Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2017
Note
1Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Bottomline Technologies (de),
Inc. (referred to below as we, us, our or Bottomline) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the
United States (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the interim financial information
have been included. Operating results for the three months ended September 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending June 30, 2018 (fiscal year
2018). For further information, refer to the financial statements and footnotes included in the Annual Report on Form
10-K
as filed with the Securities and Exchange Commission (SEC) on August 28, 2017.
Note 2Recent Accounting Pronouncements
Recently Adopted Pronouncements
Cloud Computing Arrangements:
In April 2015, the Financial Accounting Standards Board (FASB) issued an accounting standard update which
provides guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar arrangements) includes a software license and, based on that determination, how to
account for such arrangements. We adopted this standard effective July 1, 2016 on a prospective basis. The adoption of this standard did not have a material impact on our financial statements. In December 2016, the FASB issued a technical
update to this standard, clarifying that any software license within the scope of this accounting standard shall be accounted for as an intangible asset by the licensee. We adopted the technical update on July 1, 2017, and reclassified software
licenses from property and equipment, net to intangible assets, net in our consolidated balance sheets for all periods presented. The total amount reclassified in our June 30, 2017 consolidated balance sheet was $29.1 million.
Share-Based Compensation:
In March 2016, the FASB issued an accounting standard update intended to simplify several areas of accounting
for share-based compensation arrangements, including the income tax impact of excess tax benefits and tax deficiencies, accounting for forfeitures, statutory tax withholding requirements and the presentation of excess tax benefits in the statement
of cash flows. We adopted this standard on July 1, 2017 (the first quarter of our fiscal year 2018). Upon adoption of this standard excess tax benefits of $0.2 million were recognized as a component of our net deferred tax assets, with an
offsetting cumulative effect adjustment recorded as a reduction to our accumulated deficit in our consolidated balance sheet. Please refer to
Note 7 Income Taxes
for additional discussion of the recognition of excess tax benefits.
We adopted the cash flow presentation of excess tax benefits retrospectively, which resulted in the reclassification of excess tax benefits
associated with stock compensation of $0.04 million from financing activities to operating activities for the three months ended September 30, 2016 in our consolidated statement of cash flows.
The new standard also allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as
they occur, and we have elected to continue to estimate forfeitures.
Consolidation:
In October 2016, the FASB issued an accounting
standard update to remove the requirement that a single decision maker consider, in its assessment of primary beneficiary, its indirect interest held through related parties under common control to be the equivalent of a direct interest in a
variable interest entity (VIE). Instead, indirect interest held through related parties under common control will be included in the primary beneficiary assessment based on proportionate basis, consistent with the indirect interest held through
other parties. We adopted this standard effective July 1, 2017. The adoption of this standard did not have an impact on our financial statements.
Accounting Pronouncements to be Adopted
Revenue Recognition:
In May 2014, the FASB issued an accounting standard update which provides for new revenue recognition guidance,
superseding nearly all existing revenue recognition guidance. The core principle of the new guidance is to recognize revenue when promised goods or services are transferred to customers, in an amount that reflects the consideration to which the
vendor expects to receive for those goods or services. The new standard is expected to require significantly more judgment and estimation within the revenue recognition process than required under existing U.S. GAAP, including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations. The new standard is also expected to significantly
increase the financial statement disclosure related to revenue recognition. This standard is currently effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019) using one of two methods of adoption,
subject to the election of certain practical expedients: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) modified retrospective with
the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures.
6
We are continuing to evaluate the expected impact of this standard on our consolidated financial
statements and currently plan to adopt the standard using the modified retrospective method. While our assessment of the impact of this standard is not complete, we currently believe that the most significant impact will be in certain areas:
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Under the new standard, vendor specific objective evidence (VSOE) will no longer be required to determine the fair value of elements in a software arrangement. As a result, the absence of VSOE in certain software
arrangements will no longer result in strict revenue deferral. Absent a change in how we license our products, we believe that this will result in greater
up-front
recognition of software revenue for certain
of our license arrangements.
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Under the new standard, certain expenses we incur will require deferral and recognition over the period in which revenue is recognized, subject to certain exceptions. We believe that this will result in the deferral of
certain fulfillment costs associated with our SaaS offerings which would then be recognized as expense over a multi-year period; such costs are expensed directly as incurred today.
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Under the new standard, costs to obtain a contract, including sales commissions, will be capitalized and amortized on a basis that is consistent with the transfer of goods and services to its customer. We anticipate
that this will result in the deferral of certain commission related costs that, today, are expensed as incurred.
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Significantly enhanced financial statement disclosures related to revenue, including information related to the allocation of transaction price across undelivered performance obligations, will be required.
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However, we are unable to quantify the impact of these outcomes at this time, nor can we ensure that our continuing analysis and
interpretation of the standard will result in these financial reporting outcomes.
Financial InstrumentsClassification and
Measurement:
In January 2016, the FASB issued an accounting standard update which requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) at fair value, with changes in fair value recognized in earnings. Under the standard, entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available for
sale as a component of other comprehensive income (OCI). Subject to certain exceptions, entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, plus or minus adjustments for
observable price changes, with all such changes recognized in earnings. This new standard does not change the guidance for classifying and measuring investments in debt securities and loans. The standard is effective for us on July 1, 2018 (the
first quarter of our fiscal year 2019) on a prospective basis. We are currently evaluating the anticipated impact of this standard on our financial statements. We have certain cost method investments of $7.7 million at September 30, 2017,
and to the extent that there are observable price changes following the date of adoption, the accounting for these investments could be affected.
