Company Quick10K Filing
Quick10K
Bottomline Technologies
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$45.70 43 $1,970
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-06-03 M&A, Exhibits
8-K 2019-05-03 Enter Agreement
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-03-06 M&A, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2018-11-15 Officers, Shareholder Vote, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-05-03 Earnings, Exhibits
8-K 2018-02-01 Earnings, Exhibits
FDX Fedex 46,790
WAB Westinghouse Air Brake 11,620
ENTG Entegris 5,380
CISN Cision 1,720
TGP Teekay Lng Partners 1,120
MOSC Mosaic Acquisition 436
BSRR Sierra Bancorp 415
OTIC Otonomy 90
FSI Flexible Solutions International 34
NLST Netlist 0
EPAY 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1-Basis of Presentation
Note 2-Recent Accounting Pronouncements
Note 3-Revenue Recognition
Note 4-Fair Value
Note 5-Business and Asset Acquisitions
Note 6-Net Income (Loss) per Share
Note 7-Operations By Segments and Geographic Areas
Note 8-Income Taxes
Note 9-Goodwill and Other Intangible Assets
Note 10-Commitments and Contingencies
Note 11-Indebtedness
Note 12-Derivative Instruments
Note 13-Postretirement and Other Employee Benefits
Note 14-Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 d689210dex311.htm
EX-31.2 d689210dex312.htm
EX-32.1 d689210dex321.htm
EX-32.2 d689210dex322.htm

Bottomline Technologies Earnings 2019-03-31

EPAY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d689210d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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: 0-25259

 

 

Bottomline Technologies (de), Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   02-0433294

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

325 Corporate Drive

Portsmouth, New Hampshire

  03801-6808
(Address of principal executive offices)   (Zip Code)

(603) 436-0700

(Registrant’s telephone number, including area code)

 

 

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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      Accelerated Filer  
Non-Accelerated Filer      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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Common Stock, $.001 par value per share   EPAY   The Nasdaq Global Select Market

The number of shares outstanding of the registrant’s common stock as of April 30, 2019 was 43,500,999.

 

 

 


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

PART I    Page  

Item 1.

   Unaudited Condensed Consolidated Financial Statements      2  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27  

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      39  

Item 4.

   Controls and Procedures      39  
PART II   

Item 1.

   Legal Proceedings      40  

Item 1A.

   Risk Factors      40  

Item 6.

   Exhibits      41  
   SIGNATURE      42  


Table of Contents

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

 

     March 31,     June 30,  
     2019     2018  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 79,475     $ 121,860  

Cash held for customers

     4,305       2,753  

Marketable securities

     8,515       10,012  

Accounts receivable net of allowances for doubtful accounts of $1,013 at March 31, 2019 and $996 at June 30, 2018

     76,240       74,305  

Prepaid expenses and other current assets

     32,111       19,781  
  

 

 

   

 

 

 

Total current assets

     200,646       228,711  

Property and equipment, net

     54,696       28,895  

Goodwill

     204,167       200,024  

Intangible assets, net

     168,819       161,785  

Other assets

     31,610       16,553  
  

 

 

   

 

 

 

Total assets

   $ 659,938     $ 635,968  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 11,530     $ 10,251  

Accrued expenses and other current liabilities

     32,257       34,994  

Customer account liabilities

     4,305       2,753  

Deferred revenue

     80,082       75,356  
  

 

 

   

 

 

 

Total current liabilities

     128,174       123,354  

Borrowings under credit facility

     110,000       150,000  

Deferred revenue, non-current

     18,722       23,371  

Deferred income taxes

     8,311       8,367  

Other liabilities

     20,398       19,944  
  

 

 

   

 

 

 

Total liabilities

     285,605       325,036  

Stockholders’ equity

    

Preferred Stock, $.001 par value:

    

Authorized shares—4,000; issued and outstanding shares-none

     —         —    

Common Stock, $.001 par value:

    

Authorized shares—100,000; issued shares—46,726 at March 31, 2019 and 44,834 at June 30, 2018; outstanding shares—41,046 at March 31, 2019 and 39,028 at June 30, 2018

     47       45  

Additional paid-in-capital

     711,558       678,549  

Accumulated other comprehensive loss

     (35,200     (30,633

Treasury stock: 5,680 shares at March 31, 2019 and 5,806 shares at June 30, 2018, at cost

     (127,095     (129,914

Accumulated deficit

     (174,977     (207,115
  

 

 

   

 

 

 

Total stockholders’ equity

     374,333       310,932  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 659,938     $ 635,968  
  

 

 

   

 

 

 

See accompanying notes.

 

2


Table of Contents

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share amounts)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2019     2018     2019     2018  

Revenues:

        

Subscriptions and transactions

   $ 75,502     $ 67,378     $ 216,558     $ 191,279  

Software licenses

     3,802       3,134       13,979       8,119  

Service and maintenance

     25,856       29,476       80,047       85,251  

Other

     1,278       1,148       3,137       2,978  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     106,438       101,136       313,721       287,627  

Cost of revenues:

        

Subscriptions and transactions

     31,623       30,771       94,644       85,404  

Software licenses

     226       233       667       632  

Service and maintenance

     12,818       13,861       38,052       39,195  

Other

     1,046       930       2,461       2,298  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     45,713       45,795       135,824       127,529  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     60,725       55,341       177,897       160,098  

Operating expenses:

        

Sales and marketing

     25,165       22,465       70,772       63,255  

Product development and engineering

     16,887       14,179       50,267       41,981  

General and administrative

     13,175       12,763       38,944       35,589  

Amortization of acquisition-related intangible assets

     5,230       5,818       15,809       16,708  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     60,457       55,225       175,792       157,533  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     268       116       2,105       2,565  

Other expense, net

     (695     (1,111     (2,334     (8,751
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (427     (995     (229     (6,186

Income tax benefit (provision)

     1,251       (7     6,104       4,031  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 824     $ (1,002   $ 5,875     $ (2,155
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

Basic

   $ 0.02     $ (0.03   $ 0.15     $ (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.02     $ (0.03   $ 0.14     $ (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net income (loss) per share:

        

Basic

     40,911       38,348       40,412       38,055  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     41,625       38,348       41,650       38,055  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Unrealized gain (loss) on available for sale securities

     5       (4     11       (7

Unrealized gain (loss) on interest rate hedging transactions

     (841     1,004       (1,952     1,373  

Minimum pension liability adjustments

     18       (56     (38     86  

Foreign currency translation adjustments

     1,322       5,652       (2,588     7,798  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

     504       6,596       (4,567     9,250  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,328     $ 5,594     $ 1,308     $ 7,095  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

Bottomline Technologies (de), Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)

 

Three Months Ended March 31, 2019

 
     Common Stock      Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury Stock     Accumulated
Deficit
    Total
Stockholders’
Equity
 
   Shares      Amount     Shares     Amount  

Balance at December 31, 2018

     46,468      $ 46      $ 700,520      $ (35,704     5,730     $ (128,216   $ (175,801   $ 360,845  

Issuance of common stock for employees stock purchase plan and upon exercise of stock options

     21        1        996          (50     1,121         2,118  

Vesting of Restricted stock awards

     237                      —    

Stock compensation plan expense

           10,042                10,042  

Minimum pension liability adjustments, net of tax

              18             18  

Net income

                    824       824  

Unrealized gain on available for sale securities, net of tax

              5             5  

Unrealized loss on interest rate hedging transactions

              (841           (841

Foreign currency translation adjustment

              1,322             1,322  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     46,726      $ 47      $ 711,558      $ (35,200     5,680     $ (127,095   $ (174,977   $ 374,333  

Three Months Ended March 31, 2018

 
     Common Stock      Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury Stock     Accumulated
Deficit
    Total
Stockholders’
Equity
 
   Shares      Amount     Shares     Amount  

Balance at December 31, 2017

     44,075      $ 44      $ 660,701      $ (29,671     5,878     $ (131,528   $ (217,596   $ 281,950  

Issuance of common stock for employees stock purchase plan and upon exercise of stock options

     24           38          (72     1,614         1,652  

Vesting of Restricted stock awards

     217                      —    

Stock compensation plan expense

           8,592                8,592  

Minimum pension liability adjustments, net of tax

              (56           (56

Net loss

                    (1,002     (1,002

Unrealized loss on available for sale securities, net of tax

              (4           (4

Unrealized gain on interest rate hedging transactions

              1,004             1,004  

Foreign currency translation adjustment

              5,652             5,652  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     44,316      $ 44      $ 669,331      $ (23,075     5,806     $ (129,914   $ (218,598   $ 297,788  

 

4


Table of Contents

Nine Months Ended March 31, 2019

 
     Common Stock      Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury Stock     Accumulated
Deficit
    Total
Stockholders’
Equity
 
   Shares      Amount     Shares     Amount  

Balance at June 30, 2018

     44,834      $ 45      $ 678,549     $ (30,633     5,806     $ (129,914   $ (207,115   $ 310,932  

Issuance of common stock for employees stock purchase plan and upon exercise of stock options

     40        1        1,036         (126     2,819         3,856  

Vesting of Restricted stock awards

     920                     —    

Stock compensation plan expense

           31,978               31,978  

Warrant settlements

     932        1        (5             (4

Minimum pension liability adjustments, net of tax

             (38           (38

Net income

                   5,875       5,875  

Cumulative effect of adoption of updated revenue recognition standard

                   26,263       26,263  

Unrealized gain on available for sale securities, net of tax

             11             11  

Unrealized loss on interest rate hedging transactions

             (1,952           (1,952

Foreign currency translation adjustment

             (2,588           (2,588
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     46,726      $ 47      $ 711,558     $ (35,200     5,680     $ (127,095   $ (174,977   $ 374,333  

Nine Months Ended March 31, 2018

 
     Common Stock      Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury Stock     Accumulated
Deficit
    Total
Stockholders’
Equity
 
   Shares      Amount     Shares     Amounts  

Balance at June 30, 2017

     42,797      $ 43      $ 624,001     $ (32,325     5,354     $ (113,071   $ (216,692   $ 261,956  

Issuance of common stock for employees stock purchase plan and upon exercise of stock options

     53           236         (143     3,120         3,356  

Vesting of Restricted stock awards

     878                     —    

Stock compensation plan expense

           25,132               25,132  

Settlement of conversion premium upon maturity of the Notes

     588        1        (1             —    

Settlement of note hedges

           19,963         595       (19,963       —    

Cumulative effect of adoption of updated share-based compensation standard

                   249       249  

Minimum pension liability adjustments, net of tax

             86             86  

Net loss

                   (2,155     (2,155

Unrealized loss on available for sale securities, net of tax

             (7           (7

Unrealized gain on interest rate hedging transactions

             1,373             1,373  

Foreign currency translation adjustment

             7,798             7,798  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     44,316      $ 44      $ 669,331     $ (23,075     5,806     $ (129,914   $ (218,598   $ 297,788  

 

5


Table of Contents

Bottomline Technologies (de), Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine Months Ended
March 31,
 
     2019     2018  

Operating activities:

    

Net income (loss)

   $ 5,875     $ (2,155

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Amortization of acquisition-related intangible assets

     15,809       16,708  

Stock-based compensation plan expense

     31,906       25,132  

Depreciation and other amortization

     16,767       14,638  

Gain on sale of cost-method investment

     (237     —    

Deferred income tax benefit

     (8,284     (5,458

Provision for allowances on accounts receivable

     167       117  

Amortization of debt issuance costs

     311       819  

Amortization of debt discount

     —         5,574  

Amortization of discount on investments

     (108     (32

Loss (gain) on disposal of equipment

     596       (10

Loss (gain) on foreign exchange

     410       (160

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,520     (23,030

Prepaid expenses and other current assets

     (3,913     (54

Other assets

     (1,483     (337

Accounts payable

     1,485       (50

Accrued expenses

     (1,513     2,884  

Customer account liabilities

     1,562       (5,291

Deferred revenue

     7,835       6,053  

Other liabilities

     (650     175  
  

 

 

   

 

 

 

Net cash provided by operating activities

     63,015       35,523  

Investing activities:

    

Acquisition of businesses and assets, net of cash and restricted cash acquired

     (21,449     (5,741

Proceeds from sale of cost-method investment

     237       —    

Purchases of available-for-sale securities

     (7,588     (9,935

Proceeds from sales of available-for-sale securities

     9,200       1,903  

Capital expenditures, including capitalization of software costs

     (45,725     (14,865

Proceeds from disposal of property and equipment

     —         10  

Insurance proceeds received for damage to equipment

     201       —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (65,124     (28,628

Financing activities:

    

Repayment of amounts borrowed under revolving credit facility

     (40,000     (189,750

Amounts borrowed under revolving credit facility

     —         150,000  

Repayment of notes payable

     (552     (2,394

Settlement of warrants

     (4     —    

Debt issuance costs related to credit facility

     (597     —    

Proceeds from exercise of stock options and employee stock purchase plan

     3,856       3,357  
  

 

 

   

 

 

 

Net cash used in financing activities

     (37,297     (38,787

Effect of exchange rate changes on cash

     (1,427     2,331  
  

 

 

   

 

 

 

Decrease in cash, cash equivalents and restricted cash

     (40,833     (29,561

Cash, cash equivalents and restricted cash at beginning of period

     124,613       124,569  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 83,780     $ 95,008  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 79,475     $ 92,101  

Cash held for customers at end of period

     4,305       2,907  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 83,780     $ 95,008  
  

 

 

   

 

 

 

Supplemental disclosures of non-cash financing activities:

    

Issuance of common stock upon settlement of the warrants

   $ 58,451     $ —    

Issuance of note payable to seller in connection with acquisition

   $ —       $ 1,836  

Issuance of common stock upon conversion of convertible senior notes

   $ —       $ 19,736  

Receipt of common stock upon settlement of Note Hedges

   $ —       $ 19,964  

See accompanying notes.

