10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

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: 001-35170

JetPay Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other Jurisdiction of
Incorporation or Organization) 90-0632274
(I.R.S. Employer
Identification No.)

3939 West Drive, Center Valley, PA 18034

(Address of principal executive offices) (Zip code)

Registrant's Telephone Number, including area code: (610) 797-9500

(Former Name or Former Address, if Changed Since Last Report)

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. Yes x 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Smaller reporting company	x
Non-accelerated filer	¨	Accelerated filer	¨
(Do not check if a smaller reporting company)		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of November 6, 2017, there were 15,673,534 shares of the registrant’s common stock, par value $.001 per share, outstanding.

JetPay Corporation

Form 10-Q

Quarter Ended September 30, 2017

Table of Contents

		Page
PART I - FINANCIAL INFORMATION
Item 1 -	Financial Statements
	Consolidated Balance Sheets – September 30, 2017 (Unaudited) and December 31, 2016 (Audited)	1
	Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2017 and 2016	2
	Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 2017 and 2016	3
	Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2017	4
	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and 2016	5
	Notes to the Consolidated Financial Statements (Unaudited)	7
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3 -	Quantitative and Qualitative Disclosures about Market Risks	44
Item 4 -	Controls and Procedures	44
PART II - OTHER INFORMATION
Item 1 -	Legal Proceedings	45
Item 1A -	Risk Factors	45
Item 2 -	Unregistered Sales of Equity Securities	45
Item 3 -	Defaults Upon Senior Securities	45
Item 4 -	Mine Safety Disclosures	45
Item 5 -	Other Information	45
Item 6 -	Exhibits	46
Signatures		47

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JetPay Corporation

Consolidated Balance Sheets

(In thousands, except share and par value information)

	September 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,207		$	12,584
Restricted cash		1,904			2,129
Accounts receivable, less allowance for doubtful accounts		4,037			4,677
Settlement processing assets and funds		38,257			35,240
Prepaid expenses and other current assets		1,475			5,849
Current assets before funds held for clients		52,880			60,479
Funds held for clients		44,968			49,154
Total current assets		97,848			109,633
Property and equipment, net		3,468			2,125
Goodwill		48,978			48,978
Identifiable intangible assets, net of accumulated amortization of $13,549 at September 30, 2017 and $10,926 at December 31, 2016		23,467			26,090
Other assets		393			384
Total assets	$	174,154		$	187,210
LIABILITIES
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	2,862		$	8,074
Accounts payable and accrued expenses		10,583			10,821
Settlement processing liabilities		38,422			35,079
Deferred revenue		296			502
Other current liabilities		50			985
Current liabilities before client fund obligations		52,213			55,461
Client fund obligations		44,968			49,154
Total current liabilities		97,181			104,615
Long-term debt and capital lease obligations, net of current portion and unamortized discounts and financing costs of $426 and $339 at September 30, 2017 and December 31, 2016		12,872			13,794
Deferred income taxes		520			520
Other liabilities		980			1,228
Total liabilities		111,553			120,157
Commitments and Contingencies
Redeemable Convertible Preferred Stock;
Redeemable convertible Series A and Series A-1 preferred stock, $0.001 par value per share, 142,333 and 139,498 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively (liquidation preference of $85,400 at September 30, 2017)		56,817			53,324
Common Stock, subject to possible redemption (1,625,000 shares at September 30, 2017 and December 31, 2016)		3,520			3,520
Stockholders’ Equity
Preferred stock, $0.001 par value
Authorized 1,000,000 shares, none issued (which excludes 142,333 and 139,498 shares of Series A and Series A-1 redeemable convertible preferred stock at September 30, 2017 and December 31, 2016, respectively)		-			-
Common stock, $0.001 par value
Authorized 100,000,000 shares; 17,873,534 and 17,737,504 issued at September 30, 2017 and December 31, 2016, respectively (which includes 1,625,000 shares subject to possible redemption at September 30, 2017 and December 31, 2016) and 15,673,534 and 17,737,504 outstanding at September 30, 2017 and December 31, 2016, respectively		18			18
Additional paid-in capital		37,851			38,778
Treasury stock, 2,200,000 shares at cost		(4,950	)		-
Accumulated deficit		(30,655	)		(28,587	)
Total Stockholders’ Equity		2,264			10,209
Total Liabilities and Stockholders’ Equity	$	174,154		$	187,210

The accompanying notes are an integral part of these consolidated financial statements.

1

JetPay Corporation

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share information)

	For the Three Months Ended September 30,
	2017			2016
Processing revenues	$	18,440		$	15,214
Cost of processing revenues		12,855			10,199
Gross profit		5,585			5,015
Selling, general and administrative expenses		4,810			4,515
Settlement of legal matters		-			(20	)
Change in fair value of contingent consideration liability		(160	)		404
Amortization of intangibles		874			865
Depreciation		267			173
Operating loss		(206	)		(922	)
Other expenses (income)
Interest expense		281			301
Non-cash interest costs		39			11
Amortization of debt discounts		-			13
Other income		(7	)		(3	)
Loss before income taxes		(519	)		(1,244	)
Income tax expense		56			96
Net loss		(575	)		(1,340	)
Accretion of convertible preferred stock		(2,758	)		(1,557	)
Net loss applicable to common stockholders	$	(3,333	)	$	(2,897	)
Basic and diluted loss per share applicable to common stockholders	$	(0.21	)	$	(0.16	)
Weighted average shares outstanding:
Basic and diluted		15,660,540			17,682,903

The accompanying notes are an integral part of these consolidated financial statements.

2

JetPay Corporation

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share information)

	For the Nine Months Ended September 30,
	2017			2016
Processing revenues	$	56,159		$	39,069
Cost of processing revenues		38,489			25,905
Gross profit		17,670			13,164
Selling, general and administrative expenses		14,822			12,096
Settlement of legal matters		747			6,120
Change in fair value of contingent consideration liability		(343	)		234
Amortization of intangibles		2,623			2,377
Depreciation		746			540
Operating loss		(925	)		(8,203	)
Other expenses (income)
Interest expense		852			812
Non-cash interest costs		106			129
Amortization of debt discounts		-			151
Other income		(14	)		(6	)
Loss before income taxes		(1,869	)		(9,289	)
Income tax expense (benefit)		199			(1,378	)
Net loss		(2,068	)		(7,911	)
Accretion of convertible preferred stock		(7,533	)		(4,424	)
Net loss applicable to common stockholders	$	(9,601	)	$	(12,335	)
Basic and diluted loss per share applicable to common stockholders	$	(0.60	)	$	(0.78	)
Weighted average shares outstanding:
Basic and diluted		15,974,981			15,850,088

The accompanying notes are an integral part of these consolidated financial statements.

3

JetPay Corporation

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

(In thousands, except share information)

	Common Stock				Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2016		17,737,504	$	18	$	38,778		$	-		$	(28,587	)	$	10,209
Common stock issued under employee stock purchase plan		91,790		-		181			-			-			181
Common shares issued as compensation		44,240		-		97			-			-			97
Common stock released from escrow to satisfy contingent consideration obligation		-		-		525			-			-			525
Repurchase of shares into treasury		-		-		-			(4,950	)		-			(4,950	)
Warrants issued for settlement of legal matter		-		-		373			-						373
Employee stock purchase plan expense		-		-		34			-			-			34
Stock-based compensation expense		-		-		531			-			-			531
Beneficial conversion feature on convertible preferred stock		-		-		4,865			-			-			4,865
Accretion of convertible preferred stock to redemption value		-		-		(7,533	)		-			-			(7,533	)
Net loss		-		-		-			-			(2,068	)		(2,068	)
Balance at September 30, 2017		17,873,534	$	18	$	37,851		$	(4,950	)	$	(30,655	)	$	2,264

The accompanying notes are an integral part of these consolidated financial statements.

4

JetPay Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	For the Nine Months Ended September 30,
	2017			2016
Operating Activities
Net loss	$	(2,068	)	$	(7,911	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		746			540
Stock-based compensation		531			285
Common stock issued as compensation		97			-
Employee stock purchase plan expense		34			29
Amortization of intangibles		2,623			2,377
Non-cash interest costs		106			129
Amortization of debt discounts		-			151
Change in fair value of contingent consideration liability		(343	)		234
Loss on disposal of fixed assets		110			32
Deferred income taxes		-			(1,602	)
Recognition of note payable in connection with settlement of legal matter		-			1,851
Change in operating assets and liabilities:
Restricted cash		225			25
Accounts receivable		640			1,092
Settlement processing assets, funds and obligations, net		326			555
Prepaid expenses and other current assets		(576	)		(276	)
Other assets		(9	)		4,139
Deferred revenue		(206	)		(259	)
Accounts payable, accrued expenses and other liabilities		132			74
Net cash provided by operating activities		2,368			1,465
Investing Activities
Net decrease in restricted cash and cash equivalents held to satisfy client fund obligations		4,186			4,397
Cash acquired in acquisition		-			519
Purchase of property and equipment		(1,591	)		(615	)
Investment in acquired technology		-			(351	)
Proceeds on disposal of property and equipment		-			15
Net cash provided by investing activities		2,595			3,965
Financing Activities
Payments on long-term debt and capital lease obligations		(7,447	)		(2,392	)
Proceeds from issuance of common stock, net of issuance costs		-			64
Proceeds from issuance of common stock pursuant to employee stock purchase plan		181			47
Proceeds from notes payable		677			1,970
Proceeds from sale of preferred stock, net of issuance costs		825			2,500
Restricted cash reserve		-			(1,900	)
Payment of deferred financing fees associated with new borrowings		(76	)		(112	)
Payment of deferred and contingent acquisition consideration		(314	)		(1,386	)
Net decrease in client funds obligations		(4,186	)		(4,397	)
Net cash used in financing activities		(10,340	)		(5,606	)
Net decrease in cash and cash equivalents		(5,377	)		(176	)
Cash and cash equivalents, beginning		12,584			5,594
Cash and cash equivalents, ending	$	7,207		$	5,418

The accompanying notes are an integral part of these consolidated financial statements.

5

JetPay Corporation

Consolidated Statements of Cash Flows (continued)

(Unaudited)

(In thousands)

	For the Nine Months Ended September 30,
	2017		2016
Supplement disclosure of cash flow information:
Cash paid for interest	$	985	$	786
Cash paid for taxes	$	288	$	328
Supplemental disclosure of non-cash investing and financing activity:
Acquisition of equipment under capital lease	$	608	$	103
Promissory notes issued in connection with the settlement of legal matter	$	-	$	4,950
Treasury stock reclassification	$	4,950	$	-
Indemnification asset associated with settlement of legal matter	$	-	$	4,950
Issuance of warrants for settlement of legal matter	$	373	$	-
Beneficial conversion feature on convertible preferred stock	$	4,865	$	-
Accretion of convertible preferred stock	$	7,533	$	4,424
Release of common stock held in escrow	$	525	$	-
Summary of non-cash investing and financing activities:
Fair value of assets acquired	$	-	$	23,969
Fair value of company stock issued	$	-	$	(7,040	)
Fair value of contingent consideration	$	-	$	(1,975	)
Fair value of private stock purchase rights	$	-	$	(153	)
Fair value of deferred consideration	$	-	$	(143	)
Fair value of liabilities assumed	$	-	$	14,658

The accompanying notes are an integral part of these consolidated financial statements.

6

JetPay Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.   Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for fair presentation of the consolidated financial statements of JetPay Corporation and its subsidiaries (collectively, the “Company” or “JetPay”) as of September 30, 2017. The results of operations for the three and nine months ended September 30, 2017 and 2016 are not necessarily indicative of the operating results for the full year. It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2017.

Note 2.   Organization and Business Operations

The Company was incorporated in Delaware on November 12, 2010 as Universal Business Payment Solutions Acquisition Corporation, a blank check company whose objective was to acquire, through a merger, share exchange, asset acquisition, stock purchase, plan of arrangement, recapitalization, reorganization or other similar business combination, one or more operating businesses. Until December 28, 2012, the Company’s efforts were limited to organizational activities, its initial public offering and the search for suitable business acquisition transactions.

Effective August 2, 2013, Universal Business Payment Solutions Acquisition Corporation changed its name to JetPay Corporation with the filing of its Amended and Restated Certificate of Incorporation. The Company’s ticker symbol on the Nasdaq Capital Market (“NASDAQ”) changed from “UBPS” to “JTPY” effective August 12, 2013.

The Company currently operates in two business segments: the Payment Services Segment and the HR & Payroll Services Segment. The Payment Services Segment is an end-to-end processor of credit and debit card and automated clearing house (“ACH”) payment transactions that focuses on processing omni-channel (internet, mobile, and point-of-sale) transactions and recurring billings for traditional retailers, government and utility, and service providers. The HR & Payroll Services Segment provides human capital management (“HCM”) services, including full-service payroll and related payroll tax payment processing, time and attendance, HCM services, low-cost money management and payment services to unbanked and underbanked employees through prepaid debit cards, and services under the Patient Protection and Affordable Care Act (the “Affordable Care Act”).

The Company entered the payment processing and the payroll processing businesses upon consummation of the acquisitions of JetPay Payment Services, TX, LLC (f/k/a JetPay, LLC) (“JetPay Payments, TX”) and JetPay HR & Payroll Services, Inc. (f/k/a A. D. Computer Corporation) (“JetPay HR & Payroll Services”) on December 28, 2012. Additionally, on November 7, 2014, the Company acquired JetPay Payment Services, PA, LLC (f/k/a ACI Merchant Systems, LLC) (“JetPay Payments, PA”), an independent sales organization specializing in relationships with banks, credit unions and other financial institutions. On June 2, 2016, the Company acquired JetPay Payment Services, FL, LLC (f/k/a CollectorSolutions, Inc.) (“JetPay Payments, FL”), a payment processor specializing in the processing of payments in the government and utilities channels.

The Company expects to fund its operating cash needs for the next fifteen months, including debt service requirements, capital expenditures and possible future acquisitions, with cash flow from its operating activities, sales of equity securities, including the recent sale of preferred stock, and current and future borrowings. The Company believes that the investments made in its technology, infrastructure, and sales staff will help generate cash flows in the future sufficient to cover its working capital needs.

In the past, the Company has been successful in obtaining loans and selling its equity securities. To fund the Company’s current debt service needs, expand its technology platforms for new business initiatives, and pursue possible future acquisitions, the Company may need to raise additional capital through loans or additional sales of equity securities. The Company continues to investigate the capital markets for sources of funding, which could take the form of additional debt, the restructuring of our current debt, or additional equity financing. The Company cannot provide any assurance that it will be successful in securing new financing or restructuring its current debt or that it will secure such future financing with commercially acceptable terms. If the Company is unable to raise additional capital, it may need to delay certain technology capital improvements, limit its planned level of capital expenditures and future growth plans or dispose of operating assets to generate cash to sustain operations and fund ongoing capital investments.

7

As disclosed in Note 8. Redeemable Convertible Preferred Stock, between October 11, 2013 and August 9, 2016, the Company sold 99,666 shares of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), to Flexpoint Fund II, L.P. (“Flexpoint”) for an aggregate of $29.9 million, less certain costs. Additionally, on October 18, 2016, the Company sold 33,667 shares of Series A Preferred to Sundara Investment Partners, LLC (“Sundara”) for $10.1 million, less certain costs. In connection with the sale of shares of Series A Preferred to Sundara, the Company also entered into a Loan and Security Agreement with LHLJ, Inc., an affiliate of Sundara, for a term loan in the principal amount of $9.5 million, with $5.175 million of the proceeds used to simultaneously satisfy the remaining balances of a term loan and a revolving credit note payable to First National Bank of Pennsylvania (“FNB”) (the “Prior HR & Payroll Services Credit Facility”). See Note 7. Long-Term Debt, Note Payable and Capital Lease Obligations. These transactions provided approximately $14.0 million of net working capital, which the Company has used and expects to use for general working capital purposes, the payment of debt and for future capital needs, including a portion of the cost of potential future acquisitions. Finally, between May 5, 2014 and April 13, 2017, the Company sold 9,000 shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Preferred”), to an affiliate of Wellington Capital Management, LLP (“Wellington”) for an aggregate of $2.7 million.

The Company may from time to time determine that additional investments are prudent to maintain and increase stockholder value. In addition to funding ongoing working capital needs, the Company’s cash requirements for the next fifteen months ending December 31, 2018 include, but are not limited to, principal and interest payments on long-term debt and capital lease obligations of approximately $4.8 million and estimated capital expenditures of $4.4 million, $2.3 million of which the Company expects to fund with existing available credit facilities. Additionally, there are 133,334 shares of the Company’s Series A Preferred and 9,000 shares of the Company’s Series A-1 Preferred outstanding, with an aggregate redemption value of $85.4 million. On October 11, 2013, the Company issued the initial tranche of 33,333 shares of Series A Preferred to Flexpoint for an aggregate value of $10.0 million. On or after October 11, 2018, the fifth anniversary of the initial shares issuance, the holders of the shares of Series A Preferred issued in the initial tranche have the right to require the Company to repurchase any or all of such shares of Series A Preferred at the contractual redemption price of $600 per share or up to approximately $20.0 million. In addition, should the holders of the shares of the Series A Preferred exercise their redemption rights as described above, the holders of the Series A-1 Preferred may also redeem a proportionate amount of their shares outstanding up to an aggregate value of approximately $1.35 million. While these possible redemptions are not mandatory, it is outside the control of the Company and there can be no assurance that the Series A Preferred stockholders will not exercise their redemption rights on or after October 11, 2018. The Company would explore alternative financing opportunities with its Series A Preferred stockholders should they exercise their redemption rights, including exploring alternative equity or debt investors, or pursuing the possible sale of operating assets to generate sufficient liquidity. The Company believes that certain of its assets have sufficient value to meet this possible liquidity need and accordingly does not believe the potential liquidation event raises substantial doubt about the Company’s ability to continue as a going concern.

Note 3.   Business Acquisition

On June 2, 2016, JetPay completed its acquisition of CollectorSolutions, Inc. pursuant to the terms of the Agreement and Plan of Merger, dated February 22, 2016 (the “Merger Agreement”), by and among JetPay, CSI Acquisition Sub One, LLC, CSI Acquisition Sub Two, LLC, CollectorSolutions, Inc. and Gene M. Valentino, in his capacity as representative of the shareholders of CollectorSolutions, Inc. On October 21, 2016, the surviving entity of the merger changed its name to JetPay Payment Services, FL, LLC. The acquisition of JetPay Payments, FL provided the Company with additional expertise in selling debit and credit card processing services in the government and utilities channels through JetPay Payments, FL’s highly configurable payment gateway, added incremental debit, credit, and e-check processing volumes, and provided a base operation to sell the Company’s payroll, HCM, processing and prepaid card services to JetPay Payments, FL’s customer base. The consolidated financial statements include the accounts of JetPay Payments, FL since the acquisition date, June 2, 2016.

As consideration for the acquisition, the Company initially issued 3.25 million shares of its common stock to the stockholders of CollectorSolutions, Inc. and assumed approximately $1.0 million of CollectorSolutions, Inc.’s indebtedness. The 3.25 million shares of common stock issued in connection with closing, valued at $8.3 million at the date of acquisition, included: (i) 587,500 shares placed in escrow at closing as partial security for the indemnification obligations of the stockholders of CollectorSolutions, Inc. (the “Escrowed Shares”) and (ii) 500,000 shares placed in escrow at closing which would be released or cancelled if JetPay Payments, FL achieves certain gross profit performance targets in 2016 and 2017 (the “Earn-Out Shares”). In addition to the shares of its common stock issued at the date of acquisition, the Company issued an additional 54,601 shares on December 30, 2016 to the former stockholders of CollectorSolutions, Inc. in connection with a post-closing purchase price adjustment for working capital and debt levels as of the acquisition date pursuant to the Merger Agreement. JetPay Payments, FL’s former stockholders may also be entitled to receive warrants to purchase up to 500,000 shares of the Company’s common stock, each with a strike price of $4.00 per share and a 10-year term from its date of issuance, contingent upon JetPay Payments, FL achieving certain gross profit performance targets in 2018 and 2019. This contingent stock and warrant consideration, recorded as a liability, was valued at $1,975,000 at the date of acquisition utilizing a Monte Carlo simulation model. The fair value of the contingent consideration was $961,000 at September 30, 2017 (recorded within non-current other liabilities). See Note 4. Summary of Significant Accounting Policies.

8

Based upon the level of gross profit performance of JetPay Payments, FL in 2016, on June 28, 2017, the Company released 250,000 Earn-Out Shares from escrow to the former shareholders of CollectorSolutions, Inc. In addition, pursuant to the merger agreement, on June 28, 2017, the Company released 587,500 Escrowed Shares held for indemnification purposes from escrow to the former shareholders of CollectorSolutions, Inc.

In connection with the acquisition, certain executives of CollectorSolutions, Inc. were provided the right to purchase through a private placement, within twelve months after closing, up to 300,000 shares of common stock in the aggregate at a price equal to the higher of $3.00 per share and the volume-weighted average closing price of the stock of the Company for the twenty consecutive trading days ending three trading days prior to closing. This stock purchase right was valued at $152,000 utilizing a Black-Sholes option pricing model and was recorded as Additional Paid-In Capital at the date of acquisition. This purchase right was not exercised prior to its expiration on June 2, 2017.

In addition, the Company granted to each former stockholder of CollectorSolutions, Inc. a right to require the Company to repurchase up to 50% of the shares of common stock issued in connection with the acquisition and continuously held by such stockholder if Flexpoint exercises its right to redeem all of its shares of Series A Preferred. In a buyback of up to 50% of the shares issued to JetPay Payments, FL’s former shareholders, the Company would purchase each share of common stock issued as transaction consideration for $4.00 per share. The Company accounts for its common stock subject to possible redemption in accordance with the guidance in ASC 480 “Distinguishing Liabilities from Equity”. Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The common stock issued to JetPay Payments, FL’s previous shareholders features certain redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, at September 30, 2017, 50% of the estimated fair value of the common stock issued in connection with the acquisition, or $3.52 million, is presented as temporary equity, outside of the stockholders’ equity section of the Consolidated Balance Sheet.

The fair value of the identifiable assets acquired and liabilities assumed in the JetPay Payments, FL acquisition as of the acquisition date includes: (i) $520,000 of cash, (ii) $537,000 for accounts receivable; (iii) $113,000 for prepaid expenses and other assets; (iv) $10.6 million for settlement processing assets; (v) $93,000 for fixed assets; (vi) the assumption of $14.7 million of liabilities, including $9.95 million of settlement processing obligations and approximately $1.0 million of long term debt; and (vii) approximately $12.1 million allocated to goodwill and other identifiable intangible assets. Within the $12.1 million of acquired intangible assets, $7.2 million was assigned to goodwill, which is not subject to amortization under U.S. GAAP. The Company does not expect to deduct for tax purposes the goodwill related to the JetPay Payments, FL acquisition. The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) the multiple paid by market participants for businesses in the merchant card processing business; (ii) levels of JetPay Payments, FL’s current and future projected cash flows; and (iii) the Company’s strategic business plan, which includes cross-marketing the Company’s payroll, HCM, processing and prepaid card services to JetPay Payments, FL’s customer base as well as offering merchant credit card processing services to the Company’s payroll and HCM customer base. The remaining intangible assets were assigned to customer relationships (for $4.1 million), software costs (for $710,000), and tradename (for $70,000). The Company determined that the fair value of non-compete agreements with certain employees of JetPay Payments, FL was immaterial. Customer relationships, software costs, and trade name were assigned a life of 12 years, 19 months, and 7 months, respectively.

Assets acquired and liabilities assumed in the JetPay Payments, FL acquisition were recorded on the Company’s Consolidated Balance Sheets as of the acquisition date based upon their estimated fair values at such date. The results of operations of the business acquired by the Company have been included in the Statements of Operations since the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying identifiable assets acquired and liabilities assumed was allocated to goodwill.

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The allocation of the JetPay Payments, FL purchase price and the estimated fair market values of the JetPay Payments, FL assets acquired and liabilities assumed are shown below (in thousands):

Cash	$	520
Accounts receivable		537
Settlement processing assets		10,587
Prepaid expenses and other assets		113
Property and equipment, net		93
Goodwill		7,218
Identifiable intangible assets		4,881
Total assets acquired		23,949
Accounts payable and accrued expenses		1,794
Settlement processing obligations		9,951
Long term debt		1,049
Long term deferred tax liability		1,864
Total liabilities assumed		14,658
Net assets acquired	$	9,291

Unaudited pro forma results of operations for the nine months ended September 30, 2016, as if the Company and JetPay Payments, FL had been combined on January 1, 2016, follow. The pro forma results include estimates and assumptions which management believes are reasonable. The pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the date indicated, or which may result in the future. The unaudited pro forma results of operations for the nine months ended September 30, 2016 are as follows (in thousands, except for shares information):

Revenues	$	46,743
Operating loss	$	(7,941	)
Net loss	$	(7,659	)
Net loss applicable to common stockholders	$	(12,083	)
Net loss per share applicable to common stockholders	$	(0.68	)

Note 4.   Summary of Significant Accounting Policies

Significant accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company’s significant accounting policies are described below.

Use of Estimates, Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the accounting and disclosure rules and regulations of the SEC. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial statements. Such estimates include, but are not limited to, the value of purchase consideration of acquisitions; valuation of accounts receivable, reserves for chargebacks, goodwill, intangible assets, and other long-lived assets; legal contingencies; the fair value of equity instruments classified as liabilities; and assumptions used in the calculation of stock-based compensation and in the calculation of income taxes. Actual results may differ from these estimates under different assumptions or conditions. These consolidated financial statements include our accounts and those of our wholly-owned subsidiaries and all intercompany balances and transactions have been eliminated in consolidation.

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Revenue Recognition and Deferred Revenue

The Company recognizes revenue in general when the following criteria have been met: persuasive evidence of an arrangement exists, a customer contract or purchase order exists and the fees are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured. Allowances for chargebacks, discounts and other allowances are estimated and recorded concurrent with the recognition of revenue and are primarily based on historic rates.

Revenues from the Company’s credit and debit card processing operations are recognized in the period services are rendered as the Company processes credit and debit card transactions for its merchant customers or for merchant customers of its third party clients. Third party clients include Independent Sales Organizations (“ISOs”), Value Added Resellers (“VARs”), Independent Software Vendors (“ISVs”), and financial institutions. The majority of the Company’s revenue within its credit and debit card processing business is comprised of transaction-based fees, which typically constitute a percentage of dollar volume processed, or a fee per transaction processed. In the case where the Company is only the processor of transactions, it charges transaction fees only and records these fees as revenues. In the case of contracts pursuant to which the Company processes credit and debit card transactions for the third parties’ merchant customers, revenues are primarily comprised of fees charged to the merchant, as well as a percentage of the processed sale transaction. The Company’s contracts in most instances involve three parties: the Company, the merchant, and the sponsoring bank. Under certain of these sales arrangements, the Company’s sponsoring bank collects the gross revenue from the merchants, pays the interchange fees and assessments to the credit card associations, collects their fees and pays to the Company a net residual payment representing the Company’s fee for the services provided. Accordingly, under these arrangements, the Company records the revenue net of interchange, credit card association assessments and fees and the sponsoring bank’s fees. Under the majority of the Company’s sales arrangements, the Company is billed directly for certain fees by the credit card associations and the processing bank. In this instance, revenues and cost of revenues include the credit card association fees and assessments and the sponsoring bank’s fees which are billed to the Company and for which it assumes credit risk. In all of the above instances, the Company recognizes processing revenues net of interchange fees, which are assessed to its merchant and third party merchant customers on all processed transactions. Interchange rates and fees are not controlled by the Company. The Company effectively functions as a clearing house collecting and remitting interchange fee settlement on behalf of issuing banks, debit networks, credit card associations and their processing customers.

JetPay Payments, FL functions as the merchant of record and has the primary responsibility for providing end-to-end payment processing services for many of its clients. Clients contract with JetPay Payments, FL for all credit card processing services including transaction authorization, settlement, dispute resolution, security and risk management solutions, reporting and other value-added services. As such, JetPay Payments, FL is the principal obligor in these transactions and is solely responsible for all processing costs, including interchange fees. Further, JetPay Payments, FL sets prices as it deems reasonable for each merchant. The gross fees JetPay Payments, FL collects are intended to cover the interchange, assessments, and other processing fees and include JetPay Payments, FL’s margin on the transactions processed. For these reasons, JetPay Payments, FL is the principal obligor in the contractual relationship with its customers and therefore JetPay Payments, FL records its revenues, including interchange and assessments, on a gross basis. Revenues reported by JetPay Payments, FL include interchange fees of $2.43 million and $1.98 million for the three months ended September 30, 2017 and 2016, respectively and $7.73 million and $2.71 million for the nine months ended September 30, 2017 and 2016, respectively. Other fees assessed by JetPay Payments, FL to certain customers and remitted to partner entities for web and IVR supporting services provided by JetPay Payments, FL’s partner entities are presented on a net basis. The Company follows the guidance provided in ASC Topic 605-45, Revenue Recognition - Principal Agent Considerations. ASC 605-45 states that whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors are considered in the evaluation.

Additionally, the Company’s direct merchant customers have the liability for any charges properly reversed by the cardholder. In the event, however, that the Company is not able to collect such amount from the merchants due to merchant fraud, insolvency, bankruptcy or any other reason, it may be liable for any such reversed charges. The Company in some instances requires cash deposits, guarantees, letters of credit and other types of collateral from certain merchants to minimize any such contingent liability, and it also utilizes a number of systems and procedures to manage merchant risk.

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Revenues from the Company’s JetPay HR & Payroll Services operations are recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured. Certain processing services are provided under annual service arrangements with revenue recognized over the service period based on when the efforts and costs are expended. The Company’s service revenues are largely attributable to payroll-related processing services where the fees are based on a fixed amount per processing period or a fixed amount per processing period plus a fee per employee or transaction processed. The revenues earned from delivery service for the distribution of certain client payroll checks and reports is included in processing revenues, and the costs for delivery are included in selling, general, and administrative expenses on the Consolidated Statements of Operations.

Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates for payroll tax administration services and for employee payment services, and invested until remittance to the applicable tax or regulatory agencies or client employee. These collections from clients are typically remitted between one (1) and thirty (30) days after receipt, with some items extending to ninety (90) days. The interest earned on these funds is included in total revenues on the Consolidated Statements of Operations because the collecting, holding, and remitting of these funds are critical components of providing these services.

Reserve for Chargeback Losses

Disputes between a cardholder and a merchant periodically arise as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant services. Such disputes may not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means the purchase price is refunded to the customer through the merchant’s bank and charged to the merchant. If the merchant has inadequate funds, the Company must bear the credit risk for the full amount of the transaction. The Company evaluates the risk for such transactions and estimates the potential loss for chargebacks based primarily on historical experience and records a loss reserve accordingly. The Company believes its reserve for chargeback losses is adequate to cover both the known probable losses and the incurred but not yet reported losses at the balance sheet dates. Chargeback reserves totaling $349,000 and $436,000 were recorded as of September 30, 2017 and December 31, 2016, respectively.

Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, settlement processing assets and liabilities, accounts receivable, funds held for clients, accounts payable and client fund obligations, approximated fair value as of the balance sheet dates presented, because of the relatively short maturity dates on these instruments. The carrying amounts of the financing arrangements approximate fair value as of the balance sheet dates presented, because interest rates on these instruments approximate market interest rates after consideration of stated interest rates, anti-dilution protection and associated warrants.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, settlement processing assets and funds held for clients. The Company’s cash and cash equivalents are deposited with major financial institutions. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation insurable amount.

Accounts Receivable

The Company’s accounts receivable are due from its merchant credit card and its payroll customers. Credit is extended based on the evaluation of customers’ financial condition and, generally, collateral is not required. Payment terms vary but are typically collected via Automated Clearing House (“ACH”) payments originated by us two (2) to three (3) days following month end. Amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. Accounts which are outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivables when they are deemed uncollectible.

Settlement Processing Assets and Funds and Obligations

Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. Depending on the type of transaction, either the credit card interchange system or the debit network is used to transfer the information and funds between the sponsoring bank and card issuing bank to complete the link between merchants and card issuers. In certain of our processing arrangements, merchant funding primarily occurs after the sponsoring bank receives the funds from the card issuer through the card networks, creating a net settlement obligation on the Company’s Consolidated Balance Sheet. In a limited number of other arrangements, the sponsoring bank funds the merchants before it receives the net settlement funds from the card networks, creating a net settlement asset on the Company’s Consolidated Balance Sheet. Additionally, certain of the Company’s sponsoring banks collect the gross revenue from the merchants, pay the interchange fees and assessments to the credit card associations, collect their fees for processing and pay the Company a net residual payment representing the Company’s fees for the services. In these instances, the Company does not reflect the related settlement processing assets and obligations in its Consolidated Balance Sheet.

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Timing differences in processing credit and debit card and ACH transactions, as described above, interchange expense collection, merchant reserves, sponsoring bank reserves, and exception items result in settlement processing assets and obligations. Settlement processing assets consist primarily of our portion of settlement assets due from customers and receivable from merchants for the portion of the discount fee related to reimbursement of the interchange expense, our receivable from the processing bank for transactions we have funded merchants in advance of receipt of card association funding, merchant reserves held, sponsoring bank reserves and exception items, such as customer chargeback amounts receivable from merchants. Settlement processing obligations consist primarily of merchant reserves, our liability to the processing bank for transactions for which we have received funding from the members but have not funded merchants and exception items.

Settlement assets, funds and obligations resulting from JetPay Payments, FL’s processing services and associated settlement activities include settlement receivables due from credit card associations and debit networks and certain cash accounts to which JetPay Payments, FL does not have legal ownership but has the right to use the accounts to satisfy the related settlement obligations. JetPay Payments, FL’s corresponding settlement obligations are for amounts payable to customers, net of processing fees earned by JetPay Payments, FL. Settlement receivables and payables for credit and debit card transactions are recorded at the gross transaction amounts. The gross amounts are then processed through JetPay Payments, FL’s settlement accounts, and JetPay Payments, FL retains its fees for the transactions upon settlement. Settlement receivables for e-check transactions consist of only JetPay Payments, FL’s fees for the transactions. Settlement receivables are generally collected within four (4) business days. Settlement obligations are generally paid within three (3) business days, regardless of when the related settlement receivables are collected.

Property and Equipment

Property and equipment acquired in the Company’s business acquisitions have been recorded at estimated fair value. The Company records all other property and equipment acquired in the normal course of business at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are generally as follows: leasehold improvements – shorter of economic life or initial term of the related lease; machinery and equipment – five (5) to fifteen (15) years; and furniture and fixtures – five (5) to ten (10) years. Significant additions or improvements extending assets’ useful lives are capitalized; normal maintenance and repair costs are expensed as incurred.

Goodwill

Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company’s business combinations. The Company performs a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires significant judgments, including estimation of future cash flows, which are dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. The Company conducts its annual goodwill impairment test as of December 31 of each year or more frequently if indicators of impairment exist. The Company periodically analyzes whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained significant decline in our stock price and market capitalization, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, adverse actions or assessments by a regulator, among others. The Company compares the fair value of its reporting unit to its respective carrying value, including related goodwill. Future changes in the industry could impact the results of future annual impairment tests. The Company’s annual goodwill impairment testing indicated there was no impairment as of December 31, 2016. Additionally, no indicators of impairment occurred in the nine months ended September 30, 2017. There can be no assurance that future tests of goodwill impairment will not result in impairment charges.

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Identifiable Intangible Assets

Identifiable intangible assets consist primarily of customer relationships, software costs, and tradenames. Certain tradenames are considered to have indefinite lives, and as such, are not subject to amortization. These assets are tested for impairment using undiscounted cash flow methodology annually and whenever there is an impairment indicator. Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized. Several impairment indicators are beyond the Company’s control, and determining whether or not they will occur cannot be predicted with any certainty. Identifiable Intangible assets are amortized on a straight-line basis over their respective assigned estimated lives; customer relationships use eight (8) to fifteen (15) years; tradenames use one (1) to three (3) years; and software costs use one (1) to eight (8) years.

Impairment of Long–Lived Assets

The Company periodically reviews the carrying value of its long-lived assets held and used at least annually or when events and circumstances warrant such a review. If significant events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. Cash flow projections are sometimes based on a group of assets, rather than a single asset. If cash flows cannot be separately and independently identified for a single asset, the Company determines whether impairment has occurred for the group of assets for which it can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, it measures any impairment by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded. The Company’s annual testing indicated there was no impairment as of December 31, 2016. Additionally, no indicators of impairment occurred in the nine months ended September 30, 2017.

Convertible Preferred Stock

The Company accounts for the redemption premium, beneficial conversion feature and issuance costs on or of its convertible preferred stock using the effective interest method, accreting such amounts to its convertible preferred stock from the date of issuance to the earliest date of redemption.

Share-Based Compensation

The Company expenses employee share-based payments under ASC Topic 718, Compensation-Stock Compensation, which requires compensation cost for the grant-date fair value of share-based payments to be recognized over the requisite service period. The Company estimates the grant date fair value of the share-based awards issued in the form of options using the Black-Scholes option pricing model.

Loss Per Share

Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. The dilutive effect of the conversion option in the shares of Series A Preferred and shares of Series A-1 Preferred of 16,949,152 and 1,102,041 shares of common stock, respectively, at September 30, 2017, the effect of 1,469,570 exercisable stock options granted under the Company’s Amended and Restated 2013 Stock Incentive Plan (the “2013 Stock Incentive Plan”) at September 30, 2017 and the effect of 266,667 exercisable warrants issued in connection with the Company’s purchase of treasury shares in February 2017, have been excluded from the loss per share calculation for the three and nine months ended September 30, 2017 in that the assumed conversion of these options would be anti-dilutive. For the three and nine months ended September 30, 2016, the dilutive effect of the conversion option in the Series A Preferred and the Series A-1 Preferred of 10,310,276 and 616,500 shares of common stock, respectively, and the effect of 884,429 exercisable stock options granted under the Company’s 2013 Stock Incentive Plan at September 30, 2016 have been excluded from the loss per share calculation in that the assumed conversion of these options would be anti-dilutive.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company does review the terms of debt instruments it enters into to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single compound derivative instrument.

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Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges recorded within other expenses (income), using the effective interest method.

Fair Value Measurements

The Company accounts for fair value measurements in accordance with ASC Topic No. 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described below:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by ASC Topic 820, assets and liabilities are classified in their entirety based on the level of input that is significant to the fair value measurement.

	Fair Value at September 30, 2017
	Total		Level 1		Level 2		Level 3
			(in thousands)
Contingent consideration	$	1,800	$	-	$	-	$	1,800

	Fair Value at December 31, 2016
	Total		Level 1		Level 2		Level 3
			(in thousands)
Contingent consideration	$	2,982	$	-	$	-	$	2,982

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The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis (in thousands):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2017			2016		2017			2016
Beginning balance	$	1,960		$	2,915	$	2,982		$	1,296
Addition of JetPay Payments, FL contingent consideration		-			-		-			1,975
JetPay Payments, FL contingent consideration shares released from escrow		-			-		(525	)		-
Change in fair value of JetPay Payments, TX contingent consideration		(4	)		36		(58	)		93
Change in fair value of JetPay Payments, PA contingent consideration		-			13		-			33
Change in fair value of JetPay Payments, FL contingent consideration		(156	)		355		(285	)		108
Payment of JetPay Payments, PA contingent consideration		-			-		(314	)		(186	)
Totals	$	1,800		$	3,319	$	1,800		$	3,319

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the financial instrument. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department with support from the Company’s outside consultants which are approved by the Chief Financial Officer. Level 3 financial liabilities for the relevant periods consist of contingent consideration related to the JetPay Payments, TX, JetPay Payments, PA and JetPay Payments, FL acquisitions for which there are no current markets such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy will be analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

In addition to the consideration paid upon closing of the JetPay Payments, TX acquisition, WLES, L.P. (“WLES”), through December 28, 2017, is entitled to receive 833,333 shares of common stock if the trading price of the common stock is at least $8.00 per share for any 20 trading days out of a 30 trading day period and $5.0 million in cash if the trading price of the common stock is at least $9.50 per share for any 20 trading days out of a 30 trading day period. This contingent consideration was valued at $1.54 million at the date of acquisition based on utilization of option pricing models and was recorded as a non-current other liability for $700,000 and as additional paid-in capital for $840,000 at December 31, 2012. The stock-based component value of $840,000 recorded at December 28, 2012 (the JetPay Payments, TX acquisition date), remains unchanged at September 30, 2017 as a result of this component being recorded as equity. The fair value at September 30, 2017 of the cash-based contingent consideration, valued at $0, recorded within other current liabilities, was determined using a binomial option pricing model. The following assumptions were utilized in the September 30, 2017 calculations: risk free interest rate: 1.06%; dividend yield: 0%; term of contingency of 0.24 years; and volatility: 74.1%.

The fair value of the common stock was derived from the per share price of the common stock at the valuation date. Management determined that the results of its valuation were reasonable. The expected life represents the remaining contractual term of the derivative. The volatility rate was developed based on analysis of the historical volatility rates of similarly situated companies (using a number of observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue). The risk free interest rates were obtained from publicly available U.S. Treasury yield curve rates. The dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future.

In addition to the consideration paid upon closing of the JetPay Payments, PA acquisition, the previous unitholders were entitled to receive up to an additional $500,000 if certain net revenue goals were achieved through October 31, 2016. This contingent consideration was valued at $400,000 at the date of acquisition, $314,000 at December 31, 2016, and $0 at September 30, 2017, with $186,000 earned and paid to the previous unitholders of JetPay Payments, PA in February 2016 and the remaining $314,000 paid on January 17, 2017.

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In addition to the consideration paid upon closing of the JetPay Payments, FL acquisition, the previous shareholders are entitled to receive up to an additional 500,000 shares of common stock upon JetPay Payments, FL achieving certain gross profit performance targets in 2016 and 2017 and up to 500,000 warrants to purchase shares of common stock, each with a strike price of $4.00 per share and a 10-year term from its date of issuance, upon JetPay Payments, FL achieving certain gross profit performance targets in 2018 and 2019. This contingent consideration was valued at $1,975,000 at the date of acquisition, $1,770,000 at December 31, 2016 ($563,000 recorded within other current liabilities and $1.2 million recorded within non-current other liabilities), and $961,000 at September 30, 2017 (recorded within non-current other liabilities), based on utilization of a Monte Carlo simulation to estimate the variance and relative risk of achieving future gross profit performance targets. Contingent consideration liability of $525,000 was reclassified to additional paid-in capital in June 2017 with 250,000 shares of common stock issued at the closing of the acquisition released from escrow as a result of the 2016 gross profit performance targets being achieved. The key assumptions in applying the Monte Carlo simulation included expected gross profit growth rates, the expected standard deviation and serial correlation of expected net revenue growth rates as well as a normal distribution assumption.

The Company uses either a binomial option-pricing model with a Monte Carlo simulation or the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as volatility. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement.

As of September 30, 2017, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

In accordance with the provisions of ASC Topic 815, Derivatives and Hedging Activities, the Company presented its derivative liability at fair value on its Consolidated Balance Sheets, with the corresponding change in fair value recorded in the Company’s Consolidated Statement of Operations for the applicable reporting periods.

Income Taxes

The Company accounts for income taxes under ASC Topic 740, Income Taxes (“ASC Topic 740”). ASC Topic 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryovers. Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities. In establishing the provision for income taxes and determining deferred income tax assets and liabilities, the Company makes judgments and interpretations based on enacted laws, published tax guidance and estimates of future earnings. ASC Topic 740 additionally requires a valuation allowance to be established when, based on available evidence, it is more likely than not that some portion or the entire deferred income tax asset will not be realized.

ASC Topic 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC Topic 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to file income tax returns in the United States (federal) and in various state and local jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company believes that its income tax positions and deductions would be sustained upon examination and does not anticipate any adjustments that would result in material changes to its financial position.

The Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as interest expense and as a component of selling, general and administrative expense, respectively. There were no amounts accrued for penalties or interest as of or during the three and nine months ended September 30, 2017 and 2016. Management does not expect any significant changes in its unrecognized tax benefits in the next year.

Subsequent Events

Management evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, management did not identify any recognized or non-recognized subsequent events which would have required an adjustment or disclosure in the financial statements, except as described in Note 14. Subsequent Events.

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Recently Adopted Accounting Standards

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU simplifies the presentation of deferred income taxes under U.S. GAAP by requiring that all deferred tax assets and liabilities be classified as non-current. The guidance in ASU No. 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this ASU and it did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance is to be applied using various transition methods such as full retrospective, modified retrospective, and prospective based on the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company adopted this ASU and it did not have a material impact on the Company’s disclosures in the footnotes to its financial statements.

Recent Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. This new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. JetPay has not yet determined the effect of the adoption of this standard on JetPay’s consolidated financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal versus agent guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was issued in May 2014 (“ASU 2014-09”). Further, in April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU also amends ASU 2014-09 and is related to the identification of performance obligations and accounting for licenses. Most recently, in December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This amendment affects narrow aspects of the guidance issued in ASU 2014-09. The effective date and transition requirements for all of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. That is, the guidance under these standards is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the provisions of each of these standards and assessing their impact on the Company’s financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 36): Measurement of Credit Losses on Financial Instruments, which provides guidance that will change the accounting for credit impairment. Under the new guidance, companies are required to measure all expected credit losses for financial instruments held at the reporting date based on historic experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposure. This new guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18), which provides guidance that will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.   This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This ASU simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test, which required computing the implied fair value of goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This new guidance will be effective January 1, 2020. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU clarifies an entity’s ability to modify the terms or conditions of a share-based payment award presented. An entity should account for the effects of a modification unless all the following are met: the fair value of the modified award has not changed from the fair value on the date of issuance; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and, the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This ASU clarifies the recognition, measurement, and effect on earnings per share of certain freestanding equity-classified financial instruments that include down round features affect entities that present earnings per share in accordance with the guidance in Topic 260, Earnings Per Share. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. This new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

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Note 5.   Property and Equipment, net of Accumulated Depreciation

	September 30, 2017			December 31, 2016
	(in thousands)
Leasehold improvements	$	423		$	417
Equipment		2,453			1,710
Furniture and fixtures		355			330
Computer software		1,242			1,230
Vehicles		245			245
Assets in progress		1,386			83
Total property and equipment		6,104			4,015
Less: accumulated depreciation		(2,636	)		(1,890	)
Property and equipment, net	$	3,468		$	2,125

Property and equipment included $702,887 and $422,167 of computer equipment as of September 30, 2017 and December 31, 2016, respectively, net of accumulated depreciation of $441,683 and $272,729 as of September 30, 2017 and December 31, 2016, respectively, that is subject to capital lease obligations.

Assets in progress consist primarily of computer software for internal use that will be placed into service upon completion.

Depreciation expense was $267,000 and $173,000 for the three months ended September 30, 2017 and 2016, respectively, and $746,000 and $540,000 for the nine months ended September 30, 2017 and 2016, respectively.

Note 6.    Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following

(in thousands):

	September 30, 2017		December 31, 2016
Trade accounts payable	$	2,888	$	3,438
ACH clearing liability		969		1,160
Accrued compensation		1,460		1,234
Accrued agent commissions		1,224		1,023
Related party payables		51		424
Other		3,991		3,542
Total	$	10,583	$	10,821

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Note 7.   Long-Term Debt, Notes Payable and Capital Lease Obligations

Long-term debt, notes payable and capital lease obligations consist of the following:

	September 30, 2017			December 31, 2016
	(in thousands)
Term loan payable to LHLJ, Inc., interest rate of 8% payable in monthly payments of $128,677, including principal and interest, beginning on October 18, 2016, maturing on October 31, 2021, collateralized by the assets and equity interests of JetPay HR & Payroll Services and JetPay Payments, FL. See Note 12. Related Party Transactions.	$	8,765		$	9,371
Term loan payable to First National Bank of Pennsylvania (“FNB”), interest rate of 5.25% payable in monthly principal payments of $104,167 plus interest beginning on November 30, 2015, maturing November 6, 2021, collateralized by the assets and equity interests of JetPay Payments, PA.		5,104			6,042
Term note payable to Fifth Third Bank, interest rate of 4% payable in monthly payments of $27,317, including principal and interest, beginning on July 1, 2016, maturing November 30, 2019, collateralized by the assets and equity interests of JetPay Payments, FL.		705			925
Credit agreement payable to Fifth Third Bank providing for a 12-month draw period through June 22, 2018 for up to $1.6 million, converting into a 36 month amortizing term note maturing June 22, 2021. The credit agreement bears interest at LIBOR plus 3% (4.25% at September 30, 2017), collateralized by the assets and equity interests of JetPay Payments, FL.		657			-
Master equipment capital lease agreement payable to Fifth Third Bank for up to $1.5 million of lease financing to JetPay Payments, FL for a 12-month draw period through September 30, 2018. Interim draws will have a term of up to 48 months and will bear interest at LIBOR plus 3% (4.25% at September 30, 2017), until termed at a fixed rate set forth in the lease agreement, collateralized by equipment.		131			-
Amended and restated revolving promissory note payable to Fifth Third Bank, interest rate of LIBOR plus 2.00% (3.25% at September 30, 2017), maturing on June 1, 2018.		-			20
Promissory note payable to Merrick, interest rate of 12% beginning October 14, 2016 payable on the promissory note maturing on January 11, 2017, collateralized by the 3,333,333 shares of JetPay common stock issued to WLES and held in escrow. Paid in full on January 15, 2017.		-			5,000
Unsecured promissory note payable to stockholder, interest rate of 4% payable at maturity, note principal due September 30, 2017, as extended. See Note 12. Related Party Transactions.		59			492
Capital lease obligations related to computer equipment and software at JetPay Payments, TX, interest rates of 5.55% to 8.55%, due in monthly lease payments of $30,144 in the aggregate maturing from December 2017 through April 2020 collateralized by equipment.		623			357
		16,044			22,207
Less current portion		(2,862	)		(8,074	)
Less unamortized deferred financing costs		(310	)		(339	)
	$	12,872		$	13,794

The FNB term loan agreement requires the Company to provide FNB with annual financial statements within 120 days of the Company’s year-end and quarterly financial statements within 60 days after the end of each quarter. The FNB agreement also contains certain annual financial covenants with which the Company was in compliance as of September 30, 2017.

On June 2, 2016, in connection with the closing of the Company’s acquisition of JetPay Payments, FL, JetPay Payments, FL entered into a credit agreement with Fifth Third Bank to obtain a $1,068,960 term loan and a revolving line of credit facility of $500,000, in each case secured by all of JetPay Payments, FL’s assets. The term note issued to Fifth Third Bank matures on November 30, 2019 and bears interest at 4.00%. The revolving note issued to Fifth Third Bank matured on June 2, 2017 and was renewed to June 1, 2018 and bears interest at a rate of 2.00% plus the LIBOR Rate for the applicable interest period. The term note and the revolving note are guaranteed by the Company. The underlying credit agreement with Fifth Third Bank contains certain customary covenants, including a financial covenant related to JetPay Payments, FL’s fixed charge coverage ratio, with which the Company was in compliance as of September 30, 2017. The credit agreement was amended on June 22, 2017 as provided below.

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On June 22, 2017, JetPay Payments, FL entered into a new Credit Agreement with Fifth Third Bank, which provides a $1.6 million Draw/Term Note to finance software integration costs; an Amended and Restated Revolving Promissory Note for $1.0 million (increasing the previous revolving promissory note for $500,000 and extending maturity to June 1, 2018); and a Second Modification of Credit Agreement. The Draw/Term Note provides for a 12 month draw period through June 22, 2018 (“the Conversion Date”), at which time the loan converts to a 36 month amortizing term loan which matures on June 22, 2021. The Draw/Term Note bears interest at the applicable LIBOR Rate plus 3%. The Draw/Term Note is payable in monthly installments beginning on the Conversion Date and can be prepaid without penalty or premium at any time. At September 30, 2017, $657,000 was outstanding against the $1.6 million Draw/Term Note.

The Amended and Restated Revolving Promissory Note replaced and superseded the prior $500,000 Revolving Promissory Note payable to Fifth Third Bank, extending its maturity to June 1, 2018. It bears interest at a rate of 2.00% plus the LIBOR rate for the applicable interest period and is expected to be used to extend temporary credit to cover JetPay Payments, FL’s customers’ processing return items.

The Second Modification amends and restates an original term loan to JetPay Payments, FL dated June 2, 2016 in the original amount of $1,068,960 to incorporate certain terms in the new Credit Agreement, including incorporating revised debt covenants, financial reporting requirements, collateral requirements, modifications to parent guarantees, and representations and warranties of JetPay Payments, FL.

Additionally, JetPay Payments, FL entered into a Master Equipment Lease Agreement and related Interim Lease Funding Schedule with Fifth Third Bank to provide up to $1.5 million of lease financing for point-of-sale equipment related to certain JetPay Payments, FL customer contracts and other computer equipment. The Interim Lease Funding Schedule provides the details of the allowable equipment to finance and provides for an interim draw periods through June 30, 2018. Upon completion of an interim draw, the leases under the Master Lease Agreement will have a term not exceeding 48 months at an interest rate of LIBOR Rate plus 3% until termed out on a schedule, at which time such leases will amortize and bear interest at a fixed rate set forth in the applicable schedule. At September 30, 2017, $131,000 was outstanding against the $1.5 million lease facility.

On July 26, 2016, as part of its settlement of litigation with Merrick, the Company issued two promissory notes in favor of Merrick in the amounts of $3,850,000 (the “$3.85MM Note”) and $5,000,000 (the “$5MM Note” and, together with the $3.85MM Note, the “Notes”) to settle legal proceedings involving Merrick Bank. The $3.85MM Note was paid in full on October 21, 2016 and the $5.00MM Note was paid in full on January 11, 2017.

Maturities of long-term debt and capital lease obligations, excluding unamortized financing costs, are as follows for the years ending September 30: 2018 – $2.9 million; 2019 – $2.9 million; 2020 – $2.7 million; 2021 – $2.6 million; 2022 – $5.0 million; and $0 thereafter.

Note 8.    Redeemable Convertible Preferred Stock

Under a Securities Purchase Agreement entered into on August 22, 2013 (as amended, the “Series A Purchase Agreement”), the Company agreed to sell to Flexpoint, and Flexpoint agreed to purchase, upon satisfaction of certain conditions, up to 133,333 shares of Series A Preferred for an aggregate purchase price of up to $40.0 million in three tranches.  The shares of Series A Preferred had a purchase price of $300 per share.

On October 11, 2013, the Company issued 33,333 shares of Series A Preferred to Flexpoint for an aggregate of $10.0 million less certain agreed-upon reimbursable expenses of Flexpoint pursuant to the Series A Purchase Agreement. Additionally, the Company issued 4,667 shares of Series A Preferred to Flexpoint on April 14, 2014 for an aggregate of $1.4 million; 20,000 shares on November 7, 2014 for $6.0 million; 33,333 shares on December 28, 2014 for $10.0 million; and 8,333 shares on August 9, 2016 for $2.5 million.

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On October 18, 2016, the Company amended and restated the Series A Purchase Agreement in part to facilitate the Company’s issuance and sale to Sundara of the 33,667 shares of Series A Preferred that had not yet been purchased by Flexpoint (the “Remaining Shares”). Sundara purchased the remaining 33,667 shares of Series A Preferred in a single transaction for a purchase price of $10,100,100 on October 18, 2016.

The Series A Preferred is convertible into shares of common stock.  Any holder of Series A Preferred may at any time convert such holder’s shares of Series A Preferred into that number of shares of common stock equal to the number of shares of Series A Preferred being converted multiplied by $300 and divided by the then-applicable conversion price, which was initially $3.00. Under the Series A Purchase Agreement, Flexpoint and Sundara Investment Partners, LLC are provided with certain indemnification rights in the event of the incurrence of certain losses and expenses by the Company. In April 2015, Flexpoint tendered to the Company a claim letter regarding an indemnification claim with respect to a previously disclosed arbitration with EarlyBirdCapital. On August 6, 2015, in resolution of this claim, Flexpoint and the Company entered into a Letter Agreement, whereby the conversion price of any of the Series A Preferred held by Flexpoint was reduced from $3.00 per share to $2.90 per share. As a result of the previously disclosed settlement of the Direct Air matter, see Note 11. Commitments and Contingencies, on March 23, 2017, the conversion price of Series A Preferred was further adjusted to $2.36 pursuant to the Series A Securities Purchase Agreement. Pursuant to an agreement by and among the Company, Flexpoint and Sundara, the Series A Preferred conversion price may be adjusted upward upon a successful recovery of funds by the Company in the Company’s lawsuit against Valley National Bank. The conversion price of the Series A Preferred continues to be subject to downward adjustment upon the occurrence of certain events.

The Series A Preferred has an initial liquidation preference of $600 per share (subject to adjustment for any stock split, stock dividend or other similar proportionate reduction or increase of the authorized number of shares of common stock) and will rank senior to the common stock with respect to distributions of assets upon the Company’s liquidation, dissolution or winding up. Holders of Series A Preferred have the right to request redemption of any shares of Series A Preferred issued at least five (5) years prior to the date of such request by delivering written notice to the Company at the then applicable liquidation value per share, unless holders of a majority of the outstanding Series A Preferred elect to waive such redemption request on behalf of all holders of Series A Preferred, subject to certain exceptions. The five year anniversary of the Company’s initial issuance of 33,333 shares of Series A Preferred will occur on October 11, 2018.

In addition to the foregoing, pursuant to a Securities Purchase Agreement (the “Series A-1 Purchase Agreement”) with Wellington dated May 1, 2014, the Company agreed to sell to Wellington, upon the satisfaction of certain conditions, up to 9,000 shares of Series A-1 Preferred at a purchase price of $300 per share for an aggregate purchase price of up to $2.7 million. On May 5, 2014, the Company issued 2,565 shares of Series A-1 Preferred to Wellington for an aggregate of $769,500, less certain agreed-upon reimbursable expenses of Wellington. Additionally, the Company issued to Wellington 1,350 shares of Series A-1 Preferred on November 20, 2014 for $405,000; 2,250 shares of Series A-1 Preferred on December 31, 2014 for $675,000; and 2,835 shares of Series A-1 Preferred on April 13, 2017 for $850,500. The proceeds of the total investment of $2.7 million by Wellington have been used for general corporate purposes.

Shares of Series A-1 Preferred are convertible into shares of the Company’s common stock or, in certain circumstances, Series A-2 Convertible Preferred Stock, par value $0.001 per share. Shares of Series A-1 Preferred may be converted into that number of shares of common stock equal to the number of shares of Series A-1 Preferred being converted multiplied by $300 and divided by the then-applicable conversion price, which initially was $3.00. As a result of the settlement of the Direct Air matter, on March 23, 2017, the conversion price of Series A-1 Preferred was adjusted to $2.45 pursuant to the Series A-1 Securities Purchase Agreement. Pursuant to an agreement by and among Wellington, the Series A-1 Preferred conversion price may be adjusted upward upon a successful recovery of funds in the Company’s lawsuit against Valley National Bank. The conversion price of the Series A-1 Preferred is subject to further downward adjustment upon the occurrence of certain events as defined in the Series A-1 Purchase Agreement.

The Series A-1 Preferred has an initial liquidation preference of $600 per share and ranks senior to the Company’s common stock and pari passu with the Series A Preferred with respect to distributions of assets upon the Company’s liquidation, dissolution or winding up. Notwithstanding the above, no holder of the Series A-1 Preferred can convert if, as a result of such conversion, such holder would beneficially own 9.9% or more of the Company’s common stock. If at any time, no shares of Series A Preferred remain outstanding and shares of Series A-1 Preferred remain outstanding because of the limitation in the preceding sentence, all shares of Series A-1 Preferred shall automatically convert into shares of Series A-2 Preferred at a 1:1 ratio. Upon the occurrence of an Event of Noncompliance, as defined in the Series A-1 Purchase Agreement, the holders of a majority of the Series A-1 Preferred may demand immediate redemption of all or a portion of the Series A-1 Preferred at the then-applicable liquidation value.

The Company considered the guidance of ASC Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815, Derivatives, in determining the accounting treatment for its convertible preferred stock instruments. The Company considered the economic characteristics and the risks of the host contract based on the stated and implied substantive terms and features of the instruments; including, but not limited to, its redemption features, voting rights, and conversions rights; and determined that the terms of the preferred stock were more akin to an equity instrument than a debt instrument. Subject to certain exceptions applicable to Sundara, the shares of Series A Preferred and Series A-1 Preferred are subject to redemption, at the option of the holder, on or after the fifth anniversary of their original purchase. Accordingly, the convertible preferred stock has been classified as temporary equity in the Company’s Consolidated Balance Sheets.