Leases:
In February 2016, the FASB issued an accounting standard update which requires balance sheet recognition of a lease liability
and a corresponding
right-of-use
asset for all leases with terms longer than twelve months. The pattern of recognition of lease related revenue and expenses will be
dependent on its classification. The updated standard requires additional disclosures to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This standard is effective for us on
July 1, 2019 (the first quarter of our fiscal year ending June 30, 2020) with early adoption permitted; adoption is on a modified retrospective basis. We anticipate that the adoption of this standard will have a material impact to our
consolidated balance sheet due to the recognition of right of use assets and lease liabilities; however, we are still evaluating the anticipated impact of this standard on our financial statements.
Financial InstrumentsCredit Losses:
In June 2016, the FASB issued an accounting standard update that introduces a new
forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments including trade receivables. The estimate of expected credit losses will require entities to incorporate historical information,
current information and reasonable and supportable forecasts. This standard also expands the disclosure requirements to enable users of financial statements to understand the entitys assumptions, models and methods for estimating expected
credit losses. This standard is effective for us on July 1, 2020 (the first quarter of our fiscal year 2021) with early application permitted. We are currently evaluating the anticipated impact of this standard on our financial statements.
Statement of Cash Flows:
In August and November of 2016, the FASB issued updates to the accounting standard which addresses the
classification and presentation of certain cash receipts, cash payments and restricted cash in the statement of cash flows. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year 2019) and requires a
retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the anticipated impact of this standard on our financial statements.
Goodwill Impairment:
In January 2017, the FASB issued an accounting standard update to simplify the test for goodwill impairment which
removes step 2 from the goodwill impairment test. Under the revised standard, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting units fair value. The loss should not exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for us on July 1, 2020 (the
first quarter of our fiscal year 2021) on a prospective basis, with early adoption permitted for periods beginning on or after January 1, 2017. We are currently evaluating the impact of this standard on our financial statements and the timing
of adoption.
7
Defined Benefit Plan Expenses:
In March 2017, the FASB issued an accounting standard
update that changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and
non-operating
expense (all other components
of net periodic defined benefit cost). Under the revised standard, the operating expense component will be reported with similar compensation costs, while the
non-operating
components will be reported in Other
Income and Expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as property, plant and equipment. This standard is effective for us on July 1, 2018 (the first quarter of our fiscal year
2019). We do not currently believe that the adoption of this standard will have a material impact on our financial statements.
Note 3Fair Value
Fair Values of Assets and Liabilities
We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as
follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar instruments in active markets or for
similar markets that are not active.
Level 3: Unobservable inputs for which there is little or no market data and which require us to
develop our own assumptions about how market participants would price the asset or liability.
Valuation techniques for assets and
liabilities include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and managements interpretation of current market data. These
unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
At
September 30, 2017 and June 30, 2017, our assets and liabilities measured at fair value on a recurring basis were as follows:
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September 30, 2017
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June 30, 2017
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Fair Value Measurements Using Input
Types
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Fair Value Measurements Using Input
Types
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Level 1
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Level 2
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Level 3
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Total
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Level 1
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Level 2
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Level 3
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Total
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(in thousands)
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Assets
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Money market funds (cash and cash equivalents)
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$
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36
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$
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$
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$
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36
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$
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593
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$
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$
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$
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593
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Available for sale securities
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U.S. Corporate debt securities
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$
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$
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$
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1,906
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$
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1,906
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Derivative interest rate swap
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$
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$
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99
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$
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$
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99
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$
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$
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$
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$
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Liabilities
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Derivative interest rate swap
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$
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$
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334
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$
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$
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334
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$
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$
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$
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$
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Fair Value of Financial Instruments
We have certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable,
a derivative interest rate swap as more fully described in
Note 11 Derivative Instruments
and our 1.5% Convertible Senior Notes maturing on December 1, 2017 (the Notes) as more fully described in
Note 10
Indebtedness
.
Fair value information for each of these instruments is as follows:
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Cash and cash equivalents, accounts receivable and accounts payable fair value approximates their carrying values, due to the short-term nature of these instruments.
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Marketable securities classified as held to maturity are recorded at amortized cost, which at September 30, 2017 and June 30, 2017, approximated fair value.
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Marketable securities classified as available for sale are recorded at fair value. Unrealized gains and losses are included as a component of accumulated other comprehensive loss in stockholders equity, net of
tax. We use the specific identification method to determine any realized gains or losses from the sale of our marketable securities classified as available for sale.
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The fair value of our derivative interest rate swap is based on the present value of projected cash flows that will occur over the life of the instrument, after considering certain contractual terms of the arrangement.
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The carrying value of assets related to deposits we have made to fund future requirements associated with Israeli severance arrangements was $1.5 million at both September 30, 2017 and June 30, 2017,
which approximated their fair value.
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We have certain other investments accounted for at cost. The carrying value of these investments was $7.7 million at both September 30, 2017 and June 30, 2017 and are reported as a component of our other
assets. These investments are recorded at cost, less any write-downs for other-than-temporary impairment charges. To determine the fair value of these investments, we use all available financial information including information based on recent or
pending third-party equity investments in these entities. In certain instances, a cost method investments fair value may not be estimated if there are no identified events or changes in circumstances that would indicate a significant adverse
effect on the fair value of the investment and to do so would be impractical, and as a result, we have not estimated the fair value of these investments.
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The Notes were recorded at $133.3 million upon issuance, which reflected their principal value less the fair value of the embedded conversion option (Conversion Feature). The carrying value (net of debt issuance
costs) of the Notes, $187.3 million at September 30, 2017, will be accreted over the remaining term to maturity to their principal value of $189.8 million. The fair value of the Notes (inclusive of the Conversion Feature) was
approximately $202.8 million as of September 30, 2017. We estimated the fair value of the Notes by reference to quoted market prices (Level 1); however, the Notes have only a limited trading volume and as such this fair value estimate is
not necessarily the value at which the Notes could be retired or transferred.