 

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Bottomline Technologies (de), Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2019

Note 1—Basis 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 (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 and nine months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending June 30, 2019. 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 on August 29, 2018.

Note 2—Recent Accounting Pronouncements

Recently Adopted Pronouncements

Revenue Recognition: In May 2014, the Financial Accounting Standard Board (FASB) issued an accounting standard update for new revenue recognition guidance, superseding nearly all prior revenue recognition guidance. The new revenue standard outlines a single comprehensive model for accounting for revenue from contracts with customers and requires more detailed revenue disclosures. The core principle of the new standard is that revenue is to be recognized in a manner that depicts the transfer of promised goods or services to customers at amounts that reflect the consideration which the entity expects to be entitled under the arrangement.

We adopted the new revenue standard on July 1, 2018 using the modified retrospective method of adoption applied to open contracts at that date and upon adoption recorded a $26.3 million decrease to our accumulated deficit balance. The adjustments we recorded at transition were composed of:

 

     (in thousands)  

Decrease to accounts receivable

   $ (1,914

Increase to contract assets

     5,118  

Decrease to deferred revenue

     9,839  

Increase to capitalized fulfillment costs

     11,648  

Increase to capitalized sales commissions

     4,952  

Tax effects

     (3,380
  

 

 

 

Total decrease to accumulated deficit

   $ 26,263  
  

 

 

 

The adjustment to accounts receivable relates primarily to unbilled receivables reclassified as contract assets. The increase to contract assets relates to revenue recognized in excess of the amount billed to the customer and the right to payment contingent on conditions other than simply the passage of time, such as the completion of a related performance obligation. Adjustments to deferred revenue relate primarily to the acceleration of revenue under the new standard as compared to the previous revenue recognition standard. This largely relates to transactions where, under legacy GAAP, revenue was deferred due to a lack of vendor specific objective evidence of fair value, transactions accounted for under a combined services arrangement which resulted in revenue recognition over time, transactions that had contractually stipulated price increases that were accounted for as the increases occurred and certain contingent revenue arrangements. Adjustments to capitalized fulfillment costs and capitalized sales commissions reflect the requirement to capitalize these costs under the new standard; prior to adoption, we expensed these costs as incurred. Capitalized costs are recorded as components of our prepaid expenses and other current assets and other assets in our consolidated balance sheet.

Please refer to Note 3 Revenue Recognition for discussion of the adoption of this new standard.

Financial Instruments—Classification and Measurement: In January 2016, the FASB issued an accounting standard update which requires 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. 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 standard does not change the guidance for classifying and measuring investments in debt securities and loans. We adopted this standard effective July 1, 2018 and it did not have an impact on our financial statements upon adoption, but will impact our financial statements in the future if observable price changes occur for investments we hold that do not have readily determinable fair values.

 

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Statement of Cash Flows: In August and November of 2016, the FASB issued updated accounting standards which address the classification and presentation of certain cash receipts, cash payments and restricted cash in the statement of cash flows. We adopted these standards retrospectively on July 1, 2018. Our consolidated balance sheets include cash held for customers and a liability for the same amount. Cash held for customers and the related customer account liabilities arise from payment transactions we process on behalf of customers where we collect and hold customer funds for a short transient period before disbursing the cash and settling the liability. Cash we hold on behalf of customers is segregated from our other corporate cash accounts, is not available for use by us and is considered restricted cash. Prior to the adoption of this standard the change in cash held for customers and the corresponding liability were presented on a net basis in our consolidated statement of cash flows. As a result of adoption, the operating section of our consolidated statement of cash flows now reflects the impact on our total cash position, including the impact of changes in customer account liabilities.

During the nine months ended March 31, 2018, the retrospective adoption of this standard resulted in an increase in operating cash flows of approximately $5.3 million.

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 (for the service cost component) and non-operating expense (for all other components of net periodic defined benefit cost). Under the revised standard, the service cost component is classified consistently with other compensation costs, while all other components are reported in other expense, net. We adopted this standard retrospectively on July 1, 2018 and reclassified approximately $0.2 million and $0.5 million from income from operations to other expense, net for the three and nine months ended March 31, 2018, respectively, in our consolidated statement of comprehensive loss.

Accounting Pronouncements to be Adopted

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 expense will be dependent on its classification. The updated standard requires additional financial statement disclosures. We will adopt this standard on July 1, 2019 and anticipate that the standard will have a material impact to our consolidated balance sheet due to the recognition of right of use assets and lease liabilities as well as additional disclosures. We expect to adopt the standard using a modified retrospective method recording a cumulative effect of adoption on the date of adoption (July 1, 2019).

Financial Instruments—Credit 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 entity’s assumptions, models and methods for estimating expected credit losses. This standard is effective for us on July 1, 2020, with early application permitted. We are currently evaluating the anticipated impact of this standard on our financial statements as well as timing of adoption.

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 unit’s 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 on a prospective basis, with early adoption permitted. We do not currently expect the adoption of this standard to have a material impact on our financial statements.

Derivatives and Hedging: In August 2017, the FASB issued an accounting standard update that more closely aligns the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The guidance expands hedge accounting for both nonfinancial and financial risk components and refines the measurement of hedge results to better reflect an entity’s hedging strategies. In October 2018, the FASB issued an accounting standard update to expand the list of United States benchmark interest rates permitted in the application of hedge accounting. The revised standard allows the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes. These standard updates are required to be adopted concurrently and are effective for us on July 1, 2019. We do not currently expect the adoption of this standard to have a material impact on our financial statements.

Share-Based Compensation—Nonemployee Share-Based Payment Accounting: In June 2018, the FASB issued an accounting standard update to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. Under the revised standard, measurement of nonemployee awards will be fixed at the grant date by estimating the fair value of the equity instruments to be issued. Additionally, during the vesting period, nonemployee awards that contain a performance condition that affects the quantity or other terms of the award will be measured based on the probable outcome. Upon adoption, entities must recognize a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption for equity-classified nonemployee awards for which a measurement date has not been established and liability-classified nonemployee awards that have not been settled. This standard is effective for us on July 1, 2019. We do not currently expect the adoption of this standard to have a material impact on our financial statements.

 

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Note 3—Revenue Recognition

Significant Accounting Policy

Effective July 1, 2018, we adopted a new accounting standard related to revenue recognition on a modified retrospective basis to all open contracts. Other than changes in our accounting policies for revenue recognition and deferred contract costs due to the adoption of this standard, there have been no significant changes to our accounting policies as described in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Revenue Recognition

We generate revenue from the sale of SaaS or cloud-based services inclusive of both fixed and usage-based fees, perpetual and term software licenses, professional services such as consulting and implementation services, software support and maintenance and, to a lesser extent, through the sale of hardware and supplies. We recognize revenue as we transfer goods and services to customers, at amounts we expect to receive as consideration under enforceable contractual arrangements. Revenue is recognized as we satisfy contractual performance obligations, which can occur either at a point in time or over time. For perpetual and term software licenses that do not involve significant customization and for equipment and supplies sales, we normally record revenue at a point in time. For professional services, support and maintenance, stand-ready performance obligations with respect to our hosted or SaaS solutions and for software licenses that are dependent on significant customization by us we normally record revenue over time.

We recognize revenue according to a five step model that involves:

 

   

Identifying the contract (or contracts) with a customer;

 

   

Identifying the performance obligations in the contract(s);

 

   

Determining the transaction price;

 

   

Allocating the transaction price to the contractual performance obligations, and

 

   

Recognizing revenue as we satisfy the performance obligations.

We consider a contract to exist when we have legally enforceable rights and obligations with a customer. Our contracts can take a variety of forms but are normally in writing and include all major commercial terms such as the goods or services we will be obligated to transfer under the arrangement, the amount the customer is obligated to pay us upon fulfillment of our obligations and the payment terms.

Performance obligations in a contract are accounted for separately if they are determined to be distinct. We consider a performance obligation to be distinct if that good or service is separately identified from other items in the contract and if the customer can benefit from that performance obligation on its own or together with resources that are readily available to the customer. In assessing whether a customer can benefit from a performance obligation on its own, we consider factors such as the interdependency or interrelationship of the item with other goods or services in the contract, the complexity of any required integration or customization and the ability of the customer’s personnel or other third party providers to fulfill like goods or services. If a particular good or service is not considered to be distinct, it is combined with other performance obligations in the arrangement and revenue is recognized as the combined performance obligation is transferred to the customer.

The transaction price is the amount of consideration we expect to be entitled to under a contract upon fulfillment of the performance obligations. The starting point for estimating the transaction price is the selling price stipulated in the contract, however we include in the determination of the overall transaction price an estimate of variable consideration to the extent it is probable that it will not result in a significant future reversal of revenue. Variable consideration can arise in our arrangements as a result of usage-based fees. For contracts with a long period over which usage-based fees can arise, or in contracts with customers with whom we do not have a reasonable operating history, we often constrain the amount of variable consideration included in the transaction price. We update our estimate of variable consideration at the end of each financial reporting period. We exclude from the determination of the transaction price sales and other taxes we bill to and collect from customers and remit to government authorities. Shipping and handling activities performed after the customer has obtained control of the good or service is accounted for as a fulfillment activity.

The transaction price is allocated to contractual performance obligations on a relative standalone selling price basis. We normally estimate standalone selling price using the adjusted market approach, maximizing the use of observable inputs and other factors that can include: the price we charge when we sell an item separately, our internal price lists and internal pricing guidelines, cost of delivering the item and overall gross margin expectations and information about the customer or class of customer. Revenue is recorded, either at a point in time or over time, as we satisfy the performance obligations in a contract.

 

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Nature of Goods and Services

Subscriptions and Transactions: We generate subscriptions and transactions revenue through the provision of hosted and SaaS-based solutions which can include contractually fixed revenue amounts as well as usage-based fees. Our SaaS arrangements consist of an obligation for us to provide continuous access to a technology solution that we host, which we account for as a stand-ready performance obligation. These contracts may also be subject to variable pricing or overage fees based on customer processing, usage or volume. We recognize revenue for fixed subscription fees ratably over the non-cancelable term of the contract, commencing on the date the customer has access to the solution. In circumstances where we meet certain requirements to allocate variable consideration to a distinct service within a series of related services, we allocate variable consideration to each distinct period of service within the series. If we do not meet those requirements, we include an estimate of variable consideration in the transaction price and recognize it ratably over the non-cancelable term of the contract.

For certain of our hosted or SaaS solutions, customers are charged a fee for implementation services. In determining whether the implementation services are distinct from the hosting services we consider various factors, including the level of customization, complexity of the integration, the interdependency and interrelationship between the implementation services and the hosting services and the ability (or inability) of the customer’s personnel or other service providers to perform the services. We have concluded that the implementation services in our hosting arrangements with multiple performance obligations are not distinct and therefore we recognize fees for implementation services ratably over the non-cancelable term of the hosting contract.

We license certain software on a subscription basis under contractual arrangements where customers pay a specified fee, inclusive of support and maintenance, for a time-based license right to use our software. These fees recur periodically, unless the customer opts to cancel their subscription arrangement with us. These contracts typically contain two distinct performance obligations: the software license and support and maintenance. The portion of the transaction price allocated to the license right is recognized at the point in time in which we have provided the customer access to the intellectual property and the license term has commenced. The portion of the transaction price allocated to support and maintenance is recognized ratably over the non-cancelable contract term.

Software Licenses: Software licenses revenue reflects fees we charge to license software on a perpetual basis. For software licenses that do not include significant customization we recognize revenue at the point in time where the customer has obtained access to the intellectual property and the license period has commenced.

Certain of our software arrangements require significant customization and modification and involve extended implementation periods. In these arrangements the professional services and software license are highly interdependent and we treat the software license and professional services as a combined performance obligation. We recognize revenue for the combined performance obligation over time and measure progress to completion based on labor hours incurred as a percentage of total expected labor hours. We believe the use of labor hours as an input measure provides a faithful depiction of the transfer of goods and services under these contracts.

Support and Maintenance: Our software licenses are generally sold with post-contract support which is comprised of technical support and unspecified software upgrades. Unspecified upgrades refer to software upgrades which we make available at our discretion and from time-to-time, on a “when and as available” basis. We account for post-contract support as a stand-ready performance obligation and recognize revenue ratably over the non-cancelable contract term which is typically one year.

Professional Services: Our professional services revenue is normally comprised of implementation, consulting and training services. Except for professional service performance obligations that form part of an overall, highly customized arrangement, our professional services typically represent distinct performance obligations and revenue is recognized as the services are performed.

Other: Other revenue is derived from the sale of equipment and supplies and is recognized at the point in time control transfers to the customer.

 

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Disaggregation of Revenue

The tables below present our revenue disaggregated by major product category and the related financial statement classification of revenue for the three and nine months ended March 31, 2019.

