accordance with the related pricing grid set forth in the Credit Agreement.
At June 30, 2014, iPayment had approximately $346.5 million of term loans outstanding (net of discount of $1.0 million) at a weighted average interest rate of 6.75% and $30.0 million of borrowings under its revolving facility at a weighted average interest rate of 5.48%.
The Credit Agreement contains certain customary covenants that, subject to certain exceptions, restrict iPayment and its subsidiaries’ ability to, among other things (i) declare dividends or redeem or repurchase equity interests by iPayment or its subsidiaries; (ii) prepay, redeem or purchase certain debt; (iii) incur liens and engage in sale-leaseback transactions; (iv) make loans and investments; (v) incur additional indebtedness; (vi) amend or modify specified debt and other material agreements; (vii) engage in mergers, acquisitions and asset sales; (viii) change accounting policies; (ix) become a general partner; (x) enter into speculative transactions; (xi) transact with affiliates; and (xii) engage in businesses that are not related to iPayment’s existing business. In addition, under the Credit Agreement, iPayment is required to comply (subject to a right to cure in certain circumstances) with specified financial ratios and tests, including a minimum consolidated interest coverage ratio and a maximum senior secured leverage ratio.
In addition, the Credit Agreement contains certain customary affirmative covenants, including requirements for financial reports and other notices from iPayment.
Events of default, which are subject to grace periods and exceptions, as set forth in the Credit Agreement include, among others: (i) iPayment’s failure to pay principal or interest or any other amount when due under the Credit Agreement; (ii) any representation or warranty proving to have been materially incorrect; (iii) covenant defaults; (iv) judgment defaults; (v) customary ERISA defaults; (vi) invalidity of loan documents or impairment of collateral; (vii) events of bankruptcy; (viii) a change of control; (ix) cross-default to material debt; and (x) cancellation or termination of a material contract, in certain circumstances.
On July 25, 2013 (the "Amendment Date"), iPayment, Inc. entered into an amendment (the "Amendment") to the Credit Agreement. Pursuant to the Amendment, the applicable margin for the revolving facility was amended as follows: (i) if the consolidated leverage ratio as at the last test date is less than 4.0:1.0, 3.75% (for Eurodollar rate loans) or 2.75% (for base rate loans), (ii) if the consolidated leverage ratio as at the last test date is greater than or equal to 4.0:1.0 but less than 4.5:1.0, 4.25% (for Eurodollar rate loans) or 3.25% (for base rate loans), (iii) if the consolidated leverage ratio as at the last test date is greater than or equal to 4.5:1.0 but less than 5.0:1.0, 4.75% (for Eurodollar rate loans) or 3.75% (for base rate loans), and (iv) if the consolidated leverage ratio as at the last test date is greater than or equal to 5.0:1.0, 5.25% (for Eurodollar rate loans) or 4.25% (for base rate loans). The applicable margin for the term facility was increased to 5.25% (for Eurodollar rate loans) and 4.25% (for base rate loans).
Pursuant to the Amendment, the financial covenants set forth in the Credit Agreement were amended as follows: (i) the minimum Consolidated Interest Coverage Ratio is required to be not less than (1) 1.25x as of the end of each fiscal quarter through December 31, 2015, (2) 1.30x for each fiscal quarter ending between January 1, 2016 and December 31, 2016, and (3) 1.35x for each fiscal quarter ending thereafter and (ii) the maximum Senior Secured Leverage Ratio is required to be less than (1) 4.00x as of the end of each fiscal quarter through March 31, 2014, (2) 3.75x as of the end of each fiscal quarter ending between April 1, 2014 and March 31, 2015, (3) 3.50x as of the end of each fiscal quarter ending between April 1, 2015 and March 31, 2016, (4) 3.25x as of the end of each fiscal quarter ending between April 1, 2016 and March 31, 2017 and (5) 3.00x for each fiscal quarter ending thereafter.
Pursuant to the Amendment, certain voluntary prepayments made in connection with any modification of the Credit Agreement that reduces the applicable margin with respect to any Term Loans, or in connection with any refinancing of any Term Loans in whole or in part with proceeds of Indebtedness having lower applicable margins or applicable total yield than the applicable margin or applicable total yield for the Term Loans prior to the first year anniversary of the Amendment Date will be subject to a 1.00% prepayment penalty. In addition, the Amendment included certain other changes to the restricted payments and investments negative covenants in the Credit Agreement.
10.25% Notes
The 10.25% Notes were issued pursuant to an indenture, dated as of May 6, 2011 (the “10.25% Notes Indenture”), among the Company, the guarantors party thereto and Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as trustee (the “Trustee”). iPayment will pay interest on the 10.25% Notes in cash on November 15 and May 15 of each year at a rate of 10.25% per annum. Interest on the 10.25% Notes will accrue from and including the issue date of the

