Attached files
| file | filename |
|---|---|
| EX-99.3 - EXHIBIT 99.3 - Newtek Business Services Corp. | upsofwillcandsubsidiary2014.htm |
| EX-99.2 - EXHIBIT 99.2 - Newtek Business Services Corp. | upsofwillcdecember312015.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)
Financial Report
and Independent Auditor’s Report
Year Ended December 31, 2016
Universal Processing Services of Wisconsin, LLC
Index
Year Ended December 31, 2016
Pages
Independent Auditor’s Report ................................................................................................................... 1
Financial Statements
Balance Sheet ................................................................................................................................................ 2
Statement of Income ..................................................................................................................................... 3
Statement of Changes in Member’s Deficit .................................................................................................. 4
Statement of Cash Flows .............................................................................................................................. 5
Notes to Financial Statements .................................................................................................................. 6-13
1
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Stockholders
of Universal Processing Services of Wisconsin, LLC
We have audited the accompanying financial statements of Universal Processing Services of Wisconsin,
LLC (the “Company”), which comprise the balance sheet as of December 31, 2016, and the related
statements of income, 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 financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our 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
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Universal Processing Services of Wisconsin, LLC as of December 31, 2016, and the results of
its operations and its cash flows for the year then ended in accordance with accounting principles generally
accepted in the United States of America.
New York, New York
February 22, 2017
Universal Processing Services of Wisconsin, LLC
Balance Sheet
December 31, 2016
See notes to financial statements.
2
Assets
Current Assets:
Cash 7,898,628$
Accounts receivable 3,115,054
Prepaid expenses and other current assets 263,066
Inventory 245,500
Total current assets 11,522,248
Fixed assets, net 402,040
Customer merchant accounts, net 1,191,600
Restricted cash 587,707
Due from related parties 317,103
Notes receivable - related party 500,000
Goodwill 1,908,495
Total assets 16,429,193$
Liabilities and Member's Deficit
Liabilities:
Current Liabilities:
Accounts payable and accrued expenses 3,484,204$
Residuals payable 868,087
Due to related parties 464,045
Chargeback reserves 802,722
Total current liabilities 5,619,058
Bank note payable, net of deferred financing costs 16,431,529
Total liabilities 22,050,587
Commitments and contingencies (Note 9)
Member's deficit (5,621,394)
Total liabilities and member's deficit 16,429,193$
Universal Processing Services of Wisconsin, LLC
Statement of Income
Year Ended December 31, 2016
See notes to financial statements.
3
Revenue:
Electronic payment processing 103,885,710$
Expenses:
Electronic payment processing costs 88,013,827
Salaries and benefits 4,677,273
Professional fees 783,846
Depreciation and amortization 799,006
Other general and administrative costs 1,221,448
Total expenses 95,495,400
Income from operations 8,390,310
Interest expense, net (1,588,970)
Interest income - related party 183,050
Net income 6,984,390$
Universal Processing Services of Wisconsin, LLC
Statement of Changes in Member’s Deficit
Year Ended December 31, 2016
See notes to financial statements.
4
Member's Deficit
Balance, January 1, 2016 (3,495,974)$
Net income 6,984,390
Member distributions (9,109,810)
Balance, December 31, 2016 (5,621,394)$
Universal Processing Services of Wisconsin, LLC
Statement of Cash Flows
Year Ended December 31, 2016
See notes to financial statements.
5
Cash flows from operating activities:
Net income 6,984,390$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 799,006
Amortization of deferred financing costs 257,232
Changes in operating assets and liabilities:
Restricted cash (94,992)
Accounts receivable (569,643)
Prepaid expenses and other current assets (179,718)
Inventory 41,975
Accounts payable, accrued expenses and other current liabilities 1,508,596
Due to/from related parties 260,352
Net cash provided by operating activities 9,007,198
Cash flows from investing activities:
Purchase of customer merchant accounts (152,103)
Principal payments received on related party note 5,146,749
Purchase of fixed assets (203,472)
Net cash provided by investing activities 4,791,174
Cash flows used in financing activities:
Distributions to member (9,109,810)
Net increase in cash 4,688,562
Cash, beginning of year 3,210,066
Cash, end of year 7,898,628$
Supplemental disclosure of cash flow information
Interest paid 1,236,274$
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
6
1. Organization, Description of Business, and Basis of Presentation
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.
UPS-WI and its formerly wholly-owned subsidiary, Solar Processing Services, LLC (“Solar”) are
collectively hereinafter referred to as the “Company”. In June 2016, Solar merged into UPS-WI.
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.
2. Significant Accounting Policies
Use of Estimates
The preparation of the 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 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.
Recently Adopted Accounting Standards
In April 2015, the Financial Accounting Standards Board issued ASU 2015-03 “Simplifying the
Presentation of Debt Issuance Costs.” This update requires that debt issuance costs be presented in
the balance sheet as a direct deduction from the debt liability. The Company adopted this standard
with respect to its Bank note payable.
Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable and
accrued expenses, residuals payable, notes receivable from a related party and a bank note payable.
The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses 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 maintains cash balances at financial institutions of high credit quality. As of
December 31, 2016, cash deposits in excess of insured amounts totaled approximately $7,683,000.
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
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: (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 conclusion on 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.
Interest Income
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
8
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 statement of income. During the year ended December 31, 2016, 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 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 2013 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
Notes to Financial Statements
Year Ended December 31, 2016
9
Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure through
February 22, 2017, the date these financial statements were available to be issued.
