Exhibit 99.2
TRISOURCE SOLUTIONS, LLC
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2019
Financial Statements
TRISOURCE SOLUTIONS, LLC
BALANCE SHEET
(Unaudited)
| | | June 30,
2019 | | | December 31,
2018 | |
| | | | | | | |
| Current Assets | | | | | | |
| Cash | | $ | 3,392,853 | | | $ | 3,061,101 | |
| Trade receivables | | | 2,797,872 | | | | 2,443,675 | |
| Prepaid expenses and deposits | | | 56,908 | | | | 147,172 | |
| Total Current Assets | | | 6,247,633 | | | | 5,651,948 | |
| | | | | | | | | |
| Property and equipment, net | | | 416,654 | | | | 381,090 | |
| | | | | | | | | |
| Intangible assets | | | 437,071 | | | | 437,071 | |
| | | | | | | | | |
| Goodwill | | | 2,500,000 | | | | 2,500,000 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Advances to related party | | | 294,815 | | | | 294,815 | |
| Reserve account - restricted as to use | | | 486,110 | | | | 485,338 | |
| Total Other Assets | | | 4,134,650 | | | | 4,098,314 | |
| Total Assets | | $ | 10,382,282 | | | $ | 9,750,262 | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 1,375,298 | | | $ | 1,515,029 | |
| Residuals payable | | | 1,090,501 | | | | 900,968 | |
| Total Current Liabilities | | | 2,465,799 | | | | 2,415,997 | |
| | | | | | | | | |
| Long-Term Liabilities | | | | | | | | |
| Merchant deposits | | | 492,045 | | | | 490,741 | |
| Total Long-Term Liabilities | | | 492,045 | | | | 490,741 | |
| | | | | | | | | |
| Total Liabilities | | $ | 2,957,844 | | | $ | 2,906,738 | |
| | | | | | | | | |
| Members’ Equity | | $ | 7,424,438 | | | $ | 6,843,524 | |
| Total liabilities and members’ equity | | $ | 10,382,282 | | | $ | 9,750,262 | |
See the accompanying notes to financial statements
TRISOURCE SOLUTIONS, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended
| | | June 30,
2019 | | | June 30,
2018 | |
| | | | | | | |
| Processing and annual fees revenue | | $ | 15,839,771 | | | $ | 13,477,308 | |
| | | | | | | | | |
| Direct Expenses | | | | | | | | |
| Agent residuals | | | 1,551,743 | | | | 1,504,914 | |
| ISO residuals | | | 4,979,530 | | | | 4,266,274 | |
| Authorization fees | | | 2,853,040 | | | | 2,741,632 | |
| Other | | | 246,784 | | | | 178,615 | |
| Total operating expenses | | | 9,631,097 | | | | 8,691,435 | |
| | | | | | | | | |
| Gross Profit | | | 6,208,674 | | | | 4,785,874 | |
| | | | | | | | | |
| General and administrative expenses | | | 3,286,224 | | | | 3,097,964 | |
| | | | | | | | | |
| Income from operations | | | 2,922,451 | | | | 1,687,910 | |
| | | | | | | | | |
| Other Income (Expenses) | | | | | | | | |
| Interest expense | | | (36,974 | ) | | | (16,523 | ) |
| Interest income | | | 10,095 | | | | 8,236 | |
| Other income (expense) | | | 1,390 | | | | 50,000 | |
| Total other income (expenses) | | | (25,489 | ) | | | 41,713 | |
| Net Income | | $ | 2,896,961 | | | $ | 1,729,623 | |
See the accompanying notes to financial statements
TRISOURCE SOLUTIONS, LLC
STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
(Unaudited)
For the six months ended
| Balance as of December 31, 2018 | | $ | 6,843,524 | |
| Distributions | | | (2,316,047 | ) |
| Net Income | | | 2,896,961 | |
| Balance as of June 30, 2019 | | $ | 7,424,438 | |
| | | | | |
| Balance as of December 31, 2017 | | $ | 5,368,570 | |
| Distributions | | | (594,041 | ) |
| Net Income | | | 1,729,623 | |
| Balance as of June 30, 2018 | | $ | 6,504,152 | |
See the accompanying notes to financial statements
TRISOURCE SOLUTIONS, LLC
STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended
| | | June 30,
2019 | | | June 30,
2018 | |
| | | | | | | |
| Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 2,896,961 | | | $ | 1,729,623 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization of property and equipment | | | 56,089 | | | | 46,464 | |
| Loss on sale of property and equipment | | | - | | | | - | |
| Changes in assets and liabilities: | | | | | | | | |
| Trade receivables | | | (1,113,860 | ) | | | (962,302 | ) |
| Prepaid expenses and deposits | | | 90,265 | | | | 36,051 | |
| Reserve account - restricted as to use | | | (772 | ) | | | 119,992 | |
| Accounts payable and accrued expenses | | | (139,731 | ) | | | (153,488 | ) |
| Residuals payable | | | 189,533 | | | | 141,645 | |
| Merchants deposits | | | 1,304 | | | | (118,510 | ) |
| Net cash provided by operating activities | | | 1,979,789 | | | | 839,475 | |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Net advances to related parties | | | 0 | | | | (46,025 | ) |
| Purchases of property and equipment | | | (91,653 | ) | | | (55,093 | ) |
| Net cash used in investing activities | | | (91,653 | ) | | | (101,117 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
| Net borrowings on line of credit | | | 759,663 | | | | 632,760 | |
| Distribution | | | (2,316,047 | ) | | | (594,041 | ) |
| Net cash used in financing activities | | | (1,556,384 | ) | | | 38,720 | |
| | | | | | | | | |
| Change in cash | | | 331,752 | | | | 777,077 | |