16


10.25% Notes. The first interest payment date was November 15, 2011. The 10.25% Notes will mature on May 15, 2018. The 10.25% Notes Indenture contains covenants that, among other things, restrict iPayment and its restricted subsidiaries’ ability to pay dividends, redeem stock or make other distributions or restricted payments, make certain investments, incur or guarantee additional indebtedness, create liens, agree to dividend and payment restrictions affecting restricted subsidiaries, consummate mergers, consolidations or other business combinations, designate subsidiaries as unrestricted, change its or their line of business, or enter into certain transactions with affiliates. The covenants in the 10.25% Notes Indenture generally permit iPayment to distribute funds to Holdings to make interest payments on the 15.00%/15.00% Notes to the extent required to be paid in cash by the terms of the 15.00%/15.00% Notes Indenture (as defined below) and for certain other operating expenses of Holdings.
The 10.25% Notes Indenture also provides for customary events of default including non-payment of principal, interest or premium, failure to comply with covenants, and certain bankruptcy or insolvency events.

The 10.25% Notes are fully and unconditionally guaranteed by all of iPayment’s subsidiaries. However, the guarantees of iPayment’s subsidiaries may be released and iPayment’s future subsidiaries may not be required to guarantee the 10.25% Notes upon occurrence of any of the following events, all pursuant to the provisions of the 10.25% Notes Indenture: (i) any direct or indirect sale or other disposition of any interest or participation, such as corporate stock, in a guarantor subsidiary, following which such guarantor subsidiary is no longer considered a restricted subsidiary of the Company; (ii) the designation of a guarantor subsidiary as an unrestricted subsidiary by the Company; (iii) the release, discharge or termination of the guarantee which resulted in the creation of the notes’ guarantees, as defined by the 10.25% Notes Indenture; and (iv) the legal defeasance of the 10.25% Notes or satisfaction and discharge of the 10.25% Notes Indenture.
15.00%/15.00% Notes
The 15.00%/15.00% Notes were issued pursuant to an indenture, dated as of May 6, 2011 (the “15.00%/15.00% Notes Indenture”), between Holdings and the Trustee. Interest on the 15.00%/15.00% Notes accrues from and includes the issue date of the 15.00%/15.00% Notes. The first interest payment date was November 15, 2011. The 15.00%/15.00% Notes will mature on November 15, 2018. For any interest period through and including May 15, 2015, Holdings may elect to pay interest on the 15.00%/15.00% Notes (i) entirely in cash (“cash interest”) or (ii) pay interest on 50% of the outstanding principal amount of the 15.00%/15.00% Notes in cash interest and on 50% of the outstanding principal amount of the 15.00%/ 15.00% Notes by increasing the principal amount of the outstanding 15.00%/15.00% Notes or by issuing additional 15.00%/15.00% Notes (“PIK interest”). Notwithstanding the foregoing, Holdings will pay cash interest on the 15.00%/15.00% Notes to the extent that iPayment would, on the date notice of such election is required to be made, be permitted pursuant to its debt agreements to pay a dividend or distribution to Holdings in an amount sufficient to pay such cash interest on the relevant interest payment date. After May 15, 2015, Holdings will pay solely cash interest on the 15.00%/15.00% Notes, subject to certain rights to pay partial PIK interest for up to two additional interest periods.
Cash interest and PIK interest each accrue at a rate of 15.00% per annum. If Holdings’ leverage ratio exceeds 7.25 to 1.00 as of the most recent quarter end prior to an interest payment date, then for the interest period ending on such date, the interest rate will be retroactively increased by 2.00% in the form of additional PIK interest. For the quarter ended June 30, 2014 we determined that our leverage ratio was 8.66 to 1.00; accordingly, we have recognized $0.4 million of additional 2.00% PIK interest expense during the six months ended June 30, 2014 with respect to the interest period from May 15, 2014 to November 15, 2014. We are obligated to pay additional 2% PIK interest until the next interest payment date on which the Company's leverage ratio is equal to, or less than, 7.25 to 1.00 as of the most recent quarter end prior to such subsequent interest payment date. The 15.00%/15.00% Notes will bear interest on the increased principal amount thereof from and after the applicable interest payment date on which a payment of PIK interest is made. Holdings must elect the form of interest payment with respect to each interest period not later than the beginning of each interest period. In the absence of such an election, Holdings will pay interest according to the election for the previous interest period.
The 15.00%/15.00% Notes Indenture contains covenants that, among other things, restrict Holdings and its restricted subsidiaries’ ability to pay dividends, redeem stock or make other distributions or restricted payments, make certain investments, incur or guarantee additional indebtedness, create liens, agree to dividend and payment restrictions affecting restricted subsidiaries, consummate mergers, consolidations or other business combinations, designate subsidiaries as unrestricted, change its or their line of business, or enter into certain transactions with affiliates. The 15.00%/15.00% Notes Indenture also provides for customary events of default, including non-payment of principal, interest or premium, failure to comply with covenants, and certain bankruptcy or insolvency events.
The 125,000 Units issued by Holdings on May 6, 2011, consist of $125.0 million in aggregate principal amount of 15.00%/15.00% Notes and Warrants to purchase 125,000 shares of common stock at $0.01 per share, subject to adjustment upon the occurrence of certain events described in the warrant agreement entered into by Holdings and Wilmington Trust,