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Upon issuance of the 33,333 shares of the Series A Preferred, the Company recorded as a reduction to the Series A Preferred and as Additional Paid-In Capital a beneficial conversion feature of $1.5 million. The beneficial conversion feature represents the difference between the effective conversion price and the fair value of the Series A Preferred as of the commitment date. An additional beneficial conversion feature of $396,600 was recorded in August 2015 as a result of the change in conversion price per share from $3.00 to $2.90. Similarly, additional beneficial conversion features of $2.7 million and $2.2 million were recorded in March 2017 with respect to the shares of Series A Preferred issued and sold to Flexpoint in 2013 and the shares of Series A Preferred issued and sold to Sundara in 2016 as a result of the further change in conversion price per share of Series A Preferred from $2.90 to $2.36. There was no beneficial conversion feature related to the 2014, 2015 or the 2016 issuances and sales of shares of Series A Preferred to Flexpoint and shares of Series A-1 Preferred to Wellington as a result of the price of the Company’s common stock at the dates of the closings being below the effective adjusted conversion price of the preferred stock. The Company accounts for the beneficial conversion feature, the liquidation preference, and the issuance costs related to the Series A Preferred and Series A-1 Preferred using the effective interest method by accreting such amounts to its Series A Preferred and Series A-1 Preferred from the date of issuance to the earliest date of redemption as a reduction to its total permanent equity within the Company’s Consolidated Statement of Changes in Stockholders’ Equity as a charge to Additional Paid-In Capital. Any accretion recorded during the periods presented are also shown as a reduction to the income available to common stockholders in the Company’s Consolidated Statements of Operations when presenting basic and dilutive per share information. Accretion was $2.8 million and $1.6 million for the three months ended September 30, 2017 and 2016, respectively, and $7.5 million and $4.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Upon the occurrence of an Event of Noncompliance, the holders of a majority of the Series A Preferred may demand immediate redemption of all or a portion of the shares of Series A Preferred at the then-applicable liquidation value.  Such holders may also exercise a right to have the holders of the Series A Preferred elect a majority of the Board by increasing the size of the Board and filling such vacancies.  Such right to control a minimum majority of the Board would exist for so long as the Event of Noncompliance continues. An “Event of Noncompliance” shall have occurred if: (i) the Company fails to make any required redemption payment with respect to the Series A Preferred; (ii) the Company breaches the Series A Purchase Agreement and such breach has not been cured within thirty days after receipt of notice thereof; (iii) the Company or any subsidiary makes an assignment for the benefit of creditors, admits its insolvency or is the subject of an order, judgment or decree adjudicating such entity as insolvent, among other similar actions; (iv) a final judgment in excess of $5.0 million is rendered against the Company or any subsidiary that is not discharged within 60 days thereafter; or (v) an event of default has occurred under the Prior HR & Payroll Services Credit Facility, and such event of default has not been cured within thirty days after receipt of notice thereof.

Note 9.    Stockholders’ Equity

Common Stock

On January 22, 2016, the Company sold 37,037 shares of common stock to an additional investor at a purchase price of $2.70 per share for consideration of $100,000 prior to issuance costs of approximately $36,000.

On July 1, 2016, the Company issued 22,876 shares of common stock under its Employee Stock Purchase Plan and an additional 51,480 and 40,310 shares on January 5, 2017 and July 12, 2017, respectively.

On August 3, 2017, the Company issued 44,240 shares of the Company’s common stock with a fair market value of approximately $97,000, as bonus compensation to the Chief Executive Officer.

Treasury Stock

On February 15, 2017, the Company repurchased 2.2 million shares of its common stock owned by WLES, which WLES had agreed to sell in connection with the Direct Air matter as part of the WLES Settlement Agreement dated July 26, 2016. JetPay had previously repaid the $5.0MM Note due to Merrick Bank in January 2017, which WLES had agreed to indemnify as part of the WLES Settlement Agreement by agreeing to sell the 2.2 million shares to satisfy JetPay’s obligations in relation to the $5.0MM Note. As a result, no additional consideration was due to WLES in connection with the stock buyback. Effective February 15, 2017, the 2.2 million shares of JetPay common stock were placed in treasury at a cost of $4.95 million and are available for issuance.

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Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.001 per share with such designations, rights and preferences as may be determined from time to time by the Company’s Board of Directors.

As of September 30, 2017 and December 31, 2016, there were no shares of preferred stock issued or outstanding other than the Series A Preferred issued to Flexpoint and Sundara and the Series A-1 Preferred issued to Wellington described above.

Stock-Based Compensation

ASC Topic 718, Compensation-Stock Compensation, requires compensation expense for the grant-date fair value of share-based payments to be recognized over the requisite service period.

On July 5, 2017, the Board approved, subject to stockholder approval, the First Amendment to the Amended and Restated JetPay Corporation 2013 Stock Incentive Plan, to issue up to an additional 1,000,000 shares of its common stock as awards for a total of 4,000,000 shares of common stock available under the Plan. The First Amendment was subsequently approved by the Company’s stockholders at the Company’s 2017 Annual Meeting of Stockholders held on August 15, 2017. With the First Amendment to the Amended and Restated 2013 Plan, the Company had available 1,508,752 shares of common stock for the grant of awards as of September 30, 2017.

The Company granted options to purchase 340,000 and 505,000 shares of common stock under the Amended and Restated 2013 Stock Incentive Plan during the nine months ended September 30, 2017 and 2016, respectively, all at an exercise price of $3.00 per share except for 250,000 options granted at $2.48 per share in May 2016, the closing price of the Company’s common stock on the date of grant. The grant date fair value of the options granted during the nine months ended September 30, 2017 and 2016 were determined to be approximately $399,000 and $552,000, respectively, using the Black-Scholes option pricing model. Aggregated stock-based compensation expense was $170,000 and $121,000 for the three months ended September 30, 2017 and 2016, respectively, and $531,000 and $285,000 for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized compensation expense as of September 30, 2017 relating to non-vested common stock options was approximately $1.0 million and is expected to be recognized through 2021. During the nine months ended September 30, 2017 and 2016, no options were exercised and 95,000 and 158,334 options, respectively, were forfeited.

The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Expected term (years)		-		6.25		6.25		5.75 to 6.25
Risk-free interest rate		-		1.27% to 1.31%		1.93% to 2.10%		1.27% to 1.50%
Volatility		-		59.9%		62.3% to 65.6%		58.1% to 59.9%
Dividend yield		-		0%		0%		0%

Expected term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to provide a reasonable basis to estimate an expected term.

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

Volatility: The Company calculates the volatility of the stock price based on historical value and corresponding volatility using a weighted average of both the Company’s stock price and the Company’s peer group stock price for a period consistent with the stock option expected term.

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

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A summary of stock option activity for the nine months ended September 30, 2017 and the year ended December 31, 2016 is presented below:

	Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2015		1,717,082		$	3.02
Granted		905,000			2.70
Forfeited		(375,834	)		3.00
Exercised		-			-
Outstanding at December 31, 2016		2,246,248		$	2.89
Granted		340,000			3.00
Forfeited		(95,000	)		3.00
Exercised		-			-
Outstanding at September 30, 2017		2,491,248		$	2.90
Exercisable at September 30, 2017		1,469,570		$	2.92

The weighted average remaining life of options outstanding at September 30, 2017 was 7.75 years. The aggregate intrinsic value of the exercisable options at September 30, 2017 was $0.

Employee Stock Purchase Plan

On June 29, 2015, the Board of Directors adopted the JetPay Corporation Employee Stock Purchase Plan (the "Purchase Plan"), which was subsequently approved by the Company’s stockholders at the Company’s 2015 Annual Meeting of Stockholders. The Purchase Plan allows employees to contribute a percentage of their cash earnings, subject to certain maximum amounts, to be used to purchase shares of the Company’s common stock on each of two (2) semi-annual purchase dates. The purchase price is equal to 90% of the market value per share on either: (a) the date of grant of a purchase right under the Purchase Plan; or (b) the date on which such purchase right is deemed exercised, whichever is lower.

As of September 30, 2017, an aggregate of 300,000 shares of common stock were reserved for issuance under the Purchase Plan, of which 22,876 shares of common stock were issued on July 1, 2016, 51,480 issued on January 5, 2017 and 40,310 shares on July 12, 2017.

Note 10.    Income Taxes

The Company recorded income tax expense (benefit) of $56,000 and $96,000 for the three months ended September 30, 2017 and 2016, respectively, and $199,000 and $(1.38) million for the nine months ended September 30, 2017 and 2016, respectively. Income tax expense (benefit) reflects the recording of federal and state income taxes. The effective tax rates were approximately (10.8)% and (7.7)% for the three months ended September 30, 2017 and 2016, respectively, and (10.7)% and 14.8% for the nine months ended September 30, 2017 and 2016, respectively. The effective rate differs from the federal statutory rate for each period, primarily due to state and local income taxes and changes to the valuation allowance.

As of September 30, 2016, due to the acquisition of JetPay Payments, FL and its related identifiable intangibles and the recording of an associated $1.86 million deferred tax liability, management believed that it was more likely than not that the benefit of a portion of its federal net deferred tax assets would be realized equal to the future source of taxable income created by the reversal of the book amortization of the JetPay Payments, FL fixed assets and identifiable intangible assets. Accordingly, management believes recording a partial reduction of the valuation allowance against its federal net deferred tax asset of $1.6 million is appropriate.

JetPay Payments, TX is subject to and pays the Texas Margin Tax which is considered to be an income tax in accordance with the provisions of the Income Taxes Topic in FASB, ASC and the associated interpretations. There are no significant temporary differences associated with the Texas Margin Tax.

As of December 31, 2016, the Company had U.S. federal net operating loss carryovers (“NOLs”) of approximately $25.9 million available to offset future taxable income. These NOLs, if not utilized, expire at various times through 2036. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual limitation in the event of a change in control.

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In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that a total valuation allowance of approximately $9.6 million at September 30, 2017 is appropriate, representing the amount of its deferred income tax assets in excess of certain of the Company’s deferred income tax liabilities. The deferred tax liability related to goodwill that is amortizable for tax purposes (“Intangibles”) will not reverse until such time, if any, that the goodwill, which is considered to be an asset with an indefinite life for financial reporting purposes, becomes impaired or sold. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as future taxable income for purposes of determining a valuation allowance. Therefore, the deferred tax liability related to tax deductible goodwill Intangibles cannot be considered when determining the ultimate realization of deferred tax assets.

Note 11.   Commitments and Contingencies

On or about March 13, 2012, a merchant of JetPay, LLC, Direct Air, a charter travel company, abruptly ceased operations and filed for bankruptcy. Under United States Department of Transportation requirements, all charter travel company customer charges for travel are to be deposited into an escrow account in a bank under a United States Department of Transportation escrow program, and not released to the charter travel company until the travel has been completed. In the case of Direct Air, such funds had historically been deposited into such United States Department of Transportation escrow account at Valley National Bank in New Jersey, and continued to be deposited through the date Direct Air ceased operations. At the time Direct Air ceased operations, according to Direct Air’s bankruptcy trustee, there should have been in excess of $31.0 million in the escrow account. Instead there was approximately $1.0 million. As a result, Merrick Bank Corporation (“Merrick”), JetPay, LLC’s sponsor bank with respect to this particular merchant, incurred chargebacks in excess of $25.0 million. Merrick maintained insurance through a Chartis Insurance Policy for chargeback losses that named Merrick as the primary insured. The policy had a limit of $25.0 million and a deductible of $250,000. Merrick sued Chartis Insurance (“Chartis”) for payment under the claim. Under an agreement between Merrick and JetPay, LLC, JetPay, LLC had certain obligations to indemnify Merrick for losses realized from such chargebacks that Merrick was unable to recover from other parties. JetPay, LLC recorded a loss for all chargebacks in excess of $25.0 million, the $250,000 deductible on the Chartis insurance policy and $487,000 of legal fees charged against JetPay, LLC’s cash reserve account by Merrick, totaling $1.9 million in 2012, as well as an additional $597,000 in legal fees charged against JetPay, LLC’s cash reserve account by Merrick through September 30, 2013. In December 2013, Merrick, in addition to its suit against Chartis, also filed suit against Valley National Bank as escrow agent. In February 2015, JetPay joined that suit, along with American Express. During 2012 and 2013, Merrick required JetPay, LLC to maintain increased cash reserves in order to provide additional security for any obligations arising from the Direct Air situation. As of September 30, 2016, Merrick held approximately $4.4 million of total reserves related to the Direct Air matter, which amount was released in full to Merrick under the Merrick Settlement Agreement in July 2016, as more fully described below.

On August 7, 2013, JetPay Merchant Services, LLC (“JPMS”), then a wholly owned subsidiary of JetPay, LLC and indirect wholly-owned subsidiary of the Company, together with WLES (collectively, the “Plaintiffs”), filed suit in the United States District Court for the Northern District of Texas, Dallas Division, against Merrick, Royal Group Services, LTD, LLC and Gregory Richmond (collectively, the “Defendants”). The suit alleged that Merrick and Gregory Richmond (an agent of Royal Group Services) represented to JPMS that insurance coverage was arranged through Chartis Specialty Insurance Company to provide coverage for JPMS against potential chargeback losses related to certain of JPMS’s merchant customers, including Southern Sky Air Tours, d/b/a Direct Air. The complaint alleged several other causes of action against the Defendants, including violation of state insurance codes, negligence, fraud, breach of duty and breach of contract. Also, in August 2013, JPMS, JetPay, LLC, and JetPay ISO Services, LLC (“JetPay ISO”) filed the second amendment to a previously filed complaint against Merrick in the United States District Court for the District of Utah, adding to its initial complaint several causes of action related to actions Merrick allegedly took during JetPay, LLC’s transition to a new sponsoring bank in June 2013. Additionally, subsequent to this transition, Merrick invoiced the Company for legal fees incurred by Merrick totaling approximately $4.7 million. The Company did not believe it had a responsibility to reimburse Merrick for these legal fees and disputed these charges. Accordingly, the Company had not recorded an accrual for these legal fees as of September 30, 2016. These legal fees were eliminated as part of the Merrick Settlement Agreement, as described below.

As partial protection against any potential losses related to Direct Air, the Company required that, upon closing of the acquisition of JetPay, LLC, 3,333,333 shares of common stock that was to be paid to WLES as part of the JetPay, LLC acquisition be placed into an escrow account with JP Morgan Chase as the trustee. If JetPay, LLC suffered any liability as a result of the Direct Air matter, these shares would be used in partial payment for any such liability, with any remaining shares delivered to WLES.

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On July 26, 2016, we entered into two related settlement agreements: (i) a Settlement Agreement and Release by and among Merrick, the Company, certain subsidiaries of the Company and WLES (the “Merrick Settlement Agreement”) and (ii) a Settlement Agreement and Release by and among Trent Voigt, WLES and the Company (the “WLES Settlement Agreement”). In connection with the parties’ entry into the Merrick Settlement Agreement, the District Court for the District of Utah dismissed the Direct Air matter with prejudice on July 27, 2016.

As part of the Merrick Settlement Agreement, we agreed to release all claims to the $4.4 million held in reserve at Merrick. In addition, pursuant to the Merrick Settlement Agreement, we issued to Merrick a $3,850,000 note, bearing interest at a rate of 8% per annum, due December 28, 2017 (the “$3.85MM Note”) and a $5,000,000 note, bearing interest at a rate of 12% per annum, due January 11, 2017 (the “$5MM Note” and, together with the $3.85MM Note, the “Notes”) to Merrick. The Notes were secured by the 3,333,333 shares of JetPay’s common stock issued in the name of WLES and held in escrow.

In connection with its entry into the Merrick Settlement Agreement, JetPay executed three Stipulated and Confessed Judgments in favor of Merrick in the amounts of $32,500,000 (the “First Judgment”), $28,650,000 (the “Second Judgment”) and $27,500,000 (the “Third Judgment” and, together with the First Judgment and the Second Judgment, the “Judgments”), none of which would be of any effect unless and until JetPay failed to make any payment when due under the Notes. If JetPay failed to make payment when due under the Notes, Merrick, after a five (5) day cure period, would have been able to seek to obtain and/or enforce the applicable Judgments in the Federal District Court for Utah or in any court of competent jurisdiction. On October 21, 2016, the Company paid in full the $3.85MM Note and on January 11, 2017, the Company paid in full the $5.0MM Note. As a result, no Judgments are available for Merrick’s relief.

Under the terms of the WLES Settlement Agreement, WLES agreed to transfer the indebtedness represented by that certain promissory note, dated December 28, 2012 (the “WLES Note”), in the original principal amount of $2,331,369 issued by JetPay in favor of WLES to Merrick. In addition, WLES agreed to amend that certain promissory note, dated June 7, 2013, as amended, in the original principal amount of $491,693 issued by JetPay, LLC in favor of Trent Voigt in order to (a) extend its maturity date from September 30, 2016 to September 30, 2017 and (b) waive all interest payments for the period from September 30, 2016 to September 30, 2017. This note in favor of Mr. Voigt was paid down to $59,000 on August 30, 2017.

The WLES Settlement Agreement also provides for the allocation of any recoveries by JPMS in connection with the claims brought by JMPS in American Express Travel Related Services and JetPay Merchant Services, LLC v. Valley National Bank, Civil Action No. 2:14-cv-7827 (D. N.J.) between the Company and WLES. On February 15, 2017, 2,200,000 of the WLES escrowed shares were transferred to JetPay and placed into Treasury to satisfy WLES’ indemnification under the Merrick and WLES Settlement Agreements.

The Company has recorded a Settlement of Legal Matter charge of $6.19 million for the year ended December 31, 2016 based on the terms of the Merrick Settlement Agreement and the WLES Settlement Agreement. The loss includes: (i) a charge of $4.4 million related to the Company’s release of all claims to the $4.4 million held in reserve at Merrick; (ii) a charge of $1.4 million related to the Company’s issuance of the $3.85MM Note, less WLES’s agreement to transfer the WLES Note (recorded at $2,036,511, net of an unamortized discount of $294,858) and accrued interest on the WLES Note of $414,466; (iii) a charge of $50,000 representing the Company’s issuance of the $5.0MM Note less the estimated value as of July 26, 2016 of the escrowed shares; and (iv) a charge for $373,334 representing the fair value of the issuance of warrants to WLES as described in the WLES Settlement Agreement.

At the time of the acquisition of JetPay, LLC, the Company entered into an Amendment, Guarantee, and Waiver Agreement (the “Agreement”), dated December 28, 2012, between the Company, Ten Lords, Ltd. (“Ten Lords”) and JetPay, LLC (n/k/a JetPay Payment Services, TX, LLC). Under the Agreement, Ten Lords agreed to extend payment of a $6.0 million note remaining outstanding at the date of acquisition for up to twelve months. The terms of the Agreement required that the Company provide the owners of Ten Lords and Providence Interactive Capital, LLC (together with Ten Lords, the “Plaintiffs”) with a “true up” payment meant to put them in the same after-tax economic position as they would have been had the note been paid in full on December 28, 2012. The Company calculated this true-up payment to be $222,310 and paid such amount in August 2015. In addition to the $222,310 paid in 2015, the Company recorded an additional loss accrual of $125,500 relating to this matter. Subsequent to the Company’s payment, the Company received notice on October 5, 2015 that Plaintiffs filed a lawsuit (the “Lawsuit”) against JetPay, LLC and the Company disputing the true up payment. Since 2015, the Company and JetPay, LLC have been defendants in the Lawsuit in the 429th Judicial District Court of Collin County, Texas (the “Court”) styled Ten Lords, Ltd. and Providence Interactive Capital, LLC, Cause No. 429-04140-2015. The Lawsuit was tried in the Court on May 2, 2017 and the Court granted a judgment to Plaintiffs in the amount of $793,000 plus attorneys’ fees of $134,075, which judgment was entered by the Court on May 15, 2017 (the “Judgment”). On July 3, 2017, the Company and JetPay, LLC successfully settled the Lawsuit by entering into a Compromise Settlement Agreement and Mutual Release (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company paid to Plaintiffs the sum of $872,500 on July 3, 2017 and the parties released one another and their respective affiliates from all claims arising out of the matters described in the Lawsuit and the Judgment. In connection with this settlement, the Company recorded an additional loss of $747,000 in the three months ended June 30, 2017.

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In December 2015, Harmony Press Inc. (“Harmony”), a customer of ADC and PTFS, filed a suit against an employee of Harmony for theft by that employee of over $628,000. JetPay, ADC, and PTFS as well as several financial institution service providers to Harmony were also named in that suit for alleged negligence. The Company believes that the allegations in the suit regarding JetPay, ADC, and PTFS are groundless and has turned the matter over to the Company’s insurance carrier who is defending the suit. The Company is subject to a $50,000 deductible under its insurance policy. The Company has not recorded an accrual for any potential loss related to this matter as of September 30, 2017 and has incurred legal expense of $50,000 applied against its deductible, through September 30, 2017.

The Company is a party to various other legal proceedings related to its ordinary business activities. In the opinion of the Company’s management, none of these proceedings are material in relation to our results of operations, liquidity, cash flows, or financial condition.

Note 12.    Related Party Transactions

JetPay HR & Payroll Services’ headquarters are located in Center Valley, Pennsylvania and consist of approximately 22,500 square feet leased from C. Nicholas Antich and Carol A. Antich. Mr. Antich is the former President of JetPay HR & Payroll Services. The rent is currently $45,163 per month. The office lease had an initial 10-year term which expired on May 31, 2016 and was extended through January 31, 2018. Rent expense under this lease was $135,489 and $135,489 for the three months ended September 30, 2017 and 2016, respectively, and $406,467 and $395,882 for the nine months ended September 30, 2017 and 2016. On October 20, 2017, the Company entered into a new lease to replace the JetPay HR & Payroll Services’ headquarters lease in Center Valley upon its termination. See Note 14. Subsequent Events.

JetPay Payments, TX retains a backup center in Sunnyvale, Texas consisting of 1,600 square feet, rented from JT Holdings, an entity controlled by Trent Voigt, the previous Chief Executive Officer of JetPay Payments, TX. The prior lease expired on January 31, 2016. Rent expense was $18,000 and $30,000 for the three months ended September 30, 2017 and 2016, respectively, and $42,000 and $90,000 for the nine months ended September 30, 2017 and 2016, respectively. As a part of current negotiations with Mr. Voigt regarding the property and other related matters, the Company and JT Holdings entered into an agreement to extend the lease for twelve months beginning on July 1, 2017 at a monthly rate of $6,000 plus utilities and certain other costs.

In connection with the closing of the Company’s acquisition of JetPay Payments, TX, the Company entered into a Note and Indemnity Side Agreement with JP Merger Sub, LLC, WLES and Trent Voigt (the “Note and Indemnity Side Agreement”) dated as of December 28, 2012. Pursuant to the Note and Indemnity Side Agreement, the Company issued a promissory note in the amount of $2,331,369 in favor of WLES. Interest accrued on amounts due under the note at a rate of 5% per annum, and is payable quarterly. Interest expense was $8,100 and $67,000 for the three and nine months ended September 30, 2016, respectively. Under the terms of the WLES Settlement Agreement, WLES transferred the WLES Note and related accrued interest to Merrick. See Note 11. Commitments and Contingencies.

On August 22, 2013, JetPay Payments, TX entered into a Master Service Agreement with JetPay Solutions, LTD, a United Kingdom based entity 75% owned by WLES, an entity owned by Trent Voigt. The Company initiated transaction business under this agreement beginning in April 2014 with revenue earned from JetPay Solutions, LTD of $100 and $5,000 for the three months ended September 30, 2017 and 2016, respectively, and $41,700 and $16,000 for the nine months ended September 30, 2017 and 2016, respectively.

On June 7, 2013, the Company issued an unsecured promissory note to Trent Voigt, the then Chief Executive Officer of JetPay Payments, TX, in the amount of $491,693. The note matures on September 30, 2017, as extended by the WLES Settlement Agreement dated July 26, 2016, see Note 11. Commitments and Contingencies, and bore interest at an annual rate of 4% with interest expense of $4,900 and $14,700 recorded for the three and nine months ended September 30, 2016, respectively. The transaction was approved upon resolution and review by the Company’s Audit Committee of the terms of the note to ensure that such terms were no less favorable to the Company than those that would be available with respect to such transactions from unaffiliated third parties. This unsecured promissory note was paid down to $59,000 on August 30, 2017. See Note 7. Long-Term Debt, Notes Payable and Capital Lease Obligations.

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Finally, on October 18, 2016, the Company entered into the amended and restated Series A Purchase Agreement with Flexpoint and Sundara, a Delaware limited liability company wholly-owned by Laurence L. Stone. Pursuant to the amended and restated Series A Purchase Agreement, Sundara acquired 33,667 shares of Series A Preferred for $10.1 million. In connection with the Company’s entry into the amended and restated Series A Purchase Agreement, Mr. Stone was appointed as a director of the Company by holders of Series A Preferred shares. In addition, on October 18, 2016, the Company entered into a loan and security agreement with JetPay HR & Payroll Services and PTFS, as borrowers, the Company and JetPay Payments, FL, as guarantors, and LHLJ, Inc., an entity controlled and majority-owned by Laurence L. Stone, as lender. Pursuant to the loan and security agreement, LHLJ, Inc., LHLJ, Inc. provided JetPay HR & Payroll Services and PTFS a term loan of $9.5 million. The loan carries an interest rate of 8% and matures on October 18, 2021. Interest expense related to this promissory note was $182,000 and $552,000 for the three and nine months ended September 30, 2017. In connection with the parties’ entry into the loan and security agreement, the borrowers paid LHLJ, Inc. a non-refundable closing fee of $190,000.

Note 13.    Segments

The Company currently operates in two business segments, the Payment Services Segment, which is an end-to-end processor of credit and debit card and ACH payment transactions to businesses with a focus on those processing internet transactions and recurring billings, and the HR & Payroll Services Segment, which is a full-service payroll and related payroll tax payment processor.

Segment operating results are presented below (in thousands). The results reflect revenues and expenses directly related to each segment. The activity within JetPay Card Services was included in the HR & Payroll Services for the three and nine months ended September 30, 2017, and in General/Corporate, for the three and nine months ended September 30, 2016 in the tables below.

	For the Three Months Ended September 30, 2017
	Payment Services		HR & Payroll Services			General/ Corporate			Total
Processing revenues	$	14,581	$	3,859		$	-		$	18,440
Cost of processing revenues		10,806		2,049			-			12,855
Selling, general and administrative expenses		2,722		1,446			642			4,810
Change in fair value of contingent consideration liability		-		-			(160	)		(160	)
Amortization of intangibles and depreciation		813		327			1			1,141
Other expenses		97		208			8			313
Income (loss) before income taxes	$	143	$	(171	)	$	(491	)	$	(519	)

	For the Three Months Ended September 30, 2016
	Payment Services			HR & Payroll Services			General/ Corporate			Total
Processing revenues	$	11,823		$	3,374		$	17		$	15,214
Cost of processing revenues		8,300			1,878			21			10,199
Selling, general and administrative expenses		2,894			1,377			244			4,515
Settlement of legal matter		(20	)		-			-			(20	)
Change in fair value of contingent consideration liability		-			-			404			404
Amortization of intangibles and depreciation		721			316			1			1,038
Other expenses		165			61			96			322
Loss before income taxes	$	(237	)	$	(258	)	$	(749	)	$	(1,244	)

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	For the Nine Months Ended September 30, 2017
	Payment Services		HR & Payroll Services			General/ Corporate			Total
Processing revenues	$	43,873	$	12,286		$	-		$	56,159
Cost of processing revenues		32,022		6,467			-			38,489
Selling, general and administrative expenses		8,397		4,447			1,978			14,822
Settlement of legal matter		-		-			747			747
Change in fair value of contingent consideration liability		-		-			(343	)		(343	)
Amortization of intangibles and depreciation		2,391		975			3			3,369
Other expenses		276		634			34			944
Income (loss) before income taxes	$	787	$	(237	)	$	(2,419	)	$	(1,869	)
Total property and equipment, net	$	2,967	$	471		$	30		$	3,468
Property and equipment additions	$	2,064	$	132		$	3		$	2,199
Intangible assets and goodwill	$	56,528	$	15,917		$	-		$	72,445
Total segment assets	$	108,242	$	64,867		$	1,045		$	174,154

	For the Nine Months Ended September 30, 2016
	Payment Services			HR & Payroll Services		General/ Corporate			Total
Processing revenues	$	27,986		$	11,037	$	46		$	39,069
Cost of processing revenues		20,062			5,764		79			25,905
Selling, general and administrative expenses		6,722			3,907		1,467			12,096
Settlement of legal matter		6,120			-		-			6,120
Change in fair value of contingent consideration liability		-			-		234			234
Amortization of intangibles and depreciation		1,918			995		4			2,917
Other expenses		476			201		409			1,086
(Loss) income before income taxes	$	(7,312	)	$	170	$	(2,147	)	$	(9,289	)
Total property and equipment, net	$	1,626		$	547	$	31		$	2,204
Property and equipment additions	$	404		$	211	$	-		$	615
Intangible assets and goodwill	$	58,724		$	16,954	$	-		$	75,678
Total segment assets	$	91,742		$	64,485	$	6,600		$	162,827

Note 14.    Subsequent Events

On October 20, 2017, JetPay HR & Payroll Services, the Company’s wholly-owned subsidiary, entered into an office lease agreement (the “Lease”) with Brookwood Philadelphia I, LLC and Brookwood Philadelphia II, LLC to lease approximately 24,269 rentable square feet of a multi-tenant office building in Allentown, Pennsylvania (the Facility”). The Facility will house the Company’s HR & Payroll Services Segment operations. The Lease has an initial term of 10 years and 8 months from the date of occupancy planned for February 2018. Rent expense under the lease in year one is $40,448 per month with annual increases of 2.5% per annum with four months of abated rent in year one and three months of abated rent in year two of the Lease. JetPay HR & Payroll Services will not bear a prorated portion of the operating costs and taxes of the building in year one of the Lease but will be responsible for a portion of the increase in these costs over the base year amount in future years. The Lease also provides a tenant improvement allowance to cover all of the estimated leasehold improvement costs as well as a moving allowance.

Effective October 30, 2017, the board of directors (the “Board”) appointed Mr. Robert Frankfurt to fill a vacancy on the Board resulting from Fredrick S. Hammer’s resignation on August 2, 2016. Mr. Frankfurt was determined by the Board to be independent under the rules and regulations of the Nasdaq Stock Market (“NASDAQ”) and Securities and Exchange Commission (“SEC”). Mr. Frankfurt was also elected as a member and as chairman of the Audit Committee. The Board has determined that Mr. Frankfurt is an "audit committee financial expert," as such term is defined in Item 407(d)(5) of Regulation S-K, and that Mr. Frankfurt is “independent” under the rules and regulations of NASDAQ and the SEC. As a result of Mr. Frankfurt’s election to the Board and the Audit Committee, the Audit Committee now consists of three members, each of whom is independent, in compliance with Listing Rule 5605(c)(2)(A).

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “our company,” “the Company,” “JetPay,” “us,” “we” and “our” refer to JetPay Corporation.

This report and other written or oral statements made from time to time by us may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can sometimes identify forward looking-statements by our use of the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “forecast,” “guidance” and similar expressions. Some of the statements we use in this report contain forward-looking statements concerning our business operations, economic performance and financial condition, including in particular: our business strategy and means to implement the strategy; measures of future results of operations, such as revenue, expenses, operating margins, income tax rates, and earnings per share; other operating metrics such as shares outstanding and capital expenditures; our success and timing in developing and introducing new products or services and expanding our business; and the successful integration of future acquisitions.