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Marketable Securities
The table below presents information regarding our marketable securities by major security type as of September 30, 2017 and June 30,
2017.
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September 30, 2017
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June 30, 2017
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Held to
Maturity
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Available
for Sale
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Total
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Held to
Maturity
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Available
for Sale
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Total
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(in thousands)
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Marketable securities:
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Corporate and other debt securities
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$
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68
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$
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$
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68
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$
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67
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$
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1,906
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$
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1,973
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Total marketable securities
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$
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68
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$
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$
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68
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$
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67
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$
|
1,906
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$
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1,973
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Note 4Acquisitions and Other Investments
Decillion
On August 14, 2017,
we acquired Singapore-based Decillion Group (Decillion) for total consideration of 6.2 million Singapore Dollars (approximately $4.6 million based on the exchange rate in effect at the acquisition date), consisting of cash of
$2.8 million and a note payable of $1.8 million. The note is payable in equal installments over ten quarters starting during the three months ended September 30, 2017. Decillion is one of the leading financial messaging solution providers
in the Asia Pacific region. Headquartered in Singapore, Decillion has offices in Australia, China, Indonesia, Malaysia and Thailand and they operate a SWIFT service bureau which connects more than 130 financial institutions and corporations to the
SWIFT community. This acquisition expands the depth and breadth of our financial messaging solutions, particularly in the Asia Pacific region.
In the allocation of the purchase price, which is preliminary at September 30, 2017, we recorded $1.4 million of goodwill. The
goodwill is not deductible for income tax purposes and arose principally due to anticipated future benefits arising from the acquisition. Identifiable intangible assets of $2.4 million, consisting of customer related intangible assets, are
being amortized over their estimated useful life of twelve years. Decillions operating results have been included in our Cloud Solutions segment from the date of the acquisition forward and did not have a material impact on our revenue or
earnings.
Acquisition expenses of approximately $0.4 million were expensed during the three months ended September 30, 2017
related to the Decillion acquisition, principally as a component of general and administrative expense.
9
Other Investments
In December 2015, we made a $3.5 million investment in preferred stock of a privately held, early-stage technology company. We have the ability
to exercise significant influence over this company; however, we have no ability to exercise control. Investments in common stock or in-substance common stock, through which an investor has the ability to exercise significant influence over the
operating or financial policies of the investee, are accounted for under the equity method of accounting. In-substance common stock is an investment that has risk and reward characteristics that are substantially similar to an entitys common
stock. The preferred stock underlying our investment is not in-substance common stock as its terms include a substantive liquidation preference not available to common stockholders. Accordingly, we account for this investment under the cost method
of accounting, subject to periodic review for impairment. Impairment losses, to the extent occurring, would be recorded as an operating expense in the period incurred. Our maximum investment exposure, which is determined based on the cost of our
investment, was $3.5 million as of September 30, 2017 and is located within other assets on our consolidated balance sheet. There were no indicators of impairment identified as of September 30, 2017.
We concluded that this company is a VIE as it lacks sufficient equity to finance its activities. However, we also concluded that we are not
the primary beneficiary of the VIE as we do not have the power to exert control or direct the activities that most significantly impact the VIEs economic performance. As we have determined we are not the primary beneficiary, consolidation of
the VIE is not required.
Note 5Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share:
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Three Months Ended
September 30,
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2017
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2016
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(in thousands, except per share
amounts)
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Numeratorbasic and diluted:
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Net loss
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$
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(4,241
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)
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$
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(10,508
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)
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Denominator:
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Shares used in computing basic and diluted net loss per share attributable to common
stockholders
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37,730
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37,940
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Basic and diluted net loss per share attributable to common stockholders
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$
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(0.11
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)
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$
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(0.28
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)
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For the three months ended September 30, 2017 and 2016, approximately 2.8 million and
3.3 million shares, respectively, of unvested restricted stock and stock options were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.
As more fully discussed in
Note 10 Indebtedness
we issued the Notes in December 2012. We intend, upon conversion or maturity of
the Notes, to satisfy any conversion premium by issuing shares of our common stock. We have also issued warrants for up to 6.3 million shares of our common stock at an exercise price of $40.04 per share. For the three months ended
September 30, 2017, shares potentially issuable upon conversion or maturity of the Notes or upon exercise of the warrants were excluded from our earnings per share calculations as their effect would have been anti-dilutive.
Note 6Operations by Segments and Geographic Areas
Segment Information
Operating
segments are the components of our business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief
operating decision maker is our chief executive officer. Our operating segments are organized principally by the type of product or service offered and by geography.
Similar operating segments have been aggregated into four reportable segments as follows:
Cloud Solutions.
Our Cloud Solutions segment provides customers predominately with SaaS technology offerings that facilitate electronic
payment, electronic invoicing, and spend management. Our legal spend management solutions, which enable customers to create more efficient processes for managing invoices generated by outside law firms while offering insight into important legal
spend factors such as expense monitoring and outside counsel performance, are included within this segment. This segment also incorporates our settlement network solutions (financial messaging and
Paymode-X).
Our settlement network solutions are highly scalable, secure and cost effective and facilitate cash payment and transaction settlement between businesses, their vendors and banks. Revenue within this segment is generally recognized on a subscription
or transaction basis or ratably over the estimated life of the customer relationship.
Digital Banking.
Our Digital Banking segment
provides solutions that are specifically designed for banking and financial institution customers. Our Digital Banking products are now sold predominantly on a subscription basis, which has the effect of contributing to recurring subscription and
transaction revenue and the revenue predictability of future periods, but which also delays revenue recognition over a longer period.
10
Payments and Transactional Documents.