17


National Association (as successor by merger to Wilmington Trust FSB) (the “Warrant Agreement”). The proceeds from the issuance of the Units were allocated between the 15.00%/15.00% Notes and the Warrants based on the relative fair value of the items.
The fair value of the Warrants was computed using the following assumptions:
 
As of May 23, 2011
Common stock at fair value
$
9.43

Exercise price
$
0.01

Term
7.5 years

Volatility
42.68
%
Risk-free interest rate
2.54
%
Dividend yield

The total proceeds from the issuance of the Units were $121.7 million, net of issuance costs of $3.3 million. The valuation resulted in $1.2 million of the gross proceeds being allocated to the Warrants and accordingly, was recorded as a debt discount as of May 23, 2011.
The descriptions set forth in this Note 5 are intended to be summaries only, are not complete and are qualified in their entirety by reference to the full and complete terms contained in the 10.25% Notes Indenture (including the form of the notes attached thereto), the 15.00%/15.00% Notes Indenture (including the form of the notes attached thereto), the Credit Agreement and the Warrant Agreement. Copies of the 10.25% Notes Indenture and the Credit Agreement are included as Exhibits 4.1 and 10.1, respectively, to iPayment’s Current Report on Form 8-K filed with the SEC on May 12, 2011, and copies of the 15.00%/15.00% Notes Indenture and the Warrant Agreement are included as Exhibits 4.3 and 10.29, respectively, to the Company’s Registration Statement on Form S-4 filed with the SEC on October 11, 2011, which, in each case, are incorporated herein by reference.
On July 20, 2012, iPayment purchased approximately $23.9 million principal amount of the 15.00%/15.00% Notes from a third party for $20.0 million in a privately negotiated transaction. The purchase of such 15.00%/15.00% Notes and the expenses associated therewith were funded with cash on hand and borrowings under the revolving facility under the Senior Secured Credit Facilities and are carried on our balance sheet at face value as they are considered held to maturity investments. As a result of the purchase of the 15.00%/15.00% Notes, Holdings recognized a gain of $3.3 million, net of the write-off of unamortized debt issuance costs of $0.6 million. Concurrent with the purchase of such 15.00%/15.00% Notes, we requested and obtained a $20.0 million increase in the aggregate revolving facility commitment. The aggregate commitment of the lenders under the revolving facility following such increase was $95.0 million.
iPayment and its consolidated subsidiaries had net capitalized debt issuance costs related to the Senior Secured Credit Facilities of $8.6 million, 10.25% Notes of $6.9 million, and the purchase of Holdings 15.00%/15.00% Notes of $0.6 million, as of June 30, 2014. Holdings and its consolidated subsidiaries had net capitalized debt issuance costs related to the 15.00%/15.00% Notes of $1.9 million and a debt discount related to the Warrants of $0.7 million as of June 30, 2014.
These costs are being amortized to interest expense with amounts computed using an effective interest method over the life of the related debt instruments.
Amortization expense of iPayment and its consolidated subsidiaries related to the debt issuance costs for the Senior Secured Credit Facilities, the 10.25% Notes and the purchase of Holdings 15.00%/15.00% Notes were $0.7 million, $0.3 million and $0.1 million, respectively, for the three months ended June 30, 2014 and $1.4 million, $0.7 million and $0.2 million, respectively, for the six months ended June 30, 2014. Amortization expense of Holdings and its consolidated subsidiaries related to the debt issuance costs for the 15.00%/15.00% Notes was $0.1 million for the three and six months ended June 30, 2014.
(6) Segment Information and Geographical Information
We consider our business activities to be in a single reporting segment. For the years ended December 31, 2013, and 2012, we derived greater than 90% and 88%, respectively, of our revenue and results of operations from processing revenues from card-based payments. Substantially all of our revenues are generated in the United States.