Although we believe that the plans and expectations reflected in or suggested by our forward-looking statements are reasonable, those statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond our control, cannot be foreseen and reflect future business decisions that are subject to change. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Our actual revenues, revenue growth rates and margins, other results of operations and shareholder values could differ materially from those anticipated in our forward-looking statements as a result of known and unknown factors, many of which are beyond our ability to predict or control. These factors include, but are not limited to, those set forth in Item 1A - Risk Factors of this report and in our Annual Report on Form 10-K, those set forth elsewhere in this report and those set forth in our press releases, reports and other filings made with the SEC. These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements.

Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. While we may elect to update or revise forward-looking statements at some time in the future, we specifically disclaim any obligation to publicly release the results of any revisions to our forward-looking statements.

Overview

The Company entered the payment processing and the payroll processing businesses upon consummation of the acquisitions of JetPay Payment Services, TX, LLC (f/k/a JetPay, LLC) (“JetPay Payments, TX”) and JetPay HR & Payroll Services, Inc. (f/k/a A. D. Computer Corporation) (“JetPay HR & Payroll Services”) on December 28, 2012. Additionally, on November 7, 2014, the Company acquired JetPay Payment Services, PA, LLC (f/k/a ACI Merchant Systems, LLC) (“JetPay Payments, PA”), an independent sales organization specializing in relationships with banks, credit unions and other financial institutions. On June 2, 2016, the Company acquired JetPay Payment Services, FL, LLC (f/k/a CollectorSolutions, Inc.) (“JetPay Payments, FL”), a payment processor specializing in the processing of payments in the government and utilities channels.

We are a provider of debit and credit card processing, payroll and HCM services, and prepaid card services to businesses and their employees throughout the United States. We provide these services through four wholly-owned subsidiaries: JetPay Payments, TX, which provides debit and credit card processing and ACH payment services to businesses with a focus on processing omni-channel (internet, mobile, and point-of-sale) transactions and recurring billings; JetPay Payments, PA, an independent sales organization specializing in relationships with banks, credit unions, other financial institutions and strategic partners; JetPay Payments, FL, a debit and credit card processor specializing in providing services to government agencies and utilities; and JetPay HR & Payroll Services, which provides HCM services, including, payroll, tax filing, time and attendance, HR services, and Affordable Care Act and related services to small and medium-sized employers.  We also provide prepaid card services within our HR & Payroll Segment.

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Our overall business strategy is to provide payment processing services to small to large-sized businesses with a high percentage of our revenues consisting of recurring revenues with strong margins and with relatively low capital requirements. Our corporate strategy is to increase our revenues through a combination of organic growth and acquisitions. Our organic growth strategy is focused on developing and increasing our current marketing and sales staff at JetPay Payment Services and JetPay HR & Payroll Services to penetrate new customer niches and geographic markets. Our organic growth strategy also includes cross marketing initiatives to sell credit and debit card processing services to JetPay HR & Payroll Services’ payroll customers and payroll processing services to JetPay Payment Services’ credit and debit card processing customers. Additionally, we will be seeking additional debt and/or equity capital to acquire additional credit and debit card processors, ISVs, ISOs and/or payroll processors to integrate into our JetPay Payment Services and JetPay HR & Payroll Services operations. Our acquisition strategy is focused on identifying small to medium-sized companies that either provide services similar to ours or services that expand our product and service offerings and/or our geographic reach.  Both our JetPay Payment Services and our JetPay HR & Payroll Services operations have significant under-utilized processing capacity, which can be leveraged to create additional processing revenues without significant cost increases.   Our overall strategy also includes looking for cost synergies as we continue to integrate the JetPay Payment Services and JetPay HR & Payroll Services operations in such areas as insurance costs, banking costs, employee benefit costs, and other selling, general and administrative cost as well as operating cost areas.

Payment Services Segment

Revenues

JetPay Payments, TX and JetPay Payments, PA’s revenues fall into two categories: transaction processing revenues and merchant discount revenues. As such, our two primary drivers are the number of transactions and merchant dollar volume. A third measure related to merchant dollar volume, for those merchants where we charge a percentage of the sale amount, is the average size of the transaction, as costs for processing the transaction tend to be fixed, so that the higher the average ticket, the more revenue we earn for a fixed cost. JetPay’s discount revenues are generally a fixed percentage of the merchant’s dollar volume, with interchange and other third-party fees passed through to the merchant without markup. Our billings to merchants primarily consist of these transaction fees and discount fees, as well as pass-through fees for other miscellaneous services, such as handling chargebacks. Interchange costs are set by the card networks, and are paid directly by the sponsoring bank to the credit card associations based upon a percentage of transaction amounts and/or a fixed price per transaction. JetPay Payment Services refers to the ratio of processing revenues to the dollar amount of card transactions processed as the “margin.” If margin increases, processing revenues will tend to increase accordingly. Further, both the number of merchants who process transactions, and the average dollar amount of transactions processed per merchant, will impact the total transaction volume and thus the total processing revenues. As such, growth in JetPay’s merchant count and/or growth in the same store transaction volume will also drive JetPay’s processing revenue growth.

JetPay Payments, FL generates substantially all of its revenues from transaction fees for processing payment transactions. For credit card transactions, our fee may be charged as a fixed fee or as a percentage of the dollars processed. As such, the two primary factors affecting our processing revenue from accepting and processing credit card payments are the number of transactions and the average dollar volume of the transaction. Accordingly, growth in JetPay Payments, FL’s client count and growth in the “same client” transaction dollar volume impact JetPay Payments FL’s processing revenue growth. In the case of e-check (ACH) payments, typically our fees are charged as a fixed fee per transaction regardless of the payment amount.

 Expenses

The most significant components of operating expenses are credit card association fees and assessments; residual payments to ISOs / VARs / ISVs, strategic partners, and financial institutions; and salaries and other employment costs. Salaries and other employment costs are largely fixed in nature, increasing slightly with the growth in numbers of customers, but tending to grow with inflation. Credit card fees and assessments and bank sponsorship costs are generally a percentage of card volume. Bank sponsorship costs and processing fees are largely based upon transaction counts and volumes. Selling, general and administrative expenses include stable costs such as occupancy and office costs, outside services, and depreciation and amortization expense, which is recognized on a straight-line basis over the estimated useful life of the assets. Cost of processing revenues also includes chargeback losses, which vary over the long term based upon transaction volume processed by JetPay’s merchants, but can vary from period to period depending upon specific events in that period. JetPay Payment Services has experienced higher than normal professional fees due to the Direct Air matter.

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HR & Payroll Segment 

Revenues

The majority of revenues from HR & Payroll Services have traditionally been derived from its payroll processing operations, which includes the calculation, preparation, collection and delivery of employer payroll obligations and the production of internal accounting records and management reports, and from services provided for the preparation of federal, state, and local payroll tax returns, including the collection and remittance of clients’ payroll tax obligations.  In 2016, JetPay Payroll & HR Services placed a significant emphasis on providing additional human capital management services that complement the core payroll and tax filing businesses, including onboarding, time and attendance, compliance, and other services that are becoming increasingly important to employers with fifty (50) or more employees. JetPay anticipates that these revenues will become an increasingly important incremental source of revenues. JetPay HR & Payroll Services experiences increased revenues in the fourth and first calendar quarters due to additional employer annual tax filing requirements. Payroll Tax Filing Services (“PTFS”) trust account earnings represent the interest earned on the funds held for clients trust balance.  Trust fund earnings can fluctuate based on the amount held in the trust account as well as fluctuations in interest rates. Over the past two years, JetPay HR & Payroll Services has seen a significant increase in revenue from its human capital management, Affordable Care Act and time and attendance services.

Expenses

JetPay HR & Payroll Services’ most significant cost of processing revenues is its payroll and related expenses, costs of third party service providers, and facility overhead costs.  These costs are largely fixed in nature, increasing slightly with the growth in numbers of customers and payrolls processed, and except for payroll costs, tend to grow with inflation. JetPay HR & Payroll Services’ selling, general, and administrative expenses include the costs of the administrative and sales staff, payroll delivery costs, outside services, rent, office expense, insurance, sales and marketing costs and professional services costs.

Results of Operations for the Three Months Ended September 30, 2017 and 2016

The following tables represent a comparison of the results of our operations for the three month periods ended September 30, 2017 and September 30, 2016 (in thousands):

	For the Three Months Ended September 30, 2017
	Consolidated			General/ Corporate			HR & Payroll Services			Payment Services
Processing revenues	$	18,440		$	-		$	3,859		$	14,581
Cost of processing revenues		12,855			-			2,049			10,806
Gross profit		5,585			-			1,810			3,775
Selling, general, and administrative expenses		4,810			642			1,446			2,722
Settlement of legal matter		-			-			-			-
Change in fair value of contingent consideration liability		(160	)		(160	)		-			-
Amortization of intangibles		874			-			259			615
Depreciation		267			1			68			198
Operating (loss) income		(206	)		(483	)		37			240
Interest expense		281			2			182			97
Amortization of debt discounts and non-cash interest costs		39			6			26			7
Other income		(7	)		-			-			(7	)
(Loss) income before taxes		(519	)		(491	)		(171	)		143
Income tax expense		56			-			-			56
Net (loss) income		(575	)		(491	)		(171	)		87
Accretion of convertible preferred stock		(2,758	)		(2,758	)		-			-
Net (loss) income applicable to common stockholders	$	(3,333	)	$	(3,249	)	$	(171	)	$	87

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	For the Three Months Ended September 30, 2016
	Consolidated			General/ Corporate			HR & Payroll Services			Payment Services
Processing revenues	$	15,214		$	17		$	3,374		$	11,823
Cost of processing revenues		10,199			21			1,878			8,300
Gross profit (loss)		5,015			(4	)		1,496			3,523
Selling, general, and administrative expenses		4,515			244			1,377			2,894
Settlement of legal matter		(20	)		-			-			(20	)
Change in fair value of contingent consideration liability		404			404			-			-
Amortization of intangibles		865			-			259			606
Depreciation		173			1			57			115
Operating loss		(922	)		(653	)		(197	)		(72	)
Interest expense		301			76			58			167
Amortization of debt discounts and non-cash interest costs		24			20			4			-
Other expense		(3	)		-			(1	)		(2	)
Loss before taxes		(1,244	)		(749	)		(258	)		(237	)
Income tax expense		96			-			11			85
Net loss		(1,340	)		(749	)		(269	)		(322	)
Accretion of convertible preferred stock		(1,557	)		(1,557	)		-			-
Net loss applicable to common stockholders	$	(2,897	)	$	(2,306	)	$	(269	)	$	(322	)

Revenues

Revenues were $18.4 million and $15.2 million for the three months ended September 30, 2017 and 2016, respectively. Overall revenues increased $3.2 million, or 21.2%, in 2017 as compared to 2016. Of the $18.4 million of revenues for the three months ended September 30, 2017, $3.9 million, or 20.9%, was generated from our HR & Payroll Segment and $14.6 million, or 79.1%, from our Payment Services Segment. Of the $15.2 million of revenues for the three months ended September 30, 2016, $3.4 million, or 22%, was generated from our HR & Payroll Segment and $11.8 million, or 78%, from our Payment Services Segment.

Payment Services Segment’s revenues increased $2.8 million, or 23.3%, for the three months ended September 30, 2017 as compared to 2016. This increase was attributable to net revenue growth in our Government and Utilities, e-Commerce, and ISO/ISV sectors, including growth in our Discount for Cash product. JetPay Payments, FL, our Government and Utilities payment operation acquired in June 2016, provided $5.3 million of revenues in 2017 as compared to $4.6 million for the same period in 2016.

HR & Payroll Segment’s revenues increased $485,000, or 14.4%, for the three months ended September 30, 2017 as compared to the same period in 2016. This increase was attributable to net growth in volume of payroll and related payroll taxes processed in addition to revenues generated from HCM services introduced in 2015.

Cost of Processing Revenues

Cost of revenues were $12.9 million, or 69.7% of revenues, and $10.2 million, or 67.0% of revenues, for the three months ended September 30, 2017 and 2016, respectively. Of the $12.9 million cost of revenues for the three months ended September 30, 2017, $2.1 million, or 15.9%, related to our HR & Payroll Segment, and $10.8 million, or 84.1%, related to our Payment Services Segment. Of the $10.2 million cost of revenues for the three months ended September 30, 2016, $1.9 million, or 18.5%, related to our HR & Payroll Segment and $8.3 million, or 81.5%, related to our Payment Services Segment.

The cost of processing revenues within the Payment Services Segment increased $2.5 million, or 30.2%, increasing from 70.2% of revenues in 2016 to 74.1% of revenues in 2017. The increase in cost of processing revenues was primarily related to the growth in our Payment Services Segment revenues, as well as stronger growth in lower-margin business including our Government and Utilities sector. Cost of processing revenues was also impacted by increased card association and other direct processing costs with an increase in back-end settlement volumes. Overall gross profit margin as reported within our Payment Services Segment decreased slightly from 29.8% in the three months ended September 30, 2016 to 25.9% for the same period in 2017 largely as a result of a larger increase in lower-margin third party ISO revenues, as well as by the impact of the lower margin Government and Utilities revenues (due to interchange being included in cost of goods sold for many of the JetPay Payment Services, FL merchants) and the continued investments made in technology professionals.

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The cost of processing revenues within our HR & Payroll Segment increased $171,000, decreasing as a percentage of revenues from 55.7% in 2016 to 53.1% in 2017 principally due to the increase in HR related service revenues and the continued investment in technology, customer service professionals and new product management. The effect of this decrease in costs of processing revenues as a percentage of revenues was an increase in gross profit margin within our HR & Payroll Segment from 44.3% in the three months ended September 30, 2016 to 46.9% for the same period in 2017.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $4.8 million, or 26.1% of revenues, for the three months ended September 30, 2017 as compared to $4.5 million, or 29.7% of revenues, for the same period in 2016.

SG&A expenses within the Payment Services Segment decreased from $2.9 million or 24.5% of revenues in 2016, to $2.7 million, or 18.7% of revenues in 2017. The decrease was largely the result of decrease in legal fees related to resolved legacy matters and controlling spending while increasing revenues at each divisional site within the segment.

SG&A expenses within our HR & Payroll Segment increased from $1.4 million in 2016 to $1.5 million in 2017, an increase of approximately $69,000, or 5.0%, while decreasing as a percentage of revenues from 40.8% in 2016 to 37.5% in 2017. The increase in expense is largely due to an increase in payroll costs as additional sales and technology professionals were added to help develop new products and services and execute our HCM revenue growth strategies.

Additionally, we incurred corporate SG&A expenses of $642,000 for the three months ended September 30, 2017, including the benefit of $450,000 of management fees received from the Company’s operating divisions as compared to corporate SG&A expenses of $244,000 in the same period of 2016, including the benefit of $630,000 of management fees received from the operating divisions. Corporate SG&A expenses include, but are not limited to, the salaries of our executive officers, outside professional fees, acquisition costs, investor relations and other public company costs, and general corporate operating expenses. Corporate SG&A expenses for the three months ended September 30, 2017 included non-cash stock-based compensation expense of $170,000 as compared to $121,000 for the same period in 2016.

Depreciation and Amortization

Depreciation and amortization totaled $1.1 million and $1.0 million for the three months ended September 30, 2017 and 2016, respectively. The increase in depreciation and amortization expense in 2017 as compared to 2016 was primarily related to increased depreciation expense on 2016 and 2017 capital expenditures and the amortization of JetPay Payments, FL’s intangible assets acquired on June 2, 2016.

Interest Expense

Interest expense for the three months ended September 30, 2017 and 2016 was $281,000 and $301,000, respectively. The decrease in interest expense in 2017 was primarily related to notes issued to Merrick on July 2016, being paid in full in previous quarters, partially offset by interest payments on the new financings with Fifth Third Bank in June 2017 for software development and equipment purchases and the refinancing of certain debt in October 2016 at higher interest rates.

Income Taxes

The Company recorded income tax (benefit) expense of $56,000 and $96,000 for the three months ended September 30, 2017 and 2016, respectively. Income tax expense reflects the recording of state income taxes. The effective tax rates were approximately (10.8)% and (7.7)% for the three months ended September 30, 2017 and 2016, respectively. The effective rate differs from the federal statutory rate for each year, primarily due to state and local income taxes and changes to the valuation allowance.

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Results of Operations for the Nine Months Ended September 30, 2017 and 2016

The following tables represent a comparison of the results of our operations for the nine month periods ended September 30, 2017 and September 30, 2016 (in thousands):

	For the Nine Months Ended September 30, 2017
	Consolidated			General/ Corporate			HR & Payroll Services			Payment Services
Processing revenues	$	56,159		$	-		$	12,286		$	43,873
Cost of processing revenues		38,489			-			6,467			32,022
Gross profit		17,670			-			5,819			11,851
Selling, general, and administrative expenses		14,822			1,978			4,447			8,397
Settlement of a legal matter		747			747			-			-
Change in fair value of contingent consideration liability		(343	)		(343	)		-			-
Amortization of intangibles		2,623			-			778			1,845
Depreciation		746			3			197			546
Operating (loss) income		(925	)		(2,385	)		397			1,063
Interest expense		852			18			552			282
Amortization of debt discounts and non-cash interest costs		106			16			82			8
Other income		(14	)		-			-			(14	)
(Loss) income before taxes		(1,869	)		(2,419	)		(237	)		787
Income tax expense		199			-			8			191
Net (loss) income		(2,068	)		(2,419	)		(245	)		596
Accretion of convertible preferred stock		(7,533	)		(7,533	)		-			-
Net (loss) income applicable to common stockholders	$	(9,601	)	$	(9,952	)	$	(245	)	$	596

	For the Nine Months Ended September 30, 2016
	Consolidated			General/ Corporate			HR & Payroll Services			Payment Services
Processing revenues	$	39,069		$	46		$	11,037		$	27,986
Cost of processing revenues		25,905			79			5,764			20,062
Gross profit (loss)		13,164			(33	)		5,273			7,924
Selling, general, and administrative expenses		12,096			1,467			3,907			6,722
Settlement of legal matter		6,120			-			-			6,120
Change in fair value of contingent consideration liability		234			234			-			-
Amortization of intangibles		2,377			-			778			1,599
Depreciation		540			4			217			319
Operating (loss) income		(8,203	)		(1,738	)		371			(6,836	)
Interest expense		812			145			186			481
Amortization of debt discounts and non-cash interest costs		280			264			16			-
Other income		(6	)		-			(1	)		(5	)
(Loss) income before taxes		(9,289	)		(2,147	)		170			(7,312	)
Income tax (benefit) expense		(1,378	)		(1,602	)		34			190
Net (loss) income		(7,911	)		(545	)		136			(7,502	)
Accretion of convertible preferred stock		(4,424	)		(4,424	)		-			-
Net (loss) income applicable to common stockholders	$	(12,335	)	$	(4,969	)	$	136		$	(7,502	)

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Revenues

Revenues were $56.2 million and $39.1 million for the nine months ended September 30, 2017 and 2016, respectively. Overall revenues increased $17.1 million, or 43.7%, in 2017 as compared to 2016. Of the $56.2 million of revenues for the nine months ended September 30, 2017, $12.3 million, or 21.9%, was generated from our HR & Payroll Segment and $43.9 million, or 78.1%, from our Payment Services Segment. Of the $39.1 million of revenues for the nine months ended September 30, 2016, $11.1 million, or 28.0%, was generated from our HR & Payroll Segment and $28.0 million, or 72.0%, from our Payment Services Segment.

Payment Services Segment’s revenues increased $15.9 million, or 56.8%, for the nine months ended September 30, 2017 as compared to 2016. This increase was attributable to net revenue growth in our Government and Utilities, e-Commerce, and ISO/ISV sectors, including growth in our Discount for Cash product. JetPay Payments, FL, our Government and Utilities payment operation acquired in June 2016, provided $16.6 million of revenues in 2017 as compared to $6.2 million the same period in 2016.

HR & Payroll Segment’s revenues increased $1.2 million, or 11.3%, for the nine months ended September 30, 2017 as compared to the same period in 2016. This increase was attributable to net growth in volume of payroll and related payroll taxes processed in addition to revenues generated from HCM services introduced in 2015.

Cost of Processing Revenues

Cost of revenues were $38.5 million, or 68.5% of revenues, and $25.9 million, or 66.3% of revenues, for the nine months ended September 30, 2017 and 2016, respectively. Of the $38.5 million cost of revenues for the nine months ended September 30, 2017, $6.5 million, or 16.8%, related to our HR & Payroll Segment, and $32.0 million, or 83.2%, related to our Payment Services Segment. Of the $25.9 million cost of revenues for the nine months ended September 30, 2016, $5.8 million, or 22.0%, related to our HR & Payroll Segment and $20.1 million, or 78.0%, related to our Payment Services Segment.

The cost of processing revenues within the Payment Services Segment increased $12.0 million, or 59.6%, increasing from 71.7% of revenues in 2016 to 73.0% of revenues in 2017. The increase in cost of processing revenues was primarily related to the growth in our Payment Services Segment revenues, including the acquisition of JetPay Payments, FL. Cost of processing revenues was also impacted by increased card association and other direct processing costs with an increase in back-end settlement volumes. Overall gross profit margin as reported within our Payment Services Segment decreased slightly from 28.3% in the nine months ended September 30, 2016 to 27.0% for the same period in 2017 largely as a result the impact of lower margin JetPay Payments, FL revenues and the continued investments made in technology professionals.

The cost of processing revenues within the HR & Payroll Segment increased $703,000, or 12.2%, increasing slightly as a percentage of revenues from 52.2% in 2016 to 52.6% in 2017 principally due to the increase in HR related service revenues and the continued investment in technology, customer service professionals and new product management. The effect of this increase in costs of processing revenues as a percentage of revenues was a slight decrease in gross profit margin within our HR & Payroll Segment from 47.8% in the nine months ended September 30, 2016 to 47.4% for the same period in 2017.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $14.8 million, or 26.4% of revenues, for the nine months ended September 30, 2017 as compared to $12.1 million, or 31.0% of revenues, for the same period in 2016.

SG&A expenses within the Payment Services Segment increased from $6.7 million, or 24.0% of revenues in 2016, to $8.4 million, or 19.1% of revenues in 2017. This increase was largely the result of SG&A expenses related to JetPay Payments, FL of $2.7 million and the continued increase in sales staff and marketing costs to attract new business.

SG&A expenses within our HR & Payroll Segment increased from $3.9 million, or 35.4% of revenues in 2016 to $4.4 million, or 36.2% of revenues in 2017, an increase of approximately $540,000, or 13.8%, largely due to an increase in payroll costs as additional sales and technology professionals were added to help develop new products and services and execute our HCM revenue growth strategies.

Additionally, we incurred corporate SG&A expenses of $2.0 million for the nine months ended September 30, 2017, including $1.35 million of management fees received from the Company’s operating divisions, as compared to corporate SG&A expenses of $1.5 million in the same period of 2016, including $1.6 million of management fees received from the operating divisions. Corporate SG&A expenses include, but are not limited to, the salaries of our executive officers, outside professional fees, acquisition costs, investor relations and other public company costs, and general corporate operating expenses. Corporate SG&A expenses for the nine months ended September 30, 2017 included non-cash stock-based compensation expense of $531,000 as compared to $285,000 for the same period in 2016.

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Settlement of Legal Matters

Settlement of Legal Matter charge in 2017 of $747,000 reflects the Company’s loss on the settlement of the Ten Lords matter, see Note 11. Commitments and Contingencies. On July 3, 2017, the Company and JetPay, LLC successfully settled a lawsuit with Ten Lords and Providence Interactive Capital (the “Plaintiffs”) by entering into a Compromise Settlement Agreement and Mutual Release (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company paid to Plaintiffs the sum of $872,500 on July 3, 2017 and the parties released one another and their respective affiliates from all claims arising out of the matters related to the lawsuit. In connection with this settlement, the Company recorded a loss accrual of $747,000 at June 30, 2017 in addition to a previously recorded $125,500 loss reserve.

Settlement of Legal Matter charge in 2016 of $6.12 million reflects the Company’s loss based on the terms of the Merrick Settlement Agreement and the WLES Settlement Agreement. The loss includes: (i) a charge of $4.4 million related to the Company’s release of all claims to the $4.4 million held in reserve at Merrick; (ii) a charge of $1.4 million related to the Company’s issuance of the $3.85MM Note, less WLES’ agreement to transfer to Merrick the WLES Note (recorded at $2,036,511 at September 30, 2016 net of an unamortized discount of $294,858) and accrued interest on the WLES Note of $414,466; (iii) a charge of $50,000 representing the Company’s issuance of the $5.0MM Note, less the estimated value as of July 26, 2016 of the escrowed shares; and (iv) a charge for $300,000 representing the estimated value of the issuance of warrants to WLES on February 15, 2017 as described in the WLES Settlement Agreement.

Depreciation and Amortization

Depreciation and amortization totaled $3.4 million and $2.9 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in depreciation and amortization expense in 2017 as compared to 2016 was primarily related to increased depreciation expense on 2016 and 2017 capital expenditures and the amortization of JetPay Payments, FL’s intangible assets acquired on June 2, 2016.

Interest Expense

Interest expense for the nine months ended September 30, 2017 and 2016 was $852,000 and $812,000, respectively. The increase in interest expense in 2017 was primarily related to interest payments on the Fifth Third Bank term note issued on June 2, 2016 in connection with our acquisition of JetPay Payments, FL, notes issued to Merrick on July 26, 2016, and the refinancing of certain debt in October 2016 at higher interest rates.

Income Taxes

The Company recorded income tax (benefit) expense of $199,000 and $(1.38) million for the nine months ended September 30, 2017 and 2016, respectively. Income tax (benefit) expense reflects the recording of state income taxes. The effective tax rates were approximately (10.7)% and 14.8% for the nine months ended September 30, 2017 and 2016, respectively. The effective rate differs from the federal statutory rate for each year, primarily due to state and local income taxes and changes to the valuation allowance.

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Liquidity and Capital Resources

Cash and cash equivalents were $7.2 million at September 30, 2017, excluding $1.9 million of cash deposited into restricted cash accounts. The ratio of our total debt to total capitalization, which consists of total debt, convertible preferred stock, and stockholders’ equity, was 20% and 25% at September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, we had working capital, excluding funds held for clients and client funds obligations, of $667,000.

The Company expects to fund its operating cash needs for the next fifteen months, including debt service requirements, capital expenditures and possible future acquisitions, with cash flow from its operating activities, sales of equity securities, including the recent sale of preferred stock, and current and future borrowings. The Company believes that the investments made in its technology, infrastructure, and sales staff will help generate cash flows in the future sufficient to cover its working capital needs.

In the past, the Company has been successful in obtaining loans and selling its equity securities. To fund the Company’s current debt service needs, expand its technology platforms for new business initiatives, and pursue possible future acquisitions, the Company may need to raise additional capital through loans or additional sales of equity securities. The Company continues to investigate the capital markets for sources of funding, which could take the form of additional debt, the restructuring of our current debt, or additional equity financing. The Company cannot provide any assurance that it will be successful in securing new financing or restructuring its current debt or that it will secure such future financing with commercially acceptable terms. If the Company is unable to raise additional capital, it may need to delay certain technology capital improvements, limit its planned level of capital expenditures and future growth plans or dispose of operating assets to generate cash to sustain operations and fund ongoing capital investments.

As disclosed in Note 8. Redeemable Convertible Preferred Stock, from October 11, 2013 to August 9, 2016, we sold 99,666 shares of Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), to Flexpoint for an aggregate of $29.9 million, less certain costs. Additionally, on October 18, 2016, we sold 33,667 shares of Series A Preferred to Sundara for $10.1 million, less certain costs. In connection with the sale of shares of Series A Preferred to Sundara, we also entered into a Loan and Security Agreement with LHLJ, Inc., an affiliate of Sundara, for a term loan in the principal amount of $9.5 million, with $5.175 million of the proceeds used to simultaneously satisfy the remaining balances of a term loan and a revolving credit note payable to First National Bank of Pennsylvania (f/k/a Metro Bank) (“FNB”) (the “Prior JetPay HR & Payroll Services Credit Facility”). See Note 7. Long-Term debt, Note Payable and Capital Lease Obligations. Both Sundara and LHLJ are owned and controlled by Laurence L. Stone, who was appointed as a director of the Company by the holders of the Series A Preferred shares in October 18, 2016. These two transactions provided approximately $14.0 million of net working capital that we used and expect to use for general working capital needs, the payment of other debt instruments, and for future capital needs, including a portion of the cost of potential future acquisitions. Finally, from May 5, 2014 to April 13, 2017, we sold 9,000 shares of Series A-1 Convertible Preferred Stock, par value $0.001 per share (“Series A-1 Preferred”), to an affiliate of Wellington Capital Management, LLP (“Wellington”) for an aggregate of $2.7 million. Additionally, as disclosed in Note 9. Stockholders’ Equity, from December 22, 2015 to January 22, 2016, we sold to certain accredited investors, including Bipin C. Shah, Robert B. Palmer, and Jonathan M. Lubert, an aggregate of 517,037 shares of the Company’s common stock at a purchase price of $2.70 per share for aggregate consideration of $1,396,000, prior to issuance costs.

Capital expenditures, including equipment financed through capital leases, were $877,000 and $310,000 for the three months ended September 30, 2017 and 2016, respectively, and $2.2 million and $718,000 for the nine months ended September 30 2017, and 2016, respectively. We currently estimate capital expenditures, including equipment potentially financed through capital leases, for all of our ongoing operations, including the Payment Services Segment and HR & Payroll Services Segment, at approximately $800,000 to $1.2 million for the remainder of 2017, principally related to technology improvements and the implementation of major new customer contracts. Our capital requirements include working capital for daily operations, including expenditures to maintain and upgrade our technology platforms and to purchase point-of-sale equipment as required under certain customer contracts. Our operations currently generate sufficient cash flow to satisfy our current operating needs and our routine debt service requirements.

40

The Company may from time to time determine that additional investments are prudent to maintain and increase stockholder value. In addition to funding ongoing working capital needs, the Company’s cash requirements for the next fifteen months ending December 31, 2018 include, but are not limited to, principal and interest payments on long-term debt and capital lease obligations of approximately $4.8 million and estimated capital expenditures of $4.4 million, $2.3 million of which the Company expects to fund with existing available credit facilities. Additionally, there are 133,334 shares of the Company’s Series A Preferred and 9,000 shares of the Company’s Series A-1 Preferred outstanding, with an aggregate redemption value of $85.4 million. On October 11, 2013, the Company issued the initial tranche of 33,333 shares of Series A Preferred to Flexpoint for an aggregate value of $10.0 million. On or after October 11, 2018, the fifth anniversary of the initial shares issuance, the holders of the shares of Series A Preferred issued in the initial tranche have the right to require the Company to repurchase any or all of such shares of Series A Preferred at the contractual redemption price of $600 per share or up to approximately $20.0 million. In addition, should the holders of the shares of the Series A Preferred exercise their redemption rights as described above, the holders of the Series A-1 Preferred may also redeem a proportionate amount of their shares outstanding up to an aggregate value of approximately $1.35 million. While these possible redemptions are not mandatory, it is outside the control of the Company and there can be no assurance that the Series A Preferred stockholders will not exercise their redemption rights on or after October 11, 2018. The Company would explore alternative financing opportunities with its Series A Preferred stockholders should they exercise their redemption rights, including exploring alternative equity or debt investors, or pursuing the possible sale of operating assets to generate sufficient liquidity. The Company believes that certain of its assets have sufficient value to meet this possible liquidity need and accordingly does not believe the potential liquidation event raises substantial doubt about the Company’s ability to continue as a going concern.