Our Payments and Transactional Documents segment is
a supplier of software products that provide a range of financial business process management solutions, including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also
provides a range of standard professional services and equipment and supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. However, if
we license products on a subscription basis, revenue is typically recorded ratably over the subscription period or the expected life of the customer relationship.
Other
. Our Other segment consists of our healthcare and cyber fraud and risk management operating segments. Our cyber fraud and risk
management solutions
non-invasively
monitor, replay and analyze user behavior to flag and even stop suspicious activity in real time. Our healthcare solutions for patient registration, electronic signature,
mobile document and payments allow healthcare organizations to improve business efficiencies, reduce costs and improve care quality. When licensed on a perpetual license basis, revenue for our cyber fraud and risk management and healthcare products
is typically recorded upon delivery, with the exception of software maintenance which is normally recorded ratably over a twelve-month period. When products are licensed on a subscription basis, revenue is normally recorded ratably over the
subscription period.
Periodically a sales person in one operating segment will sell products and services that are typically sold within
a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of transactions that have been allocated to a
specific segment based on the contributing sales resources, rather than the nature of the product or service. Conversely, a transaction can be recorded by the operating segment primarily responsible for delivery to the customer, even if the sales
person is assigned to a different operating segment.
Our chief operating decision maker assesses segment performance based on a variety
of factors that normally include segment revenue and a segment measure of profit or loss. Each segments measure of profit or loss is on a
pre-tax
basis and excludes certain items as presented in our
reconciliation of the measure of total segment profit to GAAP loss before income taxes that follows. There are no inter-segment sales; accordingly, the measure of segment revenue and profit or loss reflects only revenues from external customers. The
costs of certain corporate level expenses, primarily general and administrative expenses, are allocated to our operating segments based on a percentage of the segments revenues.
We do not track or assign our assets by operating segment.
Segment information for the three months ended September 30, 2017 and 2016 according to the segment descriptions above, is as follows:
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Three Months Ended
September 30,
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2017
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2016
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(in thousands)
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Segment revenue:
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Cloud Solutions
(1)
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$
|
42,444
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$
|
35,557
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Digital Banking
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21,321
|
|
|
|
18,186
|
|
Payments and Transactional Documents
|
|
|
23,049
|
|
|
|
24,846
|
|
Other
|
|
|
4,482
|
|
|
|
4,495
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
|
$
|
91,296
|
|
|
$
|
83,084
|
|
|
|
|
|
|
|
|
|
|
Segment measure of profit (loss):
|
|
|
|
|
|
|
|
|
Cloud Solutions
|
|
$
|
9,384
|
|
|
$
|
5,453
|
|
Digital Banking
|
|
|
2,161
|
|
|
|
25
|
|
Payments and Transactional Documents
|
|
|
6,360
|
|
|
|
7,576
|
|
Other
|
|
|
(484
|
)
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
Total measure of segment profit
|
|
$
|
17,421
|
|
|
$
|
12,609
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Revenues from our legal spend management solutions were $15.5 million and $13.0 million for the three months ended September 30, 2017 and 2016,
respectively. Revenues from our settlement network solutions were $27.0 million and $22.6 million for the three months ended September 30, 2017 and 2016, respectively.
|
11
A reconciliation of the measure of total segment profit to GAAP loss before income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Total measure of segment profit
|
|
$
|
17,421
|
|
|
$
|
12,609
|
|
Less:
|
|
|
|
|
|
|
|
|
Amortization of acquisition-related intangible assets
|
|
|
(5,188
|
)
|
|
|
(6,285
|
)
|
Stock-based compensation expense
|
|
|
(8,460
|
)
|
|
|
(8,199
|
)
|
Acquisition and integration related expenses
|
|
|
(992
|
)
|
|
|
(1,249
|
)
|
Restructuring benefit
|
|
|
9
|
|
|
|
|
|
Minimum pension liability and related adjustments
|
|
|
(35
|
)
|
|
|
(277
|
)
|
Global ERP system implementation costs
|
|
|
(2,076
|
)
|
|
|
(2,491
|
)
|
Other expense, net
|
|
|
(4,463
|
)
|
|
|
(3,935
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(3,784
|
)
|
|
$
|
(9,827
|
)
|
|
|
|
|
|
|
|
|
|
The following depreciation and other amortization expense amounts are included in the measure of segment
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Depreciation and other amortization expense:
|
|
|
|
|
|
|
|
|
Cloud Solutions
|
|
$
|
2,443
|
|
|
$
|
1,840
|
|
Digital Banking
|
|
|
1,492
|
|
|
|
1,370
|
|
Payments and Transactional Documents
|
|
|
639
|
|
|
|
805
|
|
Other
|
|
|
94
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and other amortization expense
|
|
$
|
4,668
|
|
|
$
|
4,087
|
|
|
|
|
|
|
|
|
|
|
Geographic Information
We have presented geographic information about our revenues below. This presentation allocates revenue based on the point of sale, not the
location of the customer. Accordingly, we derive revenues from geographic locations based on the location of the customer that would vary from the geographic areas listed here; particularly in respect of financial institution customers located in
Australia for which the point of sale was North America and customers located in Africa for which the point of sale was Israel.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
North America
|
|
$
|
57,570
|
|
|
$
|
50,522
|
|
United Kingdom
|
|
|
20,071
|
|
|
|
20,831
|
|
Continental Europe
|
|
|
10,411
|
|
|
|
9,352
|
|
Asia-Pacific and Middle East
|
|
|
3,244
|
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
|
Total revenues from unaffiliated customers
|
|
$
|
91,296
|
|
|
$
|
83,084
|
|
|
|
|
|
|
|
|
|
|
12
Long-lived assets based on geographical location, excluding deferred tax assets and intangible
assets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
34,665
|
|
|
$
|
35,569
|
|
United Kingdom
|
|
|
5,193
|
|
|
|
5,188
|
|
Continental Europe
|
|
|
1,114
|
|
|
|
1,208
|
|
Asia-Pacific and Middle East
|
|
|
2,332
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
43,304
|
|
|
$
|
43,866
|
|
|
|
|
|
|
|
|
|
|
Note 7Income Taxes
The income tax expense we record in any interim period is based on our estimated effective tax rate for the fiscal year for those tax
jurisdictions in which we can reliably estimate our effective tax rate. The calculation of our estimated effective tax rate requires an estimate of
pre-tax
income by tax jurisdiction, as well as total tax
expense for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense or
pre-tax
income, including
income by jurisdiction. For those tax jurisdictions for which we are unable to reliably estimate an overall effective tax rate, we calculate income tax expense based upon the actual effective tax rate for the
year-to-date
period.