| Cash - Beginning of Year | | | 3,061,101 | | | | 1,875,895 | |
| Cash - End of Year | | $ | 3,392,853 | | | $ | 2,652,972 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | | |
| Interest paid | | $ | 36,974 | | | $ | 16,523 | |
See the accompanying notes to financial statements
TRISOURCE SOLUTIONS, LLC
NOTES TO FINANCIAL STATEMENTS
| 1. | Nature of Business and Significant Accounting Policies |
TriSource Solutions, LLC (the “Company”) is a privately-owned company headquartered in Bettendorf, Iowa with an operating facility in East Moline, Illinois. The Company was formed in July 2007 as a result of a merger between CentralBANCARD, LLC and Nobel Electronic Transfer, LLC. The Company provides full-service credit card transaction processing for merchants of acquirer banks and independent sales organizations (ISOs). All functions of settlement processing are handled in-house on internally developed software.
A summary of the Company’s significant accounting policies follows:
Reporting Entity
TriSource Solutions, LLC is an 87.69% owned subsidiary of TriSource Solutions, Inc. (the “parent”). These financial statements do not purport to represent the financial position, results of operations or cash flows of the parent company, TriSource Solutions, Inc.
Use of Estimates
The preparation of 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, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from those estimates.
Cash
The Company places its cash with high credit quality financial institutions. At times, such amounts may be in excess of the Federal Deposit Insurance Corporation insurance limits.
Accounts Receivable
Accounts receivable are carried at the original amount invoiced, less an estimate made for allowance for doubtful accounts. The allowance for doubtful accounts is based on management’s review of the outstanding receivables, historical and current collection information, current condition and aging of the accounts and existing economic conditions. Accounts are written off when all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded when received. Management believes that accounts receivable as of June 30, 2019 and 2018 are fully collectable; therefore, no allowance for doubtful accounts was recorded.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization. Major expenditures for improvements and those which substantially increase useful lives are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation or amortization are removed from the accounts and resulting gains or losses are included in the statement of income.
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
Property and equipment are depreciated or amortized using the straight-line method over the assets’ estimated useful lives.
Intangible Assets
Intangible assets consist of software and portfolios. Software is primarily industry-specific software used to process credit card transactions. Portfolios are books of business purchased by the Company. The Company assesses indefinite-lived assets for impairment annually or more frequently if circumstances indicate impairment may have occurred. The Company evaluated these assets for impairment as of June 30, 2019 and 2018 and determined that the carrying values of such assets were not impaired.
Goodwill
The Company evaluates goodwill for impairment at the entity level when a triggering event occurs that indicates that the fair value of the entity may be below its carrying amount. When a triggering event occurs, the Company first assesses qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that it is more likely than not that goodwill is impaired, the Company performs the quantitative test (referred to as a “Step 2” test) to compare the entity’s fair value with its carrying amount, including goodwill. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing is unnecessary. The goodwill impairment loss, if any, represents the excess of the carrying amount of the entity over its fair value of the entity.
No triggering events occurred during 2019 or 2018 that required goodwill impairment testing and, accordingly, no impairment loss was recorded.
Reserve Account – Restricted as To Use and Merchant Deposits
The Company’s merchant customers have the liability for any charges properly reversed by the cardholder. In the event, however, that the Company is not able to collect such amounts from the merchants due to merchant fraud, insolvency, bankruptcy or another reason, the Company may be liable for any such reversed charges. The Company’s risk of obligation in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the future.
The Company requires cash deposits as collateral from ISOs to minimize its obligation. Collateral held by the Company is classified within “reserve account – restricted as to use” and the obligation to repay the collateral if it is not needed is classified within “merchant deposits” on the Company’s balance sheet.