Debt Capitalization and Other Financing Arrangements

At September 30, 2017, we had borrowings of approximately $15.7 million net of unamortized deferred financing costs of $310,000.

In connection with the closing of our acquisitions of JetPay Payments, TX and JetPay HR & Payroll Services, we entered into a Note and Indemnity Side Agreement. Pursuant to the Note and Indemnity Side Agreement, we agreed to issue the WLES Note in the original principal amount of $2,331,369. Interest accrued on amounts due under the WLES Note at a rate of 5% per annum. Under the terms of the WLES Settlement Agreement, WLES transferred the WLES Note to Merrick on July 26, 2016. See Note 11. Commitments and Contingencies.

JetPay Payments, PA, as borrower, and the Company, as guarantor, entered into a Loan and Security Agreement on November 7, 2014 with FNB (as amended, the “JetPay Payments, PA Credit Facility”) and obtained a term loan with a principal amount of $7.5 million. Amounts outstanding under the loan accrue interest at a rate of 5.25% per annum. The loan matures on November 6, 2021 and amortizes in equal monthly installments of $104,167. The principal balance of this term loan was $5.1 million at September 30, 2017. Additional principal payments may be required at the end of each fiscal year based on a free cash flow calculation set forth in the Loan and Security Agreement.

On June 2, 2016, in connection with the closing of the JetPay Payments, FL acquisition, JetPay Payments, FL and the Company entered into a credit agreement with Fifth Third Bank. In connection with the credit agreement, JetPay Payments, FL issued in favor of Fifth Third Bank a term note with a principal amount of $1,068,960 and a $500,000 revolving note to refinance certain credit arrangements of JetPay Payments, FL in place at another financial institution prior to the closing of the transaction. The term note matures on November 30, 2019 and bears interest at 4.00%. The revolving note as amended on June 22, 2017 (as described below), matures on June 2, 2018, and the bears interest at a rate of 2.00% plus the LIBOR Rate for the applicable interest period. The term note and the revolving note are secured by the assets of JetPay Payments, FL and guaranteed by JetPay. On March 23, 2016 and June 22, 2017, the Company entered into a Modification of Credit Agreement and Other Loan Documents that amended the definition of “fixed charge coverage ratio” to account for expected capital expenditures with respect to the Company’s “Magic Platform.” The credit agreement contains certain customary covenants, including a financial covenant related to JetPay Payments, FL’s fixed charge coverage ratio, which the Company was in compliance as of September 30, 2017.

On June 22, 2017, JetPay Payments, FL entered into another credit agreement (the “Credit Agreement”) with Fifth Third Bank, which provides a $1,600,000 Draw/Term Note to finance software integration costs, an Amended and Restated Revolving Promissory Note for $1,000,000 (increased from a previous revolving promissory note for $500,000), and a Second Modification of Credit Agreement. At September 30, 2017, $657,000 was outstanding against the $1.6 million Draw/Term Note.

The Draw/Term Note provides for a twelve (12) month draw period through June 22, 2018 (“the Conversion Date”), at which time the loan converts to a 36 month amortizing term loan, which matures on June 22, 2021. The Draw/Term Note bears interest at the applicable LIBOR Rate plus 3%. The Draw/Term Note is payable in monthly installments beginning on the Conversion Date and can be prepaid without penalty or premium at any time.

The $1,000,000 Amended and Restated Revolving Promissory Note renews, amends, replaces and supersedes the original $500,000 Revolving Promissory Note, extending maturity to June 1, 2018 and bears interest at a rate of 2.00% plus the LIBOR Rate for the Interest Period. The Amended and Restate Revolving Promissory Note is expected to be used to extend temporary credit to cover JetPay Payments, FL’s customers’ processing return items.

41

The Second Modification amends and restates the original term loan to JetPay Payments, FL dated June 2, 2016 in the original principal amount of $1,068,960 to incorporate certain terms in the new Credit Agreement, including incorporating revised debt covenants, financial reporting requirements, collateral requirements, modifications to parent guarantees, and representations and warranties of Borrower. Additionally, JetPay Payments, FL entered into a Master Equipment Lease Agreement and related Interim Lease Funding Schedule with the Lender to provide up to $1.5 million of lease financing for certain point-of-sale equipment related to certain JetPay Payments, FL customer contracts and other computer equipment. The Interim Lease Funding Schedule provides the details of the allowable equipment to finance and provides for an interim draw periods through June 30, 2018. Upon completion of an interim draw, the leases under Master Lease Agreement will have a term not exceeding 48 months at an interest rate of LIBOR Rate plus 3% until termed out on a schedule, at which time such leases will amortize and bear interest at a fixed rate set forth in the applicable schedule. At September 30, 2017, $131,000 was outstanding against the $1.5 million lease facility. The Term Notes, the Revolving Note and the Master Lease Agreement are guaranteed by JetPay Corporation pursuant to a guaranty dated June 22, 2017, by and between JetPay Corporation and Fifth Third Bank in respect of the Term Notes and Master Lease Agreement and the guaranty, dated June 22, 2017, by and between the JetPay Corporation and Lender in respect of the Revolving Note (collectively, the “Guaranty Agreements”). The Guaranty Agreement requires that the Company maintain a $2,000,000 minimum liquidity level while there outstanding amounts owed under the various credit arrangements.

On October 18, 2016, JetPay HR & Payroll Services and PTFS, as borrowers, entered into a Loan and Security Agreement (the “Loan Agreement”) with LHLJ, Inc., a Delaware corporation controlled by Laurence L. Stone, as lender, for a term loan in the principal amount of $9.5 million (the “LHLJ Debt Investment”). The underlying promissory note bears interest at 8%. The loan matures on October 18, 2021 and is payable in equal monthly installments of principal and interest of $128,677 with a final payment of $4.75 million at maturity. The obligations of the borrowers under the Loan Agreement are guaranteed by the Company and JetPay Payments, FL, and are secured by all of the assets of JetPay HR & Payroll Services, PTFS and JetPay Payments, FL, as well as a pledge by the Company of its ownership interests in JetPay HR & Payroll Services and PTFS. The Loan Agreement contains affirmative and negative covenants, including limitations on the incurrence of indebtedness, liens, transactions with affiliates and other customary restrictions for loans of this type and size. The borrowers are also subject to financial covenants relating to their debt coverage ratio and total leverage ratio during the term of the loan. The Company was in compliance with these covenants as of December 31, 2016. The principal balance of this term loan was $8.77 million at September 30, 2017.

A portion of the proceeds of the LHLJ Debt Investment was used to simultaneously satisfy the remaining balance of $4.175 million outstanding under the Prior JetPay HR & Payroll Services Credit Facility. In connection with the satisfaction of the Borrowers’ obligations under the Prior JetPay HR & Payroll Services Credit Facility, JetPay Payments, PA, JetPay HR & Payroll Services, the Company and FNB entered into an amendment to the JetPay Payments, PA Credit Facility to release JetPay HR & Payroll Services’ guaranty of the obligations of JetPay Payments, PA under the JetPay Payments, PA Credit Facility and to eliminate provisions relating to the cross-collateralization.

Our ongoing ability to comply with the debt covenants under our credit arrangements and to refinance our debt depends largely on the achievement of adequate levels of cash flow. If our future cash flows are less than expected or our debt service, including interest expense, increases more than expected, causing us to default on any of the loan covenants in the future, we will need to obtain amendments or waivers from the applicable lender. In the event that non-compliance with the debt covenants should occur in the future, we would pursue various alternatives in an attempt to successfully resolve the non-compliance, which might include, among other things, seeking additional debt covenant waivers or amendments or refinancing debt with other financial institutions. There can be no assurance that debt covenant waivers or amendments would be obtained, if needed, or that the debt could be refinanced with other financial institutions on favorable terms.

Additionally, in connection with the December 2012 $9.0 million term loan, the November 2014 $7.5 million term loan, and the May 2015 Revolving Note, all payable to FNB, we incurred $23,000, $76,000, and $40,000 of deferred financing costs, respectively. Finally, we incurred (i) $95,000 of deferred financing fees related to the issuance of the promissory notes and (ii) $16,600 of deferred financing fees related to JetPay Payments, FL’s term note and revolving note, each in favor of Fifth Third Bank, and $310,000 of deferred financing fees related to the LHLJ, Inc. Loan Agreement. Unamortized deferred financing costs were $310,000 at September 30, 2017.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements as of September 30, 2017 consisted of an outstanding letter of credit in the amount of $100,000, which represents collateral with respect to a front-end processing relationship with a credit card company.

42

Contractual Obligations

We are obligated under various operating leases, primarily for office space and certain equipment related to our operations. Certain of these leases contain purchase options, renewal provisions, and contingent rentals for our proportionate share of taxes, utilities, insurance, and annual cost of living increases.

The following are summaries of our contractual obligations and other commercial commitments at September 30, 2017, excluding fair value and conversion option debt discounts and the effect of the refinancing subsequent to September 30, 2017 (in thousands):

	Payments Due By Period
	Total		Less than One Year		One to Three Years		Three to Five Years		More than 5 years
Contractual obligations (1)
Long-term debt and capital lease obligations (1)	$	16,044	$	2,862	$	5,648	$	7,534	$	-
Minimum operating lease payments (2)		496		459		37		-		-
Total	$	16,540	$	3,321	$	5,685	$	7,534	$	-

	Amounts Expiring Per Period
	Total		Less than One Year		One to Three Years		Three to Five Years		More than 5 years
Other Commercial Commitments
Standby letters of credit (3)	$	100	$	100	$	-	$	-	$	-

(1) Related interest obligations have been excluded from this maturity schedule. Our interest payments for the next twelve-month period, based on current market rates, are expected to be approximately $1.0 million.

(2) Minimum operating lease payments excludes contractual obligation related to a lease entered into on October 20, 2017 for approximately 24,269 square feet of space to replace the current HR & Payroll Services’ Center Valley, PA facility. Contractual obligations related to this new lease are as follows for the years ending September 30: 2018 –$121,000; 2019 – $368,000; 2020 – $505,000; 2021 – $517,000; 2022 – $530,000; and $3.5 million thereafter.

(3) Outstanding letter of credit of $100,000, which represents collateral for a front-end processing relationship with a credit card company.

Cash Flow

Operating Activities. Net cash provided by operating activities totaled $2.37 million for the nine months ended September 30, 2017. Cash used in operating activities in this period was primarily due to a net loss of $2.1 million, an increase in prepaid expenses and other current assets of $576,000, an increase in deferred revenue of $206,000, and a change in fair value of contingent consideration liability of $343,000, all offset by non-cash depreciation and amortization relating to fixed assets, intangible assets, non-cash interest costs and loss on the disposal of fixed assets of $3.6 million, stock based compensation expenses of $565,000, common stock issued as compensation of $97,000, a decrease in accounts receivable of $640,000, a net decrease in settlement processing assets and liabilities of $326,000, and an increase of $216,000 in restricted cash and other assets.

Net cash provided by operating activities totaled $1.5 million for the nine months ended September 30, 2016. Cash used in operating activities in this period was primarily due to a net loss of $7.9 million, an increase in prepaid expenses and other assets of $276,000, an increase in deferred income tax liability of $1.6 million, and a decrease in deferred revenue of $259,000, all offset by non-cash depreciation and amortization relating to fixed assets, intangible assets, deferred financing fees and debt discounts and conversion options of $3.2 million, a change in fair value of contingent consideration liability of $234,000, stock based compensation expenses of $285,000, recognition of a note payable in connection with the settlement of a legal matter of $1.85 million, a decrease in other assets of $4.1 million, a decrease in accounts receivable of $1.1 million, a net decrease in settlement processing assets and liabilities of $555,000, and an increase in accounts payable, accrued expenses, and other liabilities of $74,000.

43

Investing Activities. Cash provided by investing activities totaled $2.6 million for the nine months ended September 30, 2017, including a decrease of $4.2 million in restricted cash and equivalents held to satisfy client obligations, partially offset by the purchases of property and equipment of $1.6 million.

Cash provided by investing activities totaled $4.0 million for the nine months ended September 30, 2016, including a decrease of $4.4 million in restricted cash and equivalents held to satisfy client obligations and cash acquired in the JetPay Payments, FL acquisition of $519,000, all partially offset by the purchase of property and equipment of $615,000 and an investment in acquired JetPay Payments, FL technology of $351,000.

Financing Activities. Cash used in financing activities totaled $10.3 million for the nine months ended September 30, 2017, which included a decrease of $4.1 million in client fund obligations, $7.4 million of cash used for payments on long-term debt, and payment of deferred and contingent acquisition consideration of $314,000, partially offset by proceeds from notes payable of $677,000, and issuance of common stock and sale of preferred stock of $1.0 million.

Cash used in financing activities totaled $5.6 million for the nine months ended September 30, 2016, which included proceeds from issuance of promissory notes of $2.0 million, proceeds from the sale of preferred stock, net of issuance costs, of $2.5 million, proceeds from the issuance of common stock under the Employee Stock Purchase Plan of $47,000, and proceeds from issuance of common stock, net of issuance costs, of $64,000, all offset by a decrease of $4.4 million in client fund obligations, $2.4 million of cash used for routine payments on long-term debt, an increase in restricted cash reserves of $1.9 million, payment of deferred and contingent acquisition consideration of $1.4 million, and payment of deferred financing fees associated with new borrowings of $112,000.

Seasonality

The Payment Services segment has generally experienced increased revenues during the first and second quarters due to seasonal volumes of certain merchants, including vacation, travel, and government and utility clients and their billing cycles, with the government and utilities also providing some seasonality with increased revenues in the fourth quarter.

HR & Payroll Services Segment’s revenues are recognized in the period services are rendered and earned. The HR & Payroll Services Segment’s experiences increased revenues during the first and fourth quarters due to the processing of additional year-end tax filing requirements. Accordingly, revenues and earnings are greater in the first and fourth quarter than in the second and third quarters.

Effects of Inflation

The Payment Services Segment’s and HR & Payroll Services Segment’s monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation. Non-monetary assets, consisting primarily of property and equipment, are not affected by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and other operating expenses, which may not be readily recoverable in the price of services offered by us. The rate of inflation can also affect our revenues by affecting our client’s payroll processing volumes and our merchant charge volume and corresponding changes to processing revenues. While these can be positive or negative, since a portion of Payment Services Segment’s revenues are derived as a percentage of dollar volume processed, Payment Services Segment’s revenues will generally rise when inflation rises. Additionally, the HR & Payroll Services Segment’s revenues include the interest earned on the funds held for clients’ investment trust account balance.  Trust fund earnings can fluctuate based on the amount held in the trust account as well as fluctuations in interest rates.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

We are a smaller reporting company. As a result, we are not required to report the information required by Item 305 of Regulation S-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, we completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s CEO and CFO as appropriate to allow timely decisions regarding required disclosure, were effective as of September 30, 2017 to provide reasonable assurance that information that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in Internal Control

There has been no change in our internal controls over financial reporting as defined in Rule 13a-15(f) under the Exchange Act identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our quarter ended September 30, 2017 that are reasonably likely to materially affect our internal control over financial reporting.

44

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11. Commitments and Contingencies to our consolidated financial statements in Part I, Item 1 of this report.

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits:

10.1**	Lease, dated October 20, 2017, by and between Brookwood Philadelphia I, LLC, Brookwood Philadelphia II, LLC and JetPay HR & Payroll Services, Inc.
31.1**	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
	** Filed herewith

46

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

JetPay Corporation
By:	/s/ Diane (Vogt) Faro
Diane (Vogt) Faro, Chief Executive Officer
(Principal Executive Officer)
By:	/s/ Gregory M. Krzemien
Gregory M. Krzemien, Chief Financial Officer
and Chief Accounting Officer
(Principal Financial Officer)

DATE: November 9, 2017

47

EXHIBIT INDEX

Exhibit No.	Description
10.1**	Lease, dated October 20, 2017, by and between Brookwood Philadelphia I, LLC, Brookwood Philadelphia II, LLC and JetPay HR & Payroll Services, Inc.
31.1**	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
	** Filed herewith

48

EX-10.1

Exhibit 10.1

Execution Version

LEASE

BY AND BETWEEN

BROOKWOOD PHILADELPHIA I, LLC, a Delaware limited liability company, and

BROOKWOOD PHILADELPHIA II, LLC, a Delaware limited liability company,

as tenants in common

(“Landlord”)

and

JETPAY HR & PAYROLL SERVICES, INC.,

(“Tenant”)

TABLE OF CONTENTS

		Page
1.	TERMS	1
2.	THE PREMISES	3
3.	TERM	4
4.	CONDITION OF THE PREMISES	4
5.	MONTHLY RENT	4
6.	TAXES	5
7.	OPERATING EXPENSES.	5
8.	RECONCILIATION	6
9.	INSURANCE.	7
10.	WAIVER OF SUBROGATION	9
11.	SECURITY DEPOSIT	9
12.	USE	10
13.	MAINTENANCE; SERVICES.	10
14.	SUBLEASE; ASSIGNMENT	11
15.	INDEMNITY; NON-LIABILITY OF LANDLORD	12
16.	UTILITIES	13
17.	HOLDING OVER	14
18.	NO RENT DEDUCTION OR SET OFF	14
19.	CASUALTY	14
20.	SUBORDINATION; ESTOPPEL LETTERS	15
21.	ALTERATIONS; RESTORATION.	17
22.	DEFAULT; REMEDIES.	18
23.	NOTICES	22
24.	EMINENT DOMAIN	22
25.	QUIET ENJOYMENT	22
26.	RULES AND REGULATIONS	23
27.	ENVIRONMENTAL.	23
28.	FINANCIAL STATEMENTS	24
29.	BROKERS	24
30.	MISCELLANEOUS.	24

- i -

31.	PARKING	26
32.	SIGNAGE	26
33.	INTENTIONALLY OMITTED	26
34.	CERTAIN RIGHTS RESERVED TO LANDLORD	27
35.	LEASE COMMENCEMENT/ACCEPTANCE OF PREMISES	27
36.	WAIVER OF RIGHT TO JURY TRIAL	27
37.	RECORDING	27

- ii -

1.          TERMS. Each reference in this Lease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section 1.

Date of this Lease:	October __, 2017
Name of Tenant:	JetPay HR & Payroll Services, Inc., a Delaware corporation
Notice Address of Tenant:	The Premises
Name of Landlord:	Brookwood Philadelphia I, LLC, and Brookwood Philadelphia II, LLC, as tenants in common
Notice Address of Landlord:	Brookwood Philadelphia I, LLC, and Brookwood Philadelphia II, LLC c/o Brookwood Financial Partners, LLC 138 Conant Street Beverly, Massachusetts 01915 Attention: Kurt Zernich, Director of Asset Management
Landlord’s Remittance Address:	Brookwood Philadelphia II, LLC PO Box 780219 Philadelphia, PA 19178-0219 via overnight delivery to: Brookwood Philadelphia II LLC Lockbox 780219 Wells Fargo Bank, MAC Y1372-045 401 Market Street Philadelphia, PA 19106
Building:	The building located at 7450 Tilghman Street, Allentown, Pennsylvania
Property:	The Building and the real property on which the Building is located and any other buildings and improvements located thereon.
Premises:	Approximately 24,269 rentable square feet of space in the Building commonly known as Suite 170, as approximately shown by the floor plan attached hereto as Exhibit A.

1

Permitted Use:	General office, and operation of a business providing payroll related services to customers, and no other use or purpose.
Term:	The period of time beginning on the Commencement Date and ending at 11:59 P.M. on the Expiration Date.
Commencement Date:	The later to occur of (i) February 26, 2018 and (ii) Substantial Completion of the Work (as said terms are defined in the Work Letter, Exhibit E).  Landlord and Tenant shall confirm the Commencement Date pursuant to Section 35.
Expiration Date:	That certain date which is the last day of the one hundred twenty eighth (128th) complete calendar month following the Commencement Date.
Tenant’s Percentage:	23.91%, being the ratio of rentable square footage of the Premises to the total rentable square footage of the Building.  Landlord represents to Tenant that the total rentable square footage of the Building is approximately 101,520.
Base Taxes:	The Taxes for the calendar year 2018, without reduction for any atypical one-time abatement.
Tax Excess:	Tenant’s Percentage of the amount by which Taxes for any calendar year during the Term exceed Base Taxes.
Base Operating Expenses:	The Operating Expenses for the calendar year 2018.
Operating Expenses Excess:	Tenant’s Percentage of the amount by which Operating Expenses exceed Base Operating Expenses for any calendar year during the Term.
Security Deposit:	$40,448.33
Exhibits:	Exhibit A          The Premises Exhibit B           Rules and Regulations Exhibit C           Commencement Letter Exhibit D          Additional Stipulations Exhibit E           Work Letter  Exhibit F           Parking Plans and Location of Generator All of the Exhibits listed above are incorporated into and made part of this Lease.

2

Rent:	Base Rent and all Additional Rent.
Additional Rent:	All amounts required to be paid by Tenant to Landlord pursuant to this Lease other than Base Rent, including, without limitation, Operating Expenses and Taxes.
Base Rent:

Months of Term	Base Rent (per annum)		Base Rent (per month)		Base Rent (per rentable square foot, per annum)
Commencement Date-12	$	485,380.00	$	40,448.33	$	20.00
13-24	$	497,514.50	$	41,459.54	$	20.50
25-36	$	509,952.36	$	42,496.03	$	21.01
37-48	$	522,701.17	$	43,558.43	$	21.54
49-60	$	535,768.70	$	44,647.39	$	22.08
61-72	$	549,162.92	$	45,763.58	$	22.63
73-84	$	562,891.99	$	46,907.67	$	23.19
85-96	$	576,964.29	$	48,080.36	$	23.77
97-108	$	591,388.40	$	49,282.37	$	24.37
109-120	$	606,173.11	$	50,514.43	$	24.98
121-128 (plus any additional days necessary for the Term to expire on the Expiration Date)	$	621,327.44	$	51,777.29	$	25.60

*Plus the Utility Charge pursuant to Section 16 below.

Notwithstanding the foregoing, Base Rent shall be abated for the first (1^st) through the fourth (4^th) months of the Term and the thirteenth (13^th) through the fifteenth (15^th) months of the Term (collectively, the “Base Rent Abatement Period”). In no event shall the Base Rent Abatement Period be deemed to reduce or eliminate Tenant’s obligation to pay Additional Rent or any other amounts due hereunder other than Base Rent. If Tenant defaults under this Lease beyond any applicable notice and cure period, then Tenant’s right to abate the Base Rent shall immediately terminate and be of no further force and effect and any and all Base Rent which had been abated prior to Tenant’s default shall immediately become due and payable.

2.          THE PREMISES. Landlord leases to Tenant, and Tenant leases from Landlord, upon and subject to the terms and conditions of this Lease, the Premises. The Premises are leased with the right of Tenant to use for its customers, employees and visitors, in common with other parties entitled thereto, such common areas and facilities as Landlord may from time to time designate and provide.

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3.          TERM. The Premises are leased for the Term. If for any reason Landlord is unable to deliver possession of the Premises to Tenant on or prior to the Commencement Date, then Landlord shall not be liable to Tenant for any resultant loss or damage and this Lease shall not be affected except that the Commencement Date shall be extended by one (1) day for each day of such delay.

4.          CONDITION OF THE PREMISES. The Premises are leased in an “as is” and “where is” condition without any warranty of fitness for use or occupation express or implied, it being agreed that Tenant has had an opportunity to examine the condition of the Premises, that Landlord has made no representations or warranties of any kind with respect to such condition, and that Landlord has no obligation to do or approve any work or make or approve any improvements to or with respect to the Premises to prepare the same for Tenant’s occupancy, except in all respects for the Landlord’s Work described in the Work Letter attached as Exhibit E.

5.          MONTHLY RENT. Commencing on the Commencement Date, Base Rent shall be paid monthly in advance on or before the first day of each calendar month in accordance with the schedule set forth in Section 1. The Base Rent shall not be adjusted or modified if the actual rentable square footage of the Premises varies from the rentable square footage set forth in Section 1. If the Commencement Date shall be on any day other than the first day of a calendar month, Base Rent for any partial month shall be prorated based on the number of days in that month. Unless otherwise provided herein, commencing on the Commencement Date, Additional Rent shall be paid monthly in advance on or before the first day of each calendar month. If the Commencement Date shall be on any day other than the first day of a calendar month, Additional Rent for any partial month shall be prorated based on the number of days in that month. Rent shall be paid to Landlord, without notice or demand, and without deduction or offset, in lawful money of the United States of America, at Landlord’s Remittance Address as set forth in Section 1 or to such other address as Landlord may from time to time designate in writing. Tenant acknowledges that the late payment of Rent or other sums due hereunder shall cause Landlord to incur costs not contemplated by this Lease, the exact amount of which shall be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Property. Accordingly, if any installment of Rent or any other sums due from Tenant shall not be received by Landlord within five (5) business days of when due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount. In addition, any amount due to Landlord, if not paid when due, shall bear interest from the date due until paid at the lesser of: (i) the Prime Rate (as hereinafter defined) plus five percent (5%) per annum, or (ii) the highest rate permitted by law (the “Default Rate”). The term “Prime Rate” shall mean the Prime Rate as published in The Wall Street Journal from time to time. The parties agree that such late charges represent a fair and reasonable estimate of the costs Landlord shall incur by reason of late payment by Tenant. The acceptance of such late charges by Landlord shall in no event constitute a waiver of Tenant’s default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies granted hereunder. Notwithstanding anything to the contrary in this Lease, Tenant shall pay the first full monthly installment of Rent due hereunder (i.e. Rent for the first complete month of the Term, or, if applicable, for the first complete month following any initial abatement period) simultaneously with Tenant’s execution and delivery of this Lease.

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6.          TAXES. Tenant shall pay monthly commencing in January 1, 2019, as Additional Rent, one-twelfth (1/12) of the Tax Excess based on estimates provided by Landlord from time to time and subject to reconciliation as provided in Section 8 below. No credit or payment shall be due to Tenant in the event Taxes for any year are less than Base Taxes. “Taxes” means all taxes, assessments and fees levied upon the Property by any governmental entity based upon the ownership, leasing, renting or operation of the Property. Landlord may allocate Taxes incurred with respect to multiple buildings on the Property among such buildings, in a reasonable, fair and consistent manner. Taxes shall not include any federal, state or local net income, capital stock, succession, transfer, replacement, gift, estate or inheritance taxes; provided, however, if at any time during the Term, a tax or excise on income is levied or assessed by any governmental entity in lieu of or as a substitute for, in whole or in part, real estate taxes or other ad valorem taxes, such tax shall constitute and be included in Taxes to the extent, and only to the extent, that it is a substitute for real estate taxes or other ad valorem taxes. In addition to the foregoing, Tenant shall pay Landlord, as Additional Rent, for any use, rent or sales tax, service tax, value added tax, franchise tax or any other tax on Rent however designated as well as for any taxes which are reasonably attributable to the cost or value of Tenant’s equipment, furniture, fixtures and other personal property located in the Premises or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant. All expenses, including attorneys’ fees and disbursements, experts’ and other witnesses’ fees, incurred in contesting the validity or amount of any Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes for the year in which the expenses are incurred.

7.          OPERATING EXPENSES. Tenant shall pay monthly, as Additional Rent, one-twelfth (1/12) of the Operating Expenses Excess based on estimates provided by Landlord from time to time and subject to reconciliation as provided in Section 8 below. No credit or payment shall be due to Tenant in the event Operating Expenses for any year are less than Base Operating Expenses. “Operating Expenses” means and includes all legitimate bona fide expenses, costs, fees and disbursements paid or incurred by or on behalf of Landlord for managing, operating, maintaining, improving, servicing or repairing the Building or Property and all associated plumbing, heating, ventilation, air conditioning, lighting, electrical, mechanical and other systems, including, without limitation, costs of: performing the Landlord’s obligations described in Section 13; janitorial services, the repair, maintenance, repaving and re-striping of any parking and dock areas; providing any services or amenities such as conference rooms, parking garage, or cafeteria, as applicable; exterior maintenance, repair and repainting; landscaping; snow removal; utilities (unless otherwise provided in Section 16); a management fee and administration costs of five percent (5%) of gross revenue (Base Rent and Additional Rent from the Building); supplies and sundries; sales or use taxes on supplies or services; charges or assessments under any easement, license, declaration, restrictive covenant or association; legal and accounting expenses; insurance premiums for casualty insurance and liability insurance carried on the Building by Landlord; and compensation and all fringe benefits, worker’s compensation insurance premiums and payroll taxes paid to, for or with respect to all persons directly engaged in the operation, administration maintenance and repair of the Property, excluding any salaries and compensation to persons that own any equity in the Landlord, or such persons’ relatives. Landlord may allocate any item of Operating Expenses that benefits multiple buildings on the Property among such buildings, , in a reasonable, fair and consistent manner.. Landlord may allocate any item of Operating Expenses among different portions or occupants of the Building or Property based on use or other considerations as determined by Landlord in Landlord’s discretion, , in a reasonable, fair and consistent manner.. If there is less than ninety five percent (95%) occupancy during any period, Landlord will adjust those Operating Expenses that are affected by variations in occupancy levels to the amount of Operating Expenses that would have been incurred had there been ninety five percent (95%) occupancy.

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Notwithstanding the foregoing, Operating Expenses shall not include costs of alterations to the premises of other tenants of the Property, depreciation charges, interest and principal payments on mortgages, ground rental payments and real estate brokerage and leasing commissions; costs incurred for Landlord’s general overhead and any other expenses not directly attributable to the operation and management of the Building or the Property; costs of selling or financing any of Landlord’s interest in the Property; costs incurred by Landlord for the repair of damage to the Property to the extent that Landlord is reimbursed by insurance proceeds; and the costs of services and utilities separately chargeable to individual tenants of the Building. The costs of capital improvements shall not be included in Operating Expenses except for those capital improvements which are intended to reduce Operating Expenses, which are for replacements (as opposed to additions or new improvements) on non-structural items located in the common areas required to keep such areas in good condition, or which are required under any governmental laws, regulations, or ordinances that were not applicable to the Building as of the Date of this Lease, which, together with any financing charges incurred in connection therewith, shall be amortized over their useful life in accordance with generally accepted accounting principles.