We recorded income tax expense of $0.5 million and $0.7 million
for the three months ended September 30, 2017 and 2016, respectively. The income tax expense for the three months ended September 30, 2017 was principally due to tax expense associated with our U.S. and UK operations, offset in part
by a tax benefit associated with our Swiss and Israeli operations. Tax expense associated with our U.S. operations arose primarily as a result of deferred tax expense for goodwill that is deductible for tax purposes but not amortized for financial
reporting purposes. The income tax expense for the three months ended September 30, 2016 was principally due to tax expense associated with our U.S. and UK operations, offset in part by a tax benefit associated with our Swiss and Israeli
operations.
We currently anticipate that our unrecognized tax benefits will decrease within the next twelve months by approximately
$0.4 million as a result of the expiration of certain statutes of limitations associated with intercompany transactions subject to tax in multiple jurisdictions.
We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization
of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability
considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the
availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. The process of assessing deferred tax asset
recoverability is inherently judgmental, and we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our
projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.
Effective July 1, 2017, we adopted a new accounting standard intended to simplify certain aspects of accounting for share-based
compensation arrangements, including the associated income tax consequences. Upon adoption, excess tax benefits associated with share-based compensation arrangements that previously were only recognized for financial reporting purposes when they
actually reduced currently payable income taxes were recognized as deferred tax assets, net of any required valuation allowance. Accordingly, after adoption, we recognized the following:
|
|
|
|
|
|
|
(in thousands)
|
|
Increase to deferred tax assets for excess tax benefits
|
|
$
|
17,393
|
|
Increase to deferred tax asset valuation allowance
|
|
|
(17,144
|
)
|
|
|
|
|
|
Net increase to deferred tax assets
|
|
$
|
249
|
|
|
|
|
|
|
This net increase to our deferred tax assets was recorded as a cumulative effect adjustment, reducing the
accumulated deficit in our consolidated balance sheet.
At September 30, 2017 we had a total valuation allowance of $55.1 million
against our deferred tax assets given the uncertainty of recoverability of these amounts. The increase in our valuation allowance during the quarter ended September 30, 2017 relates to the valuation allowance provided against excess tax
benefits associated with share-based payment arrangements, as discussed above.
13
In November 2016, the Internal Revenue Service commenced an audit on our US federal tax return
for the fiscal year ended June 30, 2015. We do not expect this audit to have a material impact on our financial statements.
Note 8Goodwill
and Other Intangible Assets
Goodwill and acquired intangible assets are initially recorded at fair value and tested periodically for
impairment. We perform an impairment test of goodwill during the fourth quarter of each fiscal year or whenever indicators of potential impairment arise.
At September 30, 2017, the carrying value of goodwill for all of our reporting units was $197.0 million, and the carrying value of
goodwill in our Intellinx reporting unit was $4.4 million, which we believe to be at a heightened risk of impairment. Please refer to
Note 7. Goodwill and Other Intangible Assets
to our consolidated financial statements
included in Item 8 of our Annual Report in Form
10-K
for the fiscal year ended June 30, 2017 for more information regarding our accumulated impairment losses and goodwill balances.
Effective July 1, 2017, we adopted an accounting standard update requiring that software be classified as an intangible asset rather than
an element of property and equipment. Intangible asset information as of June 30, 2017 has been recast in the table that follows, to reflect this change.
The following tables set forth the information for intangible assets subject to amortization and for intangible assets not subject to
amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Weighted Average
Remaining Life
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
$
|
194,029
|
|
|
$
|
(126,218
|
)
|
|
$
|
67,811
|
|
|
|
8.6
|
|
Core technology
|
|
|
130,655
|
|
|
|
(76,731
|
)
|
|
|
53,924
|
|
|
|
8.6
|
|
Other intangible assets
|
|
|
20,502
|
|
|
|
(15,929
|
)
|
|
|
4,573
|
|
|
|
6.4
|
|
Capitalized software development costs
|
|
|
16,913
|
|
|
|
(4,078
|
)
|
|
|
12,835
|
|
|
|
4.8
|
|
Software
(1)
|
|
|
56,427
|
|
|
|
(27,497
|
)
|
|
|
28,930
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
418,526
|
|
|
$
|
(250,453
|
)
|
|
$
|
168,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
196,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
365,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Weighted Average
Remaining Life
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
$
|
190,965
|
|
|
$
|
(122,698
|
)
|
|
$
|
68,267
|
|
|
|
8.7
|
|
Core technology
|
|
|
130,572
|
|
|
|
(74,452
|
)
|
|
|
56,120
|
|
|
|
8.8
|
|
Other intangible assets
|
|
|
20,591
|
|
|
|
(15,691
|
)
|
|
|
4,900
|
|
|
|
6.6
|
|
Capitalized software development costs
|
|
|
16,304
|
|
|
|
(3,423
|
)
|
|
|
12,881
|
|
|
|
5.0
|
|
Software
(1)
|
|
|
54,489
|
|
|
|
(25,377
|
)
|
|
|
29,112
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
412,921
|
|
|
$
|
(241,641
|
)
|
|
$
|
171,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
194,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
365,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Software includes purchased software and software developed for internal use.