18


(7) Supplemental Guarantor Financial Information
On May 6, 2011 the Company issued the 10.25% Notes pursuant to the 10.25% Notes indenture. The 10.25% Notes mature on May 15, 2018. The 10.25% Notes are fully and unconditionally guaranteed by all of iPayment's subsidiaries. However, the guarantees of iPayment's subsidiaries may be released and iPayment's future subsidiaries may not be required to guarantee the 10.25% Notes upon occurrence of any of the following events, all pursuant to the provisions of the 10.25% Notes Indenture (i) any direct or indirect sale or other disposition of any interest or participation, such as corporate stock, in a guarantor subsidiary, following which such guarantor subsidiary is no longer considered a restricted subsidiary of the Company; (ii) the designation of a guarantor subsidiary as an unrestricted subsidiary by the Company; (iii) the release, discharge or termination of the guarantee which resulted in the creation of the notes' guarantees as defined by the 10.25% Notes Indenture; and (iv) the legal defeasance of the 10.25% Notes or satisfaction and discharge of the 10.25% Notes Indenture.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries the condensed consolidating balance sheets as of June 30, 2014 and December 31, 2013 and the related consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013 and the consolidated statements of cash flows for the six months ended June 30, 2014 and 2013.
Effective December 31, 2013 a number of subsidiaries which were guarantors of the 10.25% Notes were merged into iPayment, Inc. The effects of these mergers are reflected in the “iPayment, Inc.” column of the following condensed consolidating balance sheets as of June 30, 2014 and December 31, 2013, and consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2014, and the consolidated statements of cash flows for the six months ended June 30, 2014. However, the activities of the merged entities are reflected in the "Guarantor Subsidiaries" column of the following consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2013 and cash flows for the six months ended June 30, 2013.




19



iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 2014
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
680

 
$

 
$

 
$

 
$
680

Accounts receivable, net
 
24,777

 
1,546

 

 

 
26,323

Prepaid expenses and other current assets
 
3,264

 
1,316

 

 

 
4,580

Total current assets
 
28,721

 
2,862

 

 

 
31,583

Restricted cash
 
803

 

 

 

 
803

Property and equipment, net
 
5,640

 
1,242

 

 

 
6,882

Intercompany receivable
 

 
46,791

 

 
(46,791
)
 

Merchant portfolios and other intangible assets, net
 
152,108

 
16,468

 

 

 
168,576

Goodwill
 
632,688

 
47,063

 

 

 
679,751

Investment in subsidiaries
 
107,804

 

 

 
(107,804
)
 