Notwithstanding the foregoing, the maximum increase in the amount of Controllable Operating Expenses (defined hereinbelow) that may be included in calculating such Operating Expenses for each calendar year after 2018 during the Term shall be limited to 5% per calendar year on a cumulative basis. For the purposes hereof, Controllable Operating Expenses means all Operating Expenses other than real estate taxes, insurance premiums for casualty insurance and liability insurance carried on the Building by Landlord in reasonable amounts of coverage, and snow removal, janitorial supplies, and water and sewer.

8.          RECONCILIATION. Any failure by Landlord to deliver any estimate or statement of Additional Rent required under this Lease shall not operate as a waiver of Landlord’s right to collect all or any portion of Additional Rent due hereunder. On an annual basis, Landlord shall provide Tenant with a statement of all actual Operating Expenses for the preceding year. If Tenant has made estimated payments of Operating Expenses or Taxes in excess of the actual amount due, Landlord shall credit Tenant with any overpayment against the next Rent otherwise due, provided, however, if such overpayment occurs within the final year of the Term, then Landlord shall within sixty (60) days reimburse Tenant in the amount of such overpayment in cash as part of Landlord’s reconciliation procedure at the end of the Term. If the actual amount due exceeds the estimated payments made by Tenant during the preceding year, Tenant shall pay the difference to Landlord within fifteen (15) business days and such obligation shall survive the expiration or earlier termination of this Lease.

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Tenant shall have the right during the Term, by providing written notice to Landlord (the “Review Notice”) within sixty (60) days after receiving Landlord’s statement of actual Operating Expenses, to review Landlord’s records relating to Operating Expenses for such year. Within a reasonable period of time after receipt of a timely Review Notice, Landlord shall make such records available for Tenant’s review at either Landlord’s home office or at the office of the property manager for the Building. If Tenant fails to give Landlord written notice stating in reasonable detail any objection to Landlord’s statement of actual Operating Expenses within thirty (30) days after such records are made available to Tenant for review then Tenant shall be deemed to have approved Landlord’s statement of Operating Expenses for such year and Tenant shall have no further right to object or contest such statement. Upon Landlord’s receipt of a timely objection notice from Tenant, Landlord and Tenant shall work together in good faith to resolve the discrepancy between Landlord’s statement and Tenant’s review. If Landlord and Tenant determine that Operating Expenses for the year in question are less than reported in Landlord’s statement, Landlord shall provide Tenant with a credit against future Rent in the amount of any overpayment by Tenant. Likewise, if Landlord and Tenant determine that Operating Expenses for the year in question are greater than reported in Landlord’s statement, Tenant shall forthwith pay to Landlord the amount of underpayment by Tenant. Any information obtained by Tenant pursuant to the provisions of this section shall be treated as confidential and Landlord may require that Tenant execute a confidentiality agreement as a condition of Tenant’s review. If Tenant retains an agent to review Landlord’s books and records for any year, such agent must (i) be a CPA firm (ii) not be compensated on a contingency basis, and (iii) execute a confidentiality agreement with respect to such review. Tenant shall be solely responsible for all costs incurred by Tenant in connection with such review. Notwithstanding anything herein to the contrary, Tenant shall not be permitted to review Landlord’s records or to dispute any statement of Operating Expenses if Tenant is in default or if Tenant has not first paid to Landlord the amount due as shown on Landlord’s statement of actual Operating Expenses.

9.          INSURANCE.

(A)      Tenant shall maintain the following insurance in force from the date upon which Tenant first enters the Premises and throughout the Term and thereafter for so long as Tenant is in occupancy of any part of the Premises:

(i)         Commercial General Liability insurance with limits of at least $1,000,000 per occurrence, $2,000,000 general aggregate, and, if the Tenant manufacturers or produces a product, $2,000,000 products completed operations aggregate or such larger amounts as Landlord may reasonably require from time to time, covering bodily injury and property damage arising out of the use of the Premises, as well as products/completed operations, blanket contractual liability, personal injury and advertising liability;

(ii)        Worker’s Compensation insurance as required by the state in which the Premises is located covering occupational injuries or disease to all employees of Tenant and to any contractors, subcontractors or other agents used by Tenant for work or other activities on or about the Premises. Such policy shall include Employer’s Liability limits of at least $500,000 each accident, $500,000 each employee, and $500,000 disease;

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(iii)       Business Automobile Liability insurance for all owned (Symbol 1), non-owned (Symbol 9) hired, rented and/or borrowed (Symbol 8) vehicles used by the Tenant, its employees or agents. Such policy shall include a combined single limit of liability of at least $1,000,000 per claim for bodily injury and property damage and shall provide that employees are insureds;

(iv)       Excess or Umbrella Liability insurance with a limit of at least $5,000,000 providing additional limits of insurance over the primary per occurrence and aggregate limits of the Commercial General Liability (including bodily injury, property damage, products/completed operations, personal/advertising injury and blanket contractual liability), Employer’s Liability, and Business Auto Liability insurance required in (i), (ii), and (iii) above; and

(v)        Property insurance covering “all risk” of physical damage to Tenant’s personal property and any property in the care, custody, and control of the Tenant. In addition this policy shall cover any direct or indirect physical damage to all alterations, additions, improvements (including carpeting, floor coverings, paneling, decorations, fixtures and any improvements or betterments to the Premises made by Tenant or by Landlord at Tenant’s request or for Tenant’s benefit) situated in or about the Premises. Such coverage shall be for the full replacement value of the covered property.

(B)        Tenant’s Commercial General Liability, and Excess Liability/Umbrella Liability policies shall name Landlord, Landlord’s managing agent, and Landlord’s mortgagee as Additional Insureds and shall be primary insurance as to any insurance carried by the parties designated as Additional Insureds. All policies purchased and maintained by Tenant to satisfy the requirements in this Lease must be purchased from an insurance company with a minimum rating of “A- X” or its equivalent from one of the major rating agencies (AM Best, Moodys, Standard & Poors, Fitch) that is admitted or eligible to do business in the state where the Premises is located.

(C)        Tenant shall provide Landlord with a certificate of insurance for each policy simultaneously with the delivery of an executed counterpart of this Lease and prior to each renewal of such insurance. Such certificates of insurance shall be on an ACORD Form 27 or ISO Form 2026 or their equivalent, shall certify that such policy has been or shall be issued and that it provides the coverage and limits required above, and shall provide that the insurance shall not be canceled or materially changed unless thirty (30) days prior written notice shall be given to Landlord. In addition to providing the certificates of insurance required herein, Tenant shall also promptly furnish any additional information, including complete copies of Tenant’s insurance policies, as Landlord may request from time to time pertaining to Tenant’s insurance coverage. Tenant shall notify Landlord in writing at least sixty (60) days in advance if Tenant intends to or receives a notice that its insurance company intends to cancel or non-renew such insurance for any reason, or if the required coverage or limits are to be materially changed from the initial requirements in this Lease. In the event that the applicable statutory time period is less than sixty (60) days, then Tenant shall notify Landlord within three (3) business days of receipt of any cancellation or non-renew notice. In the event that Tenant fails to obtain or maintain the insurance required above or fails to provide the Certificates of Insurance required, Landlord may, at its option, obtain such insurance on behalf of Tenant. Tenant shall pay, as Additional Rent upon demand, the reasonable cost of such insurance plus a twenty-five percent (25%) surcharge. Landlord’s failure to obtain such coverage on behalf of Tenant shall not limit Tenant’s liability in the event of an uncovered loss.

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(D)       Landlord shall carry or cause to be carried such insurance in amounts and with deductibles as a reasonably prudent landlord would purchase and maintain with respect to the Property. Tenant shall pay Tenant’s Percentage of Landlord’s insurance premiums (“Insurance Premiums”) during the Term of the Lease as a part of Operating Expenses. Tenant shall not do or permit to be done anything which shall contravene, invalidate, or increase the cost of the Landlord’s insurance and shall comply with all rules, orders, regulations, requirements and recommendations of Landlord or its insurance companies relating to or affecting the condition, use, or occupancy of the Premises. If Tenant does conduct any activity within or about the Premises that results in an increase to the cost of Landlord’s insurance Tenant shall reimburse Landlord for the entire amount of such additional premiums or surcharges on demand.

10.       WAIVER OF SUBROGATION. Notwithstanding any other language of this Lease to the contrary, Landlord and Tenant each waive their respective rights to recover from the other for any and all loss of or damage to their respective property if such loss or damage is covered, or required by this Lease to be covered, by insurance. Tenant shall obtain an endorsement acknowledging such waiver from its insurance company(s) evidencing compliance with this section.

11.       SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit with Landlord the amount of the Security Deposit specified in Section 1 of this Lease. Provided that Tenant has paid all amounts due and has otherwise performed all obligations hereunder, the Security Deposit shall be returned to Tenant without interest within sixty (60) days of the expiration of the Term, further provided that Landlord may deduct from the Security Deposit prior to returning it any amounts owed by Tenant to Landlord. If Tenant defaults under any provision of this Lease, Landlord may, but shall not be obligated to, apply all or any part of the Security Deposit to cure the default. In the event Landlord elects to apply the Security Deposit as provided for above, Tenant shall, within five (5) business days after Landlord’s demand, restore the Security Deposit to the original amount. Furthermore, if Tenant defaults under this Lease more than two (2) times during any twelve (12) month period, irrespective of whether such default is cured, then, without limiting Landlord’s other rights and remedies, Landlord may, in Landlord’s sole discretion, modify the amount of the Security Deposit. Within ten (10) days after notice of such modification, Tenant shall submit to Landlord the required additional sums and Tenant’s failure to do so shall constitute an Event of Default without further notice or right to cure, and Landlord shall have the right to exercise any remedy provided for in this Lease. Landlord may, at its discretion, commingle the Security Deposit with its other funds. Upon any sale or other conveyance of the Building, Landlord shall transfer the Security Deposit (or any amount of the Security Deposit remaining) to a successor owner, and Tenant agrees to look solely to the successor owner for repayment of the same, if it was transferred. The Security Deposit shall not operate as a limitation on any recovery to which Landlord may be entitled.

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12.       USE. The Premises shall be used for the Permitted Use and for no other purposes whatsoever. Tenant shall not do or permit to be done in or about the Premises, Building or Property anything which is prohibited by any ordinance, order, rule, regulation, certificate of occupancy, or other governmental requirement, now in force or which may hereafter be enacted, including, without limitation, the Americans with Disabilities Act of 1990, as amended (collectively, “Applicable Law”). Tenant shall comply with all Applicable Law in its use of the Premises and common areas of the Property. Tenant shall use and cause all contractors, agents, employees, invitees and visitors of Tenant to use the Premises and any common area of the Property in such a manner as to prevent waste, nuisance and any disruption of other occupants. Tenant shall not place a load upon any floor in the Premises exceeding the floor load per square foot of area which such floor was designed to carry or which is allowed by law. Tenant shall, at Tenant’s sole cost and expense, make any changes necessary to bring the Premises into compliance with any Applicable Law. The judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any Applicable Law in the use or occupancy of the Premises, Building or Property shall be conclusive of that fact as between Landlord and Tenant.

13.       MAINTENANCE; SERVICES. Excepting only those obligations for which Landlord is expressly responsible pursuant to this section, Tenant will, throughout the Term and at its sole cost, keep and maintain the Premises and all fixtures and equipment located therein, including, without limitation, carpeting, wall-covering, doors, plumbing and other fixtures, and any alterations performed for the benefit of the Premises, clean safe and in good working order, condition and repair and make all necessary repairs and replacements thereto, including, without limitation, replacing all interior broken glass with glass of the same size and quality as that broken and repairing or replacing all systems or portions of systems exclusively serving the Premises including, without limitation, electrical, mechanical, plumbing and heating, ventilating and air conditioning systems. All repairs and replacements required of Tenant in connection herewith shall be of a quality and class at least equal to the minimum building standards established by the then applicable building code requirements in Allentown, Pennsylvania and shall be done in a good and workmanlike manner in compliance with all applicable laws and the terms and conditions of this Lease. If Tenant fails to consistently maintain the Premises in compliance with the terms hereof, Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required and Tenant shall reimburse Landlord for the cost thereof as Additional Rent upon demand. If Tenant uses heat generating machines or equipment in the Premises that materially affect the temperature otherwise maintained by the heating, ventilating and air conditioning system, Landlord reserves the right to install supplementary units for the Premises and the cost of supplementary units, if installed by Landlord, including the cost of installation, operation and maintenance, shall be paid by Tenant to Landlord as Additional Rent upon demand. Should Tenant require any additional service not provided by Landlord pursuant to this Lease, including any services furnished outside the Building’s normal business hours, Landlord may, but shall not be obligated to, furnish such additional service and Tenant agrees to pay Landlord’s charges therefor, including a reasonable administrative fee, any taxes imposed thereon, and, where appropriate, a reasonable allowance for depreciation of any systems being used to provide such service, as Additional Rent upon demand.

Landlord shall maintain the roof, foundation, exterior walls, structural portions, elevators, if any, any common areas and electrical, plumbing, mechanical and fire protection systems (subject to systems exclusive to the Premises such as dishwashers) of the Building, the cost of which shall be included as a part of Operating Expenses, provided that Landlord shall have no obligation to make any repairs unless Landlord has first received written notice of the need for such repairs from Tenant. Notwithstanding the foregoing, any damage to the Property occasioned by the negligence or willful act of Tenant or any person claiming under Tenant, or contractors, agents, employees, invitees or visitors of Tenant or any such person, shall be repaired by and at the sole expense of Tenant, except that Landlord shall have the right, at its sole option, to make such repairs and to charge Tenant for all costs and expenses incurred in connection therewith and Tenant shall pay the cost therefor as Additional Rent upon demand.

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14.       SUBLEASE; ASSIGNMENT. Tenant shall not mortgage, pledge, hypothecate or otherwise encumber its interest in this Lease. Tenant shall not allow the Premises to be occupied, in whole or in part, by any other party and shall neither sublet the Premises, in whole or in part, nor assign this Lease, nor amend any sublease or assignment to which Landlord has consented, without in each case obtaining the prior written consent of Landlord. Any sublease or assignment, or amendment to any sublease or assignment, without Landlord’s prior written consent shall, at Landlord’s option, be null, void and of no effect, and shall, at Landlord’s option, constitute an Event of Default. The provisions of this section shall apply to a transfer, by one or more transfers, of all, or substantially all, of the business or assets of Tenant, of a majority of the stock, partnership or membership interests, or other evidences of ownership, of Tenant, and of any shares, voting rights or ownership interests of Tenant which results in a change in the identity of the entity or entities which exercise, or may exercise, effective control of Tenant as if such transfers were an assignment of this Lease. Tenant must request Landlord’s consent to any assignment or sublease at least thirty (30) days prior to the proposed effective date of the assignment or sublease. At the time of its request, Tenant shall provide Landlord in writing: (a) the name and address of the proposed assignee or subtenant, (b) a complete copy of the proposed assignment or sublease, (c) reasonably satisfactory information about the nature, business, and business history of the proposed assignee or subtenant and its proposed use of the Premises, and (d) banking, financial or other credit information about the proposed assignee or subtenant sufficient to enable Landlord to determine its financial condition and operating performance. Landlord shall not unreasonably withhold, condition or delay its consent to Tenant’s written request to sublease the Premises or assign this Lease which is made in compliance with the terms and conditions of this section. Without limiting the other instances in which it may be reasonable for Landlord to withhold its consent to an assignment or sublease, Landlord’s refusal to consent to any proposed assignment or sublease shall not be unreasonable if: (a) the financial condition or operating performance of the proposed subtenant or assignee, determined in Landlord’s reasonable discretion, is less than the greater of the financial condition or operating performance of the Tenant on (i) the date of execution of this Lease or (ii) the date of Tenant’s request for Landlord’s consent to the proposed assignment or sublease, (b) Tenant is in default under any of the terms, covenants or conditions of this Lease, (c) the proposed use of the Premises may result in: (i) increased wear and tear on the Premises, Building or Property or (ii) any adverse effect on other tenants in the Building or adjacent buildings owned by Landlord, (d) the proposed subtenant or assignee is a governmental agency, (e) Landlord has space available elsewhere in the Building which can accommodate the needs of the proposed subtenant or assignee or the proposed subtenant or assignee is a prospect to whom Landlord has made a proposal for the lease of space within the prior six (6) months, in Allentown, PA, (g) the proposed subtenant or assignee would cause Landlord to be in violation of any covenant or restriction contained in another lease or other agreement, or (h) Landlord’s lender, if any, does not consent to the proposed sublease or assignment.

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No subletting or assignment shall release Tenant from Tenant’s obligations under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. Any subtenant shall, at Landlord’s election, attorn to Landlord following any early termination of this Lease and any assignee shall be jointly and severally liable for the full performance of all of Tenant’s obligations hereunder. Landlord may require, as a condition to granting Landlord’s consent with respect to the provisions of this section, that the proposed subtenant or assignee enter into a written agreement with Landlord confirming the obligations of such subtenant or assignee under this Lease. Tenant shall pay, as Additional Rent on demand, all legal fees incurred by Landlord in connection with each proposed assignment or sublease whether or not Landlord’s consent is obtained. If Tenant receives rent or other payments under any assignment or sublease in excess of the payments made by Tenant to Landlord under this Lease (as such amounts are adjusted on a per square foot basis if less than all of the Premises is transferred), then Tenant shall pay Landlord one-half of such excess after deducting the actual out of pocket costs of tenant improvements, market brokerage commissions, and reasonable legal fees incurred by Tenant in connection with such sublease or assignment. Landlord’s consent to one assignment or sublease shall not be deemed a waiver of the requirement of Landlord’s consent to any subsequent assignment or sublease. In the event Tenant seeks to assign its interest in this Lease, and Landlord does not consent to such proposed assignment, Landlord may elect to terminate this Lease in its entirety, and the last day of the Term of this Lease shall be the thirtieth (30th) day after Landlord notifies Tenant of Landlord’s election to terminate this Lease. In the event Tenant seeks to sublet all or any portion of the Premises and Landlord does not consent to such proposed sublease, Landlord may elect to terminate this Lease with respect to the portion of the Premises that would be subject to such sublease and the last day of the Term of this Lease for such space shall be the thirtieth (30th) day after Landlord notifies Tenant of Landlord’s election to terminate this Lease and, if less than the entire Premises is affected, Landlord shall have the right to perform any alterations to make such space a self-contained rental unit.

15.       INDEMNITY; NON-LIABILITY OF LANDLORD. Except to the extent prohibited by law, as a material part of the consideration for Landlord’s execution of this Lease, Tenant shall neither hold nor attempt to hold Landlord or its employees or Landlord’s agents or contractors or their employees liable for, and Tenant covenants and agrees that it shall indemnify and defend Landlord for and against any and all penalties, damages, fines, causes of action, liabilities, judgments, expenses (including, without limitation, attorneys’ fees) or charges incurred in connection with or arising from: (i) the use or occupancy of the Premises by Tenant or any person claiming under Tenant; (ii) any acts, omissions or negligence of Tenant or any person claiming under Tenant, or contractors, agents, employees, invitees or visitors of Tenant or any such person; (iii) any breach, violation or nonperformance by Tenant or any person claiming under Tenant or the employees, agents, contractors, invitees or visitors of Tenant or any such person of any term, covenant or provision of this Lease or any law, ordinance or governmental requirement of any kind; (iv) any injury or damage to the person, property or business of Tenant, its employees, agents, contractors, invitees, visitors or any other person entering upon the Property under the express or implied invitation of Tenant; or (v) any matter occurring in the Premises during the Term, except for any such matter occurring in the Premises which arises directly as a result of Landlord’s gross negligence or willful misconduct and not as a result of any other matter described in (i) through (iv) above.

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Except for the grossly negligent acts or willful misconduct of the Landlord, the Landlord, to the fullest extent not prohibited by law, shall not be liable for any damage occasioned by failure to keep the Premises, Building or Property in repair, nor for any damage done or occasioned by or from plumbing, gas, electricity, water, sprinkler, or other pipes or sewerage or the bursting, leaking or running of any pipes, tank or plumbing fixtures, in, above, upon or about the Premises or the Building nor from any damage occasioned by water, snow or ice being upon or coming through the roof, skylights, trap door or otherwise, nor for any damages arising from acts, or neglect of co-tenants or other occupants of the Building or of any owners or occupants of adjacent or contiguous property, nor for any loss of or injury to property or business occurring, through, in connection with or incidental to the failure to furnish any such services or the interruption of any services to the Premises. Further, Landlord shall not be liable or responsible to Tenant for any loss or damage to any property or person occasioned by theft or any other criminal act, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, law of requisition or order of any governmental authority.

Landlord shall not be liable in any event for incidental or consequential damages to Tenant by reason of any default by Landlord hereunder, whether or not Landlord is notified that such damages may occur. The term “Landlord”, as used in this Lease, so far as covenants or obligations to be performed by Landlord are concerned, means only the owner or owners at the time in question of the Landlord’s interest in the Building, and in the event of any transfer or transfers of title to the Landlord’s interest in the Building, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved from and after the date of such transfer or conveyance of all liability as respects the performance of any covenants or obligations on the part of the Landlord contained in this Lease thereafter to be performed. Tenant’s sole recourse against Landlord, and any successor to the interest of Landlord in the Premises, is to the interest of Landlord, and any successor, in the Premises and the Building of which the Premises are a part. In no event whatsoever shall Landlord or any beneficiary of any trust of which Landlord is a trustee or any of Landlord’s officers, directors, partners, managers, members, shareholders, agents, attorneys and employees ever be personally liable hereunder.

16.       UTILITIES. Tenant shall contract directly with public utility providers for all utilities which are separately metered to the Premises and shall pay such utility providers directly and promptly when due. If any utility is not separately metered to the Premises, the cost of such utility consumed on the Premises, as reasonably determined by Landlord, by reference to a submeter, if applicable, or otherwise, shall be paid by Tenant as a part of Operating Expenses. Tenant’s obligation to pay for utilities provided to the Premises during the Term shall survive the expiration or earlier termination of the Lease. Tenant shall not utilize an alternative provider for a utility service other than the public utility provider servicing the Property unless Tenant shall first obtain the written consent of Landlord. Landlord shall in no way be liable or responsible for any loss, damage, or expense that Tenant may sustain or incur by reason of any change, failure, interruption, or defect in the supply or character of the electric energy furnished to the Premises or Building. To ensure the proper functioning and protection of all utilities, Tenant agrees to abide by all reasonable regulations and requirements which Landlord may prescribe and to allow Landlord and its utility providers access to all electric lines, feeders, risers, wiring, and any other machinery within the Premises.

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17.       HOLDING OVER. If Tenant or any party claiming by or under Tenant remains in occupancy of the Premises or any part thereof beyond the expiration or earlier termination of this Lease, such holding over shall be without right and a tenancy at sufferance, and Tenant shall be liable to Landlord for any loss or damage incurred by Landlord as a result thereof, including consequential damages. In addition, for each month or any part thereof that such holding over continues, Tenant shall pay to Landlord a monthly fee for the use and occupancy of the Premises equal to the greater of (a) the monthly fair market rental for the Premises and (b) one hundred fifty percent (150%) of the Rent payable for the month immediately preceding such hold over for the first thirty (30) days of such holdover and equal to the greater of (a) the monthly fair market rental for the Premises and (b) two hundred percent (200%) of the Rent payable for the month immediately preceding such hold over thereafter, and there shall be no adjustment or abatement for any partial month. The provisions of this section shall not be deemed to limit or exclude any of Landlord’s rights of re-entry or any other right granted to Landlord hereunder, at law or in equity.

18.       NO RENT DEDUCTION OR SET OFF. Tenant’s covenant to pay Rent is and shall be independent of each and every other covenant of this Lease. Tenant agrees that any claim by Tenant against Landlord shall not be deducted from Rent nor set off against any claim for Rent in any action. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any remedy provided in this Lease or at law. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent.

19.       CASUALTY. If the Premises or any part thereof are damaged by fire or other casualty, Tenant shall give prompt notice thereof to Landlord. If the Premises or the Building are totally or partially damaged or destroyed by fire or other casualty, thereby rendering the Premises totally or partially inaccessible or unusable, Landlord shall diligently restore and repair the Premises and the Building to substantially the same condition they were in prior to such damage. Provided that such damage was not caused by the act or omission of Tenant or any of its employees, agents, licensees, invitees or subtenants, until the repair and restoration of the Premises is completed Base Rent shall be abated for that part of the Premises that Tenant is unable to use without substantial interference and is not occupied while repairs are being made, based on the ratio that the amount of unusable rentable area bears to the total rentable area of the Premises. Landlord shall bear the costs and expenses of repairing and restoring the Premises and the Building, provided, however, that Landlord shall not be obligated to spend more than the net proceeds of insurance proceeds made available for such repair and restoration nor shall Landlord be obligated to repair or restore, or to pay for the repair or restoration of, any furnishings, equipment or personal property belonging to Tenant or any alterations, additions, or improvements (including carpeting, floor coverings, paneling, decorations, fixtures) made to the Premises or Building by Tenant or by Landlord at Tenant’s request or for Tenant’s benefit. It shall be Tenant’s sole responsibility to repair and restore all such items.

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Notwithstanding the foregoing, (a) if there is a destruction of the Building that exceeds twenty-five percent (25%) of the replacement value of the Building from any risk, whether or not the Premises are damaged or destroyed, or (b) if Landlord reasonably believes that the repairs and restoration cannot be completed despite reasonable efforts within ninety (90) days after the occurrence of such damage, or (c) if Landlord reasonably believes that there shall be less than two (2) years remaining in the Term (exclusive of any extension options) upon the substantial completion of such repairs and restoration, or (d) if any mortgagee or lender fails or refuses to make sufficient insurance proceeds available for repairs and restoration, or (e) if zoning or other applicable laws or regulations do not permit such repairs and restoration, Landlord shall have the right to terminate this Lease by giving written notice of termination to Tenant within one hundred eighty (180) days after the occurrence of such damage. If this Lease is terminated pursuant to the preceding sentence, all Rent payable hereunder shall be apportioned and paid to the date of termination.

All time periods provided in this Section for Landlord’s performance shall be subject to extension on account of delays in effectuating a satisfactory settlement with any insurance company involved and events beyond Landlord’s reasonable control. In the event of any damage or destruction to the Building or Premises, it shall be Tenant’s responsibility to secure the Premises and, upon notice from Landlord, to remove forthwith, at its sole cost and expense, property belonging to Tenant or its licensees from such portion of the Premises as Landlord shall request.

Notwithstanding anything to the contrary in this section, in the event Landlord elects or is required to repair and restore the Premises, and such repair has not commenced within ninety (90) days after the date of casualty, or been substantially completed within two hundred seventy (270) days following the date repair was commenced, Tenant shall have the right to terminate the Lease by providing written notice to Landlord, such termination to be effective sixty (60) days after notice from Tenant is received by Landlord, unless Landlord substantially completes the repairs within such sixty (60) day period.

20.       SUBORDINATION; ESTOPPEL LETTERS.

(A)       This Lease is expressly subordinate to any current or future mortgage or mortgages placed on the Property and to all other documents executed in connection with any such mortgage. Tenant agrees not to pay rent more than thirty (30) days in advance and to attorn to any party acquiring rightful possession of the Premises by or through any such mortgage ("Successor Landlord"). Notwithstanding anything to the contrary in this Lease, Successor Landlord shall not be liable for or bound by any of the following matters: (i) any right of Tenant to any offset, defense, claim, counterclaim, reduction, deduction, or abatement against Tenant's payment of rent or performance of Tenant's other obligations under this Lease, arising from Landlord's breach or default under this Lease ("Offset Right") that Tenant may have against Landlord or any other party that was landlord under this Lease at any time before the occurrence of any attornment by Tenant ("Former Landlord") relating to any event or occurrence before the date of attornment, including any claim for damages of any kind whatsoever as the result of any breach by Former Landlord that occurred before the date of attornment; provided, however, the foregoing shall not limit either (x) Tenant’s right to exercise against Successor Landlord any Offset Right otherwise available to Tenant because of events occurring after the date of attornment or (y) Successor Landlord’s obligation to correct any conditions that existed as of the date of attornment and violate Successor Landlord’s obligations as landlord under this Lease; (ii) any obligation with respect to any security deposited with Former Landlord, unless such security was actually delivered to Successor Landlord; (iii) any payment of rent that Tenant may have made to Former Landlord more than thirty (30) days before the date such rent was first due and payable under the Lease with respect to any period after the date of attornment other than, and only to the extent that, the Lease expressly required such a prepayment; and (iv) to commence or complete any initial construction of improvements in the Premises, unless sums to commence or complete such construction shall have been actually delivered to Successor Landlord by way of an assumption of escrow accounts or otherwise; and (v) to pay Tenant any sum(s) that any Former Landlord owed to Tenant unless such sums, if any, shall have been actually delivered to Successor Landlord by way of an assumption of escrow accounts or otherwise.

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Tenant shall send to each Mortgagee (after notification of the identity of such Mortgagee and the mailing address thereof is provided to Tenant) copies of all default notices that Tenant sends to Landlord; such notices to said mortgagee shall be sent concurrently with the sending of the notices to Landlord and in the same manner as notices are required to be sent pursuant to this Lease. Tenant will accept performance of any provision of this Lease by such mortgagee as performance by, and with the same force and effect as though performed by, Landlord. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right until (a) Tenant gives notice of such act or omission to Landlord and Mortgagee, and (b) a reasonable period of time for remedying such act or omission elapses following the time when Mortgagee becomes entitled under the applicable mortgage to remedy same (which reasonable period shall in no event be less than the period to which Landlord is entitled under this Lease).

(B)       Tenant agrees that from time to time it shall deliver to Landlord or Landlord’s mortgagee or designee within ten (10) business days of the date of Landlord’s or Landlord’s mortgagees or such other designee’s request, a statement, in writing, certifying (i) that this Lease is unmodified and in full force and effect, if this is so, or if there have been modifications, that the Lease, as modified, is in full force and effect; (ii) the dates to which Rent and other charges have been paid; (iii) that Landlord is not in default under any provisions of this Lease or, if in default, the nature thereof in reasonable detail; (iv) the subordination of this Lease to any current or future mortgage or mortgages placed on the Property by Landlord and Tenant’s agreement to attorn to any party acquiring rightful possession of the Premises by or through any such mortgage; and (v) such other true statements as Landlord or Landlord’s mortgagee or designee may require. Tenant’s failure to execute and deliver such statements within the time required shall, at Landlord’s election, be an Event of Default and shall also be conclusive upon Tenant that (a) this Lease is in full force and effect and has not been modified except as represented by Landlord; (b) that Landlord is not in default under any provisions of this Lease and that Tenant has no right of offset, counterclaim or deduction against Rent; and (c) not more than one month’s Rent has been paid in advance.