|
14
Estimated amortization expense for the remainder of fiscal year 2018 and subsequent fiscal years
for acquired intangible assets, capitalized software development costs and software is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Intangible
Assets
|
|
|
Capitalized Software
Development Costs
|
|
|
Software
|
|
|
|
(in thousands)
|
|
Remaining 2018
|
|
$
|
15,680
|
|
|
$
|
2,016
|
|
|
|
6,189
|
|
2019
|
|
|
18,874
|
|
|
|
2,687
|
|
|
|
7,202
|
|
2020
|
|
|
16,777
|
|
|
|
2,687
|
|
|
|
5,723
|
|
2021
|
|
|
15,199
|
|
|
|
2,687
|
|
|
|
3,377
|
|
2022
|
|
|
13,240
|
|
|
|
2,687
|
|
|
|
2,157
|
|
2023 and thereafter
|
|
|
46,538
|
|
|
|
|
|
|
|
3,121
|
|
Each period, for capitalized software development costs, we evaluate whether amortization expense using a
ratio of revenue in the period to total expected revenue over the products expected useful life would result in greater amortization than as calculated under a straight-line methodology and, if that were to occur, amortization in that period
would be accelerated accordingly.
The following table represents a rollforward of our goodwill balances, by reportable segment, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud
Solutions
|
|
|
Digital
Banking
|
|
|
Payments and
Transactional
Documents
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at June 30, 2017
(1)
|
|
$
|
90,069
|
|
|
$
|
35,880
|
|
|
$
|
60,557
|
|
|
$
|
8,194
|
|
|
$
|
194,700
|
|
Goodwill acquired during the period
|
|
|
1,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,421
|
|
Impact of foreign currency translation
|
|
|
244
|
|
|
|
|
|
|
|
610
|
|
|
|
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
(1)
|
|
$
|
91,734
|
|
|
$
|
35,880
|
|
|
$
|
61,167
|
|
|
$
|
8,194
|
|
|
$
|
196,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other goodwill balance is net of $7.5 million accumulated impairment losses.
|
There can be no assurance that there will not be impairment charges in future periods as a result of future impairment reviews. To the extent
that future impairment charges occur it would likely have a material impact on our financial results.
Note 9Commitments and Contingencies
Legal Matters
In May
2017, we received notification from a customer alleging a warranty claim associated with software we licensed to them in September 2013. Their claim seeks recovery of $1.269 million in software, professional services and support fees, inclusive
of related sales tax. On September 22, 2017, the customer commenced arbitration proceedings in connection with the claim. No date for the arbitration has been set. We believe the claim is without merit and intend to vigorously defend ourselves.
At September 30, 2017 we had not accrued for any losses associated with this matter as we do not believe a loss is probable.
We are,
from time to time, a party to legal proceedings and claims that arise out of the ordinary course of our business. We are not currently a party to any material legal proceedings.
Note 10Indebtedness
Credit Agreement
On December 9, 2016, we (as borrower) and certain of our existing and future domestic material restricted subsidiaries (the
Guarantors) entered into a credit agreement (the Credit Agreement) with Bank of America, N.A. and certain other lenders (the Lenders) that provides for a five-year revolving credit facility in the amount of up to $300 million (the Credit
Facility). We intend to finance the repayment of the principal balance of the Notes through a combination of cash on hand and with borrowings under the Credit Facility.
Under the Credit Agreement, we also have the right to request an increase of the aggregate commitments under the Credit Facility by up to
$150 million without the consent of any Lenders not participating in such increase, subject to specified conditions.
15
The proceeds of the Credit Facility may be used for lawful corporate purposes of Bottomline and
its subsidiaries, including acquisitions, share buybacks, capital expenditures, the repayment or refinancing of indebtedness, redemption of the Notes and general corporate purposes. The Credit Facility is available for the issuance of up to
$20 million of letters of credit and up to $20 million of swing line loans. The Credit Facility will terminate on December 8, 2021.
Loans outstanding under the Credit Facility will bear interest, at our option, at either (i) a Eurodollar rate plus a margin of between
1.50% and 2.25% (which is initially 1.75%) based on the Consolidated Net Leverage Ratio (as defined in the Credit Agreement), or (ii) a base rate plus a margin of between 0.50% and 1.25% (which is initially 0.75%) based on the Consolidated Net
Leverage Ratio. Loans under the Credit Agreement may be prepaid at par and commitments under the Credit Agreement may be reduced at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs).
The Credit Facility is guaranteed by the Guarantors and is secured by substantially all of our domestic assets and those of the Guarantors,
including a pledge of all of the shares of capital stock of the Guarantors and 65% of the shares of the capital stock of our first-tier foreign subsidiaries or those of any Guarantor, in each case subject to certain exceptions as set forth in the
Credit Agreement. The collateral does not include, among other things, any real property or the capital stock or any assets of any unrestricted subsidiary.
The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to, material adverse events,
specified restrictions on indebtedness, liens, investments, acquisitions, sales of assets, dividends and other restricted payments, and transactions with affiliates. We are required to comply with (a) a maximum consolidated net leverage ratio
of 3.75 to 1.00, stepping down to 3.50 to 1.00 for the quarter ending June 30, 2018; (b) a minimum consolidated interest coverage ratio of 3.00 to 1.00; and (c) a minimum liquidity requirement at all times that the Notes are
outstanding, where the outstanding principal amount of the Notes must not exceed the sum of the unutilized availability under the Credit Agreement plus our domestic cash and marketable securities.
As of September 30, 2017, we were in compliance with the covenants associated with the Credit Facility.
