Attached files

file filename
EX-32.2 - EX-32.2 - BOTTOMLINE TECHNOLOGIES INCd377508dex322.htm
EX-32.1 - EX-32.1 - BOTTOMLINE TECHNOLOGIES INCd377508dex321.htm
EX-31.2 - EX-31.2 - BOTTOMLINE TECHNOLOGIES INCd377508dex312.htm
EX-31.1 - EX-31.1 - BOTTOMLINE TECHNOLOGIES INCd377508dex311.htm
EX-23.1 - EX-23.1 - BOTTOMLINE TECHNOLOGIES INCd377508dex231.htm
EX-21.1 - EX-21.1 - BOTTOMLINE TECHNOLOGIES INCd377508dex211.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended June 30, 2017

OR

 

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

For the transition period from                      to                     

Commission file number: 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

(Address of principal executive offices)

 

03801-6808

(Zip Code)

(603) 436-0700

(Registrant’s telephone number, including area code)

 

 

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

 

Title of each class:

 

Name of each exchange on which registered:

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

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☐

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

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer   ☐ (Do not check if a smaller reporting company)    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  ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price of the registrant’s common stock at the close of business on December 31, 2016 was $983,780,796 (reference is made to Part II, Item 5 herein for a statement of assumptions upon which this calculation is based). The registrant has no non-voting stock.

There were 40,387,931 shares of common stock, $.001 par value per share, of the registrant outstanding as of August 18, 2017.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to our executive officers, which is set forth under

“Part I-Executive Officers and Other Key Employees of the Registrant”) have been omitted from this report, as we expect to file with the Securities and Exchange Commission, not later than 120 days after the close of our fiscal year ended June 30, 2017, a definitive proxy statement for our 2017 annual meeting of stockholders. The information required by Items 10, 11, 12, 13 and 14 of Part III of this report, which will appear in our definitive proxy statement, is incorporated by reference into this report.


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2017

TABLE OF CONTENTS

 

         Page  
  PART I   

Item 1.

  Business      3  

Item 1A.

  Risk Factors      13  

Item 1B.

  Unresolved Staff Comments      26  

Item 2.

  Properties      26  

Item 3.

  Legal Proceedings      26  

Item 4.

  Mine Safety Disclosures      26  
  PART II   

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27  

Item 6.

  Selected Financial Data      29  

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      31  

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      50  

Item 8.

  Financial Statements and Supplementary Data      52  

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      96  

Item 9A.

  Controls and Procedures      96  

Item 9B.

  Other Information      97  
  PART III   

Item 10.

  Directors, Executive Officers and Corporate Governance      98  

Item 11.

  Executive Compensation      98  

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      98  

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      98  

Item 14.

  Principal Accountant Fees and Services      98  
  PART IV   

Item 15.

  Exhibits and Financial Statement Schedules      99  

Item 16.

  Form 10-K Summary      103  
  Signatures      104  

 

2


Table of Contents

PART I

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Any statements (including statements to the effect that we believe, expect, anticipate, plan, and similar expressions) that are not statements relating to historical matters should be considered forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements as a result of numerous important factors, including those discussed in Item 1A. Risk Factors.

 

Item 1. Business.

Our Company

We help businesses pay and get paid. We make complex business payments simple, smart and secure by providing a trusted and easy-to-use set of cloud-based business payment, digital banking, fraud prevention, payment and financial document solutions. We offer cloud solutions, as well as software designed to run on-site at the customer’s location. The majority of our revenues are derived from offerings sold as SaaS-based solutions and paid for on a subscription and transaction basis.

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 banks and credit unions use to facilitate customer acquisition and growth. We offer legal spend management solutions that help manage and determine the right amount to pay for legal services and claims vendor expenditures for insurance companies and other large corporate consumers of outside legal services. Our corporate customers rely on our solutions to automate their 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 comprehensive 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.

Bottomline was originally organized as a New Hampshire corporation in 1989 and was reincorporated as a Delaware corporation in August 1997. We maintain our corporate headquarters in Portsmouth, New Hampshire and our international headquarters in Reading, England. We maintain a website at www.bottomline.com. Our website includes links to our Code of Business Conduct and Ethics, and the charters of our Audit Committee, Leadership Development and Compensation Committee, and Nominations and Corporate Governance Committee. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Unless the context requires otherwise, references in this Annual Report on Form 10-K to we, us, our, Bottomline and the Company refer to Bottomline Technologies (de), Inc. and its subsidiaries. Our fiscal year ends on June 30, and we sometimes identify our fiscal years in this Annual Report on Form 10-K by the calendar years in which they end. For example, we refer to the fiscal year ended June 30, 2017 as “fiscal year 2017.”

 

3


Table of Contents

Our Strategy

Our objective is to be the leading global provider of business payment technology. Key elements of our strategy include the following:

 

    providing solutions that allow businesses to make complex and fragmented payment processes simple, smart and secure;

 

    growing our business payment settlement network solutions by adding customers, strategic partners and new capabilities;

 

    continuing to deliver solutions that enable organizations to adapt to and leverage business payment environment changes such as faster payments, real-time settlement and open banking;

 

    providing digital banking solutions that enable banks of all sizes to offer their business customers leading cash management and treasury capabilities;

 

    developing innovative new technologies that will allow us to broaden our market footprint, enhance our competitive position in our current markets and capitalize on new market opportunities;

 

    delivering an increasingly broad set of solutions via the cloud to provide ease of deployment and efficiency for our customers and increased recurring revenue to us;

providing an intuitive, easy-to-use/easy-to-navigate experience, accessible via a variety of technology platforms including mobile devices;

 

    attracting and retaining exceptional technical, industry and management talent who have experience in our markets and the capability to grow our business;

 

    continuing to develop and broaden strategic relationships that enhance our global position; and

 

    pursuing strategic acquisitions that expand our geographical footprint and market share or extend our product functionality.

Our Products and Services

Settlement Network Solutions

Paymode-X is a cloud-based payment network allowing businesses to easily transition from paper to electronic payments, maximizing cost-savings, efficiency and security. With more than 365,000 member businesses, new Paymode-X customers gain immediate benefits because many of their vendors are already part of the Paymode-X network and can be paid electronically on day one. Our vendor enrollment process leverages our Intelligent Engagement Model which includes predictive analytics tools and proprietary processes designed to maximize vendor adoption. As a comprehensive settlement network, customers can easily optimize working capital and their payment mix by making card, ACH, wire and check payments with a single integrated payment file. We continually invest in features and services that enhance the network value and usability for member businesses, including: electronic payments and remittance delivery, online access to payment detail and reports, online payment approvals, electronic invoice delivery and turnkey vendor enrollment and support. We partner with Visa and Mastercard to offer Paymode-X with card capabilities.