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21.       ALTERATIONS; RESTORATION.

(A)       Tenant shall not make or permit to be made any alterations, additions, or improvements in or to the Premises (“Alterations”) without first obtaining the prior written consent of Landlord which consent may be withheld in Landlord’s sole discretion. All Alterations (i) must comply with all applicable laws, (ii) must be compatible with the Building and its mechanical, electrical, heating, ventilating, air-conditioning and life safety systems; (iii) must not interfere with the use and occupancy of any other portion of the Building by any other tenant or their invitees; and (iv) must not affect the integrity of the structural portions of the Building. In addition, Landlord may impose as a condition to such consent such additional requirements as Landlord in its sole discretion deems necessary or desirable, including, without limitation: (a) Tenant’s submission to Landlord, for Landlord’s prior written approval, of all plans and specifications relating to the Alterations; (b) Landlord’s prior written approval of the time or times when the Alterations are to be performed; (c) Landlord’s prior written approval of the contractors and subcontractors performing work in connection with the Alterations; (d) Tenant’s receipt of all necessary permits and approvals from all governmental authorities having jurisdiction over the Premises prior to the construction of the Alterations; (e) Tenant’s delivery to Landlord of such bonds and insurance as Landlord customarily requires; (f) Tenant’s payment to Landlord of a commercially reasonable fee for Landlord’s supervision of any Alterations; (g) Tenant’s and Tenant’s contractor’s compliance with such construction rules and regulations and building standards as Landlord promulgates from time to time; and (i) Tenant’s delivery to Landlord of “as built” drawings of the Alterations in such form or medium as Landlord may require. All direct and indirect costs relating to any modifications, alterations or improvements of Building, whether outside or inside of the Premises, required by any governmental agency or by law as a condition or as the result of any Alteration requested or effected by Tenant shall be borne by Tenant. Landlord may elect to perform such modifications, alterations or improvements (at Tenant’s sole cost and expense) or require such performance directly by Tenant. Tenant shall not permit any mechanic’s lien or other liens to be placed upon the Premises or the Building as a result of any materials, services or labor ordered by or provided to Tenant or any of Tenant’s agents, officers, or employees. Without waiving any other rights or remedies under this Lease, Landlord may bond or insure or otherwise discharge any such lien and Tenant shall reimburse Landlord for any amount paid by Landlord in connection therewith as Additional Rent upon demand. Notwithstanding the foregoing, Landlord will not withhold its consent to the performance by Tenant of cosmetic Alterations that (a) cost less than $20,000.00 in the aggregate in any calendar year (b) are not visible from the exterior of the Premises, and (c) comply with requirements (i) through (iv) of this subsection, provided prior notice of such cosmetic Alterations has been provided to Landlord.

(B)        Upon the expiration or earlier termination of the Lease, Tenant shall surrender the Premises in good working order and condition. Tenant shall remove any and all Alterations, trade fixtures, equipment, data/telecommunications cabling and wiring installed by or on behalf of Tenant and furniture from the Premises and Tenant shall fully repair any damage, including any structural damage above normal wear and tear, occasioned by the removal of the same. Notwithstanding the foregoing, Landlord may require that Tenant not remove any or all Alterations and any such Alteration or Alterations shall become a part of the realty and shall belong to Landlord without compensation, and title thereto shall pass to Landlord under this Lease as by a bill of sale. At Landlord’s election, all Alterations, trade fixtures, equipment, wire and cable, furniture, fixtures, other personal property not removed shall conclusively be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant or to any other person and without obligation to account for them. Tenant shall pay Landlord all reasonable expenses incurred in connection with Landlord’s disposition of such property, including without limitation the cost of repairing any damage to the Building or the Premises caused by removal of such property, and shall hold Landlord harmless from loss, liability, or expense arising from the claims of third parties such as Tenant’s lenders whose loans are secured by such property. Tenant’s obligations under this section shall survive the end of this Lease.

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22.       DEFAULT; REMEDIES.

(A)       In addition to any other acts or omissions designated in this Lease as Events of Default, each of the following shall constitute an Event of Default by Tenant hereunder: (i) the failure to make any payment of Rent or any installment thereof or to pay any other sum required to be paid by Tenant under this Lease or under the terms of any other agreement between Landlord and Tenant after written notice and grace period of five (5) days to cure (the notice and cure period shall not be offered for more than 2 defaults per 12 month period); (ii) the use or occupancy of the Premises for any purpose other than the Permitted Use without Landlord’s prior written consent or the conduct of any activity in the Premises which constitutes a violation of law; (iii) if the interest of Tenant or any part thereof under this Lease shall be levied on under execution or other legal process and said interest shall not have been cleared by said levy or execution within fifteen (15) days from the date thereof; (iv) if any voluntary or involuntary petition in bankruptcy or for corporate reorganization or any similar relief shall be filed by or against Tenant or any guarantor of the Lease or if a receiver shall be appointed for Tenant or any guarantor or any of the property of Tenant or guarantor; (v) if Tenant or any guarantor of the Lease shall make an assignment for the benefit of creditors or if Tenant shall admit in writing its inability to meet Tenant’s debts as they mature; (vi) if any insurance required to be maintained by Tenant pursuant to this Lease shall be cancelled or terminated or shall expire or shall be reduced or materially changed, except, in each case, as permitted in this Lease, or mutually agreed to in writing by the parties; (vii) if Tenant shall fail to immediately discharge or bond over any lien placed upon the Premises in violation of this Lease; (viii) if Tenant shall abandon or vacate the Premises during the Term; (ix) if Tenant shall fail to execute and deliver an estoppel certificate or subordination agreement as required hereunder; or (x) the failure to observe or perform any of the other covenants or conditions in this Lease which Tenant is required to observe and perform and which Tenant has not corrected within twenty (20) days after written notice thereof to Tenant, provided, however, that if (x) Tenant can not through best efforts correct such failure within said twenty (20) day period, and (y) Tenant has provided Landlord with written documentation detailing the steps taken to correct the failure prior to the twentieth (20^th) day of said period, then Tenant shall have such longer period as is reasonably required to correct any such default not to exceed twenty (20) additional days; provided, however, that if said failure involves the creation of a condition which, in Landlord’s reasonable judgment, is dangerous or hazardous, Tenant shall be required to cure same within 24 hours.

(B)        Upon the occurrence of an Event of Default by Tenant beyond any applicable notice and cure period, the unamortized cost of all legal fees, Tenant allowances, work performed by Landlord to the Premises, and any other Tenant inducements paid or provided under this Lease plus interest on the foregoing items accruing from the date of such Event of Default at the Default Rate shall immediately become due, and Landlord may, at its option, with or without notice or demand of any kind to Tenant or any other person, exercise any one or more of the following described remedies, in addition to all other rights and remedies provided at law, in equity or elsewhere herein, and such rights and remedies shall be cumulative and none shall exclude any other right allowed by law:

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(i)         Landlord may terminate this Lease, repossess and re-let the Premises, in which case Landlord shall be entitled to recover as damages (in addition to any other sums or damages for which Tenant may be liable to Landlord) a lump sum equal to the amount by which the present value of the excess Rent remaining to be paid by Tenant for the balance of the Term of the Lease exceeds the fair market rental value of the Premises, after deduction of all anticipated expenses of reletting. For the purpose of determining present value, Landlord and Tenant agree that the interest rate shall be the rate applicable to the then-current yield on obligations of the U.S. Treasury having a maturity date on or about the Expiration Date. Should the fair market rental value of the Premises for the balance of the Term (after deduction of all anticipated expenses of reletting) exceed the value of the Rent to be paid by Tenant for the balance of the Term, Landlord shall have no obligation to pay to or otherwise credit Tenant for any such excess amount;

(ii)        Landlord may, without terminating the Lease, terminate Tenant’s right of possession, repossess the Premises including, without limitation, removing all or any part of Tenant’s personal property in the Premises and to place such personal property in storage or a public warehouse at the expense and risk of Tenant, and relet the same for the account of Tenant for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting, Landlord is authorized to decorate, repair, remodel or alter the Premises. Tenant shall pay to Landlord as damages a sum equal to all Rent under this Lease for the balance of the Term unless and until the Premises are relet. If the Premises are relet, Tenant shall be responsible for payment upon demand to Landlord of any deficiency between the Rent as relet and the Rent for the balance of this Lease, all costs and expenses of reletting, and all reasonable decoration, repairs, remodeling, alterations, additions and collection of the rent accruing therefrom. Tenant shall not be entitled to any rents received by Landlord in excess of the rent provided for in this Lease. No re-entry or taking possession of the Premises by Landlord shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any breach, and in addition to the other remedies it may have, recover as damages (in addition to any other sums or damages for which Tenant may be liable to Landlord) a lump sum equal to the amount by which the present value of the excess Rent remaining to be paid by Tenant for the balance of the Term of the Lease exceeds the fair market rental value of the Premises, after deduction of all anticipated expenses of reletting. In the event Landlord repossesses the Premises as provided above, Landlord may remove all persons and property from the Premises and store any such property at the cost of Tenant, without liability for damage; and

(iii)       Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant hereunder, make any payment or perform such other act on Tenant’s part to be made or performed as provided in this Lease. All sums so paid by Landlord and all necessary incidental costs shall be payable to Landlord as Additional Rent on demand and Tenant covenants to pay such sums.

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(iv)       By notice to Tenant, Landlord shall have the right to accelerate all Rent and all expense due hereunder and otherwise payable in installments over the remainder of the Term; and the amount of accelerated rent to the termination date, without further notice or demand for payment, shall be due and payable by Tenant within five (5) days after Landlord has so notified Tenant, such amount collected from Tenant shall be discounted to present value using an interest rate of six percent (6%) per annum. Any Additional Rent which has not been included, in whole or in part, in accelerated rent, shall be due and payable by Tenant during the remainder of the Term, in the amounts and at the times otherwise provided for in this Lease.

(C)       Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this section from time to time and that no suit or recovery of any portion due Landlord hereunder shall be any defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Landlord.

(D)       Tenant shall promptly pay upon notice, as Additional Rent, all reasonable costs, charges and expenses incurred by Landlord (including, without limitation, reasonable fees and out-of-pocket expenses of legal counsel, collection agents, and other third parties retained by Landlord) together with interest thereon at the rate set forth in Section 5 of this Lease, in collecting any amount due from Tenant, enforcing any obligation of Tenant hereunder, or preserving any rights or remedies of Landlord; and Tenant shall pay all reasonable attorneys’ fees and expenses arising out of any litigation, negotiation or transaction in which Tenant causes Landlord, without Landlord’s fault, to become involved or concerned.

(E)       No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy on account of the violation of such provision, even if such violation be continued or repeated subsequently, and no express waiver by Landlord shall be valid unless in writing and shall not affect any provision other than the one specified in such written waiver and that provision only for the time and in the manner specifically stated in the waiver. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Term or Tenant’s right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of Rent shall not waive or affect said notice, suit or judgment. Landlord shall not be required to serve Tenant with any notices or demands as a prerequisite to its exercise of any of its rights or remedies under this Lease, other than those notices and demands specifically required under this Lease. Tenant expressly waives the service of any statutory demand or notice which may be specified in the Landlord and Tenant Act of Pennsylvania, Act of April 6, 1951, as amended, or ay similar or successor provision of law and agrees that five (5) days’ notice shall be sufficient in any case where a longer period may be statutorily specified.

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(F)       In addition to, and not in lieu of any of the foregoing rights granted to Landlord: TENANT HEREBY EMPOWERS ANY PROTHONOTARY, CLERK OF COURT OR ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR TENANT IN ANY AND ALL ACTIONS WHICH MAY BE BROUGHT FOR ANY RENT, OR ANY CHARGES HEREBY RESERVED OR DESIGNATED AS RENT OR ANY OTHER SUM PAYABLE BY TENANT TO LANDLORD UNDER OR BY REASON OF THIS LEASE, INCLUDING, WITHOUT LIMITATION, ANY SUM PAYABLE HEREUNDER, AND TO SIGN FOR TENANT AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN ACTION OR ACTIONS FOR THE RECOVERY OF SAID RENT, CHARGES AND OTHER SUMS, AND IN SAID SUIT OR IN SAID ACTION OR ACTIONS TO CONFESS JUDGMENT AGAINST TENANT FOR ALL OR ANY PART OF THE RENT SPECIFIED IN THIS LEASE AND THEN UNPAID INCLUDING, AT LANDLORD’S OPTION, THE RENT FOR THE ENTIRE UNEXPIRED BALANCE OF THE TERM OF THIS LEASE, AND ALL OR ANY PART OF ANY OTHER OF SAID CHARGES OR SUMS, AND FOR INTEREST AND COSTS TOGETHER WITH REASONABLE ATTORNEY’S FEES OF 5%. SUCH AUTHORITY SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF, BUT JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME AS OFTEN AS ANY OF SAID RENT OR SUCH OTHER SUMS, CHARGES, PAYMENTS, COSTS AND EXPENSES SHALL FALL DUE OR BE IN ARREARS, AND SUCH POWERS MAY BE EXERCISED AS WELL AFTER THE EXPIRATION OF THE TERM OR DURING ANY EXTENSION OR RENEWAL OF THIS LEASE.

WHEN THIS LEASE OR TENANT’S RIGHT OF POSSESSION SHALL BE TERMINATED BY COVENANT OR CONDITION BROKEN, OR FOR ANY OTHER REASON, EITHER DURING THE TERM OF THIS LEASE OR ANY RENEWAL OR EXTENSION THEREOF, AND ALSO WHEN AND AS SOON AS THE TERM HEREBY CREATED OR ANY EXTENSION THEREOF SHALL HAVE EXPIRED, IT SHALL BE LAWFUL FOR ANY ATTORNEY AS ATTORNEY FOR TENANT TO FILE AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN ACTION TO CONFESS JUDGMENT IN EJECTMENT AGAINST TENANT AND ALL PERSONS CLAIMING UNDER TENANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF EXECUTION OR OF POSSESSION MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OF PROCEEDINGS, WHATSOEVER, AND PROVIDED THAT IF FOR ANY REASON AFTER SUCH ACTION SHALL HAVE BEEN COMMENCED THE SAME SHALL BE DETERMINED AND THE POSSESSION OF THE PREMISES HEREBY DEMISED REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS, OR UPON THE TERMINATION OF THIS LEASE AS HEREINBEFORE SET FORTH, TO BRING ONE OR MORE ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION OF THE SAID PREMISES.

In any action to confess judgment in ejectment or for rent in arrears, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this Lease (and of the truth of the copy such affidavit shall be sufficient evidence) be filed in such action, it shall not be necessary to file the origins as a warrant of attorney, any rule of Court, custom or practice to the contrary notwithstanding.

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__________ (INITIAL). TENANT WAIVER. TENANT SPECIFICALLY ACKNOWLEDGES THAT TENANT HAS VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVED CERTAIN DUE PROCESS RIGHTS TO A PREJUDGMENT HEARING BY AGREEING TO THE TERMS OF THE FOREGOING PARAGRAPHS REGARDING CONFESSION OF JUDGMENT. TENANT FURTHER SPECIFICALLY AGREES THAT IN THE EVENT OF DEFAULT, LANDLORD MAY PURSUE MULTIPLE REMEDIES INCLUDING OBTAINING POSSESSION PURSUANT TO A JUDGMENT BY CONFESSION AND ALSO OBTAINING A MONEY JUDGMENT FOR PAST DUE AND ACCELERATED AMOUNTS AND EXECUTING UPON SUCH JUDGMENT. IN SUCH EVENT AND SUBJECT TO THE TERMS SET FORTH HEREIN, LANDLORD SHALL PROVIDE FULL CREDIT TO TENANT FOR ANY MONTHLY CONSIDERATION WHICH LANDLORD RECEIVES FOR THE LEASED PREMISES IN MITIGATION OF ANY OBLIGATION OF TENANT TO LANDLORD FOR THAT MONEY. FURTHERMORE, TENANT SPECIFICALLY WAIVES ANY CLAIM AGAINST LANDLORD AND LANDLORD’S COUNSEL FOR VIOLATION OF TENANT’S CONSTITUTIONAL RIGHTS IN THE EVENT THAT JUDGMENT IS CONFESSED PURSUANT TO THIS LEASE. TENANT SPECIFICALLY WAIVES AND DISCLAIMS SECTION 5601.3(b) OF TITLE 20, CHAPTER 56 OF THE PENNSYLVANIA CONSOLIDATED STATUTES.

23.       NOTICES. All notices permitted or required hereunder shall be in writing and (i) delivered personally, (ii) sent by U.S. certified mail, postage prepaid, with return receipt requested, or (iii) sent overnight by nationally recognized overnight courier and sent to the respective parties at the Notice Addresses provided in Section 1 of this Lease. If sent by U.S. certified mail, such notice shall be considered received by the addressee on the second (2nd) business day after posting. If sent by nationally recognized overnight courier, such notice shall be considered received by the addressee on the first (1st) business day after deposit with the courier. Notices may be given by an agent on behalf of Landlord or Tenant. Any notice from Landlord to Tenant shall also be deemed to have been given if delivered to the Premises, addressed to Tenant.

24.       EMINENT DOMAIN. If during the Term (a) the whole of the Premises or the Building shall be taken by any governmental or other authority having powers of eminent domain or conveyed to such entity under threat of the exercise of such power or (b) any part of the Premises or the Building shall be so taken or conveyed and as a result, the remainder of the Premises or the Building has been rendered impractical, in Landlord’s sole judgment, for the operation of Landlord’s rental activities on the Property, this Lease shall terminate on the date of the taking or conveyance, and rent shall be apportioned to the date thereof. Tenant shall have no right to any apportionment of or any share in any condemnation award or judgment for damages made for the taking or conveyance of any part of the Premises or the Building. Tenant has the right to pursue its own condemnation award, claim or judgement through separate proceedings for the loss of leasehold improvements paid for by Tenant, fixtures and relocation expenses so long as Tenant’s award does not diminish or otherwise adversely affect Landlord’s award.

25.       QUIET ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord subject to the terms and provisions of this Lease. “During the term of this Lease, Landlord shall provide for the use of the Tenant along with the other tenants of the Building; (i) a conference room having a permitted occupancy and seating for 120 persons; (ii) a conference room having a permitted occupancy and seating for 20-25 persons with moveable tables and (iii) a fitness center with equipment and workout devices and that has a permitted occupancy of 10 persons.

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25.       Landlord shall not be liable for any interference or disturbance by other tenants or third persons, nor shall Tenant be released from any of the obligations of this Lease because of such interference or disturbance.

26.       RULES AND REGULATIONS. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit B and with such reasonable modifications thereof and reasonable additions thereto as Landlord may from time to time make. Landlord agrees to enforce the rules and regulations uniformly against all tenants of the Property. Landlord shall not be liable, however, for any violation of said rules and regulations by other tenants or occupants of the Building or Property.

27.       ENVIRONMENTAL. “Environmental Laws” shall mean all federal, state and local laws (including, without limitation, case and common law), statutes, regulations, rules, ordinances, guidance, permits, licenses, grants, orders, decrees and judgments relating to the environment, human health and safety. “Hazardous Substances” shall mean all explosive materials, radioactive materials, hazardous or toxic materials, wastes, chemicals or substances, petroleum, petroleum by-products and petroleum products (including, without limitation, crude oil or any fraction thereof), asbestos and asbestos-containing materials, radon, lead, polychlorinated biphenyls, mold, urea-formaldehyde, and all materials, wastes, chemicals and substances that are regulated by any Environmental Law; except for a di minimis amount of standard office cleaning products for use in the Premises. Tenant shall not (i) manufacture, generate, utilize, store, handle, treat, process, or release any Hazardous Substances at, in, under, from or on the Premises or Property or (ii) suffer or permit to occur any violation of Environmental Laws with respect to the Premises or Property. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord and at Tenant’s sole cost) and hold harmless Landlord and its partners, managers, members, officers, directors, employees, agents, successors, grantees, assigns and mortgagees from any and all claims, demands, liabilities, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions, causes of action and losses of any and every kind and nature, including, without limitation, diminution in value of the Property, damages for the loss or restriction on use of the rentable or usable space or of any amenity, natural resource damages, damages arising from any adverse impact on leasing space on the Premises or Property, and sums paid in settlement of claims and for attorney’s fees, consultant’s fees and expert’s fees that may arise during or after the Term or any extension of the Term in connection with any breach by Tenant of the covenants contained in this section, the presence, release or threatened release of Hazardous Substances at, in, under, from, to or on the Premises or Property, or any violation or alleged violation of any Environmental Laws. For purposes of this section, the term “costs” includes, without limitation, costs, expenses and consultant’s fees, expert’s fees and attorney’s fees incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, restoration, monitoring or maintenance work. This covenant of indemnity shall survive the termination of this Lease. Notwithstanding the foregoing, the prohibition contained herein shall not apply to ordinary office products that may contain de minimis quantities of Hazardous Substances, provided such products are used in compliance with Environmental Laws; however, Tenant’s indemnification obligations are not diminished with respect to the presence of such products. Tenant shall immediately notify Landlord of any release or threatened release at, in, under, from, to or on the Premises or Property.

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28.       FINANCIAL STATEMENTS. From time to time, but not more often than once each year, Tenant shall furnish Landlord within ten (10) business days of such request copies of financial statements showing Tenant’s current financial condition and the results of the previous year’s operations which shall be certified as true and correct by the chief financial officer, or other responsible officer, of Tenant.

29.       BROKERS. Landlord utilized the services of Colliers International (the “Listing Broker”) and Tenant utilized the services of Gola Corporate Real Estate (the “Non-Listing Broker”) in connection with this Lease. Tenant represents to Landlord that Tenant did not involve any other brokers in procuring this Lease. Landlord shall pay a commission to the Non-Listing Broker and the Listing Broker as is agreed to by the parties per a separate agreement. Tenant agrees to forever indemnify, defend and hold Landlord harmless from and against any commissions, liability, loss, cost, damage or expense (including reasonable attorneys’ fees) that may be asserted against or incurred by Landlord by any broker other than the Listing Broker and Non-Listing Broker as a result of any misrepresentation by Tenant hereunder.

30.       MISCELLANEOUS.

(A)       Time is of the essence of this Lease and each of its provisions.

(B)       This Lease and all covenants and agreements herein contained shall be binding upon, apply, and inure to the respective heirs, executors, successors, administrators and assigns of all parties to this Lease; provided, however, that this Lease shall not inure to the benefit of any assignee, heir, administrator, devisee, legal representative, successor, transferee or successor of Tenant except upon the prior written consent of Landlord.

(C)       This Lease contains the entire agreement of the parties, all other and prior representations, negotiations and agreements having been merged herein and extinguished hereby. No modification, waiver or amendment of this Lease or of any of its conditions or provisions shall be binding upon either party hereto unless in writing signed by both parties.

(D)       The captions of sections and subsections of this Lease are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such sections or subsections.

(E)        Interpretation of this Lease shall be governed by the laws of the state or commonwealth in which the Premises is located, without regard to conflict of laws. Tenant and Landlord irrevocably submits to the nonexclusive jurisdiction of the courts of said state or commonwealth and agrees that all suits, actions, claims or proceedings may be heard and determined in such courts. Tenant waives any objection which it may have at any time to the laying of venue of any suit, action, claim or proceeding arising out of or relating to this Lease. The foregoing shall not be deemed to preclude Landlord from bringing any suit, action, claim or proceeding in connection with this Lease in any other jurisdiction.

(F)        This Lease is and shall be deemed and construed to be the joint and collective work product of Landlord and Tenant and, as such, this Lease shall not be construed against either party, as the otherwise purported drafter of same, by any court of competent jurisdiction in order to resolve any inconsistency, ambiguity, vagueness or conflict, if any, in the terms or provisions contained herein.

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(G)        In the event that either party thereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure labor, inability to procure materials or equipment or reasonable substitutes therefore, failure of power, fire or other casualty, restrictive government laws or regulations, judicial orders, enemy or hostile government actions, riots, insurrection or other civil commotions, war or other reason of a like nature not at the fault of the party delayed in performing any act as required under the terms of this Lease (“Force Majeure”), then performance of such act shall be excused for the period of delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. Force Majeure shall not operate to excuse Tenant from the prompt payment of Rent or any other payments required under the terms of this Lease.

(H)       Tenant shall reimburse Landlord as Additional Rent on demand for all reasonable out-of-pocket expenses, including without limitation legal, engineering or other professional services or expenses incurred by Landlord in connection with any requests by Tenant for consents or approvals hereunder.

(I)         A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect.

(J)         If more than one person or entity shall ever be Tenant, the liability of each such person and entity shall be joint and several.

(K)       If Tenant is a corporation, a limited liability company, an association or a partnership, it shall, concurrently with the signing of this Lease, at Landlord’s option, furnish to Landlord certified copies of the resolutions of its board of directors (or of the executive committee of its board of directors) or consent of its members or partners authorizing Tenant to enter into this Lease. Moreover, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease and that Tenant is a duly organized corporation, limited liability company, association or partnership under the laws of the state of its incorporation or formation, is qualified to do business in the jurisdiction in which the Building is located, is in good standing under the laws of the state of its incorporation or formation and the laws of the jurisdiction in which the Building is located, has the power and authority to enter into this Lease, and that all corporate or partnership action requisite to authorize Tenant to enter into this Lease has been duly taken.

(L)        The submission of this Lease to Tenant is not an offer to lease the Premises, or an agreement by Landlord to reserve the Premises for Tenant. Landlord shall not be bound to Tenant until Tenant has duly executed and delivered an original Lease to Landlord and Landlord has duly executed and delivered an original Lease to Tenant. Notwithstanding the Commencement Date or Commencement Date contemplated in Section 1 hereof, this Lease shall take effect and be binding upon the parties hereto as of its execution and delivery.

(M)       This Lease may be executed in any number of counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Any signature to this Lease transmitted via facsimile (or other electronic means) shall be deemed an original signature and be binding upon the parties hereto.

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(N)       Tenant represents and warrants to Landlord that neither Tenant nor any of Tenant’s members, shareholders or other equity owners, is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action.

31.       PARKING. Tenant, its employees and visitors, shall be entitled to the non-exclusive use, on a first come-first serve basis, of parking areas in the back lot designated by Landlord. Landlord shall supply a parking area having at least of 7 spaces per each 1,000 sq. feet of the Building. Additionally, Tenant shall be entitled to exclusive use of: (i) twenty-five (25) parking spaces for delivery vehicles; (ii) four (4) reserved parking spaces near the Tenant’s side entrance of the Building; and (iii) eight (8) reserved Tenant visitor parking spaces near the front entrance of the Building, all as designated on the plans attached hereto as Exhibit F. Any cost to designate such spaces for exclusive use by Tenant may be deducted by Landlord from the Tenant Improvement Allowance set forth in the Work Letter attached hereto as Exhibit E. Landlord shall not be obligated to enforce parking limits. Tenant shall not use any parking space designated by Landlord as visitor parking or as exclusive to other parties. If Tenant uses parking in excess of that provided for herein, and if such excess use occurs on a regular basis, and if Tenant fails, after written notice from Landlord of any one violation, to reduce its excess use of the parking areas, then such excess use shall constitute an Event of Default under this Lease without further notice or opportunity to cure such Event of Default.

32.       SIGNAGE. Subject to Landlord’s review and approval, Tenant, at Landlord’s expense, shall be entitled to Building standard suite entry and directory signage. Landlord may specify that the design of such signage be similar to, or consistent with, the design and location of other signs identifying tenants in the Building. Such signage shall be subject to all applicable laws and ordinances. Upon termination of this Lease, Tenant shall remove such signage and repair any damage caused thereby.

33.       INTENTIONALLY OMITTED.

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34.       CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights, each of which Landlord may exercise without notice or liability to Tenant, and the exercise of any such rights shall not be deemed to constitute an eviction or disturbance of Tenant’s use or possession of the Premises and shall not give rise to any claim for set-off or abatement of Rent or any other claim: (a) to enter the Premises for the purposes of examining the same or to make repairs or alterations or to provide any service, except that Landlord may not enter areas containing confidential information without an escort of Tenant’s selection except in cases of emergency; (b) to change the arrangement and/or locations of entrances, or passageways, doors and doorways, and corridors, windows, elevators, stairs, parking areas and any other common areas, (c) to change the name or street address of the Building or the suite number of the Premises; (d) to install, affix and maintain any and all signs on the exterior or interior of the Building; (e) to make repairs, decorations, alterations, additions or improvements, whether structural or otherwise, in, about and to the Building or common areas and for such purposes temporarily close doors, corridors and other areas of the Building and interrupt or temporarily suspend services or use of common areas; (f) to retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises; (g) to grant to any person or to reserve unto itself the exclusive right to conduct any business or render any service in the Building; (h) to show the Premises at reasonable times and upon reasonable prior notice and, if vacated or abandoned, to prepare the Premises for reoccupancy; (i) to install, use and maintain in and through the Premises pipes, conduits, wires and ducts serving the Building; (j) to approve the weight, size and location of safes or other heavy equipment or other articles which may be located in the Premises and to determine the time and manner in which such articles may be moved in, about or out of the Building or Premises; and (k) to take any other action which Landlord deems reasonable in connection with the operation, maintenance, marketing or preservation of the Premises or Building. The reduction or elimination of Tenant’s light, air or view shall not affect Tenant’s liability under this Lease, nor shall it create any liability of Landlord to Tenant.

35.       LEASE COMMENCEMENT/ACCEPTANCE OF PREMISES. At Landlord’s request, Landlord and Tenant shall enter into a commencement letter agreement (the “Commencement Letter”) in form substantially similar to that attached hereto as Exhibit C. Tenant’s failure to execute and return the Commencement Letter, or to provide written objection to the statements contained in the Commencement Letter, within fifteen (15) days shall be deemed an approval by Tenant of the statements contained therein.

36.       WAIVER OF RIGHT TO JURY TRIAL. LANDLORD AND TENANT WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM, ACTION, PROCEEDING OR COUNTERCLAIM BY EITHER PARTY AGAINST THE OTHER ON ANY MATTERS ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, AND/OR TENANT’S USE OR OCCUPANCY OF THE PREMISES OR BUILDING (INCLUDING ANY CLAIM OF INJURY OR DAMAGE OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY CURRENT OR FUTURE LAWS, STATUTES, REGULATIONS, CODES OR ORDINANCES).

37.       RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a short form memorandum of this Lease for recording purposes.

[signatures on following page]

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IN WITNESS WHEREOF, the parties hereto have executed this Lease.