Investment in 15.00%/15.00% Notes
 
26,469

 

 

 

 
26,469

Other assets, net
 
21,605

 
22

 

 

 
21,627

Total assets
 
$
975,838

 
$
114,448

 
$

 
$
(154,595
)
 
$
935,691

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
3,747

 
$
1,159

 
$

 
$

 
$
4,906

Income taxes payable
 
6,427

 

 

 

 
6,427

Accrued interest
 
6,999

 

 

 

 
6,999

Accrued liabilities and other
 
18,898

 
2,448

 

 

 
21,346

Deferred tax liabilities
 
2,055

 
784

 

 

 
2,839

Total current liabilities
 
38,126

 
4,391

 

 

 
42,517

Deferred tax liabilities
 
24,543

 
2,253

 

 

 
26,796

Intercompany payable
 
46,791

 

 

 
(46,791
)
 

Long-term debt
 
776,512

 

 

 

 
776,512

Other liabilities
 
3,367

 

 

 

 
3,367

Total equity
 
86,499

 
107,804

 

 
(107,804
)
 
86,499

Total liabilities and equity
 
$
975,838

 
$
114,448

 
$

 
$
(154,595
)
 
$
935,691


20


iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
 
 
December 31, 2013
 
 
(Audited)
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,005

 
$

 
$

 
$

 
$
8,005

Accounts receivable, net
 
26,366

 
1,129

 

 

 
27,495

Prepaid expenses and other current assets
 
2,788

 
2,262

 

 

 
5,050

Total current assets
 
37,159

 
3,391

 

 

 
40,550

Restricted cash
 
825

 

 

 

 
825

Property and equipment, net
 
6,031

 
871

 

 

 
6,902

Intercompany receivable
 

 
40,216

 

 
(40,216
)
 

Merchant portfolios and other intangible assets, net
 
168,683

 
16,116

 

 

 
184,799

Goodwill
 
632,688

 
46,016

 

 

 
678,704

Investment in subsidiaries
 
99,921

 

 

 
(99,921
)
 

Investment in 15.00%/15.00% Notes
 
24,661

 

 

 

 
24,661

Other assets, net
 
24,141

 
20

 

 

 
24,161

Total assets
 
$
994,109

 
$
106,630

 
$

 
$
(140,137
)
 
$
960,602

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
3,371

 
$
816

 
$

 
$

 
$
4,187

Income taxes payable
 
5,992

 

 

 

 
5,992

Accrued interest
 
7,028

 

 

 

 
7,028

Accrued liabilities and other
 
19,868

 
4,210

 

 

 
24,078

Deferred tax liabilities
 
2,055

 
784

 
 
 
 
 
2,839

Total current liabilities
 
38,314

 
5,810

 

 

 
44,124

Deferred tax liabilities
 
23,728

 
899

 

 

 
24,627

Intercompany payable
 
40,216

 

 

 
(40,216
)
 

Long-term debt
 
785,357

 

 

 

 
785,357

Other liabilities
 
3,062

 

 

 

 
3,062

Total equity
 
103,432

 
99,921

 

 
(99,921
)
 
103,432

Total liabilities and equity
 
$
994,109

 
$
106,630

 
$

 
$
(140,137
)
 
$
960,602


21


iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended June 30, 2014
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues
 
$
129,960

 
$
52,915

 
$

 
$

 
$
182,875

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Interchange
 
67,988

 
29,347

 

 

 
97,335

Other costs of services
 
49,588

 
13,627

 

 

 
63,215

Selling, general and administrative
 
4,490

 
2,332

 

 

 
6,822

Embezzlement recoveries
 
(156
)
 

 

 

 
(156
)
Total operating expenses
 
121,910

 
45,306

 

 

 
167,216

Income from operations
 
8,050

 
7,609

 

 

 
15,659

Other expense:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
16,497

 

 

 

 
16,497

Other expense, net
 
(155
)
 

 

 

 
(155
)
Income (loss) before income taxes
 
(8,292
)
 
7,609

 

 

 
(683
)
Income tax (benefit) provision
 
(639
)
 
265

 

 

 
(374
)
Equity in subsidiary earnings, net
 
7,344

 