Our cloud-based financial messaging solutions leverage the SWIFT global messaging network to allow banks and corporations to exchange financial information including payment instructions, cash reporting and other messages to facilitate transaction settlement with banks and counterparties around the world. Our financial messaging solutions allow banks and corporations to achieve lower costs, rapid implementation, greater security and improved risk management, while avoiding costly internal infrastructure.

Digital Banking

We offer payments, cash management and online banking solutions to financial institutions, including banks and credit unions. Our solutions enable banks of all sizes to offer their customers a host of capabilities

 

4


Table of Contents

including ACH and BACS payments, wires, international payments, check production, customer acquisition, balance and information reporting and other features that facilitate enterprise-wide cash management and interaction with their customers. Our web payment fraud module integrates with our cloud-based payments and cash management platforms, providing real time security monitoring and automated transaction blocking for fraudulent activity. Our solutions allow our bank customers to attract and service a full range of client segments from small businesses to multi-nationals. These solutions feature an intuitive user interface designed to simplify all aspects of payments and cash management for customers of all sizes and sophistication, through both browser-based and mobile channels.

Legal Spend Management

Our cloud-based legal spend management solutions and services integrate with claims management and time and billing systems to automate legal invoice management processes and to provide insight into all areas of a company’s outside legal spend. The combination of automated invoice routing and a sophisticated rules engine allows corporate legal and insurance claims departments to create more efficient processes for managing invoices generated by outside law firms and other service providers, while offering insight into important legal spend factors including expense monitoring and outside counsel performance. We continue to expand the capabilities of these offerings to leverage predictive analytics to facilitate the selection and retention of counsel, forecast claim settlement and litigation expense and augment the management and budgeting of litigation matters.

Cyber Fraud and Risk Management

Our cyber fraud and risk management solutions (CFRM) non-invasively monitor, replay and analyze user behavior and payment transactions to flag and even stop suspicious activity in real time. These solutions are highly configurable and create accountability by recording and analyzing each application interaction and screen view, reducing the risk of theft, information leakage, internal fraud and payments fraud, as well as decreasing the cost of regulatory compliance. Case management capabilities centralize risk management, speed investigations, and facilitate compliance with regulations pertaining to Anti Money Laundering (AML), the Health Insurance Portability and Accountability Act (HIPAA) and Know Your Customer (KYC).

Payment and Document Automation

Our payment automation solutions can generate a wide variety of domestic and international payment instructions along with consolidated bank reporting of cash activity. Our web fraud and security module is designed to identify and track fraudulent activity that occurs in a customer’s platform. Our solutions can reduce administrative expenses and strengthen compliance and anti-fraud controls. Users are able to gather and access data via the web related to payment and bank account information, including account totals and detailed transaction data, providing improved workflow, financial reporting and bank communications.

To help augment financial document workflow and delivery, we also offer a number of solutions designed to automate a wide variety of business documents and supply chain processes as well as related web-based delivery and document archive. Our products offer advanced design, output formatting and delivery capabilities to replace paper-based forms, as well as automating the labor-intensive accounts payable processing of invoices.

Healthcare Solutions

We offer solutions for patient registration, electronic signature, mobile document and payments for healthcare organizations to improve business efficiency, reduce costs and improve care quality. Our solutions are utilized across the acute care hospital enterprise and broader healthcare systems, accelerating the paper-to-electronic transition while helping our customers streamline data flows.

We also extend our CFRM platform to provide privacy and data security for healthcare organizations enabling them to better protect themselves and their patients’ data from the growing threat posed by the misuse of valid user credentials. The use of user behavior analytics, profiling and a risk scoring engine allows healthcare organizations to detect user behavior changes and receive alerts in real-time.

 

5


Table of Contents

Professional Services

Our teams of service professionals draw on extensive experience to provide consulting, project implementation and training services to our customers. By easing the implementation of our products, these services help our customers accelerate the time to value. By improving the overall customer experience, these services help us retain customers and drive future revenue-generating arrangements from existing customers.

Our Customers

Our customers are in industries such as banking, financial services, insurance, healthcare, technology, retail, communications, education, media, manufacturing and government. Our customers include leading organizations such as Bank of America Merrill Lynch, Berkley Risk Administrators, British Telecommunications plc., Capital One, CIBC, Cigna Corporation, Citizens Bank, Deutsche Bank, Franklin Templeton Investments, Fidelity Investments, HSBC, Johnson Controls, Inc., JPMorgan Chase, Lloyds Bank, Metro Bank, Regions Financial Corporation, Santander Bank, Starling Bank, State Farm Insurance, Tesco Stores Ltd., The Hartford, Vodafone and Zurich American Insurance Company.

Our Competition

The markets in which we participate are highly competitive. We believe our ability to compete depends on factors within and beyond our control, including:

 

    our ability to develop new, innovative technology solutions that meet the evolving needs of our customers and the shifting dynamics of the markets we participate in;

 

    our ability to attract and retain employees with the requisite domain knowledge and technical skill set necessary to develop and support our products;

 

    the performance, reliability, features, ease-of-use and price of our offerings as compared to competitor alternatives;

 

    our industry knowledge and expertise;

 

    the execution of our sales and services organizations; and

 

    the timing and market acceptance of new products as well as enhancements to existing products, by us and by our current and future competitors.

For our settlement network solutions, our principal competitors include AvidXchange, US Bank Payments Plus and combined card and ACH Solutions from JPMorgan Chase, Wells Fargo, D+H Corporation, Eastnets, SunGard and SWIFT.

For our digital banking payments and cash management solutions, we primarily compete with companies such as ACI Worldwide, Fiserv, FIS, Q2, Jack Henry, Backbase, NCR, MeridianLink and Polaris, that offer a wide range of financial services, including electronic banking applications. We also encounter competition in our digital banking customer acquisition offerings from MeridianLink and D+H Corporation.

For our legal spend management solutions, we compete with a number of companies, including Wolters Kluwer ELM Solutions, LexisNexis, Mitratech and Computer Sciences Corporation (CSC).

For our cyber fraud and risk management products, we primarily compete with NICE Actimize, Norkom-Deitca, SAS, Guardian Analytics and FairWarning.

For our healthcare solutions, our primary competitors are Access, FairWarning, FormFast, Iatric Systems and Standard Register.

Our payment and document automation products compete primarily with products from companies that provide solutions to create, publish, manage and archive electronic documents and companies that offer payments software and services. Our products also compete with companies that provide a diverse array of

 

6


Table of Contents

accounts payable automation and workflow capabilities. We also compete with providers of enterprise resource planning (ERP) solutions and providers of traditional payment products, including check stock and check printing software and services. In addition, some financial institutions compete with us as outsourced check printing and electronic payment service providers.