The Credit Agreement also contains customary events of default and related cure provisions. In the case of a continuing event of default, the
administrative agent would be entitled to exercise various remedies on behalf of the Lenders, including the acceleration of any outstanding loans.
Convertible Senior Notes
On
December 12, 2012, we issued $189.8 million aggregate principal amount of the Notes, inclusive of the underwriters exercise in full of their over-allotment option of $24.8 million. Cash interest at a rate of 1.50% per year
began to accrue on December 12, 2012 and is payable semi-annually on June 1 and December 1 of each year beginning on June 1, 2013. We received net proceeds from the offering of approximately $167.3 million after adjusting
for debt issue costs, including the underwriting discount, and the net cash used to purchase the Note Hedges and sell the Warrants which are discussed below.
The Notes were issued under an indenture dated December 12, 2012 (the Base Indenture) by and between us and The Bank of New York Mellon
Trust Company, N.A., as Trustee and a First Supplemental Indenture dated December 12, 2012 (the First Supplemental Indenture) by and between us and the Trustee (the Base Indenture and the First Supplemental Indenture are collectively referred
to as the Indenture). There are no financial or operating covenants relating to the Notes.
The Notes are senior unsecured obligations of
ours and rank senior in right of payment to any future unsecured indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of our existing and future unsecured indebtedness that is not
subordinated. The Notes are effectively junior in right of payment to any of our secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other
liabilities, including trade payables, of our subsidiaries. Prior to this offering, neither we nor our subsidiaries had any outstanding indebtedness for borrowed money. The Indenture does not limit the amount of debt that we or our subsidiaries may
incur. The Notes are not guaranteed by us or any of our subsidiaries.
Holders were able to convert their Notes at their option, prior to
the close of business on the business day immediately preceding June 1, 2017, in multiples of $1,000 principal amount, only under the following circumstances:
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during any calendar quarter commencing after the calendar quarter ending on March 31, 2013 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days
(whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
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during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of the convertible notes for each trading day of the
measurement period was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on each trading day; or
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upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of our assets.
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On or after June 1, 2017 and until the close of business on the second scheduled trading day immediately preceding the maturity date of
December 1, 2017, holders may convert their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
16
The conversion rate for the Notes is initially 33.3042 shares per $1,000 principal amount of
Notes (equivalent to an initial conversion price of approximately $30.03 per share of our common stock). The conversion rate is subject to customary adjustment for certain events as described in the Indenture.
The principal balance of the Notes is always required to be settled in cash. However, we are permitted at our election to settle any
conversion obligation in excess of the principal portion in cash, shares of our common stock, or a combination of cash and shares of our common stock.
We may not redeem the Notes prior to their maturity date. If we undergo a fundamental change (as described in the Indenture), subject to
certain conditions, holders may require us to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the
Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture
contains customary events of default with respect to the Notes and provides that upon certain events of default occurring and continuing, the Trustee may, and the Trustee at the request of such holders of at least 25% in principal amount of the
convertible notes shall, declare 100% of the principal of and accrued and unpaid interest, if any, on the Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary,
100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.
Under limited circumstances, we may be required to pay contingent interest on the Notes as a result of failure to comply with the
reporting obligations in the Indenture or failure to file required Securities and Exchange Commission documents and reports. When applicable, the contingent interest payable per $1,000 principal amount is 0.25% per annum over the applicable
term as provided under the Indenture. The contingent interest features of the Notes are embedded derivative instruments. The estimated fair value of the contingent interest features of the Notes was zero at issuance and at September 30, 2017,
as the likelihood of any liability being incurred under these provisions was deemed remote and, to the extent occurring, the time period during which a contingent interest charge would apply is projected to be short.
The Notes were recorded upon issuance using a residual method of valuation, meaning since the Conversion Feature was initially a derivative
instrument recorded at fair value, we allocated debt proceeds to the Conversion Feature based on the fair value of that instrument and the residual proceeds were allocated to the Notes. The carrying amount of the Notes will be accreted to the
principal amount over the remaining term to maturity and we will record a corresponding charge to interest expense.
The net carrying
amount of the Notes at September 30, 2017 was as follows:
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(in thousands)
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Principal amount
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$
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189,750
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Unamortized discount
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(2,272
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)
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Unamortized debt issuance costs
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(197
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)
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Net carrying value
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$
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187,281
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We incurred certain third party costs in connection with our issuance of the Notes, principally related to
underwriting and legal fees, which are being amortized to interest expense ratably over the five-year term of the Notes.
The following
table sets forth total interest expense related to the Notes:
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Three Months Ended
September 30,
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2017
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2016
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(in thousands)
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Contractual interest expense (cash)
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$
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712
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$
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712
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Amortization of debt discount
(non-cash)
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3,303
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3,076
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Amortization of debt issue costs
(non-cash)
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296
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296
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$4,311
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$4,084
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Effective interest rate of the liability component
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8.46
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%
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7.99
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%
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Note Hedges
In December 2012, we entered into privately negotiated transactions to purchase hedge instruments (the Note Hedges), covering approximately
6.3 million shares of our common stock. The Note Hedges are subject to anti-dilution provisions substantially similar to those of the Notes, have a strike price that corresponds to the conversion price of the Notes, are exercisable by us upon
any conversion under the Notes and expire on December 1, 2017.
17
The Note Hedges are generally expected to reduce the potential dilution to our common stock (or,
in the event the Conversion Feature is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Notes. The cost of the Note Hedges, $42.3 million,
is expected to be tax deductible as an original issue discount over the life of the Notes, as the Notes and the Note Hedges represent an integrated debt instrument for tax purposes.
The Note Hedges are transactions that are separate from the terms of the Notes and the Warrants (discussed below), and holders of the Notes
and the Warrants have no rights with respect to the Note Hedges.