The Company utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company historically has experienced some level of losses due to merchant defaults.
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
The Company’s reserve is recorded based primarily on historical experiences and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included in “direct expenses” in the Company’s statement of income.
Revenue Recognition
Revenue is recognized when credit card transactions are processed. The majority of the Company’s revenues are comprised of transaction-based fees, which constitute a percentage of dollar volume processed, a fee per transaction processed, account on file or some combination thereof.
Income Taxes
TriSource Solutions, LLC is a limited liability company. Income from limited liability companies is taxed to the members on their individual returns. Under the terms of the operating agreement, allocations of profits, losses, capital gains and distributions are in accordance with the pro rata number of issued and outstanding units held by each member.
Pending Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that result in a company providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This standard will be effective for the calendar year ending December 31, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the financial statements.
In February 2016, the FASB issued ASU 2016-02,Leases. The standard requires all leases with terms over 12 months to be capitalized as a right-of-use asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified as either finance or operating. This distinction will be relevant for the pattern of expense recognition in the statement of income. This standard will be effective for the calendar year ending December 31, 2020. The Company is currently in the process of evaluating the impact of adoption of this ASU on the financial statements.
Subsequent Events
Management has evaluated subsequent events through September 20, 2019, the date the financial statements were available to be reissued.
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
Accounts receivable are presented net of liabilities for which a right of offset exists. The Company receives processing revenue net of all related fees. The acquirer bank offsets the fees against the processing revenue after month end and the net revenue is then available to the Company after offset. Gross fees during the month are charged against the line of credit provided by the acquirer bank. The line of credit can only be used to accumulate fees during the month and the Company cannot borrow funds against the line of credit. This line of credit is limited to $4,000,000, is collateralized by all Company assets and matures September 2019. Interest on outstanding borrowings is payable monthly at the Federal Funds Rate (effective rate of 2.38% and 2.50% as of June 30, 2019 and December 31, 2018, respectively). The balance outstanding as of June 30, 2019 and December 31, 2018 was $3,915,906 and $3,156,243, respectively.
Offsetting of assets and liabilities at June 30, 2019 and December 31, 2018 is as follows:
| | | Gross Amounts of Assets and Liabilities | | | Gross Amounts Offset in the Balance Sheet | | | Net Amount of Assets Presented in the Balance Sheet | |
| June 30, 2019 | | | | | | | | | |
| Trade receivables | | $ | 7,166,660 | | | $ | (4,368,789 | ) | | $ | 2,797,872 | |
| Payables and line of credit | | | (4,368,789 | ) | | | 4,368,789 | | | | - | |
| | | $ | 2,797,872 | | | $ | - | | | $ | 2,797,872 | |
| December 31, 2018 | | | | | | | | | | | | |
| Trade receivables | | $ | 6,113,914 | | | $ | (3,670,239 | ) | | $ | 2,443,675 | |
| Payables and line of credit | | | (3,670,239 | ) | | | 3,670,239 | | | | - | |
| | | $ | 2,443,675 | | | $ | - | | | $ | 2,443,675 | |
In 2019, the Company extended their line of credit agreement. This agreement increased the maximum draw amount to $5,000,000 and extended the maturity date to December 2019. The line continues to be collateralized by all Company assets, with interest based on the Federal Funds Rate.
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
Property and equipment as of June 30, 2019 and December 31, 2018 consists of:
| June 30, 2019 | | | |
| Machinery and equipment | | $ | 551,413 | |
| Software | | | 183,547 | |
| Office furniture and fixtures | | | 4,165 | |
| | | | 739,125 | |
| Less: Accumulated depreciation and amortization | | | 322,471 | |
| | | $ | 416,654 | |
| December 31, 2018 | | | | |
| Machinery and equipment | | $ | 459,760 | |
| Software | | | 183,547 | |
| Office furniture and fixtures | | | 4,165 | |
| | | | 647,472 | |
| Less: Accumulated depreciation and amortization | | | 266,382 | |
| | | $ | 381,090 | |
| 4. | Reserve Account – Restricted as To Use and Merchant Deposits |
Reserve Account – Restricted as To Use
Reserve accounts are restricted as to use and are reflected in other assets on the Company’s balance sheet.
The Company’s primary sponsoring acquiring bank requires the Company to maintain a reserve that is the greater of $100,000 or ..003% of the cumulative prior six months’ net sales volume for all merchants under the bank’s sponsorship. At June 30, 2019 and December 31, 2018, the reserve was $367,342 and $331,001, respectively. In addition, the Company has established its own reserve account, which totaled $118,767 and $154,337 at June 30, 2019 and December 31, 2018, respectively. These reserves are maintained as a contingency against potential transaction losses by merchants processed through the Company.