Although we believe that we compete favorably in each of the markets in which we participate, the markets for our products and services are intensely competitive and characterized by rapid technological change and a number of factors could adversely affect our ability to compete in the future, including those discussed in Item 1A. Risk Factors.

Our Segments

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 predominately with SaaS technology offerings that facilitate electronic payment, electronic invoicing and spend management. Our legal spend management solutions, which enable customers to create more efficient processes for managing invoices generated by outside law firms while offering insight into important legal spend factors such as expense monitoring and outside counsel performance, are included within this segment. This segment also incorporates our settlement network solutions (financial messaging and Paymode-X). Our settlement network solutions are highly scalable, secure and cost effective and facilitate cash payment and transaction settlement between businesses, their vendors and banks. Revenue within this segment is generally recognized on a subscription or transaction basis or ratably over the estimated life of the customer relationship.

Digital Banking. Our Digital Banking segment provides solutions that are specifically designed for banking and financial institution customers. Our Digital Banking products are now sold predominantly on a subscription basis, which has the effect of contributing to recurring subscription and transaction revenue and the revenue predictability of future periods, but which also delays revenue recognition over a longer period.

Payments and Transactional Documents. Our Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also incorporates our payments automation software for direct debit and receivables management and provides a range of standard professional services and equipment and supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. This segment also incorporates certain other solutions that are licensed on a subscription basis, revenue for which is typically recorded on a subscription or transaction basis or ratably over the expected life of the customer relationship.

Other. Our Other segment consists of our healthcare and cyber fraud and risk management operating segments. Our cyber fraud and risk management solutions non-invasively monitor, replay and analyze user behavior to flag and even stop suspicious activity in real time. Our healthcare solutions for patient registration, electronic signature, mobile document and payments allow healthcare organizations to improve business efficiency, reduce costs and improve care quality. When licensed on a perpetual license basis, revenue for our cyber fraud and risk management and healthcare products is typically recorded upon delivery, with the exception of software maintenance which is normally recorded ratably over a twelve-month period. When products are licensed on a subscription basis, revenue is normally recorded ratably over the subscription period.

Periodically a sales person in one operating segment will sell products and services that are typically sold within a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of

 

7


Table of Contents

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 stock compensation expense, acquisition and integration related expenses (including acquisition related contingent consideration), amortization of acquired intangible assets, impairment of goodwill, fixed asset charges, restructuring related charges, minimum pension liability adjustments, non-core charges related to our 1.50% convertible senior notes due in December 2017 and our five-year revolving credit facility in the amount of up to $300 million, global enterprise resource planning (ERP) system implementation costs and other non-core or non-recurring gains and losses that arise from time to time. 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.

The following represents a summary of our reportable segments:

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

Segment revenue:

      

Cloud Solutions

   $     154,821     $ 138,641     $ 126,178  

Digital Banking

     79,227       70,747       77,184  

Payments and Transactional Documents

     98,150       115,213       116,685  

Other

     17,214       18,673       10,842  
  

 

 

   

 

 

   

 

 

 

Total segment revenue

   $ 349,412     $ 343,274     $ 330,889  
  

 

 

   

 

 

   

 

 

 

Segment measure of profit (loss):

      

Cloud Solutions

   $ 28,044     $ 23,380     $ 15,329  

Digital Banking

     2,901       5,696       12,440  

Payments and Transactional Documents

     29,832       34,225       36,010  

Other

     (3,075     (1,795     (2,870
  

 

 

   

 

 

   

 

 

 

Total measure of segment profit

   $ 57,702     $ 61,506     $ 60,909  
  

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

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

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

Total measure of segment profit

   $     57,702     $ 61,506     $ 60,909  

Less:

      

Amortization of acquired intangible assets

     (24,246     (28,978     (30,383

Goodwill impairment charge

     (7,529            

Fixed asset charge

     (2,399            

Stock-based compensation expense

     (31,913     (30,279     (27,025

Acquisition and integration related expenses

     (2,596     (741     (2,835

Restructuring expenses

     (547     (850     (1,297

Minimum pension liability and related adjustments

     (1,079     (203     (56

Other non-core income (expense)

     223       246       (76

Global ERP system implementation costs

     (8,804     (4,252      

Other expense, net

     (17,086     (15,312     (15,553
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

   $ (38,274   $ (18,863   $ (16,316
  

 

 

   

 

 

   

 

 

 

Financial Information About Geographic Areas

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 with respect to financial institution customers located in Australia for which the point of sale was North America and customers located in Africa for which the point of sale was Israel.

 

    Fiscal Year Ended June 30,
    2017   2016   2015
    (Dollars in thousands)

North America

  $   221,608     63.5%   $ 199,765     58.2%   $ 193,286     58.4%

United Kingdom

    80,421     23.0%     96,244     28.0%     93,735     28.3%

Continental Europe

    38,590     11.0%     38,849     11.3%     38,053     11.5%

Asia-Pacific and Middle East

    8,793     2.5%     8,416     2.5%     5,815     1.8%
 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

Total revenues from unaffiliated customers

  $ 349,412     100.0%   $   343,274     100.0%   $   330,889     100.0%
 

 

 

   

 

 

 

 

   

 

 

 

 

   

 

 

9


Table of Contents

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

 

     June 30,  
     2017      2016  
     (in thousands)  

Long-lived assets:

     

North America

   $ 59,800      $ 56,885  

United Kingdom

     8,705        8,499  

Continental Europe

     2,449        1,924  

Asia-Pacific and Middle East

     2,024        2,080  
  

 

 

    

 

 

 

Total long-lived assets

   $     72,978      $     69,388  
  

 

 

    

 

 

 

A significant percentage of our revenues are generated by our international operations and our future growth rates and success are in part dependent on continued growth and success in international markets. As is the case with most international operations, the success and profitability of these operations is subject to numerous risks and uncertainties including exchange rate fluctuations. We do not currently hedge against exchange rate fluctuations. A number of other factors could also have a negative effect on our business and results from operations outside the U.S., including different regulatory and industry standards and certification requirements, reduced protection for intellectual property rights in some countries, import or export licensing requirements, the complexities of foreign tax jurisdictions and difficulties and costs of staffing and managing our foreign operations.

Sales and Marketing

As of June 30, 2017, we employed 329 sales and marketing employees worldwide, of whom 203 were focused on North American markets, 111 were focused on the United Kingdom and continental Europe markets and 15 were focused on Asia-Pacific and Middle East markets. We market and sell our products directly through our sales force and indirectly through a variety of channel partners and reseller relationships. We market and sell our products domestically and internationally, with an international focus on the United Kingdom and continental Europe. We also maintain an inside sales group which provides a cost effective channel into maintaining existing customers and expanding our customer base.