 

     Three Months Ended March 31, 2019  
     Settlement
Network
Solutions(1)
     Legal Spend
Management
Solutions(1)
     Banking
Solutions
     Payments and
Transactional
Documents
     Healthcare(2)      Other(2)      Total  
     (in thousands)  

Financial statement classification:

                    

Subscriptions and transactions

   $ 26,373      $ 18,916      $ 17,819      $ 11,749      $ 619      $ 26      $ 75,502  

Software licenses

     245        —          527        1,982        1        1,047        3,802  

Service and maintenance

     5,905        —          5,557        11,402        916        2,076        25,856  

Other

     —          —          —          961        —          317        1,278  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 32,523      $ 18,916      $ 23,903      $ 26,094      $ 1,536      $ 3,466      $ 106,438  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended March 31, 2019  
     Settlement
Network
Solutions(1)
     Legal Spend
Management
Solutions(1)
     Banking
Solutions
     Payments and
Transactional
Documents
     Healthcare(2)      Other(2)      Total  
     (in thousands)  

Financial statement classification:

                    

Subscriptions and transactions

   $ 75,536      $ 56,461      $ 49,410      $ 33,363      $ 1,676      $ 112      $ 216,558  

Software licenses

     1,052        —          3,953        5,635        884        2,455        13,979  

Service and maintenance

     18,293        —          15,920        36,762        2,686        6,386        80,047  

Other

     —          —          —          2,511        —          626        3,137  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 94,881      $ 56,461      $ 69,283      $ 78,271      $ 5,246      $ 9,579      $ 313,721  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Cloud Solutions segment

(2) 

Other segment

Remaining Performance Obligations

The transaction price allocated to remaining performance obligations that are unsatisfied, or partially unsatisfied, as of March 31, 2019 represents contracted revenue that will be recognized in future periods. Our future performance obligations consist primarily of SaaS hosting/subscription obligations relating to future periods, contracted but uncompleted professional services obligations and support and maintenance obligations. The amount of revenue recognized during the three and nine months ended March 31, 2019 from performance obligations satisfied in prior periods was not significant.

Revenue allocated to remaining performance obligations was $387.3 million as of March 31, 2019 of which we expect to recognize approximately $170.4 million over the next twelve months and the remainder thereafter. We exclude from our measure of remaining performance obligations amounts related to future transactional or usage-based fees for which the value of services transferred to the customer will correspond to the amount we will invoice for those services.

 

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Contract Assets and Liabilities

The table below presents our accounts receivable, contract assets and deferred revenue balances as of July 1, 2018 and March 31, 2019.

 

     March 31,      July 1,         
     2019      2018      $ Change  
    

(in thousands)

        

Accounts receivable

   $ 76,240      $ 72,391      $ 3,849  

Contract assets

     6,129        5,118        1,011  

Deferred revenue

     98,804        88,888        9,916  

Accounts receivable include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that may not have been invoiced. Contract assets arise when we recognize revenue in excess of the amount billed to the customer and the right to payment is contingent on conditions other than simply the passage of time, such as the completion of a related performance obligation. Contract assets are classified in our consolidated balance sheets as other current assets for those contract assets with amortization periods of one year or less and other assets for contract assets with amortization periods greater than one year. Deferred revenue consists of billings or customer payments in excess of amounts recognized as revenue.

For the three and nine months ended March 31, 2019, we recognized $14.6 million and $66.4 million, respectively, in revenue from amounts that were included in deferred revenue as of July 1, 2018.

Contract Costs

We capitalize incremental costs incurred in connection with obtaining a contract if they have a period of benefit that is greater than one year and we expect to recover the costs through future contract revenues. Incremental costs incurred to obtain a contract relate to sales commissions. We also capitalize costs incurred in fulfilling a contract when the costs relate directly to a specifically identifiable customer contract, when the costs generate or enhance resources that we will use to satisfy performance obligations in the future and when the costs are expected to be recovered through future contract revenues. Capitalized costs to obtain a contract and capitalized fulfillment costs totaled $5.5 million and $16.4 million, respectively, at March 31, 2019.

Capitalized costs are amortized on a basis consistent with the transfer of the goods or services to which the asset relates. This results in capitalized costs being recognized on a ratable basis over the estimated period of future benefit, which is generally five years. We estimate the future period of benefit considering the current contract term, the impact of estimated customer renewal terms and the estimated life of the technology solution underlying the contracts. Amortization expense associated with costs of obtaining and costs of fulfilling a contract was $0.5 million and $1.0 million, respectively, for the three months ended March 31, 2019, and were recorded as components of sales and marketing expense and cost of revenues, respectively, in our unaudited consolidated statement of comprehensive income (loss). Amortization expense associated with costs of obtaining and costs of fulfilling a contract was $1.3 million and $2.5 million, respectively, for the nine months ended March 31, 2019, and were recorded as components of sales and marketing expense and cost of revenues, respectively, in our unaudited consolidated statement of comprehensive income (loss).

 

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The following tables summarize the impact of adopting the new revenue standard on our consolidated financial statements as of and for the three and nine months ended March 31, 2019:

Unaudited Condensed Consolidated Balance Sheet

 

     At March 31, 2019  
(in thousands, unaudited)    As
Reported
     Adjustments      Balances without
adoption of new
revenue standard
 

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 79,475      $ —        $ 79,475  

Cash held for customers

     4,305        —          4,305  

Marketable securities

     8,515        —          8,515  

Accounts receivable, net

     76,240        1,235        77,475  

Prepaid expenses and other current assets

     32,111        (11,158      20,953  
  

 

 

    

 

 

    

 

 

 

Total current assets

     200,646        (9,923      190,723  

Property and equipment, net

     54,696        —          54,696  

Goodwill

     204,167        —          204,167  

Intangible assets, net

     168,819        —          168,819  

Other assets

     31,610        (16,142      15,468  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 659,938      $ (26,065    $ 633,873  
  

 

 

    

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 11,530      $ —        $ 11,530  

Accrued expenses and other current liabilities

     32,257        —          32,257  

Customer account liabilities

     4,305        —          4,305  

Deferred revenue

     80,082        4,306        84,388  
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     128,174        4,306        132,480  

Borrowings under credit facility

     110,000        —          110,000  

Deferred revenue, non-current

     18,722        5,224        23,946  

Deferred income taxes

     8,311        (456      7,855  

Other liabilities

     20,398        —          20,398  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     285,605        9,074        294,679  

Stockholders’ equity

        

Preferred Stock, $.001 par value

     —          —          —    

Common Stock, $.001 par value

     47        —          47  

Additional paid-in-capital

     711,558        —          711,558  

Accumulated other comprehensive loss

     (35,200      91        (35,109

Treasury stock, at cost

     (127,095      —          (127,095

Accumulated deficit

     (174,977      (35,230      (210,207
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     374,333        (35,139      339,194  
  

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 659,938      $ (26,065    $ 633,873  
  

 

 

    

 

 

    

 

 

 

 

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Unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)

 

     Three Months Ended March 31, 2019     Nine Months Ended March 31, 2019  
(in thousands, unaudited)    As Reported     Adjustments     Balances without
adoption of new
revenue standard
    As Reported     Adjustments     Balances without
adoption of new
revenue standard
 

Revenues:

            

Subscriptions and transactions

   $ 75,502     $ (833   $ 74,669     $ 216,558     $ 393     $ 216,951  

Software licenses

     3,802       (180     3,622       13,979       (3,562     10,417  

Service and maintenance

     25,856       540       26,396       80,047       1,767       81,814  

Other

     1,278       (18     1,260       3,137       (55     3,082  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     106,438       (491     105,947       313,721       (1,457     312,264  

Cost of revenues:

            

Subscriptions and transactions

     31,623       29       31,652       94,644       678       95,322  

Software licenses

     226       —         226       667       2       669  

Service and maintenance

     12,818       303       13,121       38,052       1,104       39,156  

Other

     1,046       12       1,058       2,461       (16     2,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     45,713       344       46,057       135,824       1,768       137,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     60,725       (835     59,890       177,897       (3,225     174,672  

Operating expenses:

            

Sales and marketing

     25,165       256       25,421       70,772       621       71,393  

Product development and engineering

     16,887       44       16,931       50,267       222       50,489  

General and administrative

     13,175       —         13,175       38,944       —         38,944  

Amortization of acquisition-related intangible assets

     5,230       —         5,230       15,809       —         15,809  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     60,457       300       60,757       175,792       843       176,635  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     268       (1,135     (867     2,105       (4,068     (1,963

Other expense, net

     (695     —         (695     (2,334     —         (2,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (427     (1,135     (1,562     (229     (4,068     (4,297

Benefit (expense) from income taxes

     1,251       839       2,090       6,104       (4,899     1,205  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 824     $ (296   $ 528     $ 5,875     $ (8,967   $ (3,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

            

Basic

   $ 0.02     $ (0.01   $ 0.01     $ 0.15     $ (0.07   $ 0.08  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.02     $ (0.01   $ 0.01     $ 0.14     $ (0.06   $ 0.08  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net income (loss) per share:

            

Basic

     40,911       —         40,911       40,412       —         40,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     41,625       (714     40,911       41,650       (1,238     40,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

            

Unrealized gain on available for sale securities

     5       —         5       11       —         11  

Unrealized gain (loss) on interest rate hedging transactions

     (841     —         (841     (1,952     —         (1,952

Minimum pension liability adjustments

     18       —         18       (38     —         (38

Foreign currency translation adjustments

     1,322       (93     1,229       (2,588     92       (2,496
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

     504       (93     411       (4,567     92       (4,475
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 1,328     $ (389   $ 939     $ 1,308     $ (8,875   $ (7,567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Unaudited Condensed Consolidated Statement of Cash Flows

 

     Nine Months Ended March 31, 2019  
(in thousands, unaudited)    As Reported      Adjustments      Balances without
adoption of new
revenue standard
 

Operating activities:

        

Net income (loss)

   $ 5,875      $ (8,967    $ (3,092

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Amortization of acquisition-related intangible assets

     15,809        —          15,809  

Stock-based compensation plan expense

     31,906        11        31,917  

Depreciation and other amortization

     16,767        —          16,767  

Gain on sale of cost-method investment

     (237      —          (237

Deferred income tax benefit

     (8,284      4,899        (3,385

Provision for allowances on accounts receivable

     167        —          167  

Amortization of debt issuance costs

     311        —          311  

Amortization of discount on investments

     (108      —          (108

Loss (gain) on disposal of equipment

     596        —          596  

Loss (gain) on foreign exchange

     410        (8      402  

Changes in operating assets and liabilities:

        

Accounts receivable

     (3,520      663        (2,857

Prepaid expenses and other current assets

     (3,913      2,724        (1,189

Other assets

     (1,483      943        (540

Accounts payable

     1,485        —          1,485  

Accrued expenses

     (1,513      —          (1,513

Customer account liabilities

     1,562        —          1,562  

Deferred revenue

     7,835        (265      7,570  

Other liabilities

     (650      —          (650
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

   $ 63,015      $ —        $ 63,015  

The following summarizes the significant adjustments resulting from our adoption of the new revenue recognition standard compared to what would have been recorded in our financial statements had we continued to apply the provisions of legacy GAAP:

Consolidated Balance Sheet

Adjustments to prepaid expenses and other current assets and other assets relate to costs to fulfill and costs to obtain a customer contract which are capitalized under the new revenue standard and expensed as incurred under legacy GAAP. Adjustments to deferred revenue reflect the acceleration of revenue recognition for certain transactions that required longer term revenue deferral under legacy GAAP.

Consolidated Statement of Comprehensive Income (Loss)

Adjustments to software license revenues reflect the requirement under legacy GAAP to defer recognition of revenue when vendor specific evidence of fair value could not be established. The new revenue standard does not have a similar requirement and instead results in the recognition of software license revenue when that performance obligation has been transferred to the customer. In addition, the new revenue standard changed the methodology for allocating the transaction price between performance obligations, which had the impact of increasing software revenue. The decrease in our deferred tax benefit under legacy GAAP is driven by the overall decrease in net income and the inability to recognize certain interim tax benefits.

Consolidated Statement of Cash Flows

The adoption of the new revenue standard had no impact on our total cash flows or the net cash provided by operating activities. The adjustments reflect offsetting shifts in the components of operating cash flow driven by changes to individual balance sheet accounts and the change in our net income (loss).

 

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Note 4—Fair 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 management’s 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 March 31, 2019 and June 30, 2018, our assets and liabilities measured at fair value on a recurring basis were as follows:

 

     March 31, 2019      June 30, 2018  
     Fair Value Measurements
Using Input Types
            Fair Value Measurements
Using Input Types
        
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (in thousands)  

Assets

                       

Money market funds (cash and cash equivalents)

   $ 1,769      $ —        $ —        $ 1,769      $ 154      $ —        $ —        $ 154  

Available for sale securities—Debt

                       

U.S. Corporate

   $ —        $ 998      $ —        $ 998      $ —        $ 3,467      $ —        $ 3,467  

Government—U.S.

     —          7,455        —          7,455        —          6,480        —          6,480  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ —        $ 8,453      $ —        $ 8,453      $ —        $ 9,947      $ —        $ 9,947  

Short-term derivative interest rate swap

   $ —        $ 432      $ —        $ 432      $ —        $ 407      $ —        $ 407  

Long-term derivative interest rate swap

   $ —        $ 249      $ —        $ 249      $ —        $ 2,183      $ —        $ 2,183  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,769      $ 9,134      $ —        $ 10,903      $ 154      $ 12,537      $ —        $ 12,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                       

Long-term derivative interest rate swap

   $ —        $ 43      $ —        $ 43      $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ —        $ 43      $ —        $ 43      $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

We have certain financial instruments which consist of cash and cash equivalents, cash held for customers, marketable securities, accounts receivable, accounts payable, customer account liabilities, derivative interest rate swaps and debt drawn on our Credit Facility (see Note 11). Fair value information for each of these instruments is as follows:

 

   

Cash and cash equivalents, cash held for customers, accounts receivable, accounts payable and customer account liabilities fair values approximates their carrying values, due to the short-term nature of these instruments.

 

   

Marketable securities classified as held to maturity, all of which mature within one year, are recorded at amortized cost, which at March 31, 2019 and June 30, 2018, approximated fair value.