Merchant Deposits
Each ISO office has a reserve maintained at the level specified in their contract based on a specific percentage of their merchants’ monthly dollar volume processed. Initial ISO reserves are based on the ISO principal’s credit worthiness along with the expected type of merchants to be boarded from processing. The ISO reserve may have a capped amount, or it may be an ongoing monthly reserve dependent on the performance of the merchant portfolio under each ISO.
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
| 5. | Related-Party Transactions |
The Company is related to DCC Merchant Services USA, LLC and BDH Ventures, LLC through common ownership. The Company had gross processing income and residual expense for the six months ended:
| | | June 30, 2019 | | | June 30, 2018 | |
| | | Processing Income | | | Residual Expense | | | Processing Income | | | Residual Expense | |
| DCC Merchant Services USA, LLC | | $ | 57,950 | | | $ | 26,637 | | | $ | 64,265 | | | $ | 32,865 | |
| BDH Ventures, LLC | | | 1,825 | | | | 520 | | | | 1,968 | | | | 559 | |
| | | $ | 59,775 | | | $ | 27,157 | | | $ | 66,232 | | | $ | 33,424 | |
The Company incurred payroll and related expenses for two of DCC Merchant Services USA, LLC’s employees totaling $0 and $45,355 for the six months ended June 30, 2019 and 2018, respectively.
| 6. | Operating Leases and Commitments |
The Company leases office space under non-cancelable operating leases that expire at various dates through November 2021, with options to renew for additional 3-year terms. The agreements require monthly payments ranging from $6,602 to $10,787. Total rent expense for the six months ended June 30, 2019 and 2018 was $104,339 and $96,931.
The Company also leases equipment under cancelable and non-cancelable operating leases that expire at various dates through May 2022. These agreements require monthly payments ranging from $131 to $4,791. Total rent expense under these leases was approximately $43,027 and $50,099 for the six months ended June 30, 2019 and 2018, respectively.
Minimum future commitments under non-cancellable operating leases are as follows:
| | | Office Lease | | | Equipment Lease | | | Total | |
| 2019 | | $ | 104,338 | | | $ | 48,539 | | | $ | 109,850 | |
| 2020 | | | 208,677 | | | | 3,629 | | | | 212,306 | |
| 2021 | | | 180,500 | | | | 3,628 | | | | 184,128 | |
| 2022 | | | - | | | | 1,209 | | | | 1,209.00 | |
| 2023 | | | - | | | | - | | | | - | |
| Thereafter | | | - | | | | - | | | | - | |
| | | $ | 493,515 | | | $ | 57,005 | | | $ | 550,520 | |
TRISOURCE SOLUTIONS, LLC
Notes To Financial Statements(Continued)
| 7. | Employment Agreements and Phantom Unit Plan |
The Company has employment agreements with certain key employees that contain bonus clauses, determined by management of the Company on an annual basis. The bonus, if any, is due within sixty days after the fiscal year. Amounts expensed under these contracts were approximately $0 and $181,625 for the six months ended June 30, 2019 and 2018, respectively.
In conjunction with the employment agreements with certain key employees, the Company has a phantom unit plan. The total number of phantom units to be granted under this plan cannot exceed 3,000 units. Prior to 2018, the phantom units vested up to 80% based on years of service with the remaining 20% vesting at the time of a change in control event, defined as a more than 50% change in the Company’s membership interest or sale of substantially all of the Company. Effective January 1, 2018, the plan was amended, restating all prior terms, to indicate the phantom units vest at the occurrence of a change in control event. Eligible participants were awarded 1,700 phantom units between 2014 and 2017. During the first six months of 2018, an additional 400 phantom units were granted. As of and for the six months ended June 30, 2019 and 2018, no liability or compensation expense was recorded in the financial statements as a change in control event has not occurred.
In addition, the Company has a separate employment agreement with another key employee. Prior to 2018, this agreement required the transfer of a 9.67% equity ownership as a portion of his compensation. Effective January 1, 2018, the plan was amended, restating all prior terms. Under that new agreement, the key employee is entitled to receive payments based on a 9.67% phantom economic interest in an amount determined by “net sales proceeds” at the time of a change in control event, as defined in the agreement. As of and for the six months ended June 30, 2019 and 2018, no liability or compensation expense was recorded in the financial statements as a change in control event has not occurred.
On August 14, 2019, the Company was acquired by Hawk Parent Holdings, LLC and Subsidiaries for an amount up to $65 million, which includes a performance based earnout.
Due to the change in control, the amount due to certain key employees under the phantom unit plan and separate employment agreements totaled $1,618,055 and $5,773,865, respectively.
The financial statements have not been adjusted for the impact of these transactions.
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