Product Development and Engineering

Our product development and engineering organization includes employees as well as strategic development partners who provide a flexible supplement to our internal resources. We have three primary development groups: product design and user experience, software engineering, and quality assurance. We expensed $53.0 million, $47.4 million and $47.2 million in product development and engineering costs in fiscal years 2017, 2016 and 2015, respectively.

Our product design and user experience team is extensively involved in the design of all of our products, driving the user-centered design process to ensure elegant, engaging and easy-to-use products. Part of this process is user experience testing that is conducted to provide additional productivity gains for the end user.

Our software engineers have substantial experience in advanced software development techniques as well as extensive knowledge of the complex processes involved in business document workflow, cash management, payment and invoicing applications. They maintain extensive knowledge of software development trends and best practices. Our technology focuses on providing business solutions utilizing industry standards, providing a path for extendibility and scalability of our products. Security, control and fraud prevention, as well as performance, data management and resource efficiencies are priorities in the technology we develop and deploy.

Our quality assurance engineers have extensive knowledge of our products and expertise in software quality assurance techniques. The quality assurance team participates in all phases of our product development

 

10


Table of Contents

processes. Members of the quality assurance group make use of both manual and automated software testing techniques to ensure high-quality software is being delivered to our customers. The quality assurance group members participate in alpha and beta releases, testing of new product releases and performance and security testing for our products.

Backlog

At the end of fiscal year 2017, our backlog was $213.2 million, including deferred revenues of $96.2 million. At the end of the fiscal year 2016, our backlog was $215.6 million, including deferred revenues of $93.4 million. We do not believe that backlog is a meaningful indicator of revenues that can be expected for any future period, and there can be no assurance that backlog at any point in time will translate into revenue in any specific subsequent period.

Proprietary Rights

We use a combination of patents, copyrights, trademarks and trade secret laws to help establish and protect our proprietary rights in our technology and products. During fiscal year 2017, we added 4 issued patents to our portfolio. In total, we currently hold 31 U.S. patents as well as 9 foreign equivalent patents in Europe, Israel and India. We expect to receive other patents, as we have 10 applications pending before the U.S. Patent and Trademark Office. The earliest year of expiration of any of our remaining patents is 2019.

We intend to continue to file patent applications as we identify patentable technology. There can be no assurance, however, that our existing patent applications, or any others that we may file in the future, will issue or will be of sufficient scope and strength to provide meaningful protection of our technology or any commercial advantage to us, or that the issued patents will not be challenged, invalidated or circumvented. In addition, we rely upon a combination of copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to help protect our proprietary rights. Given the rapidly changing nature of the industry’s technology, the creative abilities of our development, marketing and service personnel may be as or more important to our competitive position as are the legal protections and rights afforded by patents. We also enter into agreements with our employees and clients that seek to limit and protect our intellectual property and the distribution of proprietary information. However, there can be no assurance that the steps we have taken to protect our intellectual property will be adequate to deter misappropriation of proprietary information, and we may not be able to detect unauthorized use and take appropriate steps to enforce our proprietary rights.

Government Regulation

Our U.S. chartered financial institution customers are federally regulated by either the Federal Reserve (FED), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Association (NCUA) or the Consumer Financial Protection Bureau (CFPB). Our non U.S. based financial institution customers are normally subject to a similar regulatory oversight within their respective country of domicile. We are subject to periodic examination by the Federal Financial Institutions Examination Council (FFIEC) interagency in our capacity as a technical financial service provider, during which our operating practices are risk-assessed and compared against applicable laws and regulations. If we, as part of such an examination, were to receive a material unfavorable regulatory rating, our customers may be advised by their direct federal regulators to reassess their commercial relationships with us, including the continued use of our products.

Each of our operating segments provides services and/or products that may be subject to various federal, state or foreign laws or regulations, particularly in the area of data security and privacy. These laws and regulations govern the collection, processing, storage, use and disclosure of personal information as well as notification requirements in the event of security breaches. The legal and regulatory framework in these areas is complex and continually evolving, particularly with respect to data security, payment technology and payment methodologies. We may become subject to new or increased regulation in the future, and the cost of complying with current or future regulatory requirements could exceed our estimates. Our products and services must be designed to work effectively within this legal framework.

 

11


Table of Contents

Employees

As of June 30, 2017, we had approximately 1,600 full-time employees. None of our employees are represented by a labor union. We have not experienced any work stoppages and we believe that employee relationships are good. Our future success will depend in part on our continued ability to attract, retain and motivate highly-qualified technical and managerial personnel in a highly competitive market.

Executive Officers and Other Key Employees of the Registrant

Our executive officers and other key employees and their respective ages as of August 28, 2017, are as follows:

 

  Name

   Age    

  Positions

  Robert A. Eberle

     56       President, Chief Executive Officer and Director

  Richard D. Booth

     48       Chief Financial Officer and Treasurer

  Karen S. Brieger

     45       Vice President, Human Resources

  Norman J. DeLuca

     56       Managing Director, Digital Banking

  Paul J. Fannon

     49       Group Sales Director, Europe

  John F. Kelly

     59       General Manager, Legal Solutions

  John J. Mason

     47       Chief Information Officer

  Brian S. McLaughlin

     53       Chief Experience Officer

  Andrew J. Mintzer

     55       Executive Vice President, Product Strategy and Customer Delivery

  Jessica Pincomb Moran

     43       General Manager, Cloud Payment Solutions

  Eric K. Morgan

     47       Executive Vice President, Global Controller

  Christine M. Nurnberger

     38       Chief Marketing Officer

  Nigel K. Savory

     50       Managing Director, Europe

  David G. Sweet

     54       Executive Vice President, Strategy and Corporate Development

Robert A. Eberle has served as a director since September 2000, as President since August 2004 and as Chief Executive Officer since November 2006.

Richard D. Booth has served as Chief Financial Officer and Treasurer since April 2015. Mr. Booth served as Vice President and Corporate Controller at Sapient Corporation from January 2014 to March 2015. From November 2012 through January 2014, Mr. Booth served as Vice President Financial Planning and Analysis at Nuance Communications and as Vice President and Assistant Corporate Controller from July 2009 through November 2012.

Karen S. Brieger has served as Vice President, Human Resources since August 2010 and as Director, Human Resources from February 2008 through July 2010.

Norman J. DeLuca has served as Managing Director, Digital Banking since November 2011. From October 2009 through October 2011, Mr. DeLuca served as Managing Partner at NMD Investments. From January 2008 through October 2009, Mr. DeLuca served as Chief Executive of RBS Global Transaction Services, Americas. From January 2007 through January 2008, Mr. DeLuca served as Vice Chairman, RBS Citizens Financial Group.