 

   

Marketable debt securities classified as available for sale are recorded at fair value. Unrealized gains and losses are included as a component of other accumulated comprehensive income (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 debt securities classified as available for sale.

 

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The fair value of our derivative interest rate swaps are based on the present value of projected cash flows that will occur over the life of the instruments, after considering certain contractual terms and counterparty credit risk.

 

   

The carrying value of assets related to deposits we have made to fund future requirements associated with Israeli severance arrangements was $1.3 million and $1.4 million at March 31, 2019 and June 30, 2018, respectively, which approximated fair value.

 

   

We have certain other investments for which there is no readily determinable fair value. The carrying value of these investments was $4.6 million and $4.4 million at March 31, 2019 and June 30, 2018, respectively, and they are reported as a component of our other assets. These investments are recorded at cost, less impairment (if any), plus or minus adjustments for observable price changes.

 

   

We have borrowings of $110 million against our Credit Facility. The fair value of these borrowings, which are classified as Level 2, approximates their carrying value at March 31, 2019, as the instrument carries a variable rate of interest which reflects current market rates.

Marketable Securities

The table below presents information regarding our marketable securities by major security type as of March 31, 2019 and June 30, 2018.

 

     March 31, 2019      June 30, 2018  
     Held to
Maturity
     Available
for Sale
     Total      Held to
Maturity
     Available
for Sale
     Total  
     (in thousands)  

Marketable securities:

                 

Corporate and other debt securities

   $ 62      $ 8,453      $ 8,515      $ 65      $ 9,947      $ 10,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ 62      $ 8,453      $ 8,515      $ 65      $ 9,947      $ 10,012  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the estimated fair value of our investments in available for sale marketable securities classified by the contractual maturity date of the securities:

 

     March 31,
2019
 
     (in thousands)  

Due within 1 year

   $ 8,453  

Due in 1 year through 5 years

     —    
  

 

 

 

Total

   $ 8,453  
  

 

 

 

All of our available for sale marketable securities are classified as current assets.

The following table presents the aggregate fair values and gross unrealized losses for those available for sale investments that were in an unrealized loss position as of March 31, 2019 and June 30, 2018, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

 

     At March 31, 2019      At June 30, 2018  
     Less than 12 Months  
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 
     (in thousands)  

Government—U.S.

   $ 3,488      $ (1    $ 6,480      $ (6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,488      $ (1    $ 6,480      $ (6
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5—Business and Asset Acquisitions

Fiscal Year 2019

During the nine months ended March 31, 2019, we completed two business acquisitions and an asset acquisition for aggregate purchase consideration of $42.4 million.

 

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Experian Limited

On March 6, 2019, we acquired certain technology assets and customer related assets from Experian Limited for 9.5 million British Pound Sterling (approximately $12.6 million based on the exchange rate in effect at the acquisition date), funded with existing cash on hand. These assets will complement our existing UK payment products.

In the preliminary allocation of the purchase price, we recorded $2.7 million of goodwill. The goodwill is not deductible for income tax purposes and arose principally due to the anticipated future benefits arising from the acquisition. Identifiable intangible assets of $12.6 million, consisting primarily of customer related assets, are being amortized over a weighted average estimated useful lives of eleven years. Experian’s operating results are included in our Payments and Transactional Documents segment from the date of the acquisition forward and did not have a material impact on our revenue or net income (loss).

Microgen Banking Systems Limited

On July 2, 2018, we acquired Microgen Banking Systems Limited (Microgen), a UK-based BACS payment company, for 6.9 million British Pound Sterling (approximately $9.1 million based on the exchange rate in effect at the acquisition date). Microgen provides BACS payment products and supporting services to a wide range of UK-based customers and is expected to expand our customer base.

In the preliminary allocation of the purchase price, we recorded $2.7 million of goodwill. The goodwill is not deductible for income tax purposes and arose principally due to the anticipated future benefits arising from the acquisition. Identifiable intangible assets of $8.4 million, consisting primarily of customer related assets, are being amortized over a weighted average estimated useful life of thirteen years. Microgen’s operating results are included in our Payments and Transactional Documents segment from the date of the acquisition forward and did not have a material impact on our revenue or net income (loss).

Acquisition expenses of approximately $1.4 million were recognized during the nine months ended March 31, 2019 related to the Experian and Microgen acquisitions, principally as a component of general and administrative expense.

EMEA Headquarters

In January 2019, we purchased a building in Reading, UK for a base purchase price of 16 million British Pound Sterling (approximately $20.7 million based on the exchange rate in effect at the acquisition date), funded with existing cash on hand. When it is ready for its intended use, the building will ultimately replace our current Reading, UK building as our European headquarters.

Fiscal Year 2018

During the fiscal year ended June 30, 2018, we completed two business acquisitions for an aggregate purchase consideration of $18.5 million.

First Capital Cashflow Ltd.

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 shares, which were issued to the selling stockholders of FCC who became employees of Bottomline, have vesting conditions tied to continued employment; as such the shares are compensatory and we will record share-based payment expense over the underlying stock vesting period of five years. FCC’s operating results are included in our Payments and Transactional Documents segment from the date of the acquisition forward and did not have a material impact on our revenue or net income (loss).

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 $2.8 million in cash 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’s 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 net income (loss).

 

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Table of Contents

Note 6—Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands, except per share amounts)  

Numerator—basic and diluted:

           

Net income (loss)

   $ 824      $ (1,002    $ 5,875      $ (2,155
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Shares used in computing basic net income (loss) per share attributable to common stockholders

     40,911        38,348        40,412        38,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact of dilutive securities

     714        —          1,238        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in computing diluted net income (loss) per share attributable to common stockholders

     41,625        38,348        41,650        38,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income (loss) per share attributable to common stockholders

   $ 0.02      $ (0.03    $ 0.15      $ (0.06
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income (loss) per share attributable to common stockholders

   $ 0.02      $ (0.03    $ 0.14      $ (0.06
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three and nine months ended March 31, 2018, approximately 2.5 million and 2.7 million shares, respectively, of unvested restricted stock and stock options and warrants for up to 6.3 million shares of our common stock were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.

Note 7—Operations 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 generally organized 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 primarily 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 contract term.

Banking Solutions. Our Banking Solutions segment provides solutions that are specifically designed for banking and financial institution customers. Our Banking Solutions products are now sold predominantly on a hosted basis, with revenue recorded over time. This has the effect of contributing to recurring revenue and the revenue predictability of future periods, but results in revenue recognition over a longer period than a traditional on-premise software license transaction.

Payments and Transactional Documents. Our Payments and Transactional Documents segment supplies financial business process management software 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. When licensed for on-premise deployment, software license revenue is typically recorded upon delivery of the software and commencement of the license term. In hosted arrangements, we typically record revenue over time. Professional services revenue is normally recorded as we perform the work and software support and maintenance revenue is recorded ratably over the support period.

Other. Our Other segment consists of our healthcare and cyber fraud and risk management operating segments. 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. 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. When licensed for on-premise deployment, software revenue for these operating segments is typically recorded upon delivery of the software and commencement of the license term. Professional services revenue is normally recorded as we perform the work and software support and maintenance revenue is recorded ratably over the support period.

 

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Table of Contents

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 segment’s 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 income (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 segment’s revenues.

We do not track or assign our assets by operating segment.

Segment information for the three and nine months ended March 31, 2019 and 2018 according to the segment descriptions above, is as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Segment revenue:

           

Cloud Solutions

   $ 51,439      $ 46,486      $ 151,342      $ 133,448  

Banking Solutions

     23,903        22,900        69,283        65,175  

Payments and Transactional Documents

     26,094        27,124        78,271        75,516  

Other

     5,002        4,626        14,825        13,488  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment revenue

   $ 106,438      $ 101,136      $ 313,721      $ 287,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment measure of profit (loss):

           

Cloud Solutions

   $ 11,463      $ 9,308      $ 32,497      $ 28,342  

Banking Solutions

     2,082        1,630        6,097        4,939  

Payments and Transactional Documents

     6,933        7,661        22,799        21,755  

Other

     (1,545      (627      (3,019      (2,014
  

 

 

    

 

 

    

 

 

    

 

 

 

Total measure of segment profit

   $ 18,933      $ 17,972      $ 58,374      $ 53,022  
  

 

 

    

 

 

    

 

 

    

 

 

 

A reconciliation of the measure of total segment profit to GAAP income (loss) before income taxes is as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Total measure of segment profit

   $ 18,933      $ 17,972      $ 58,374      $ 53,022  

Less:

           

Amortization of acquisition-related intangible assets

     (5,230      (5,818      (15,809      (16,708

Stock-based compensation plan expense

     (10,015      (8,592      (31,906      (25,132

Acquisition and integration-related expenses

     (1,373      (224      (2,966      (1,596

Restructuring expense

     (1,332      (1,485      (1,963      (1,476

Minimum pension liability adjustments

     93        3        248        (35

Global ERP system implementation and other costs

     (557      (1,558      (3,110      (4,973

Other expense, net (1)

     (946      (1,293      (3,097      (9,288
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

   $ (427    $ (995    $ (229    $ (6,186
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

On July 1, 2018, we adopted an accounting standard update that changes the classification of certain pension related items. For purposes of this reconciliation of segment profit, we have presented pension related adjustments discretely, not as a component of other expense, net.

 

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The following depreciation and other amortization expense amounts are included in the measure of segment profit:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Depreciation and other amortization expense:

           

Cloud Solutions

   $ 2,854      $ 2,671      $ 8,663      $ 7,649  

Banking Solutions

     1,919        1,605        5,634        4,634  

Payments and Transactional Documents

     719        722        2,202        2,066  

Other

     84        97        268        289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and other amortization expense

   $ 5,576      $ 5,095      $ 16,767      $ 14,638  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 the United States.

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Revenues from unaffiliated customers:

           

United States

   $ 66,227      $ 60,984      $ 194,132      $ 176,783  

United Kingdom

     24,942        24,388        73,313        66,927  

Switzerland

     9,682        10,613        29,289        29,146  

Other

     5,587        5,151        16,987        14,771  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues from unaffiliated customers

   $ 106,438      $ 101,136      $ 313,721      $ 287,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-lived assets based on geographical location, excluding deferred tax assets and intangible assets, were as follows:

 

     At
March 31,
     At
June 30,
 
     2019      2018  
     (in thousands)  

Long-lived assets:

     

United States

   $ 47,516      $ 36,374  

United Kingdom

     31,982        5,586  

Other

     4,814        3,488  
  

 

 

    

 

 

 

Total long-lived assets

   $ 84,312      $ 45,448  
  

 

 

    

 

 

 

Note 8—Income 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 that 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, our annual estimated effective tax rate is subject to adjustment if there are changes to our initial estimates of total tax expense or pre-tax income, including the mix of 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.

 

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Provision for Income Taxes

We recorded an income tax benefit of $1.3 million and income tax expense of $7,000 for the three months ended March 31, 2019 and 2018, respectively. In the three months ended March 31, 2019, the income tax benefit we recorded was driven largely by discrete tax benefits of $0.8 million relating to stock-based compensation. The income tax expense for the three months ended March 31, 2018 was principally associated with our UK operations, offset by an income tax benefit principally associated with our Swiss, Israeli and U.S. operations.

We recorded an income tax benefit of $6.1 million and $4.0 million for the nine months ended March 31, 2019 and 2018, respectively. In the nine months ended March 31, 2019, the income tax benefit we recorded was driven largely by discrete tax benefits of $5.4 million relating to stock-based compensation and a discrete tax benefit of $0.5 million arising from a reduction to deferred tax liabilities related to state tax consequences of repatriated foreign earnings. The income tax benefit for the nine months ended March 31, 2018 was principally due to a discrete tax benefit of $4.4 million relating to the consequences of the Tax Act (discussed below) and a tax benefit associated with our Swiss and Israeli operations, offset in part by tax expense associated with our U.S. and UK 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.

At March 31, 2019, we had a total valuation allowance of $33.0 million against our deferred tax assets given the uncertainty of recoverability of these amounts. The change in our valuation allowance during the nine months ended March 31, 2019 includes a reduction in our valuation allowance as a result of the adoption of the new accounting standard for revenue recognition.

U.S. Tax Cuts and Jobs Act

The U.S. Tax Cuts and Jobs Act (the Tax Act) was signed into U.S. law on December 22, 2017 and made broad and complex changes to the U.S. tax code. This legislation contained a variety of income tax changes, including a reduction to the federal corporate income tax rate from 35% to 21%, a repeal of the corporate alternative minimum tax, a one-time transition tax on accumulated foreign earnings, a move to a territorial tax system, a limitation on the tax deductibility of interest expense and an acceleration of tax deductions for qualifying capital expenditures.

The Tax Act resulted in four consequences to us in our prior fiscal year, as follows:

 

   

Assessing whether we would incur any tax liability under the one-time transition tax. Under the Tax Act, un-repatriated foreign earnings post-1986 are subject to a one-time transition tax at rates that vary depending on the composition of foreign assets. We did not incur any transition tax liability due to our accumulated deficit position with respect to our foreign subsidiaries.

 

   

Re-valuing our U.S. deferred tax balances to reflect lower income tax rates. Deferred tax assets and deferred tax liabilities are recorded based on the income tax rates expected to be in effect when book and tax basis differences reverse. We are in a net U.S. deferred tax liability position. During the fiscal year ended June 30, 2018 we reduced the carrying value of our net deferred tax liabilities to reflect the impact of lower future income tax rates and recognized a non-recurring income tax benefit of $3.7 million.

 

   

Recognizing the ability to recover amounts paid for alternative minimum tax. The Tax Act eliminated the alternative minimum tax calculation and provided for the ability to recover certain amounts previously paid for such tax. We expect to receive a tax refund of $0.7 million and recognized a non-recurring income tax benefit in this amount in the fiscal year ended June 30, 2018.