3. Fixed Assets
The Company’s fixed assets are comprised of the following at December 31, 2016:
Accumulated
Depreciation Net Book
Cost and Amortization Value
Telephone systems 375,861$ 155,621$ 220,240$
Software 488,791 331,712 157,079
Leasehold improvements 63,644 53,227 10,417
Computer equipment 93,257 79,040 14,217
Website 5,205 5,118 87
Totals 1,026,758$ 624,718$ 402,040$
Depreciation expense related to fixed assets for the year ended December 31, 2016 was
approximately $198,000.
4. Goodwill
The carrying value of goodwill at December 31, 2016 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, 2016 and no further assessment was
required.
5. Customer Merchant Accounts
The net carrying value of customer merchant accounts is approximately $1,192,000 which consists
of approximately $2,744,000 of gross costs, net of accumulated amortization of approximately
$1,552,000 at December 31, 2016. 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 statement of income was
approximately $601,000.
Total expected amortization expense for the next five fiscal years and thereafter is as follows:
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
10
Year Ending December 31,
2017 480,935
2018 353,545
2019 228,385
2020 111,382
2021 17,025
Thereafter 328
1,191,600$
6. Bank Note Payable, Net of Deferred Financing Costs
In June 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, 2016 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 and the Facility is
guaranteed by Holdco’s parent, Newtek Business Services Corp (“Newtek”). The Facility provides
for monthly/quarterly 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 a
“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, 2016
was 7.67%. 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,
2016. At December 31, 2016, the Company had approximately $16,999,000 of total borrowings
outstanding under the Facility. Interest expense and amortization of deferred financing costs for the
year ended December 31, 2016 was approximately $1,608,000.
Outstanding borrowings under the Bank note payable consisted of the following at December 31,
2016:
Principal 16,998,694$
Unamortized deferred financing costs (567,165)
Net carrying amount 16,431,529$
7. Notes Receivable – Related Party
The Company had $500,000 outstanding on its revolving line of credit with Newtek, at December
31, 2016. The line, which matures in June 2019, allows for maximum borrowings of $38,000,000
and bears interest at a rate equal to that in effect under the Company’s Facility, at any given time.
The Company recorded related party interest income of approximately $183,000 during the year
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
11
ended December 31, 2016. At December 31, 2016 there was approximately $188,000 in accrued
interest income under the line.
8. Related Party Transactions
The Company earned electronic payment processing revenue of approximately $45,000 from
Premier. The Company incurred residual expenses totaling approximately $3,878,000 from several
related parties. In addition, the Company incurred gateway fees of approximately $138,000 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
statement of income. Salaries and overhead costs of approximately $36,000 charged from
CrystalTech are included in salaries and benefits. Payroll processing costs of approximately
$20,000 from PMTWorks Payroll, LLC and managed technology services of approximately
$160,000 from CrystalTech are included in other general and administrative costs. At December
31, 2016, total amounts due to related parties are approximately $147,000.
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, 2016, were approximately $468,000.
The Company’s parent, Holdco, and Newtek are both guarantors of the Facility with Goldman
Sachs Bank USA.
9. Commitments and Contingencies
Operating Commitments
The Company entered into noncancellable operating leases for office facilities with future rentals
as follows:
Year Ending December 31,
2017 181,067
181,067$
Total rent expense for the year ended December 31, 2016 was approximately $186,000.
Under the amended terms of a Service Agreement, amended terms of a Merchant Program
Processing Agreement, amended terms of a Preferred Card Agreement, and amended terms of a
Marketing Agreement, UPS-WI is required to pay minimum fees of $4,200,000 in total under these
agreements during the period January 1, 2016 through December 31, 2017. The term of the Service
agreement was extended to December 31, 2018. The Merchant Program Processing Agreement
initial term was extended to November 30, 2018 and renews automatically each year. The
Marketing Agreement initial term was extended to May 31, 2018 and renews automatically each
two years for two year terms. The Preferred Card Agreement initial term was extended to April 30,
2018 and renews automatically for six-month terms.
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
12
Under the terms of an Independent Sales Organization Agreement and Member Services Provider
Agreement between UPS-WI 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, 2016.
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, 2016, exceeded the minimum required amount under these agreements. The agreement expires
July 2018.
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 was deposited
with the Court pending the outcome of an appeal of the judgement.
On June 14, 2016, the United States Court of Appeals for the Eleventh Circuit set aside the Court’s
judgment awarding joint and several liability for equitable monetary relief in the amount of
approximately $1,735,000 against UPS-WI, and remanded the case to the Court for findings of fact
and conclusions of law as to whether and why UPS-WI should be jointly and severally liable for
restitution, and in what amount, if any. On October 18, 2016, the Court ordered that the
$1,735,000 payment be returned to UPS-WI. On October 26, 2016, the Court entered an equitable
monetary judgment against UPS-WI for approximately $1,735,000. UPS-WI has filed a notice of
appeal of the judgment. The total $1,735,000 has been accrued and is included in the balance sheet
in Accounts payable and accrued expenses. There is no current year income statement effect.
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 asserted claims
against the Company for breach of the UPS-WI and NCMIC agreement for the processing of credit
card transactions, and seeks monetary relief. In April 2016, in order to avoid the cost of trial and
any appeals, UPS-WI settled the matter for $200,000. The total $200,000 was paid during 2016 and
is included in the statement of income in other general and administrative costs.
In September 2014, UPS-WI filed an action in Wisconsin state court against a former independent
sales agent and his company. The complaint alleges several causes of action including breach of
contract. The defendant filed an answer and filed counterclaims against UPS-WI seeking monetary
damages. The court granted certain aspects of defendants’ motions for summary judgment,
Universal Processing Services of Wisconsin, LLC
Notes to Financial Statements
Year Ended December 31, 2016
13
dismissing certain of the claims asserted by UPS-WI. The matter is presently stayed pending the
Wisconsin Supreme Court’s ruling on matters under appeal.