Paul J. Fannon has served as Group Sales Director, Europe since October 2008.

John F. Kelly has served as General Manager, Legal Solutions since April 2011. From January 2006 through April 2011, Mr. Kelly served as Chief Executive Officer of Allegient Systems, Inc.

John J. Mason has served as Chief Information Officer since June 2010. From March 2009 through June 2010, Mr. Mason served as Vice President of Information Technology at Anacomp, Inc.

 

12


Table of Contents

Brian S. McLaughlin has served as Chief Experience Officer since November 2016 and as Vice President of Product Design and User Experience from February 2011 through October 2016. From 2009 through February 2011, Mr. McLaughlin served as Director of User Experience at CashStar, Inc.

Andrew J. Mintzer has served as Executive Vice President, Product Strategy and Delivery since July 2013 and as Senior Vice President, Product Strategy and Delivery from November 2007 through June 2013.

Jessica Pincomb Moran has served as General Manager, Cloud Payment Solutions since June 2015 and Vice President, Client Services from June 2011 through May 2015. From February 2008 through May 2011, Ms. Moran served as Vice President, Corporate Services.

Eric K. Morgan has served as Controller since September 2000.

Christine M. Nurnberger has served as Chief Marketing Officer since September 2014. Ms. Nurnberger served as Vice President, Marketing for SunGard Availability Services from January 2012 until August 2014 and as Vice President, Global Marketing Operations for Info Global Solutions from November 2005 until January 2012.

Nigel K. Savory has served as Managing Director, Europe since December 2003.

David G. Sweet has served as Executive Vice President, Strategy and Corporate Development since March 2013. From October 2010 through October 2012, Mr. Sweet served as a strategy and business development executive for IBM’s Enterprise Marketing Management group. From April 2005 through October 2010, Mr. Sweet served as Senior Vice President of Corporate Development at Unica Corporation.

 

Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making an investment decision involving our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties may also impact our business operations.

If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock.

Risks Related To Owning Our Common Stock

Our common stock has experienced and may continue to undergo significant market price fluctuations

The market price of our common stock has recently experienced and may continue to experience significant fluctuations due to a variety of factors, including:

 

    general and industry-specific business, economic and market conditions;

 

    changes in or our failure to meet analysts’ or investors’ estimates or expectations;

 

    actual or anticipated fluctuations in our operating results;

 

    public announcements concerning us, our competitors or our industry;

 

    acquisitions, divestitures, strategic partnerships, joint ventures, or capital commitments by us or our competitors;

 

    adverse developments in patent or other proprietary rights; and

 

    announcements of technological innovations by our competitors.

If our revenues are below anticipated levels or if our operating results are below analyst or investor expectations, the market price of our common stock could be adversely affected

A significant percentage of our expenses, particularly personnel and facilities costs, are relatively fixed and based in part on anticipated revenue levels which can be difficult to predict. A decline in revenues without a

 

13


Table of Contents

corresponding and timely slowdown in expense growth could adversely affect our business. Significant revenue shortfalls in any quarter may cause significant declines in operating results since we may be unable to reduce spending in a timely manner.

Quarterly or annual operating results that are below the expectations of public market analysts could adversely affect the market price of our common stock. Factors that could cause fluctuations in our operating results include:

 

    a change in customer demand for our products, which is highly dependent on our ability to continue to offer innovative technology solutions in very competitive markets;

 

    overall economic conditions, which may affect our customers’ and potential customers’ budgets for information technology expenditures;

 

    foreign exchange rate volatility, which can have a significant effect on our total revenues and costs when our foreign operations are translated to U.S. dollars;

 

    the timing of customer orders;

 

    the timing of product implementations, which are highly dependent on customers’ resources and discretion;

 

    the incurrence of costs relating to the integration of software products and operations in connection with acquisitions of technologies or businesses; and

 

    the timing and market acceptance of new products or product enhancements by either us or our competitors.

Our mix of products and services could have a significant effect on our results of operations and the market price of our common stock

The gross margins for our products and services vary considerably. Our software license revenues generally yield significantly higher gross margins than do our subscriptions and transactions, service and maintenance and other revenue streams. If software license revenues or our recurring revenues significantly decline in any future period, or if the mix of our products and services in any given period does not match our expectations, our results of operations and the market price of our common stock could be significantly adversely affected.

Risks Related To Our Business

The markets in which we compete are extremely competitive and we may not be able to compete effectively

The markets in which we compete are intensely competitive and characterized by rapid technological change. There is no assurance that we will be able to maintain our current market share or our customer base.

We compete with a wide range of companies ranging from small start-up enterprises with limited resources, which we compete with principally on the basis of technology features or specific customer relationships, to large companies which can leverage significantly larger customer bases and greater financial resources. Many of our competitors have longer operating histories, significantly greater financial, technical, and sales and marketing resources, greater brand recognition and a larger customer base than we do. We anticipate that the markets in which we compete will continue to attract new competitors and new technologies and we may not be able to compete successfully with them.

To compete successfully, we need to maintain a successful research and development function. If we fail to enhance our current products and develop new, innovative solutions or if we fail to bring new solutions to market quickly enough, our products could become less competitive or obsolete.

 

14


Table of Contents

We continue to make significant investments in our existing products and our new product offerings, which may adversely affect our operating results or may not be successful

Given the highly competitive and rapidly evolving technology environment we operate within, we believe that it is important to constantly enhance our existing product offerings as well as to develop new product offerings to meet strategic opportunities as they evolve. This includes developing and enhancing our products to include what we believe is necessary to meet the future needs of our customers.

Our operating results have been affected by increases in product development expenses in recent years as we have continued to make investments in a number of our products, and as we have funded new product development based on market opportunities. We expect to continue to make these investments and we may at any time, based on product need or marketplace demand, decide to significantly increase our product development expenditures in these or other products.

Investments in existing products and new product offerings can have a negative impact on our operating results, and any new product enhancement or offering may not be accepted in the marketplace or generate material revenues for us.