Warrants
In December 2012, we received aggregate proceeds of $25.8 million, net of issue costs, from the sale of warrants (the Warrants), for the
purchase of up to 6.3 million shares of our common stock, subject to antidilution adjustments, at a strike price of $40.04 per share. The Warrants are exercisable in equal tranches over a period of 150 days beginning on March 1, 2018, and
ending on October 18, 2018.
The Warrants are transactions that are separate from the terms of the Notes and the Note Hedges, and
holders of the Notes and Note Hedges have no rights with respect to the Warrants.
Note Payable
We financed a portion of the Decillion purchase price by entering into a note payable for 2.5 million Singapore Dollars (approximately $1.8
million based on the exchange rate in effect at the acquisition date). The note is payable in equal installments over ten quarters starting during the three months ended September 30, 2017. Please refer to
Note 4 Acquisitions and Other
Investments
for additional discussion of our Decillion acquisition.
Note 11Derivative Instruments
Note Hedges, Conversion Feature and Warrants
Our derivative instruments related to the Notes for the quarter ended September 30, 2017 consisted of the Note Hedges, Conversion Feature
and Warrants as discussed in
Note 10 Indebtedness
. As of September 30, 2017, each of these instruments continued to meet the classification requirements for inclusion within stockholders equity and as such they were not
subject to fair value
re-measurement.
We are required, for the remaining term of the Notes, to assess whether we continue to meet the stockholders equity classification requirements. If in any future
period we failed to satisfy those requirements, we would be required to reclassify the derivative instruments out of stockholders equity, to either assets or liabilities depending on their nature, and record those instruments at fair value
with changes in fair value reflected in earnings.
Cash Flow Hedges
Interest Rate Swap
On
July 10, 2017, we entered into an interest rate swap agreement to hedge our exposure to interest rate risk. The agreement has a notional value of $100.0 million, is effective as of December 1, 2017 and expires on December 1,
2021. The notional amount of the swap will match the corresponding principal amount of the borrowings under the Credit Agreement with the Lenders. During the term of the agreement, we have a fixed interest rate of 1.9275 percent on the notional
amount and Citizens Bank, National Association, as counterparty to the agreement, will pay us interest at a floating rate based on the 1 month
USD-LIBOR-BBA
swap rate on
the notional amount. Interest payments are made quarterly on a net settlement basis.
We designated the interest rate swap as a hedging
instrument and it qualified for hedge accounting upon inception and at September 30, 2017. To continue to qualify for hedge accounting, the instrument must retain a highly effective ability to hedge interest rate risk for borrowings
under the Credit Agreement. We are required to test hedge effectiveness at the end of each financial reporting period. If a derivative qualifies for hedge accounting, changes in fair value of the hedge instrument will be recognized in accumulated
other comprehensive income (loss) (AOCI) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The reclassification into earnings will be recorded as a component of our interest expense within other
expense, net. If the instrument were to lose some or all of its hedge effectiveness, changes in fair value for the ineffective portion of the instrument would be recorded immediately in earnings.
The fair values of the gross asset and gross liability of our interest rate swap and their respective locations in our consolidated balance
sheet at September 30, 2017 were as follows:
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Description
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Balance Sheet Location
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September 30, 2017
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(in thousands)
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Derivative interest rate swap
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Derivative asset
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Other assets
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$
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99
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Derivative liability
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Accrued expenses and other current liabilities
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$
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334
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The following table presents the effect of the derivative interest rate swap in our consolidated
statement of comprehensive loss for the three months ended September 30, 2017.
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Amount of Gain (Loss) Recognized in OCI
on Derivative Instruments (Effective Portion)
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Amount of Gain (Loss) Reclassified from
AOCI into Net Loss (Effective Portion)
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Three Months Ended September 30,
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Three Months Ended September 30,
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2017
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2016
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2017
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2016
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(in thousands)
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Derivative interest rate swap
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$
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(235
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)
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$
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$
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$
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During the three months ended September 30, 2017, we concluded that no portion of the hedge was
ineffective.
As of September 30, 2017, there was $0.2 million of unrealized loss in accumulated other comprehensive loss. We
expect to reclassify approximately $0.2 million of unrealized loss from accumulated other comprehensive loss to earnings over the next twelve months.
Note 12Postretirement and Other Employee Benefits
Defined Benefit Pension Plan
We
sponsor a retirement plan for our Swiss-based employees that is governed by local regulatory requirements. This plan includes certain minimum benefit guarantees that, under U.S. GAAP, require defined benefit plan accounting.
Net periodic pension costs for the Swiss pension plan included the following components:
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Three Months Ended
September 30,
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2017
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2016
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(in thousands)
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Components of net periodic cost
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Service cost
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$
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640
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$
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750
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Interest cost
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89
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32
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Prior service credit
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(23
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)
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(23
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Net actuarial loss
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55
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165
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Expected return on plan assets
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(301
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)
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(224
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Net periodic cost
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$
|
460
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$
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700
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Note 13Subsequent Events
On October 4, 2017, we acquired First Capital Cashflow Ltd. (FCC) for 10.5 million British Pound Sterling (approximately
$13.9 million based on the exchange rate in effect at the acquisition date) in cash and 42,080 shares of our common stock. The common stock is subject to a vesting schedule tied to continued employment; as such we will record share-based
payment expense over the underlying stock vesting period of five years. FCC is headquartered and operates in the United Kingdom and is a leading provider of transaction settlement solutions. The acquisition is expected to strengthen our payment
solution capabilities and further enhance our ability to provide secure, scalable technology solutions that enable customers to adapt to and leverage changes in the business payments environment. FCCs operating results will be included in the
Payments and Transactional Documents segment from the date of the acquisition forward.
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