 

   

Reversal of indefinite-lived deferred tax liabilities as a source of future taxable income when assessing the realizability of indefinite-lived net operating loss carryforwards. Under the Tax Act, net operating loss carryforwards arising in tax years beginning after December 31, 2017 are limited to 80% of taxable income in any year, and net operating losses generated in tax years ending after December 31, 2017 can be carried forward indefinitely. Based on the projection of future reversals of our deferred tax differences as of June 30, 2018 we determined that a portion of our indefinite-lived deferred tax liabilities could be used as a source of taxable income when assessing the realizability of future indefinite-lived net operating loss carryforwards. Accordingly, we recognized an income tax benefit of $4.1 million through a reduction to our valuation allowance in the fiscal year ended June 30, 2018.

 

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All of our accounting calculations and financial reporting positions for consequences arising from the Tax Act were final as of December 31, 2018.

A provision of the Tax Act subjects a U.S. shareholder to current tax on “global intangible low-taxed income” (GILTI) of its controlled foreign corporations. We have elected to treat any tax related to GILTI as current tax expense in the period the tax is incurred.

The Tax Act also provides that the repatriation to the U.S. of foreign earnings can be done without federal tax consequence. During fiscal year 2018, as a result of the Tax Act provisions, we reassessed and changed our assertion that cumulative earnings by our UK and Switzerland subsidiaries were indefinitely reinvested. We continue to permanently reinvest the earnings, if any, of our international subsidiaries other than the UK and Switzerland and therefore we do not provide for U.S. income taxes or withholding taxes that could result from the distribution of those earnings to the U.S. parent. If any such earnings were ultimately distributed to the U.S. in the form of dividends or otherwise, or if the shares of our international subsidiaries were sold or transferred, we would likely be subject to additional U.S. state income taxes. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these undistributed earnings.

Note 9—Goodwill 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 sooner, if indicators of potential impairment arise.

At March 31, 2019, the carrying value of goodwill for all of our reporting units was $204.2 million.

The following tables set forth the information for intangible assets subject to amortization and for intangible assets not subject to amortization.

 

     As of March 31, 2019  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Value
     Weighted Average
Remaining Life
 
     (in thousands)      (in years)  

Amortized intangible assets:

           

Customer related

   $ 220,669      $ (142,270    $ 78,399        8.9  

Core technology

     130,233        (88,264      41,969        7.6  

Other intangible assets

     21,933        (18,529      3,404        5.1  

Capitalized software development costs

     22,241        (8,840      13,401        3.3  

Software (1)

     71,393        (39,747      31,646        4.3  
  

 

 

    

 

 

    

 

 

    

Total

   $ 466,469      $ (297,650    $ 168,819     
  

 

 

    

 

 

       

Unamortized intangible assets:

           

Goodwill

           204,167     
        

 

 

    

Total intangible assets

         $ 372,986     
        

 

 

    
     As of June 30, 2018  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Carrying
Value
     Weighted Average
Remaining Life
 
     (in thousands)      (in years)  

Amortized intangible assets:

           

Customer related

   $ 201,214      $ (134,133    $ 67,081        8.4  

Core technology

     130,257        (82,815      47,442        8.1  

Other intangible assets

     21,983        (17,299      4,684        5.3  

Capitalized software development costs

     19,527        (6,265      13,262        4.0  

Software (1)

     62,711        (33,395      29,316        4.6  
  

 

 

    

 

 

    

 

 

    

Total

   $ 435,692      $ (273,907    $ 161,785     
  

 

 

    

 

 

       

Unamortized intangible assets:

           

Goodwill

           200,024     
        

 

 

    

Total intangible assets

         $ 361,809     
        

 

 

    

 

(1)

Software includes purchased software and software developed for internal use.

 

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Estimated amortization expense for the remainder of fiscal year 2019 and subsequent fiscal years for acquired intangible assets, capitalized software development costs and software, in each case that have been placed in service as of March 31, 2019, is as follows:

 

     Acquired Intangible
Assets
     Capitalized Software
Development Costs
     Software  
     (in thousands)  

Remaining 2019

   $ 5,483      $ 898      $ 2,340  

2020

     19,713        3,593        8,410  

2021

     18,444        3,593        6,115  

2022

     16,596        3,593        4,493  

2023

     15,272        679        2,816  

2024 and thereafter

     48,264        117        2,975  

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 product’s 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:

 

     Cloud
Solutions
    Banking
Solutions
     Payments
and
Transactional
Documents
    Other      Total  
     (in thousands)  

Balance at June 30, 2018 (1)

   $ 90,270     $ 35,880      $ 65,680     $ 8,194      $ 200,024  

Goodwill acquired during the period

     —         —          5,344       —          5,344  

Impact of foreign currency translation

     (463     —          (738     —          (1,201
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance at March 31, 2019 (1)

   $ 89,807     $ 35,880      $ 70,286     $ 8,194      $ 204,167  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Other goodwill balance is net of $7.5 million accumulated impairment losses, recorded previously.

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 10—Commitments and Contingencies

Legal Matters

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 11—Indebtedness

Credit Agreement

We are party to a credit agreement (the Credit Agreement) that provides for a five-year revolving credit facility in the amount of up to $300 million (the Credit Facility), which was amended on July 16, 2018. We also have the right to request an increase of the aggregate commitments under the Credit Facility by up to $150 million, subject to specified conditions. The Credit Facility expires in July 2023. At March 31, 2019, we owed $110 million under the Credit Facility.

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, 2020; and (b) a minimum consolidated interest coverage ratio of 3.00 to 1.00. The Credit Agreement also contains customary events of default and related cure provisions. As of March 31, 2019, we were in compliance with the covenants associated with the Credit Facility.

 

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Warrants

In December 2012, we received aggregate proceeds of $25.8 million, net of issue costs, from the sale of warrants for the purchase of up to 6.3 million shares of our common stock at a strike price of $40.04 per share. The warrants were exercisable in equal tranches over a period of 150 days beginning on March 1, 2018 and ending on October 2, 2018. Each warrant was exercisable into one share of our common stock. During the nine months ended March 31, 2019, we issued approximately 932 thousand shares of common stock related to the warrants exercised by the holders and all warrant exercises were net settled. There were no warrants outstanding as of March 31, 2019.

Note Payable

We financed a portion of the purchase price for our acquisition of Decillion 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, with the final installment due in the quarter ended December 31, 2019.

Note 12—Derivative Instruments

Cash Flow Hedges

Interest Rate Swap Agreements

We utilize interest rate swap agreements to hedge our exposure to interest rate risk. At March 31, 2019, we had two outstanding interest rate swap agreements which were entered into in July 2017 and March 2019 with notional values of $100 million and $80 million, respectively.

The notional value of each interest rate swap agreement is expected to match the corresponding principal amount of a portion of our borrowings under the Credit Facility.

The $100 million notional value agreement is effective as of December 1, 2017 and expires on December 1, 2021. During this period, 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.

The $80 million notional value agreement is effective as of December 1, 2021 and expires on July 16, 2023. During this period, we have a fixed interest rate of 2.125 percent on the notional amount and Bank of America, N.A., 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 will be made monthly on a net settlement basis.

We designated the interest rate swap agreements as hedging instruments and they qualified for hedge accounting upon inception and at March 31, 2019. To continue to qualify for hedge accounting, the instruments must retain a “highly effective” ability to hedge interest rate risk for borrowings under the Credit Facility. 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 are 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 is 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 interest rate swaps and their respective locations in our consolidated balance sheets at March 31, 2019 and June 30, 2018 were as follows:

 

Description

   Balance Sheet Location      March 31,
2019
     June 30,
2018
 
Derivative interest rate swap           (in thousands)  

Short-term derivative asset

     Prepaid expenses and other current assets      $ 432      $ 407  

Long-term derivative asset

     Other assets      $ 249      $ 2,183  

Long-term derivative liability

     Other liabilities      $ 43      $ —    

The following tables present the effect of our derivative interest rate swaps and related tax effects in AOCI for the nine months ended March 31, 2019 and 2018.

 

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     Gain (Loss) in
AOCI
June 30, 2018
     Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
    Amount of (Gain) Loss
Reclassified from AOCI
into Net Income (Loss)
(Effective Portion) (1)
    Income Tax Benefit
(Provision) in OCI on
Derivative Instruments
    Gain (Loss) in
AOCI
March 31, 2019
 
     (in thousands)  

Derivative interest rate swap

   $ 2,590      $ (1,671   $ (281   $ —       $ 638  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Gain (Loss) in
AOCI
June 30, 2017
     Amount of Gain (Loss)
Recognized in OCI on
Derivative Instruments
(Effective Portion)
    Amount of (Gain) Loss
Reclassified from AOCI
into Net Income (Loss)
(Effective Portion) (1)
    Income Tax Benefit
(Provision) in OCI on
Derivative Instruments
    Gain (Loss) in
AOCI
March 31, 2018
 
     (in thousands)  

Derivative interest rate swap

   $ —        $ 1,869     $ 130     $ (626   $ 1,373  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Recorded as interest income (expense) within other expense, net in our unaudited consolidated statements of comprehensive income (loss).

During the three and nine months ended March 31, 2019, we concluded that no portion of the hedges was ineffective.

As of March 31, 2019, there was $0.6 million of unrealized gain in AOCI. We expect to reclassify approximately $0.5 million of this unrealized gain from AOCI to earnings over the next twelve months.

Note 13—Postretirement and Other Employee Benefits

Defined Benefit Pension Plan

We sponsor a defined benefit pension plan for our Swiss-based employees (the Swiss pension plan) 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:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Components of net periodic cost

           

Service cost

   $ 625      $ 650      $ 1,900      $ 1,914  

Interest cost

     113        91        343        267  

Prior service credit

     (76      (23      (231      (68

Net actuarial loss

     54        56        164        165  

Expected return on plan assets

     (342      (306      (1,040      (901
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 374      $ 468      $ 1,136      $ 1,377  
  

 

 

    

 

 

    

 

 

    

 

 

 

The components of net periodic pension cost other than current service cost are presented within other expense, net in our unaudited consolidated statements of comprehensive income (loss).

 

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Note 14—Subsequent Events

In April 2019, we received cash proceeds of $7.7 million and recorded a gain of $7.3 million in connection with the sale of an entity in which we held a small equity investment.

In May 2019, we signed an agreement to acquire the outstanding capital stock of BankSight Software Systems, Inc. (BankSight) for $2.8 million in cash and 40,000 shares of our common stock which have vesting conditions tied to the continued employment of certain BankSight employees. We currently hold a minority investment in preferred stock of BankSight. The transaction is subject to the satisfaction or waiver of customary closing conditions, which we expect to occur by May 31, 2019. BankSight is an early-stage technology company that develops and markets a SaaS-based customer engagement and growth platform for banks and credit unions.

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

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Without limiting the foregoing, the words may, will, should, could, expects, plans, intends, anticipates, believes, estimates, predicts, potential and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to and including the date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II. Item 1A. Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission (SEC), including Part II. Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

In the management discussion that follows, we have highlighted those changes and operating events that were the primary factors affecting period to period fluctuations. The remainder of the change in period to period fluctuations from that which is specifically discussed arises from various individually insignificant items.

Overview

We help make complex business payments simple, smart and secure. Corporations and banks rely on us for domestic and international payments, efficient cash management, automated workflows for payment processing and bill review, and fraud detection, behavioral analytics and regulatory compliance solutions.

We operate cloud-based settlement networks that facilitate electronic payments and transaction settlement between businesses, their vendors and banks. We offer cloud and on-premise solutions that banks use to provide payment, cash management and treasury capabilities to their business customers, as well as solutions that financial institutions use to facilitate customer acquisition. Our cloud-based legal spend management solutions help manage and determine the right amount to pay for legal services and claims vendor expenditures for insurance companies and other large consumers of outside legal services. Corporate customers rely on our solutions to automate payment and accounts payable processes and to streamline and manage the production and retention of electronic documents. Our healthcare customers use our solutions to streamline financial processes, particularly the patient enrollment process. We also offer cyber fraud and risk management solutions that are designed to non-invasively monitor and analyze user behavior and payment transactions to flag behavioral and data anomalies and other suspicious activity.

Our solutions are designed to complement, leverage and extend our customers’ existing information systems, accounting applications and banking relationships so that they can be deployed quickly and efficiently. To help our customers realize the maximum value from our products and meet their specific business requirements, we also provide professional services for installation, training, consulting and product enhancement.

Financial Highlights

The discussion that follows compares our operating results for the three and nine months ended March 31, 2019 to the three and nine months ended March 31, 2018. We adopted the new revenue recognition standard on July 1, 2018 and, in accordance with the method of adoption, did not recast prior period information. The new revenue standard has generally resulted in a modest reduction of subscription and transaction and services and maintenance revenue, while increasing software license revenue, for the nine months ended March 31, 2019 as compared to the respective prior period. The new revenue standard requires the capitalization of certain costs incurred to fulfill or obtain contracts, which prior to adoption were expensed as incurred. Accordingly, this has resulted in a modest reduction to cost of revenues and operating expenses for the three and nine month periods ended March 31, 2019 as compared to the respective prior periods. Please refer to Note 3 Revenue Recognition to our unaudited consolidated financial statements included in this Form 10-Q for a detailed reconciliation of the impact of the adoption of this standard on our operating results.