Acquisitions could disrupt our business and harm our financial condition

An active acquisition program has been an important element of our corporate strategy. We have been an acquisitive company historically, and we expect to continue to make acquisitions in the future. Any acquisition or strategic investment we have made or may make in the future may entail numerous risks, including the following:

 

    difficulties integrating acquired operations, personnel, technologies or products;

 

    entrance into markets and operating geographies in which we have no or limited prior experience or knowledge;

 

    failure to realize anticipated revenue increases for any number of reasons, including if a larger than expected number of acquired customers decline to renew software maintenance contracts or subscription based contracts, if we are unsuccessful in selling the acquired products into our existing customer base or if the terms of the acquired contracts do not permit us to recognize revenue on a timely basis;

 

    costs incurred to combine the operations of companies we acquire, such as integration costs, transitional employee expenses and employee retention or relocation expenses, may be higher than expected;

 

    write-offs related to existing or acquired assets such as deferred tax assets, goodwill or other intangible assets;

 

    inability to retain key personnel of the acquired company;

 

    inadequacy of existing operating, financial and management information systems to support the combined organization, including the difficulty in integrating an acquired company’s accounting, financial reporting and other administrative systems to permit effective management;

 

    difficulties implementing controls, procedures and policies appropriate for a public company at companies that, prior to the acquisition, may have lacked such controls, policies and procedures;

 

    in the case of foreign acquisitions, challenges integrating operations across different cultures and languages and addressing the particular regulatory, economic, currency and political risks associated with different countries or regions;

 

    diversion of management’s focus from our core business concerns;

 

    dilution to existing stockholders and our earnings per share;

 

15


Table of Contents
    incurrence of substantial debt;

 

    exposure to litigation from third parties, including claims related to intellectual property or other assets acquired or liabilities assumed; and

 

    failure to realize anticipated benefits of the transaction due to the above factors or other factors.

Any such difficulties encountered as a result of any merger, acquisition or strategic investment could have a material adverse effect on our business, operating results and financial condition.

As a result of our acquisitions, we could be subject to significant future write-offs with respect to intangible assets, which may adversely affect our future operating results

In the second quarter of fiscal year 2017, we recorded a $7.5 million goodwill impairment charge for one of our reporting units. Please refer to Part II Item 8. Note 7 Goodwill and Other Intangible Assets to our consolidated financial statements included within this Annual Report on Form 10-K for further details regarding this matter. The carrying value of our intangible assets, including goodwill, represents a significant portion of our total assets. We periodically review our goodwill and our other intangible assets for impairment and could, in any future period, be subject to impairment charges with respect to these assets or intangible assets arising as a result of acquisitions in future periods. Any such charges, to the extent occurring, would likely have a material adverse effect on our operating results.

We face risks associated with our international operations that could harm our financial condition and results of operations

A significant percentage of our revenues have been generated by our international operations and our future growth rates and success are in part dependent on our continued growth and success in international markets. As is the case with most international operations, the success and profitability of these operations are subject to numerous risks and uncertainties that include, in addition to the risks our business as a whole faces, the following:

 

    currency exchange rate fluctuations, particularly with the British Pound Sterling, the Swiss Franc, the European Euro, the Israeli Shekel and the Australian Dollar;

 

    difficulties and costs of staffing and managing foreign operations;

 

    differing regulatory and industry standards and certification requirements;

 

    the complexities of tax laws in foreign jurisdictions;

 

    the complexities of foreign data privacy laws and regulations;

 

    the complexities of various sanctions regimes and related commercial restrictions;

 

    reduced protection for intellectual property rights in some countries; and import or export licensing requirements.

Weakness or deterioration in domestic and global economic conditions could have a significant adverse impact on our business, financial condition and operating results

Our business, financial condition and operating results are significantly affected by general economic conditions. The U.S. and global economies have experienced deterioration in the recent past and prospects for sustained economic recovery remain uncertain. Prolonged economic weakness or any downturn in the U.S. and global economies could result in a variety of risks to our business, including:

 

    increased volatility in our stock price;

 

    increased volatility in foreign currency exchange rates;

 

16


Table of Contents
    delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of continuing economic uncertainty or as a result of their inability to access the liquidity necessary to engage in purchasing initiatives;

 

    pricing pressures for our products and services, including reductions in the duration or renewal rates for our subscription contracts and software maintenance contracts;

 

    increased credit risk associated with our customers or potential customers, particularly those that may operate in industries or geographic regions most affected by the economic downturn; and

 

    impairment of our goodwill or other assets.

To the extent that economic conditions remain uncertain or deteriorate, or any of the above risks occur, our business and operating results could be significantly and adversely affected.

The voting result of the Referendum of the United Kingdom’s Membership of the European Union (UK Referendum) advising for the exit of the United Kingdom (UK) from the European Union (EU), and the subsequent formal notification by the UK of its intention to withdraw from the EU (referred to as Brexit), could cause disruptions to and create uncertainty surrounding our business, including affecting 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. The measures could potentially disrupt the markets we serve and the tax jurisdictions in which we operate, adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers, and employees in the UK and other countries. 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.

The announcement of the results of the UK Referendum caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business, particularly the British Pound Sterling which, shortly after the announcement, decreased to the lowest exchange levels seen since 1985. Any strengthening of the U.S. dollar relative to other foreign currencies affects our results of operations in a number of ways, including:

 

    Our international sales are predominately denominated in currencies other than U.S. dollars. A decrease of foreign currency exchanges rates will have the effect of decreasing our overall revenues upon translation to U.S. dollars;

 

    Any significant devaluation of foreign currencies may impact the purchasing power of our customers and potential customers and could affect the demand for our products; and

 

    EU member countries could make it more difficult for our UK subsidiary or us to trade effectively or competitively in those regions.

We are subject to the political, economic and security conditions in Israel

We have a subsidiary headquartered in Tel Aviv, Israel. Since the establishment of the State of Israel, a number of armed conflicts have taken place between Israel and its neighbors. During the past several years, Israel has experienced periodic armed conflicts which at times have disrupted day-to-day civilian activity in Israel.

There can be no assurance that future conflicts will not occur and that such conflicts will not affect our premises or major infrastructure and transport facilities in the country, which could have an adverse effect on our ability to conduct business in Israel. In addition, acts of terrorism, armed conflicts or political instability in the region could negatively affect global as well as local economic conditions and adversely impact our operating results.

 

17


Table of Contents

Our business and operating results are subject to fluctuations in foreign currency exchange rates

We conduct a substantial portion of our operations outside of the U.S., principally in the United Kingdom and in continental Europe and, to a lesser extent, in the Asia-Pacific and Middle East regions. During the twelve months ended June 30, 2017, approximately 37% of our revenues and 43% of our operating expenses were attributable to customers or operations located outside of North America. During the twelve months ended June 30, 2017 as compared to the twelve months ended June 30, 2016, the foreign currency exchange rates of the British Pound Sterling to the U.S. Dollar decreased. Future appreciation of the U.S. Dollar against the British Pound Sterling, Swiss Franc, European Euro or Australian Dollar will have the impact of reducing both our revenues and operating expenses associated with our operations in those regions.