 

 
(7,344
)
 

Net and comprehensive income (loss)
 
$
(309
)
 
$
7,344

 
$

 
$
(7,344
)
 
$
(309
)
 
 
Three Months Ended June 30, 2013
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues
 
$
134,103

 
$
39,836

 
$

 
$

 
$
173,939

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Interchange
 
67,869

 
22,733

 

 

 
90,602

Other costs of services
 
51,657

 
10,412

 

 

 
62,069

Selling, general and administrative
 
4,555

 
9,300

 

 

 
13,855

Embezzlement recoveries
 
(458
)
 

 

 

 
(458
)
Total operating expenses
 
123,623

 
42,445

 

 

 
166,068

Income from operations
 
10,480

 
(2,609
)
 

 

 
7,871

Other expense:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
15,484

 
1

 

 

 
15,485

Other expense, net
 
164

 
25

 

 

 
189

Income (loss) before income taxes
 
(5,168
)
 
(2,635
)
 

 

 
(7,803
)
Income tax provision
 
13,779

 

 

 

 
13,779

Equity in subsidiary earnings, net
 
(2,635
)
 

 

 
2,635

 

Net and comprehensive income (loss)
 
$
(21,582
)
 
$
(2,635
)
 
$

 
$
2,635

 
$
(21,582
)
 
 
 
 
 
 
 
 
 
 
 

22


iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Six Months Ended June 30, 2014
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues
 
$
245,529

 
$
95,453

 
$

 
$

 
$
340,982

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Interchange
 
129,471

 
53,870

 

 

 
183,341

Other costs of services
 
95,716

 
26,175

 

 

 
121,891

Selling, general and administrative
 
8,516

 
4,721

 

 

 
13,237

Embezzlement recoveries
 
(272
)
 

 

 

 
(272
)
Total operating expenses
 
233,431

 
84,766

 

 

 
318,197

Income from operations
 
12,098

 
10,687

 

 

 
22,785

Other expense:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
32,947

 

 

 

 
32,947

Other expense, net
 
(68
)
 

 

 

 
(68
)
Income (loss) before income taxes
 
(20,781
)
 
10,687

 

 

 
(10,094
)
Income tax provision
 
309

 
1,453

 

 

 
1,762

Equity in subsidiary earnings, net
 
9,234

 

 

 
(9,234
)
 

Net and comprehensive income (loss)
 
$
(11,856
)
 
$
9,234

 
$

 
$
(9,234
)
 
$
(11,856
)
 
 
Six Months Ended June 30, 2013
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues
 
$
256,538

 
$
73,351

 
$

 
$

 
$
329,889

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Interchange
 
130,970

 
41,473

 

 

 
172,443

Other costs of services
 
101,365

 
20,400

 

 

 
121,765

Selling, general and administrative
 
9,093

 
10,629

 

 

 
19,722

Embezzlement recoveries
 
(2,777
)
 

 

 

 
(2,777
)
Total operating expenses
 
238,651

 
72,502

 

 

 
311,153

Income from operations
 
17,887

 
849

 

 

 
18,736

Other expense:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
30,853

 
1

 

 

 
30,854

Other expense, net
 
2,671

 
55

 

 

 
2,726

Income (loss) before income taxes
 
(15,637
)
 
793

 

 

 
(14,844
)
Income tax provision
 
10,405

 

 

 

 
10,405

Equity in subsidiary earnings, net
 
793

 

 

 
(793
)
 

Net and comprehensive income (loss)
 
$
(25,249
)
 
$
793

 
$

 
$
(793
)
 
$
(25,249
)
 
 
 
 
 
 
 
 
 
 
 


23


iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended June 30, 2014
 
 
iPayment, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
iPayment, Inc. Consolidated
(Dollars in thousands)
 
 
 
 
 
Net cash provided by
 
 
 
 
 
 
 
 
 
 
operating activities
 
$
8,303

 
$
3,667

 
$

 
$

 
$
11,970

Investing activities:
 
 
 
 
 
 
 
 
 
 
Change in restricted cash
 
22

 

 

 

 
22

Expenditures for property and equipment
 
(1,397
)