For the nine months ended March 31, 2019, our revenue increased to $313.7 million from $287.6 million in the same period of the prior fiscal year. Our revenue for the nine months ended March 31, 2019 was unfavorably impacted by $3.5 million due to the impact of foreign currency exchange rates primarily related to the Swiss Franc and British Pound Sterling, both of which depreciated against the U.S. Dollar as compared to the same period of the prior fiscal year. The revenue increase was attributable to revenue increases in our Cloud Solutions segment of $17.9 million, our Banking Solutions segment of $4.1 million and our Payments and Transactional Documents segment of $2.8 million. Increased revenue from our legal spend management and our

 

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Paymode-X and financial messaging settlement network solutions accounted for the revenue increase in our Cloud Solutions segment. The revenue increase in our Payments and Transactional Documents segment was related to higher European subscriptions and transactions revenue in our payment products. The Banking Solutions segment’s revenue increase was primarily due to new customer engagements and platform go-lives, as customers continued to deploy our solutions.

Net income was $5.9 million in the nine months ended March 31, 2019 compared to a net loss of $2.2 million in the same period of the prior fiscal year. Our net income for the nine months ended March 31, 2019 was favorably impacted by gross profit expansion of $17.8 million, a reduction in other expense, net of $6.4 million, due to decreases in the amortization of debt discount costs and an increase in income tax benefit of $2.1 million. These improvements were partially offset by an increase in operating expenses of $18.3 million as we continued to grow our business. The increase in gross margins was driven by increases in revenue in our Cloud Solutions, Payments and Transactional Documents and Banking Solutions segments. The increase in operating expenses was primarily driven by increased product development and engineering costs of $8.3 million as we continued to invest in new product innovation, increased sales and marketing costs of $7.5 million and increased general and administrative costs of $3.4 million.

In the nine months ended March 31, 2019, we derived approximately 38% of our revenue from customers located outside of North America, principally in the United Kingdom, continental Europe and the Asia-Pacific region.

We expect future revenue growth to be driven primarily by our banking and cloud solutions.

Over the past several years we have made strategic investments in innovative new technology offerings that we believe will enhance our competitive position, help us win new business, drive subscription revenue growth and expand our operating margins. We expect to continue to make investments in our suite of products so that we can continue to offer innovative, feature-rich technology solutions to our customers.

Critical Accounting Policies and Significant Judgments and Estimates

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because they involve areas of financial reporting that require us to make judgments and estimates about matters that are uncertain at the time we make the estimate and different estimates—which also would have been reasonable—could have been used.

The critical accounting policies and estimates we identified in our most recent Annual Report on Form 10-K for the fiscal year ended June 30, 2018 related to revenue recognition, the valuation of goodwill and intangible assets, the valuation of acquired deferred revenue and income taxes. With the exception of revenue recognition, which is discussed further below, there have been no material changes to the critical accounting policies from those we disclosed in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Effective July 1, 2018 we adopted a new accounting standard related to revenue recognition on a modified retrospective basis. The cumulative effect of initially applying the new revenue recognition standard was recorded as an adjustment to our accumulated deficit balance as of July 1, 2018. Our consolidated balance sheet, consolidated statement of comprehensive income (loss), our consolidated statement of stockholders’ equity and our consolidated statement of cash flows reflect the adoption of the new standard for all periods subsequent to the adoption date, however financial statements for periods prior to the adoption date have not been revised. The notes to our financial statements include a reconciliation of the adjustments recorded to our current period financial statements to comply with the new standard and the amounts that would have been reflected in our financial statements under the prior revenue recognition framework.

Revenue Recognition Framework

The new revenue standard applies to all customer contracts and requires that revenue be recognized upon the transfer of control of the product or service to the customer at an amount that reflects an appropriate allocation of the total transaction price. Broadly, revenues are recognized according to the following five step model:

 

   

Identifying the contract (or contracts) with a customer;

 

   

Identifying the performance obligations in the contract;

 

   

Determining the transaction price;

 

   

Allocating the transaction price to the contractual performance obligations; and

 

   

Recognizing revenue as performance obligations are satisfied.

 

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Our customer contracts can take a variety of forms but normally are in writing and include all major commercial terms, promised goods and services and the selling price. Our contracts often include multiple promised goods or services that we evaluate to determine if they represent distinct performance obligations. Our performance obligations vary based on the nature of the promised goods or services but commonly consist of:

 

   

Software licensed on either a perpetual or term-license basis;

 

   

Professional services;

 

   

Support and maintenance services; and

 

   

“Stand-ready” obligations to perform in respect of technology solutions we provide under a hosted or SaaS contract.

The transaction price represents the amount of consideration that we expect to be entitled to receive under the contract. It includes the impact of variable consideration such as refunds, penalties, usage-based fees or similar items. We estimate and include variable consideration in the transaction price if we conclude that a significant future reversal of revenue under the contract will not occur. Estimating the amount of variable consideration to include in the transaction price involves significant estimation and is discussed further below.

The transaction price is allocated to the individual performance obligations in a contract. If a contract only has one performance obligation (for example, a professional services only engagement) the entire transaction price is allocated to that performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the proportionate relationship of that performance obligation’s standalone selling price to the total transaction price. Determining standalone selling price involves significant judgment and estimation. In most cases we use an adjusted market assessment approach to estimate standalone selling price and consider the following:

 

   

The price we charge when we sell that item separately;

 

   

Internal price lists and internal pricing guidelines;

 

   

Cost of delivering the item and overall gross margin expectations; and

 

   

Information about the customer or class of customer.

Revenue is recognized for each performance obligation as we satisfy the obligation. Performance obligations are satisfied either over time or at a point in time. Our perpetual license and term license obligations that do not include significant customization are normally satisfied at a point in time. Our professional services, support and maintenance, stand-ready performance obligations with respect to our hosted or SaaS solutions and software licenses dependent on significant customization by us are normally satisfied over time.

Deferred Costs

Under the new revenue standard, certain costs that we historically expensed as incurred are now required to be capitalized. Costs capitalized can relate to either costs to fulfill a contract or costs to obtain a contract.

We capitalize costs incurred to fulfill a contract when the costs relate directly to a specifically identifiable customer contract, when the costs generate or enhance the resources that we will use to satisfy performance obligations in the future and when we estimate that we will recover the costs through future revenues under the contract.

Costs incurred to obtain a contract are those incremental costs that would not have been incurred if the contract had not been obtained, such as sales commissions. We capitalize sales commissions when we estimate that the capitalized amounts will be recovered through future revenues under the contract and the period of benefit is longer than twelve months.

Any costs that we capitalize are amortized to expense over the period during which we expect to transfer the specific goods or services to the customer, including the impact of any estimated renewal periods.

Significant Judgments

There are several aspects of the revenue recognition standard that require us to exercise significant judgment or estimation.

Standalone selling price. The determination of standalone selling price considers several factors. In establishing standalone selling price, we maximize the use of observable inputs such as the price actually charged when we sell the good or service separately, internal pricing policies or pricing goals, information specific to the customer or class of customer and overall market conditions. Maximizing the use of observable inputs helps ensure that our estimation process considers all relevant data points necessary to obtain a reasonable outcome.

Identifying performance obligations. Identifying the performance obligations in a contract may require significant judgment. An individual good or service is accounted for as a separate performance obligation if it is distinct. A performance obligation is considered to be distinct if it is separately identifiable from other items in the contract and a customer can benefit from the good or service on its own. In determining whether a customer can benefit from a good or service on its own, we consider the complexity of any required integration or customization, the interdependency and interrelationship of the particular good or service to other items in the contract and the ability (or inability) of the customer’s personnel or other third party providers to successfully fulfill like goods or services. If we are unable to conclude that a promised good or service meets the criteria for a separate performance obligation it is combined with other items in the contract and treated as a combined performance obligation. Revenue is then recognized in the amount of the transaction price allocated to the combined performance obligation as the combined performance obligation is transferred to the customer.

 

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Estimating variable consideration. As part of estimating the total transaction price, we estimate the total consideration we expect to be entitled to under the contract. In circumstances where the transaction price is confined to a fixed overall contract price, the estimate of the total transaction price is normally straightforward. However, we have contracts where the estimate of total contract price can vary, particularly due to the impact of variable consideration such as usage based fees. Unless we meet certain exceptions, we are required to estimate the amount of variable consideration we expect to receive under the contract. In formulating this estimate, we consider the specific customer’s operating history with us, current usage data and the length of time over which the variable fees are expected to be incurred. We include an estimate of variable consideration in the transaction price if we conclude that a significant future reversal of revenue under the contract will not occur.

Amortization of capitalized costs. Costs incurred to fulfill a contract and costs incurred to obtain a contract are capitalized according to the framework discussed above. These costs are amortized on a straight-line basis over the estimated future period during which we expect to derive benefit from the contract. Estimating the future period of benefit involves judgment. We estimate the future period of benefit after considering a number of factors including the current contract term, the impact of estimated customer renewal terms and the estimated life of the technology solution underlying the contract. We estimate our future period of benefits for capitalized costs to be approximately five years.

It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as filed with the SEC on August 29, 2018, as updated above.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, please refer to Note 2 Recent Accounting Pronouncements to our unaudited consolidated financial statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

Three and Nine Months Ended March 31, 2019 Compared to the Three and Nine Months Ended March 31, 2018

Segment Information

Operating segments are components of an enterprise 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: Cloud Solutions, Banking Solutions, Payments and Transactional Documents and Other.

 

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The following tables represent our segment revenues and our segment measure of profit (loss):

 

     Three Months Ended
March 31,
    Increase (Decrease)
Between Periods
    Nine Months Ended
March 31,
    Increase (Decrease)
Between Periods
 
     2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
    2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Segment revenue:

                

Cloud Solutions

   $ 51,439     $ 46,486     $ 4,953       10.7   $ 151,342     $ 133,448     $ 17,894       13.4

Banking Solutions

     23,903       22,900       1,003       4.4     69,283       65,175       4,108       6.3

Payments and Transactional Documents

     26,094       27,124       (1,030     (3.8 )%      78,271       75,516       2,755       3.6

Other

     5,002       4,626       376       8.1     14,825       13,488       1,337       9.9
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total segment revenue

   $ 106,438     $ 101,136     $ 5,302       5.2   $ 313,721     $ 287,627     $ 26,094       9.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Segment measure of profit (loss):

                

Cloud Solutions

   $ 11,463     $ 9,308     $ 2,155       23.2   $ 32,497     $ 28,342     $ 4,155       14.7

Banking Solutions

     2,082       1,630       452       27.7     6,097       4,939       1,158       23.4

Payments and Transactional Documents

     6,933       7,661       (728     (9.5 )%      22,799       21,755       1,044       4.8

Other

     (1,545     (627     (918     (146.4 )%      (3,019     (2,014     (1,005     (49.9 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total measure of segment profit

   $ 18,933     $ 17,972     $ 961       5.3   $ 58,374     $ 53,022     $ 5,352       10.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

A reconciliation of the measure of total segment profit to GAAP loss before income taxes is as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2019      2018      2019      2018  
     (in thousands)  

Total measure of segment profit

   $ 18,933      $ 17,972      $ 58,374      $ 53,022  

Less:

           

Amortization of acquisition-related intangible assets

     (5,230      (5,818      (15,809      (16,708

Stock-based compensation plan expense

     (10,015      (8,592      (31,906      (25,132

Acquisition and integration-related expenses

     (1,373      (224      (2,966      (1,596

Restructuring expense

     (1,332      (1,485      (1,963      (1,476

Minimum pension liability adjustments

     93        3        248        (35

Global ERP system implementation and other costs

     (557      (1,558      (3,110      (4,973

Other expense, net

     (946      (1,293      (3,097      (9,288
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

   $ (427    $ (995    $ (229    $ (6,186
  

 

 

    

 

 

    

 

 

    

 

 

 

Cloud Solutions

Revenues from our Cloud Solutions segment increased $5.0 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to increased revenue of $2.8 million from our legal spend management solutions and $2.1 million from our settlement network solutions. Segment profit increased $2.2 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, due primarily to the revenue increase described above, partially offset by increased cost of revenues of $0.8 million and increased operating expenses of $2.0 million related to increased sales and marketing and product development and engineering costs.

Revenues from our Cloud Solutions segment increased $17.9 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to increased revenue of $9.1 million from our settlement network solutions and $8.8 million from our legal spend management solutions. Segment profit increased $4.2 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to the revenue increase described above, partially offset by increased cost of revenues of $6.0 million and increased operating expenses of $7.8 million primarily related to increased sales and marketing and product development and engineering costs. We expect revenue and profit for the Cloud Solutions segment to increase in fiscal year 2019 as compared to the prior fiscal year as a result of increased revenue from our legal spend management and our Paymode-X and financial messaging settlement network solutions.

 

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Banking Solutions

Revenues from our Banking Solutions segment increased $1.0 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to increased subscriptions and transactions revenue of $2.1 million and software licenses revenue of $0.4 million, partially offset by decreased service and maintenance revenue of $1.5 million. The increase in subscriptions and transactions revenue was primarily related to customers going live on our hosted platform and the increase in software license revenue was related, in part, to the impact of the new revenue standard we adopted on July 1, 2018. Segment profit increased $0.5 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to the revenue increase described above.

Revenues from our Banking Solutions segment increased $4.1 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due to increased software license revenue of $3.8 million and subscriptions and transactions revenue of $3.0 million, partially offset by decreased service and maintenance revenue of $2.7 million. The increase in software license revenue was related, in part, to the impact of the new revenue standard we adopted on July 1, 2018. Segment profit increased $1.2 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due primarily to the increased revenue described above, partially offset by increased product development and engineering costs. We expect revenue to continue to increase and profit to remain consistent for the Banking Solutions segment in fiscal year 2019 as compared to the prior fiscal year as new customers go live with our hosted platform.