We may have larger than anticipated tax liabilities

The determination of our provision for income taxes requires significant judgment and estimation and there are transactions and calculations where the ultimate tax determination is uncertain. We are subject to tax in multiple U.S. and foreign tax jurisdictions and the determination of our tax liability is always subject to audit and review by the applicable domestic or foreign taxing authority. As an example, our U.S. federal tax return for fiscal 2015 is currently under routine audit. In light of fiscal challenges in U.S. federal and state governments and in many international locations, taxing authorities are increasingly focused on ways to increase revenues which may make resolving tax disputes more difficult. While we have established tax reserves using assumptions and estimates that we believe to be reasonable, these reserves may prove insufficient in the event that a taxing authority asserts a tax position that is contrary to our position.

A significant percentage of our revenues to date have come from our payment and document management offerings and our future performance will depend on continued market acceptance of these solutions

A significant percentage of our revenues to date have come from the license and maintenance of our payment and document management offerings and sales of associated products and services. Any significant reduction in demand for our payment and document management offerings could have a material adverse effect on our business, operating results and financial condition. Our future performance could depend on the following factors:

 

    retaining and expanding our software maintenance and subscriptions and transactions customer bases, which are significant sources of our recurring revenue;

 

    continued market acceptance of our payment and document management offerings;

 

    our ability to demonstrate the value of our solutions as compared to solutions from other vendors such as enterprise resource planning software vendors that offer a broader enterprise application solution; and

 

    our ability to introduce enhancements to meet the market’s evolving needs for secure payments and cash management solutions.

Our future financial results will be affected by our success in selling our products in a subscription and transaction model, which carries with it certain risks

A substantial portion of our revenues and profitability were historically generated from perpetual software license revenues; however, we continue to offer a growing number of products under a subscription and transaction based revenue model. We believe a subscription based revenue model has certain advantages over a perpetual license model, including better predictability of revenue; however, it also presents a number of risks to us, including the following:

 

    arrangements entered into on a subscription basis generally delay the timing of revenue recognition and can require the incurrence of up-front costs, which may be significant;

 

   

subscription based revenue arrangements often include specific performance requirements or service levels that we may be unable to consistently achieve, subjecting us to penalties or other costs. A

 

18


Table of Contents
 

material breach of these arrangements by us, such as a persistent failure to achieve required service levels, might permit the customer to exit the contract prior to its expiration, without additional compensation to us;

 

    customer retention is critical to our future growth rates. Customers in a subscription arrangement may elect not to renew their contract upon expiration, or they may attempt to renegotiate pricing or other contractual terms at the point of (or prior to) renewal on terms that are less favorable to us; and

 

    there is no assurance that the solutions we offer on a subscription basis, including new revenue models or new products that we may introduce, will receive broad marketplace acceptance.

Because we recognize subscription revenue from our customers over the term of their agreements, downturns or upturns in sales of our subscription based offerings will not be immediately reflected in our operating results and may adversely affect revenue in the future

We recognize subscription revenue over the term of our customer agreements. As a result, most of our subscription revenue arises from agreements entered into during previous periods. A shortfall in orders for our subscription based solutions in any one period would most likely not significantly reduce our subscription revenue for that period, but could adversely affect revenue in future periods. In addition, we may be unable to quickly reduce our cost structure in response to a decrease in these orders. Accordingly, the effect of downturns in sales of our subscription based solutions will not be fully reflected in our operating results until future periods. A subscription revenue model also makes it difficult for us to rapidly increase our revenue through additional subscription sales in any one period, as revenue is generally recognized over the applicable customer term.

Large and complex customer contracts, or contracts that involve the delivery of services over contractually committed periods, can delay the timing of our revenue recognition and, in the short-term, may adversely affect our operating results, financial condition and the market price of our stock

Large and complex customer contracts can delay the timing of our revenue recognition. These arrangements require significant implementation work, product customization and modification, systems integration and user acceptance testing. This results in the recognition of revenue over the period of project completion which normally spans several quarters. Delays in revenue recognition on these contracts, including delays that result from customer decisions to halt or slow down a long-term project due to their own staffing or other challenges, could adversely affect our operating results, financial condition and the market price of our common stock. Large customer opportunities are very competitive and take significant time and effort to consummate. When competing for these customer opportunities, we face greater sales costs, longer sales cycles and less predictability with respect to these orders than with orders in other areas of our business. If we are unable to continue to generate new large orders on a regular basis, our business operating results and financial condition could be adversely affected.

If our products and services do not comply with laws, regulations and industry standards to which we and our customers are subject, our business could be adversely affected

Our software products and SaaS offerings facilitate the transmission of cash, business documents and confidential information including, in some cases, personally identifiable information related to individuals and corporations. Our software products and certain of our SaaS offerings store and transmit this data electronically, and therefore our products must operate within the laws, regulations and industry standards regarding security, data protection and electronic commerce. While we believe that our products comply with current regulatory requirements, the interpretation and application of these requirements continues to evolve and may evolve in ways that we cannot predict; so there can be no assurance that future legal or regulatory actions will not adversely impact us. To the extent that current or future regulatory or legal developments mandate a change in any of our products or services, require us or our customers to comply with any industry specific licensing or compliance requirements, alter the demand for or the competitive environment of our products and services or require us to make material changes to how we operate our business, including any changes to our internal

 

19


Table of Contents

operating, financial or management information systems, we might not be able to respond to such requirements in a timely or cost effective manner. If this were to occur, our business, operating results and financial condition could be materially adversely affected.

Security or data breaches could have an adverse effect on our business

In the course of providing services to our customers, we collect, store, process and transmit highly sensitive and confidential information. Certain of our solutions also facilitate the actual transfer of cash or transmit instructions that initiate cash transfer. Our products and services, particularly our SaaS and Web-based offerings, may be vulnerable to unauthorized access, computer viruses, cyber-attacks, distributed denial of service attacks and other disruptive problems, which could result in the theft, destruction or misappropriation of confidential information. Security risks in recent years have increased significantly given the increased sophistication and activities of hackers, organized crime and other external parties. We may need to spend significant capital or allocate significant resources to ensure effective ongoing protection against the threat of security breaches or to address security related concerns. Despite our efforts, a security breach or computer virus could still occur, which could have a significant negative impact on our business, including reputational harm, the loss of customers and material financial liability to us.

Defects or disruptions in our products or services could diminish demand for our solutions and have a material adverse effect on our future financial results

Our software products are complex. Despite testing prior to their release and throughout the lifecycle of a product or service, software and SaaS offerings can contain undetected errors or defects that can impact their function, performance and security. Any unanticipated performance problems or defects in our products or services could result in additional development costs, diversion of technical and other resources from our other development efforts, service disruptions for our SaaS offerings, negative publicity and reputational harm to us and our products and exposure to potential liability claims. As a result, any error or defect in our products or services could adversely affect our future financial results.