LANDLORD:		TENANT:
BROOKWOOD PHILADEPHIA I, LLC,		JETPAY HR & PAYROLL SERVICES, INC.,
a Delaware limited liability company		a Delaware corporation
By:	/s/ Kurt M. Zernich	By:	/s/ Michael J. Pires
Name:	Kurt M. Zernich	Name:	Michael J. Pires
Its:	Authorized Signature	Its:	President
BROOKWOOD PHILADEPHIA II, LLC,
a Delaware limited liability company
By:	/s/ Kurt M. Zernich
Name:	Kurt M. Zernich
Its:	Authorized Signature

TENANT NOTARY

STATE OF                PA)

COUNTY OF      Lehigh) 

I, the undersigned authority, a Notary Public in and for said county in said state, hereby certify that Michael J. Pires, whose name is signed to the foregoing instrument on behalf of JETPAY HR & PAYROLL SERVICES, INC. and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument,<he/she> executed the same voluntarily on behalf of JETPAY HR & PAYROLL SERVICES, INC. on the day the same bears date.

Given under my hand and official seal this the 20^th day of October, 2017.

/s/ Lisa J. Sell

Notary Public

AFFIX SEAL

My commission expires: 8/26/2019

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EXHIBIT A

THE PREMISES

[See attached]

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EXHIBIT B

RULES AND REGULATIONS

1.          The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances (including, without limitation, coffee grounds) shall be thrown therein. All damages resulting from misuse of the fixtures shall be borne by Tenant if Tenant or its servants, employees, agents, visitors or licensees shall have caused the same.

2.          No cooking (except for hot-plate and microwave cooking by Tenants’ employees for their own consumption, the location and equipment of which is first approved by Landlord), sleeping or lodging shall be permitted by any tenant on the Premises. No tenant shall cause or permit any unusual or objectionable odors to be produced upon or permeate from the Premises.

3.          Except as otherwise provided in the Lease, no inflammable, combustible, or explosive fluid, material, chemical or substance shall be brought or kept upon, in or about the Premises. Fire protection devices, in and about the Building, shall not be obstructed or encumbered in any way.

4.          Canvassing, soliciting and peddling at the Property is prohibited and each tenant shall cooperate to prevent the same.

5.          There shall not be used in any space, or in the public halls of the Building, either by any tenant or by its agents, contractors, jobbers or others, in the delivery or receipt of merchandise, freight, or other matters, any hand trucks or other means of conveyance except those equipped with rubber tires, rubber side guards, and such other safeguards as Landlord may require, and Tenant shall be responsible to Landlord for any loss or damage resulting from any deliveries to Tenant in the Building. Deliveries of mail, freight or bulky packages shall be made through the freight entrance or through doors specified by Landlord for such purpose.

6.          Mats, trash or other objects shall not be placed in the public corridors. The sidewalks, entries, passages, elevators, public corridors and staircases and other parts of the Building which are not occupied by Tenant shall not be obstructed or used for any other purpose than ingress or egress.

7.          Tenant shall not install or permit the installation of any awnings, shades, draperies and/or other similar window coverings, treatments or like items visible from the exterior of the Premises other than those approved by the Landlord in writing.

8.          No vehicles or materials shall be permitted to block any sidewalks, driveways, loading docks or any other common area nor shall any vehicle be parked in the parking lot for longer than is necessary for the customary business purposes of Tenant. Landlord shall have the right, but not the obligation, to remove any vehicles and dispose of any materials, debris, or other items in violation of this section and such removal or disposal shall be at the sole risk of Tenant and Tenant shall pay the cost therefor to Landlord as Additional Rent upon demand.

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9.          Tenant shall not allow any signs, cards or placards to be posted, or placed within the Premises such that they are visible outside of the Premises except as specifically provided for in this Lease.

10.        Tenant shall not construct, maintain, use or operate within said Premises or elsewhere in the Building or on the outside of the Building, any equipment or machinery which produces music, sound or noise which is audible beyond the Premises.

11.        Bicycles, motor scooters or any other type of vehicle shall not be brought into the lobby or elevators of the Building or into the Premises except for those vehicles which are used by a physically disabled person in the Premises.

12.        All blinds for exterior windows shall be building standard and shall be maintained by Tenant.

13.        No additional locks shall be placed upon doors to or within the Premises except as shall be necessary adequately to safeguard the payroll and other confidential data of the Tenant and its customers and United States Government security classified documents stored with the Premises. The doors leading to the corridors or main hall shall be kept closed during business hours, except as the same may be used for ingress or egress. If Landlord provides a proximity card or key for the entry doors, Landlord may make a reasonable charge for such proximity cards or keys, and replacements. Tenant, upon termination of it tenancy, shall deliver to the Landlord all keys of offices, rooms and toilet rooms which have been furnished Tenant or which the Tenant shall have had made, and in the event of loss of any keys so furnished shall pay Landlord therefore.

14.        Landlord reserves the right to temporarily shut down the air conditioning, electrical systems, heating, plumbing and/or elevators when necessary by reason of accident or emergency, or for repair, alterations, replacements or improvement.

15.        No carpet, rug or other article shall be hung or shaken out of any window of the Building and Tenant shall not sweep or throw or permit to be swept or thrown from the Premises any dirt or other substances into any of the corridors or halls, elevator, or out of the doors or windows or stairways of the Building. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be kept in or about the Building. Smoking or carrying lighted cigars or cigarettes in the elevators of the Building is prohibited.

16.        Landlord shall not restrict access to the Building on weekdays, or weekends, or holidays during the period from 6:30 AM to 10:00 PM except in cases or emergency. Reasonable access to the Premises for Tenant’s employees and customers shall be accorded at all times. Tenant shall be responsible for all persons for whom it requests access and shall be liable to Landlord for all acts of such persons.

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17.        Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by Landlord with respect to the Building’s air conditioning and ventilation systems.

18.        Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale in the Premises.

19.        In the event it becomes necessary for the Landlord to gain access to the underfloor electric and telephone distribution system for purposes of adding or removing wiring, then upon request by Landlord, Tenant agrees to temporarily remove the carpet over the access covers to the underfloor ducts for such period of time until work to be performed has been completed. The cost of such work shall be borne by Landlord except to the extent such work was requested by or is intended to benefit Tenant or the Premises, in which case the cost shall be borne by Tenant.

20.        Violation of these rules, or any amendments thereof or additions thereto, may be considered a default of Tenant’s lease and shall be sufficient cause for termination of the Lease pursuant to the provisions of the Lease at the option of Landlord.

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EXHIBIT C

COMMENCEMENT LETTER

___________, 20___

___________________

___________________

___________________

RE:        Lease dated ________, between _____________, a ________ (“Landlord”) and ______________, a __________ (“Tenant”) concerning ______________.

In accordance with the above-referenced Lease, we request that you and/or the proper authority, please confirm the following statements:

1.          The Commencement Date is deemed to be ______________ and the Expiration Date is ______________.

2.          Tenant acknowledges and agrees that as of the date of this letter (i) all improvements required by the Lease to be performed by Landlord to the Premises have been completed; and (ii) Tenant has accepted the Premises in its current condition, except for ________________________________________.

Please confirm your agreement with the above terms of this letter by signing below and returning a copy to Landlord. Failure to execute this letter and deliver the same to Landlord shall be conclusive evidence against Tenant that the above statements are accurate and true.

Sincerely,

By:

Name:

Its:

AGREED TO & ACCEPTED BY:

By:

Name:

Its:

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EXHIBIT D

ADDITIONAL STIPULATIONS

This extension option is a part of the Lease dated October __, 2017 by and between BROOKWOOD PHILADELPHIA I, LLC, a Delaware limited liability company, and BROOKWOOD PHILADELPHIA II, LLC, a Delaware limited liability company, as tenants in common (“Landlord) and JETPAY HR & PAYROLL SERVICES, INC., a Delaware corporation (“Tenant”) concerning Suite 170 located at 7450 Tilghman Street, Allentown, Pennsylvania.

EXTENSION OPTION. So long as there exists no default either at the time of exercise or on the first day of the Extension Term (as hereinafter defined) and Tenant has not assigned this Lease in whole or in part nor sublet the Premises in whole or in part, Tenant shall have the option to extend the Term for two (2) additional five (5) year periods (each an “Extension Term”) upon written notice to Landlord given not less than nine (9) months and not more than twelve (12) months prior to the expiration of the then current Term. If Tenant fails to exercise its option to extend the Term strictly within the time period set forth in this section, then Tenant’s option(s) to extend the Term shall automatically lapse and be of no further force or effect. In the event that Tenant exercises the option(s) granted hereunder, the applicable Extension Term shall be upon the same terms and conditions as are in effect under this Lease immediately preceding the commencement of such Extension Term, except that the Base Rent due from the Tenant shall be increased to Landlord’s determination of Base Rent as provided herein, and Tenant shall have no further right or option to extend the Term beyond the two (2) Extension Terms provided herein or to any abatements, improvement allowance or other inducements. If Tenant timely exercises its applicable option to extend the Term, then no later than thirty (30) days following receipt of Tenant’s notice, Landlord shall notify Tenant in writing of Landlord’s determination of the Base Rent for such Extension Term (“Landlord’s Rental Notice”). If Tenant does not object to Landlord’s determination of the Base Rent by written notice to Landlord within ten (10) days after the date of Landlord’s Rental Notice, then Tenant shall be deemed to have accepted the Base Rent set forth in Landlord’s Rental Notice. If Tenant does timely object to Landlord’s determination of Base Rent for the Extension Term, the parties shall use commercially reasonable efforts to agree upon the Base Rent for such Extension Term, provided, however, if the parties cannot agree upon the Base Rent within thirty (30) days after Landlord receives Tenant’s notice of objection, then the Term shall not be extended and Tenant’s rights under this section shall terminate and be of no further force or effect.

For the purposes of this section, Base Rent for the Extension Term shall reflect Landlord’s reasonable determination of the fair market rental rate that would be agreed upon between a landlord and a tenant for a comparable term and for space comparable to the Premises in the Building and buildings comparable to the Building in the market area. Such determination of fair market rental rate may take into account any material economic differences between the terms of this Lease and any comparison lease, such as the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. The determination of fair market rental rate may also take into consideration any reasonably anticipated changes in rental conditions from the time such fair market rental rate is being determined and the date upon which the Extension Term shall begin. Notwithstanding the foregoing, in no event shall the Base Rent for any Extension Term be less than the Base Rent paid by Tenant during the last month of the then current Term.

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RIGHT OF FIRST OFFER. Provided that (i) Tenant is not then in default under the Lease beyond the expiration of notice, cure and grace periods, and no condition exists which, with the giving of notice or passage of time or both, would constitute an Event of Default hereunder, (ii) the Lease is then in full force and effect, (iii) the Tenant named herein has not assigned the Lease or sublet any part of the Premises and is then in actual occupancy of the entire Premises demised hereunder, and (iv) Tenant’s financial condition meets the financial criteria Landlord requires for the lease of such space, if, at any time during the Term, any space located within the Building is or will be “available for lease” and Landlord desires to lease such space, Landlord shall notify Tenant. Landlord’s notice shall identify the space available (the "Offered Space"), set forth the terms and conditions on which it is willing to lease the Offered Space, which terms and conditions may include a term whose expiration date is not coterminous with the Term applicable to the Premises, and the date on which such Offered Space is expected to be available (collectively, the “Terms”). Tenant shall thereupon have a one-time right and option to lease the Offered Space on the Terms by delivering notice to Landlord within ten (10) days after receipt of Landlord’s notice, time being of the essence. If Tenant elects to lease the Offered Space, it shall, within thirty (30) days after such election, enter into an amendment to the Lease on a form prepared by Landlord incorporating the Offered Space as part of the Premises subject to the Terms. If Tenant shall not elect to lease the Offered Space within such 10- day period, or fails to enter into such an amendment to the Lease within such 30-day period, then Tenant shall have no further rights under this section. Space shall not be deemed to be "available for lease" if such space is the subject of any option or commitment now or hereafter held by another tenant or the renewal or extension of an expiring lease with a then existing tenant or if such space is vacant as of the date hereof then such space shall not be deemed to be “available for lease” until after the date upon which such space shall have been initially leased to a third party and thereafter becomes vacant. Landlord shall not be liable to Tenant for any failure to deliver such space as a result of any holdover tenant or other occupant of any Offered Space.

FAÇADE SIGNAGE. Upon Landlord’s written approval of the location, material, size, design and content thereof, Tenant may, at its sole cost and expense, install a sign on the exterior of the Building (“Tenant’s Exterior Building Signage”). Tenant’s Exterior Building Signage shall contain only Tenant’s name and no advertising material, shall be in accordance with all applicable laws, and shall be installed by a contractor or other party which meets with Landlord’s prior approval. Tenant shall be solely responsible for obtaining any necessary permits or governmental approvals required for Tenant’s Exterior Building Signage, shall remove Tenant’s Exterior Building Signage upon the expiration or earlier termination of this Lease, and shall reimburse Landlord for the cost of repairing any damage caused thereby. Tenant acknowledges and agrees that Landlord shall have the right, from time to time (but not more frequently than once in any twelve month period), to adopt new reasonable sign criteria governing the Building, and that, in connection therewith, Tenant, at Tenant’s sole cost and expense, shall cause Tenant’s Exterior Building Signage to be aesthetically compatible to any such newly adopted sign criteria. At its expense, Tenant will maintain Tenant’s Exterior Building Signage in good condition and repair and if Tenant fails to do so, Landlord may remove Tenant’s Exterior Building Signage at Tenant’s expense upon twenty (20) days prior notice.

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TERMINATION OPTION. So long as there exists no default either at the time of exercise or on the Early Termination Date (as hereinafter defined), the Tenant named herein has not assigned any portion of this Lease nor sublet any portion of the Premises, Tenant shall have the option to terminate this Lease (the “Termination Right”) effective as of the first day of the eighty-fifth month of the Term (the “Early Termination Date”) upon not less than twelve (12) months prior written notice to Landlord. In order to be effective, such notice must be accompanied by a termination payment equal to (i) the unamortized balance of Landlord’s “Lease Costs” (as hereinafter defined) plus (ii) three (3) months’ Rent at the rate payable as of the Early Termination Date. If Tenant fails to exercise the Termination Right strictly in accordance with this section, then the Termination Right shall automatically lapse and Tenant shall have no right to terminate this Lease. Upon timely exercise of the Termination Right in compliance with the terms hereof, the Early Termination Date shall be deemed the Expiration Date and Tenant shall surrender the Premises on or before the Early Termination Date in accordance with the terms of this Lease. For the purposes hereof, “Lease Costs” shall be the cost of all brokerage commissions, rental abatements, and Tenant allowances, plus interest on the foregoing items accruing from the Rent Commencement Date at the rate of eight percent (8%) per annum. For purposes of determining the unamortized balance of Lease Costs, Lease Costs shall be amortized on a straight line basis over the Initial Term. Within sixty (60) days after substantial completion of Landlord’s Work, Landlord shall provide a detailed breakdown of the Lease Costs and an amortization schedule for the same, provided that any delay in delivery of such breakdown shall not have any impact on the obligation of Tenant to pay such amounts as provided in this paragraph.

GENERATOR. Tenant may locate one (1) back-up generator (“Tenant’s Generator”) in a location adjacent to the Premises. The type, size and exact location of Tenant’s Generator shall be subject to Landlord’s prior approval, which shall not be unreasonably withheld, conditioned, or delayed. It is anticipated that Tenant’s Generator shall be located in the location identified on Exhibit F attached hereto as Generator Location, and Landlord hereby approves the location of Tenant’s Generator within such location. Tenant shall maintain Tenant’s Generator at Tenant’s sole cost in good working order, condition and repair. Tenant’s Generator shall be maintained at the sole risk of Tenant and shall be subject to applicable law and such reasonable rules and regulations from time to time provided by Landlord. Upon Landlord’s request, Tenant shall promptly relocate, temporarily or permanently, Tenant’s Generator. Landlord shall reimburse Tenant for the reasonable out of pocket cost of relocating Tenant’s Generator if such relocation is performed at the request of Landlord. Tenant’s Generator shall not interfere with the use and operation of the Building. To the extent that Tenant’s Generator shares facilities with any Building system, Tenant shall pay the incremental costs of such facilities in excess of the costs that Landlord would incur but for such sharing within thirty (30) days of Landlord’s demand. Upon Landlord’s request, Tenant shall provide sound and visual screening of Tenant’s Generator reasonably acceptable to Landlord and shall secure and protect, to the extent necessary in Landlord’s determination, Tenant’s Generator from vehicular traffic. Tenant shall be required to remove Tenant’s Generator upon expiration or sooner termination of this Lease and repair all damage resulting from such removal and restore any damage caused thereby. Tenant agrees that Tenant’s Generator shall only be used for back up purposes in the event of disruption of Tenant’s primary power source.

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MOVING ALLOWANCE. Landlord shall reimburse Tenant in an amount up to, but not in excess of $121,345.00, being $5.00 per useable square foot of the Premises (the “Moving Allowance”), for the out of pocket costs paid by Tenant for cabling, new furniture, fixtures and equipment and the moving of Tenant’s existing furniture, equipment, other personal property, from Tenant’s current location to the Premises (“Tenant’s Moving Costs”). All Tenant’s Moving Costs shall first be paid by Tenant and then reimbursed by Landlord as follows: subsequent to the Commencement Date and the completion of Tenant’s move, and provided there shall be no existing Event of Default under this Lease, Landlord shall reimburse Tenant for the Tenant’s Moving Costs up to the Moving Allowance within thirty (30) days after Landlord receives Tenant’s bill therefor accompanied by invoices evidencing the amount of Tenant’s Moving Costs and showing that such amounts have been paid in full. There shall be no credit given to Tenant for any unused portion of the Moving Allowance.

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EXHIBIT E

WORK LETTER

1.          Landlord’s Work. Landlord will make certain improvements to the Premises (the “Landlord’s Work”) as set forth on that certain space plan and scope of work (collectively, the “Plans”) attached hereto as Schedule 1 and previously approved by Tenant. Should said Plans or any part of Landlord’s Work require the preparation or development of additional plans or specifications, then Tenant shall have three (3) business days from Landlord’s submission of such additional plans or specifications to Tenant to approve or disapprove the same. Tenant’s failure to so approve or disapprove within such three (3) business day period shall constitute a Tenant Delay (as defined herein) and, at Landlord’s election, be deemed Tenant’s approval thereof. Tenant’s disapproval of such plans and specifications shall specifically identify the nature of such disapproval. Landlord shall then have such plans and specifications amended to incorporate those items specified in Tenant’s disapproval to which Landlord agrees. Tenant’s approval of such plans and specifications shall not be unreasonably withheld, conditioned or delayed. Landlord and Tenant shall diligently work together in good faith to agree upon such plans and specifications, it being agreed that Tenant shall have no right to request that such plans and specifications be revised to reflect any work which is not contemplated on Schedule 1 attached hereto except pursuant to Section 5 below. Upon approval, or deemed approval, of such additional plans and specifications the same shall be deemed the “Plans” for the purposes of this Work Letter. Except as may be otherwise shown on the Plans, Landlord shall perform Landlord’s Work using new building standard materials, quantities and procedures then in use by Landlord.

2.          Substantial Completion.

a.           “Substantial Completion” or “Substantially Complete” means that Landlord’s Work has been sufficiently completed such that the Premises is suitable for its intended purpose, notwithstanding any minor or insubstantial details of construction, decoration or mechanical adjustment that remain to be performed and which can be performed without materially adversely interfering with Tenant’s ability to move into or effectively use the entire Premises. Landlord will use commercially reasonable efforts to Substantially Complete Landlord’s Work on or before February 26, 2018 provided this Lease is fully executed and delivered by both parties no later than October 20, 2017 with final approved plans and specifications for Landlord’s Work attached hereto as Schedule 1.

b.           If there is a delay in the Substantial Completion of the Landlord’s Work for any reason neither Landlord, nor the managing or leasing agent of the Building, nor any of their respective agents, partners or employees, shall have any liability to Tenant in connection with such delay, nor shall the Lease be affected in any way, except that (i) the Commencement Date shall not occur until Landlord’s Work is Substantially Complete and (ii) if Landlord is unable to Substantially Complete Landlord’s Work on or before March 12, 2018 (the “Rent Credit Date”), subject to delays caused by Force Majeure (as defined in the Lease) and Tenant Delay (as defined below), the Tenant shall be entitled to one (1) day of credit against the Base Rent payable hereunder for each day such delay continues beyond March 12, 2018 until Landlord has Substantially Completed Landlord’s Work. Notwithstanding the foregoing or any language of the Lease to the contrary, if Landlord’s Work is delayed by a Tenant Delay (as defined below) then Tenant shall begin paying Rent as required under the Lease as of the date the Commencement Date would have occurred but for such Tenant Delay.

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c.           Landlord shall provide Tenant with Landlord’s best estimate of the date of Substantial Completion at least five (5) business days prior to the date Landlord estimates that Substantial Completion will be achieved. At such point, if in Landlord’s reasonable judgment, Landlord’s Work has proceeded to such point where Tenant may install furniture, fixtures and equipment (“Tenant’s Work”) within the Premises without interfering with the performance of the Landlord’s Work (which date shall be no later than ten (10) days prior to the estimated date of Substantial Completion only with respect to the “Printer Room” identified on the Plans), Landlord shall so notify Tenant and, from and after such date of notification, Tenant and its contractors shall have access to the Premises for the purposes of performing work (the “Tenant Work”) in preparation for Tenant’s occupancy of the Premises. In connection with such access, Tenant agrees (a) to cease promptly upon notice from Landlord any Tenant Work which has not been approved by Landlord or is not in compliance with the provisions of this Lease or which shall interfere with or delay the performance of Landlord’s Work, and (b) to comply promptly with all reasonable procedures and regulations prescribed by Landlord from time to time for coordinating the Landlord’s Work the Tenant Work, each with the other and with any other activity or work in the Building, including, without limitation, the use of labor which shall work in harmony with all other contractors performing work at the Building. Such access by Tenant shall be deemed to be subject to all of the applicable provisions of the Lease, except that (x) there shall be no obligation on the part of Tenant solely because of such access to pay any Rent prior to the Rent Commencement Date, and (y) Tenant shall not be deemed thereby to have taken or accepted possession of the Premises or any portion thereof. If Tenant fails or refuses to comply or cause its contractors to comply with any of the obligations described or referred to above, then immediately upon notice to Tenant, Landlord may revoke Tenant’s rights of access to the Premises. Landlord shall assume no responsibility for the quality or completion of the Tenant Work under this Section, and shall not be responsible for equipment or supplies left or stored on the Premises by Tenant or Tenant’s contractors.

3.          Allowance. Landlord shall provide Tenant with a tenant improvement allowance in an amount not greater than Nine Hundred Twenty-Two Thousand Two Hundred Twenty-Two and 00/100 Dollars ($922,222.00) (the “Allowance”) to be applied to the cost to perform Landlord’s Work. A four percent (4%) construction project management fee based upon the total cost of Landlord’s Work shall be paid to Landlord out of the Allowance. Landlord shall pay the aggregate cost of Landlord’s Work up to an amount not to exceed the Allowance and Tenant shall pay the excess of the aggregate cost of the Landlord’s Work over the Allowance (the “Excess”). If Landlord estimates at any time or from time to time that there will be an Excess, Landlord shall notify Tenant in writing of Landlord’s good faith estimate of the amount thereof, which estimate shall be itemized in reasonable detail. Tenant shall pay Landlord’s good faith estimate of the Excess billed by Landlord within thirty (30) days after it receives Landlord’s bill therefor. In the event Tenant fails to timely pay any such good faith estimate of the Excess, such failure shall be deemed a Tenant Delay and Landlord shall be entitled to suspend the performance of Landlord’s Work until such time as such payment is received by Landlord. If the aggregate total cost of Landlord’s Work performed pursuant to this Work Letter is less than the Allowance, then Tenant may use any unused portion of the Allowance toward Tenant’s moving expenses from its existing location to the Premises and toward the cost of Tenant’s furniture, fixtures and equipment to be utilized by Tenant at the Premises and Tenant may use up to $40,448.33 of any unused portion of the Allowance toward the next installment of Base Rent due hereunder. Any other remaining portion of the Allowance shall be retained by Landlord.

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4.          Tenant Delay. In addition to any occurrence defined elsewhere in the Lease or in this Work Letter as Tenant Delay, “Tenant Delay” means the occurrence of any one or more of the following which cause an actual delay in the completion of Landlord’s Work: (i) Tenant is Delinquent (as hereafter defined) in submitting to Landlord any information, authorization or approvals requested by Landlord in connection with the performance of Landlord’s Work; (ii) the performance or completion of any work or activity by a party employed by Tenant, including any of Tenant’s employees, agents, contractors, subcontractors and materialmen; (iii) any postponements or delays requested by Tenant and agreed to by Landlord regarding the completion of the Landlord’s Work; (iv) any error in Landlord’s Work caused or related to any act or omission by Tenant or its employees or agents; (v) the performance of any TI Changes (as defined below); (vi) any failure of Tenant to timely review and/or approve the Plans in accordance with this Work Letter; or (viii) any other act or omission of the Tenant which causes a delay in the completion of Landlord’s Work. For the purposes of this Section, the term “Delinquent” shall mean that the action or communication required of Tenant is not taken within five (5) days following request by Landlord.

5.          Changes to Landlord’s Work. Tenant will have no right to make any changes (“TI Changes”) to the Plans or Landlord’s Work without the prior written consent of Landlord and the execution by Landlord and Tenant of a written change order which specifies (i) the nature of the TI Changes; (ii) an estimate of the cost to Tenant as a result of such TI Changes; and (iii) any Tenant Delay that will result from such TI Change. Tenant shall be solely responsible for the costs of all TI Changes and Tenant shall pay such costs as Additional Rent upon demand.

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Schedule 1

[See attached]

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JetPay

Finish Selections

October 19, 2017

Flooring

Carpet 1 - Carpet Tile

Manufacturer: Shaw Contract

Series: #5T079 Field Tile

Color: #78675 Landscape

Location: Open Areas

Installation: Quarter Turn

Carpet 2 - Carpet Tile

Manufacturer: Shaw Contract

Series: #5T078 Realm

Color: #78675 Landscape

Location: Open Areas

Installation: In groups of 4 accent tiles/quarter turn

Carpet 3 - Carpet Tile

Manufacturer: Shaw Contract

Series: #5T079 Field Tile

Color: #78761 Area

Location: Offices, All conference except boardroom

Installation Methods:

-Offices: Monolithic

-Conference Rooms: Quarter Turn

Carpet 4-Carpet Tile

Manufacturer: Shaw Contract

Series: #5T080 Scape

Color: #78761 Area

Location: Boardroom Installation: Monolithic

Luxury Vinyl Plank

Manufacturer: Shaw Hard Surface

Series: #0502V Grain Direct Glue Down

Color: #64155 Ashen

Location: Reception, Boardroom Perimeter, BreakRoom, Executive Bathroom

Vinyl Composition Tile

Manufacturer: Armstrong

Series: Imperial Texture Standard Excelon

Color: #51927 Field Gray

Location: Packaging Area, Storage

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Static Dissipative Tile

Manufacturer: Armstrong

Color: #51956 Fossil Gray

Location: Print Room, Splitter Room

Vinyl Base 1 - Cove Base

Manufacturer: Johnsonite

Color: #264 Grounded

Location: All carpeted Areas

Vinyl Base 2 - Cove Base

Manufacturer: Johnsonite

Color: #281 Grizzly

Location: All Area with Vinyl Comp. Tile/Static Diss. Tile

Vinyl Base 3- Millwork Base System

Manufacturer: Johnsonite

Series: Reveal 4.25" High base

Color: #MW-281 Grizzly

Location: All areas with Luxury Vinyl Floor, President Office/Bathroon

Wall Finishes

Paint 1 - Sherwin Williams

Color: #SW7070 Site White

Location: General color and Door trim unless other wise noted

Paint 2 - Sherwin Williams

Color: #SW7017 Dorian Gray

Location: Back wall at BreakRoom, One wall in each office

Paint 3 - Sherwin Williams

Color: #SW6885 Knockout Orange

Location: Behind Copy Counters

Paint 4 - Sherwin Williams

Color: #SW6767 Aquarium

Locations: Behind TV walls at Conference Rooms/Boardroom

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Vinyl Wall Covering 1

Manufacturer: Eykon

Series: Fabrications

Color: #A151-022

Location: Wall behind reception desk

Vinyl Wall Covering 2

Manufacturer: Eykon

Series: Lombard

Color: #A132-011

Location: All walls in boardroom except walls with TV's (opposite door)

Millwork Finishes

SS-1 - Manufactured Stone

Manufacturer: Quartz Cambria

Color: New Quay

Location: Reception Desk Transaction Counters, Boardroom Counter top

SS-2 - Solid Surface

Manufacturer: Corian

Color: Concrete

Location: Breakroom/Coffee Counter tops

Plam 1 - Plastic Laminate

Manufacturer: Wilsonart

Color: #7966K-12 5^th Ave Elm

Location: Reception Desk fronts & Boardroom/Coffee cabinets

Plam 2 - Plastic Laminate

Manufacturer: Wilsonart

Color: #D91-60 Slate Grey

Location: reception Desk Fronts/back

Plam 3 - Plastic Laminate

Manufacturer: Wilsonart Color: D96-60 Shadow

Location: Worksurfaces and any other interior desk locations

Plam 4- Plastic Laminate

Manufacturer: Wilsonart

Color: #Y0356-60 Sea Berry

Location: Breakroom Base Cabinets

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Plam 5 - Plastic Laminate

Manufacturer: Wilsoanrt

Color: #7976K-12 White Cypress

Location: Break Room Upper cabinets

Plam 6 - Plastic Laminate

Manufacturer: Wilsonart

Color: #Y0338-60 Marmalade

Location: Copy Area base cabinets

Plam 7 - Plastic Laminate

Manufacturer: Wilsonart

Color: #4810-60 Titanium EV

Location: Copy Area counter tops

Decorative Pendant

Manufacturer: Kichler

Series: Everly Lighting Collection

Color: Brushed Chrome Finish/Seeded Glass

Location: Above Reception Desk

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EXHIBIT F

PARKING PLANS AND GENERATOR LOCATION

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Diane (Vogt) Faro, certify that:

1. I have reviewed this quarterly report on Form 10-Q of JetPay Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of a transition report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2017	/s/ Diane (Vogt) Faro
	Diane (Vogt) Faro
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Gregory M. Krzemien, certify that:

1. I have reviewed this quarterly report on Form 10-Q of JetPay Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of a transition report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2017	/s/ Gregory M. Krzemien
	Gregory M. Krzemien
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

In connection with the quarterly report on Form 10-Q of JetPay Corporation (the “Company”) for the quarter ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Diane (Vogt) Faro, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2017	/s/ Diane (Vogt) Faro
	Diane (Vogt) Faro
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION

In connection with the quarterly report on Form 10-Q of JetPay Corporation (the “Company”) for the quarter ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory M. Krzemien, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2017	/s/ Gregory M. Krzemien
	Gregory M. Krzemien
	Chief Financial Officer