Payments and Transactional Documents

Revenues from our Payments and Transactional Documents segment decreased $1.0 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, due primarily to decreased service and maintenance revenue of $2.8 million and decreased software license revenue of $0.4 million, partially offset by increased subscriptions and transactions revenue of $2.1 million from our European payments and transactional documents solutions, due in part to the impact of recent acquisitions. The decrease in maintenance revenue was driven by the continued migration of customers to our hosted payment products rather than deployed, on-premise solutions. Segment profit decreased $0.7 million for the three months ended March 31, 2019, as compared to the same period in the prior fiscal year, due primarily to the revenue decreases described above.

Revenues from our Payments and Transactional Documents segment increased $2.8 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due primarily to increased subscriptions and transactions revenue of $8.3 million from our European payments and transactional documents solutions, due in part to the impact of recent acquisitions, partially offset by decreased service and maintenance revenue of $4.9 million and decreased software license revenue of $0.6 million. The decrease in maintenance revenue was driven by the continued migration of customers to our hosted payment products rather than deployed, on-premise solutions. Segment profit increased $1.0 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, due primarily to the revenue increase described above, partially offset by increased operating expenses of $1.8 million primarily related to increased product development and engineering costs. We expect revenue and profit for the Payments and Transactional Documents segment to increase in fiscal year 2019 as compared to the prior fiscal year, as a result of increased sales of our subscription-based payment and document automation solutions.

Other

Revenues from our Other segment increased $0.4 million and $1.3 million for the three and nine months ended March 31, 2019, respectively, as compared to the same periods in the prior fiscal year, due primarily to increased software license revenue. Segment profit decreased $1.0 million for both the three and nine months ended March 31, 2019, as compared to the same periods in the prior fiscal year. We expect Other segment revenue to increase slightly and profit to decrease slightly in fiscal year 2019 as compared to the prior fiscal year, principally as the result of increased sales of our cyber fraud and risk management products, offset in part by increased operating expenses.

 

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Revenues by category

 

     Three Months Ended
March 31,
    Increase (Decrease)
Between Periods
    Nine Months Ended
March 31,
    Increase (Decrease)
Between Periods
 
     2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
    2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Revenues:

                

Subscriptions and transactions

   $ 75,502     $ 67,378     $ 8,124       12.1   $ 216,558     $ 191,279     $ 25,279       13.2

Software licenses

     3,802       3,134       668       21.3     13,979       8,119       5,860       72.2

Service and maintenance

     25,856       29,476       (3,620     (12.3 )%      80,047       85,251       (5,204     (6.1 )% 

Other

     1,278       1,148       130       11.3     3,137       2,978       159       5.3
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total revenues

   $ 106,438     $ 101,136     $ 5,302       5.2   $ 313,721     $ 287,627     $ 26,094       9.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

As % of total revenues:

                

Subscriptions and transactions

     70.9     66.7         69.0     66.6    

Software licenses

     3.6     3.1         4.5     2.8    

Service and maintenance

     24.3     29.1         25.5     29.6    

Other

     1.2     1.1         1.0     1.0    
  

 

 

   

 

 

       

 

 

   

 

 

     

Total revenues

     100.0     100.0         100.0     100.0    
  

 

 

   

 

 

       

 

 

   

 

 

     

Subscriptions and Transactions

Revenues from subscriptions and transactions increased $8.1 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year. The overall revenue increase was due principally to increases in revenue from our Cloud Solutions segment, Payments and Transactional Documents segment and Banking Solutions segment of $4.1 million, $2.3 million and $2.1 million, respectively, due to the impact of customers going live on our hosted platforms and, to a lesser degree, the impact of recent acquisitions.

Revenues from subscriptions and transactions increased $25.3 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year. The overall revenue increase was due principally to increases in revenue from our Cloud Solutions segment and Payments and Transactional Documents segment of $14.9 million and $8.5 million, respectively, due to the impact of customers going live on our hosted platforms and, to a lesser degree, the impact of recent acquisitions. We expect subscriptions and transactions revenues to continue to increase in fiscal year 2019 as compared to the prior fiscal year, primarily as a result of the revenue contribution from our legal spend management solutions, our Paymode-X and financial messaging settlement network solutions and continued revenue increases in our Banking Solutions segment.

Software Licenses

Revenues from software licenses increased $0.7 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year, primarily as a result of increased revenue from our Other segment and Banking Solutions segment of $0.5 million and $0.4 million, respectively. The increase in revenue is due in part from our adoption of the new revenue standard on July 1, 2018 which results in revenue recognition sooner for certain arrangements for which revenue recognition was delayed under legacy GAAP, such as when vendor specific evidence of fair value could not be established. In addition, the change in methodology for allocation of the transaction price between performance obligations had the impact of increasing software revenue under the new standard.

Revenues from software licenses increased $5.9 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year, primarily as a result of increased revenue from our Banking Solutions segment and Other segment of $3.8 million and $1.6 million, respectively. The increase in revenue is due in part from our adoption of the new revenue standard on July 1, 2018 which results in revenue recognition sooner for certain arrangements for which revenue recognition was delayed under legacy GAAP, such as when vendor specific evidence of fair value could not be established. In addition, the change in methodology for allocation of the transaction price between performance obligations had the impact of increasing software revenue under the new standard. We expect software license revenues to increase in fiscal year 2019 as compared to the prior fiscal year, primarily as a result of revenue contribution from our Banking Solutions, Payments and Transactional Documents and Other segments.

 

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Service and Maintenance

Revenues from service and maintenance decreased $3.6 million for the three months ended March 31, 2019 as compared to the same period in the prior fiscal year. The overall revenue decrease was due principally to decreases in revenue from our Payments and Transactional Documents segment of $2.8 million and Banking Solutions segment of $1.5 million, in each case reflecting the continued migration of customers to our hosted solutions rather than deployed, on-premise solutions. These decreases were partially offset by increased revenue from our Cloud Solutions segment of $0.7 million.

Revenues from service and maintenance decreased $5.2 million for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year. The overall revenue decrease was due principally to decreases in revenue from our Payments and Transactional Documents segment of $4.9 million and Banking Solutions segment of $2.7 million, in each case reflecting the continued migration of customers to our hosted solutions rather than deployed, on-premise solutions. These decreases were partially offset by increased revenue from our Cloud Solutions segment and Other segment of $2.0 million and $0.3 million, respectively. We expect service and maintenance revenues will decrease slightly in fiscal year 2019 as compared to the prior fiscal year, as a result of decreased services revenue from our Banking Solutions segment, primarily due to the continued impact of customers transitioning from on-premise to SaaS-based solutions.

Other

Our other revenues consist principally of equipment and supplies sales, which remained minor components of our overall revenue. We expect that other revenues will decrease in fiscal year 2019 as compared to the prior fiscal year, due to the absence of a one-time revenue transaction recorded in the fourth quarter of fiscal year 2018.

Cost of revenues by category

 

     Three Months Ended
March 31,
    Increase (Decrease)
Between Periods
    Nine Months Ended
March 31,
    Increase (Decrease)
Between Periods
 
     2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
    2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Cost of revenues:

                

Subscriptions and transactions

   $ 31,623     $ 30,771     $ 852       2.8   $ 94,644     $ 85,404     $ 9,240       10.8

Software licenses

     226       233       (7     (3.0 )%      667       632       35       5.5

Service and maintenance

     12,818       13,861       (1,043     (7.5 )%      38,052       39,195       (1,143     (2.9 )% 

Other

     1,046       930       116       12.5     2,461       2,298       163       7.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total cost of revenues

   $ 45,713     $ 45,795     $ (82     (0.2 )%    $ 135,824     $ 127,529     $ 8,295       6.5
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Gross Profit ($)

   $ 60,725     $ 55,341     $ 5,384       9.7   $ 177,897     $ 160,098     $ 17,799       11.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Gross Profit (%)

     57.1     54.7         56.7     55.7    

Subscriptions and Transactions

Subscriptions and transactions costs include salaries and other related costs for our professional services teams as well as costs related to our hosting infrastructure such as depreciation and facilities related expenses. Subscriptions and transactions costs decreased to 42% of subscriptions and transactions revenues in the three months ended March 31, 2019 as compared to 46% of subscriptions and transactions revenues in the three months ended March 31, 2018 due to the continued revenue expansion from our hosted solutions.

Subscriptions and transactions costs were relatively consistent at 44% of subscription and transactions revenues in the nine months ended March 31, 2019 as compared to 45% of subscriptions and transactions revenues in the nine months ended March 31, 2018. We expect subscriptions and transactions costs as a percentage of subscriptions and transactions revenues will decrease slightly in fiscal year 2019 as a result of increased revenue contribution from our cloud-based banking and legal spend management.

Software Licenses

Software license costs consist of expenses incurred by us to distribute our software products and related documentation and costs of licensing third party software that is incorporated into or sold with certain of our products. Software license costs remained consistent at 6% of software license revenues in the three months ended March 31, 2019 as compared to 7% of software license revenues in the three months ended March 31, 2018.

 

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Software license costs decreased to 5% of software license revenues in the nine months ended March 31, 2019 as compared to 8% of software license revenues in the nine months ended March 31, 2018. Costs decreased as a percentage of revenue due to increased software license sales which contained minimal third party costs. We expect that software license costs as a percentage of software license revenues will decrease in fiscal year 2019 as compared to the prior fiscal year primarily due to increased revenue in our Banking Solutions segment.

Service and Maintenance

Service and maintenance costs include salaries and other related costs for our customer service, maintenance and help desk support staffs, as well as third party contractor expenses used to complement our professional services team. Service and maintenance costs increased slightly to 50% of service and maintenance revenues in the three months ended March 31, 2019 as compared to 47% of service and maintenance revenues in the three months ended March 31, 2018 due primarily to increased service and maintenance costs as a percentage of revenue from our European payments and transactional documents solutions.

Service and maintenance costs increased slightly to 48% of service and maintenance revenues in the nine months ended March 31, 2019 as compared to 46% of service and maintenance revenues in the nine months ended March 31, 2018 due primarily to increased service and maintenance costs as a percentage of revenue from our European payments and transactional documents solutions. We expect that service and maintenance costs as a percentage of service and maintenance revenues will continue to increase slightly in fiscal year 2019 as compared to the prior fiscal year, as we continue the implementation phases of certain customers in our Banking Solutions segment.

Other

Other costs include the costs associated with equipment and supplies that we resell, as well as freight, shipping and postage costs associated with the delivery of our products. These remain minor components of our business. We expect that other costs as a percentage of other revenues will increase in fiscal year 2019 as compared to the prior fiscal year, due to the absence of a one-time revenue transaction recorded in the fourth quarter of fiscal year 2018.

Operating Expenses

 

     Three Months Ended
March 31,
    Increase (Decrease)
Between Periods
    Nine Months Ended
March 31,
    Increase (Decrease)
Between Periods
 
     2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
    2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Operating expenses:

                

Sales and marketing

   $ 25,165     $ 22,465     $ 2,700       12.0   $ 70,772     $ 63,255     $ 7,517       11.9

Product development and engineering

     16,887       14,179       2,708       19.1     50,267       41,981       8,286       19.7

General and administrative

     13,175       12,763       412       3.2     38,944       35,589       3,355       9.4

Amortization of acquisition-related intangible assets

     5,230       5,818       (588     (10.1 )%      15,809       16,708       (899     (5.4 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total operating expenses

   $ 60,457     $ 55,225     $ 5,232       9.5   $ 175,792     $ 157,533     $ 18,259       11.6
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

As % of total revenues:

                

Sales and marketing

     23.6     22.2         22.6     22.0    

Product development and engineering

     15.9     14.0         16.0     14.6    

General and administrative

     12.4     12.6         12.4     12.4    

Amortization of acquisition-related intangible assets

     4.9     5.8         5.0     5.8    
  

 

 

   

 

 

       

 

 

   

 

 

     

Total operating expenses

     56.8     54.6         56.0     54.8    
  

 

 

   

 

 

       

 

 

   

 

 

     

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade show participation. Sales and marketing expenses increased in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 due primarily to an increase in employee related costs of $2.2 million, incurred to support our continued revenue growth.

 

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Sales and marketing expenses increased in the nine months ended March 31, 2019 as compared to the nine months ended March 31, 2018 due primarily to an increase in employee related costs of $6.5 million, incurred to support our continued revenue growth. We expect sales and marketing expenses as a percentage of total revenue will remain relatively consistent in fiscal year 2019 as compared to the prior fiscal year.

Product Development and Engineering

Product development and engineering expenses consist primarily of personnel costs to support product development, which consists of enhancements and revisions to our products based on customer feedback and general marketplace demands. Product development and engineering expenses in the three and nine months ended March 31, 2019 as compared to the three and nine months ended March 31, 2018 increased principally as a result of an increase in headcount related costs as we continued to invest in the deployment of innovative, feature-rich products. We expect product development and engineering expenses as a percentage of total revenues will increase slightly in fiscal year 2019 as compared to the prior fiscal year.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs for operations and finance employees and legal and accounting services. General and administrative expenses increased in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 due primarily to increased employee related costs of $0.8 million.

General and administrative expenses increased in the nine months ended March 31, 2019 as compared to the nine months ended March 31, 2018 due primarily to increased employee related costs of $3.8 million and restructuring costs related to a facility exit of $0.3 million, partially offset by decreased global enterprise resource planning (ERP) implementation and other costs of $1.9 million. We expect general and administrative expenses as a percentage of total revenues will remain relatively consistent in fiscal year 2019 as compared to the prior fiscal year.

Amortization of Acquisition-related Intangible Assets

We amortize our acquired intangible assets in proportion to the estimated rate at which the asset provides economic benefit to us. Accordingly, amortization expense rates are often higher in the earlier periods of an asset’s estimated life. The decrease in amortization expense in the three and nine months ended March 31, 2019 as compared to the three and nine months ended March 31, 2018 occurred as a result of the impact of amortization of intangible assets from our business acquisitions during fiscal year 2018 and the three and nine months ended March 31, 2019. We expect that total amortization expense for acquired intangible assets for the remainder of fiscal year 2019 will be approximately $5.5 million.

Other Expense, Net

 

     Three Months
Ended March 31,
    Increase (Decrease)
Between Periods
    Nine Months Ended
March 31,
    Increase (Decrease)
Between Periods
 
     2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
    2019     2018     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Interest income

   $ 174     $ 67     $ 107       159.7   $ 452     $ 184     $ 268       145.7

Interest expense

     (903     (1,467     564       38.4     (2,958     (9,724     6,766       69.6

Other (expense) income, net

     34       289       (255     (88.2 )%      172       789       (617     (78.2 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

   $ (695   $ (1,111   $ 416       37.4   $ (2,334   $ (8,751   $ 6,417       73.3
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Other expense, net decreased $0.4 million for the three months ended March 31, 2019 and $6.4 million for the nine months ended March 31, 2019 as compared to the same periods in the prior fiscal year, respectively. The decrease for the nine months ended March 31, 2019 as compared to the same period in the prior fiscal year is primarily due to decreases in the amortization of debt discount costs upon the maturity of our convertible senior notes in December 2017.

Provision for Income Taxes

We recorded an income tax benefit of $1.3 million and an income tax expense of $7 thousand for the three months ended March 31, 2019 and 2018, respectively. We recorded an income tax benefit of $6.1 million and $4.0 million for the nine months ended March 31, 2019 and 2018, respectively. Please refer to Note 8 Income Taxes to our unaudited consolidated financial statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q for further discussion.

 

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Liquidity and Capital Resources

We are party to a credit agreement which provides for a five-year revolving credit facility in the amount of up to $300 million (the Credit Facility). We also have the right to request an increase to the aggregate commitments to the Credit Facility of up to $150 million, subject to specified conditions. The Credit Facility expires in July 2023. During the nine months ended March 31, 2019, we used $40.0 million of cash on hand to pay down a portion of the borrowings under our Credit Facility. At March 31, 2019, borrowings were $110 million and we were in compliance with all covenants associated with the Credit Facility.

During the nine months ended March 31, 2019, warrant holders exercised warrants for approximately 932 thousand shares of our common stock and we issued shares of common stock in the same amount. All of the warrant exercises were net settled and there were no warrants outstanding as of March 31, 2019.

We have financed our operations primarily from cash provided by operating activities, the sale of our common stock and debt proceeds. We have historically generated positive operating cash flows. Accordingly, we believe that the cash generated from our operations and the cash and cash equivalents we have on hand will be sufficient to meet our operating requirements for the foreseeable future. If our existing cash resources along with cash generated from operations is insufficient to satisfy our operating requirements, we may need to sell additional equity or debt securities or seek other financing arrangements.

One of our financial goals is to maintain and improve our capital structure. The key metrics we focus on in assessing the strength of our liquidity and a summary of our cash activity for the nine months ended March 31, 2019 and 2018 are summarized in the tables below:

 

     March 31,      June 30,  
     2019      2018  
     (in thousands)  

Cash and cash equivalents

   $ 79,475      $ 121,860  

Marketable securities

     8,515        10,012  

Borrowings under credit facility

     110,000        150,000  

 

     Nine Months Ended
March 31,
 
     2019      2018  
     (in thousands)  

Cash provided by operating activities

   $ 63,015      $ 35,523  

Cash used in investing activities

     (65,124      (28,628

Cash used in financing activities

     (37,297      (38,787

Effect of exchange rates on cash

     (1,427      2,331  

Cash, cash equivalents and marketable securities. At March 31, 2019, our cash and cash equivalents of $79.5 million consisted primarily of cash deposits held at major banks and money market funds. The $42.4 million decrease in cash and cash equivalents at March 31, 2019 from June 30, 2018 was primarily due to cash used for the repayment of amounts borrowed under the Credit Facility of $40.0 million, cash used to fund business acquisitions, net of cash acquired, of $21.4 million and capital expenditures, including capitalization of software costs of $45.7 million, partially offset by cash generated from operations of $63.0 million.

Cash, cash equivalents and marketable securities included approximately $57.9 million held by our foreign subsidiaries as of March 31, 2019. During the three months ended September 30, 2018, we repatriated $20.8 million from our UK subsidiary. We continue to permanently reinvest the earnings, if any, of our international subsidiaries other than the UK and Switzerland and therefore we do not provide for U.S. income taxes that could result from the distribution of foreign earnings from our international subsidiaries other than the UK and Switzerland. If our reinvestment plans change based on future events and we decide to repatriate amounts from our international subsidiaries other than the UK and Switzerland to fund our domestic operations, those amounts would generally become subject to state tax in the U.S. to the extent there were cumulative profits in the foreign subsidiary from which the distribution to the U.S. was made.

Cash and cash equivalents held by our foreign subsidiaries are denominated in currencies other than U.S. Dollars. Decreases primarily in the foreign currency exchange rate of the British Pound Sterling to the U.S. Dollar decreased our overall cash balances by approximately $1.4 million for the nine months ended March 31, 2019. Further changes in the foreign currency exchange rates of the British Pound Sterling and other currencies could have a significant effect on our overall cash balances. However, we continue to believe that our existing cash balances, even in light of the foreign currency volatility we periodically experience, are adequate to meet our operating requirements for the foreseeable future.

 

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Operating Activities. Operating cash flow is derived by adjusting our net income or loss for non-cash operating items, such as depreciation and amortization, stock-based compensation plan expense, deferred income tax benefits or expenses, and impairment charges and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations. Cash generated from operations increased by $27.5 million in the nine months ended March 31, 2019 versus the same period in the prior fiscal year. The increase was primarily related to an increase in cash flows from accounts receivables of $19.5 million and an increase in cash generated from our net income of $8.0 million.

At March 31, 2019, a substantial portion of our deferred tax assets have been reserved since, given the available evidence, it was deemed more likely than not that these deferred tax assets would not be realized.

Investing Activities. Investing cash flows consist primarily of capital expenditures, inclusive of capitalized software costs, investment purchases and sales and cash used for the acquisition of businesses and assets. The $36.5 million increase in net cash used in investing activities for the nine months ended March 31, 2019 versus the same period in the prior fiscal year was primarily due to an increase in cash used to fund business acquisitions, net of cash acquired, of $15.7 million and an increase in capital expenditures of $30.9 million, partially offset by a decrease in the purchase of available for sale securities of $2.3 million and an increase in proceeds from sales of available for sale securities of $7.3 million. The increase in capital expenditures was primarily related to the purchase of a building in Reading, UK in January 2019 for approximately $20.7 million. When it is ready for its intended use, the building will ultimately replace our current Reading, UK building as our European headquarters.

Financing Activities. Financing cash flows consist primarily of repurchases of common stock, issuance and repayment of debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.

Contractual Obligations

Following is a summary of future payments that we are required to make under existing contractual obligations as of March 31, 2019:

 

     Payment Due by Fiscal Year  
     2019      2020-2021      2022-2023      Thereafter      Total  
     (in thousands)  

Credit Facility

              

Principal payment

   $ —        $ —        $ —        $ 110,000      $ 110,000  

Interest payments (1)

     852        6,816        7,267        141        15,076  

Commitment fee (2)

     83        665        665        13        1,426  

Note payable

     184        369        —          —          553  

Operating leases

     1,481        10,593        7,143        10,617        29,834  

Purchase commitments

     3,097        9,134        1,177        7        13,415  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 5,697      $ 27,577      $ 16,252      $ 120,778      $ 170,304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The Credit Facility carries a variable rate of interest. Interest payments were estimated using the applicable interest rate as of March 31, 2019, net of the impact of the interest rate swaps we entered into in July 2017 and March 2019.

(2)

The Credit Facility agreement includes a commitment fee, which we have included in the table above, based on the applicable interest rate as of March 31, 2019 and our current unborrowed capacity of $190 million.

Purchase orders are not included in the table above. Our purchase orders represent authorizations to purchase rather than binding agreements. The contractual obligation amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under contract that we can cancel without a significant penalty are not included in the table above.

Our estimate of unrecognized tax benefits for which cash settlement may be required, in the amount of $1.5 million, has been excluded from the table above. These amounts have been excluded because, as of March 31, 2019, we are unable to estimate the timing of future cash outflows, if any, associated with these liabilities as we do not currently anticipate settling any of these tax positions with cash payment in the foreseeable future.

 

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The contractual obligations table above also excludes our estimate of the contributions we will make to our Swiss defined benefit pension plan in fiscal year 2019, which is $1.7 million based on foreign exchange rates in effect on March 31, 2019. We have not disclosed contributions for periods after fiscal year 2019, as those amounts are subject to future changes.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the three months ended March 31, 2019.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

We are exposed to a variety of risks, including interest rate changes, foreign currency exchange rate fluctuations, and derivative instruments classification. We have not entered into any foreign currency hedging transactions or other instruments to minimize our exposure to foreign currency exchange rate fluctuations nor do we presently plan to in the future.

We are a party to interest rate swap agreements which we designated as hedge instruments to minimize our exposure to interest rate fluctuations under our Credit Facility.

There has been no material change to our exposure to market risk from that which was disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 as filed with the SEC on August 29, 2018, which is incorporated herein by reference.

Item 4.    Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

We are, from time to time, a party to legal proceedings and claims that arise in the ordinary course of our business. We do not believe that there are claims or proceedings pending against us for which the ultimate resolution would have a material effect on, or require further disclosure in, our financial statements.

Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors identified in Part I. Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 before making an investment decision involving our common stock. These risk factors could materially affect our business, financial condition or results of operations and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. These risks and uncertainties are not the only ones facing us. Additional risks and uncertainties may also impact our business operations. Except for the following additional risk factors, there have been no material changes to the risk factors disclosed in Part I. Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

The formal notification by the UK of its intention to withdraw from the European Union (EU) (referred to as Brexit), could create disruption and uncertainty to our business, including our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations

In connection with Brexit, the British government is negotiating the future terms of the UK’s relationship with the EU, including the terms of trade between the UK and the EU. The ultimate effects of Brexit will depend on any agreements the UK makes to retain access to EU markets, either during a transitional period or more permanently, and could potentially disrupt the markets we serve and the tax jurisdictions in which we operate. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Remaining EU member countries may also seek to make it more difficult for us to trade effectively or competitively in those regions.

The UK had a period of a maximum of two years from the date of its formal notification to negotiate the terms of its withdrawal from, and future relationship with, the EU. If no formal withdrawal agreement can be reached between the UK and the EU, then the UK’s membership of the EU will automatically terminate on the deadline, which was initially March 29, 2019. That deadline has been extended to October 31, 2019 to provide additional time for the parties to negotiate a withdrawal agreement. However, based on the limited progress to date in these negotiations, there is a possibility that the UK will leave the EU without a withdrawal agreement and associated transition period in place, which is likely to cause significant market and economic disruption.

The lack of a formalized and orderly process for the UK’s exit from the EU, to the extent occurring, could create uncertainty and challenges (particularly in the near term) with respect to trading relationships between our UK subsidiary and other EU nations. Further, following the UK’s exit from the EU, there could be divergent or unreconciled positions in respect of other regulatory areas such as employment law or data privacy, which could create additional uncertainty and challenges for us.

Risks Related to our Indebtedness

Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial results and operation

In July 2017, the Financial Conduct Authority (the regulatory authority over LIBOR) stated they will plan for a phase out of regulatory oversight of LIBOR interest rate indices after 2021 to allow for an orderly transition to an alternate reference rate. The Alternative Reference Rates Committee (ARRC) has proposed that the Secured Overnight Financing Rate (SOFR) is the rate that represents the best alternative to LIBOR for derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has proposed a market transition plan to SOFR from LIBOR. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. The market transition away from LIBOR towards SOFR is expected to be complicated. There can be no guarantee that SOFR will become a widely accepted benchmark in place of LIBOR. Borrowings under our Credit Facility, as hedged by our interest swap, are indexed to LIBOR. It is uncertain at this time, what the impact of a possible transition to SOFR may be on our business, financial results and operations.

 

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Item 6.    Exhibits

 

         

Incorporated by Reference

Exhibit
Number

  

Description

  

Form

  

File No.

  

Exhibit

  

Filing
Date

  

Filed
Herewith

  31.1

   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer                X

  31.2

   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer                X

  32.1

   Section 1350 Certification of Principal Executive Officer                X

  32.2

   Section 1350 Certification of Principal Financial Officer                X

101.INS**

   XBRL Instance Document                X

101.SCH**

   XBRL Taxonomy Extension Schema Document                X

101.CAL**

   XBRL Taxonomy Calculation Linkbase Document                X

101.DEF**

   XBRL Taxonomy Definition Linkbase Document                X

101.LAB**

   XBRL Taxonomy Label Linkbase Document                X

101.PRE**

   XBRL Taxonomy Presentation Linkbase Document                X

 

**

submitted electronically herewith

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended March 31, 2019 and 2018, (iii) Unaudited Consolidated Statements of Stockholders’ Equity for the three and nine months ended March 31, 2019 and 2018, (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018 and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

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SIGNATURE

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.

 

    Bottomline Technologies (de), Inc.
Date: May 10, 2019     By:   /s/    RICHARD D. BOOTH        
      Richard D. Booth
      Chief Financial Officer and Treasurer
      (Principal Financial and Accounting Officer)

 

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