The failure of our cyber fraud and risk management products to prevent a security breach or detect a cyber fraud, or the failure of our customers to take action based on the risks identified by these products could harm our reputation and adversely impact our operating results

Our cyber fraud and risk management products provide our customers the ability to configure a multitude of settings and establish certain rule-based alerts, and it is possible that a customer could misconfigure these products or fail to configure these products in an optimal manner, which could cause threats to go undetected. Similarly, if our cyber fraud and risk management products detect threats or otherwise alert a customer to suspicious activity but the customer does not take action to investigate those threats or alerts, customers may erroneously believe that our products were not effective.

Any real or perceived defects, errors or vulnerabilities in our cyber fraud and risk management products or any failure of these products to prevent, detect or alert a customer to a threat could result in:

 

    a loss of customers or potential customers;

 

    delayed or lost revenue and harm to our financial condition and results or operations;

 

    a delay in attaining, or the failure to attain, market acceptance for our cyber fraud and risk management solutions;

 

    an increase in warranty claims;

 

    harm to our reputation; or

 

    litigation, regulatory inquiries or investigations that may be expensive and that would further harm our reputation.

 

20


Table of Contents

We rely on certain third-party hardware and software which could cause errors, interruptions or failures to our solutions or be difficult to replace

We rely on third party hardware and software to deliver certain of our solutions. These third party products may not continue to be available to us on commercially reasonable terms, or at all. The loss of the right to use any of these products could result in delays in our ability to provide our solutions until equivalent technology is either developed by us or acquired from another third party, if available, which may not be possible on a cost-effective basis. In addition, errors or defects in third-party products used in conjunction with our solutions could adversely affect the operation of our products.

Catastrophic events may disrupt our business, including our third party data centers

We are a highly-automated business and we rely on our network infrastructure, various software applications and many internal technology systems and data networks for our customer support, development, sales and marketing and accounting and finance functions. Further, our SaaS offerings provide services to our customers from third party data center facilities in different U.S. and international locations over which we have no control. A disruption or failure of these systems or data centers in the event of a natural disaster, telecommunications failure, power outage, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in product development, breaches of data security and loss of critical data. Such an event could also prevent us from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of our cloud offerings. While we have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of such events, a catastrophic event that resulted in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our business, operating results and financial condition could be adversely affected.

We could incur substantial costs resulting from warranty claims or product liability claims

Our product agreements typically contain provisions that afford customers a degree of warranty protection in the event that our products fail to conform to written specifications. These agreements normally contain provisions intended to limit the nature and extent of our risk of warranty and product liability claims. A court, however, might interpret these terms in a limited way or conclude that part or all of these terms are unenforceable. Furthermore, some of our agreements are governed by non-U.S. law, and there is a risk that foreign law might provide us less or different protection. While we maintain general liability insurance, including coverage for errors and omissions, we cannot be sure that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims.

A warranty or product liability claim, whether or not meritorious, could harm our reputation, result in substantial financial costs or divert management’s attention, which could have an adverse effect on our business, operating results and financial condition.

We could be adversely affected if we are unable to protect our proprietary technology and could be subject to litigation regarding intellectual property rights, which could cause serious harm to our business

We rely upon a combination of patent, copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to protect our proprietary rights. However, there is no assurance that our patents, pending applications for patents that may issue in the future, or other intellectual property will be of sufficient scope and strength to provide meaningful protection for our technology or any commercial advantage to us. Further, we cannot be certain that our patents will not be challenged, invalidated or circumvented. We enter into agreements with our employees and customers that seek to limit and protect the distribution of proprietary information. Despite our efforts to safeguard and maintain our proprietary rights, there is no assurance that such rights will remain protected or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

Litigation involving patents and other intellectual property rights is common in the United States and in other countries where we operate. We may be a party to litigation in the future to protect our intellectual property

 

21


Table of Contents

rights or as a result of an alleged infringement of the intellectual property rights of others. Any such claims, whether or not meritorious, could result in reputational harm to us, require us to spend significant sums in litigation costs or damages, delay product implementations, or require us to develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of the infringement claim. In addition, under many of our customer contracts, we are required to indemnify our customers for third-party intellectual property infringement claims, which would increase the costs to us of any such claims. These claims could have a material adverse effect on our business, operating results and financial condition.

Our ability to attract and retain qualified employees is critical to the success of our business and failure to do so could adversely affect our operating results

Our success depends upon the efforts and abilities of our executive officers and technical and sales employees who are skilled in e-commerce, payment methodology and regulation, business banking technologies, and web, database and network technologies. Our success and future growth depends to a significant degree on the skills and continued services of our management team. Our current key employees and employees whom we seek to hire in order to support our growth are in high demand within the marketplace. The loss of one or more of our key employees or our failure to consistently attract and retain sufficient qualified employees to grow our operations could have a material adverse effect on our business. We do not maintain key man life insurance policies on any of our employees and our employees are generally free to terminate their employment with us at any time. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business, operating results and financial condition.

We engage off-shore development resources which may not be successful and which may put our intellectual property at risk

In order to optimize our research and development capabilities and to meet development timeframes, we contract with off-shore third-party vendors for certain development activities. While our experience to date with these resources has been positive, there are a number of risks associated with off-shore development activities including:

 

    less efficient and less accurate communication and information flow as a consequence of time, distance and language barriers between our primary development organization and the off-shore resources, resulting in delays or deficiencies in development efforts;

 

    disruption due to political or military conflicts;

 

    misappropriation of intellectual property, which we may not readily detect; and

 

    currency exchange rate fluctuations that could adversely impact the cost advantages intended from these agreements.

To the extent that these or unforeseen risks occur, our operating results and financial condition could be adversely impacted.

Changes in financial accounting standards may cause unexpected financial reporting fluctuations and affect our reported results of operations

Changes in accounting standards or practices could adversely affect our reported results of operations. New accounting pronouncements, such as the upcoming changes in US GAAP related to revenue recognition, accounting for lease arrangements and accounting for share-based compensation arrangements, and varying interpretations of accounting pronouncements, have occurred and will occur in the future. Changes to existing accounting rules or practices may materially affect our reported results of operations or the way we conduct our business in future periods.

 

22


Table of Contents

If we fail to maintain appropriate and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that we re-evaluate regularly. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. However, despite our efforts, any failure to maintain or implement the necessary internal controls could cause us to fail to meet our financial reporting obligations or result in misstatements in our financial statements, either of which could cause investors to lose confidence in our reported financial information and lead to a decline in the trading price of our common stock.

Early in fiscal year 2018 we expect to complete the first phase of our implementation of a complex, company-wide enterprise resource planning (ERP) system. If we were to experience significant operating problems once implemented, it could adversely affect our business and results of operations

ERP implementations are inherently complex and time-consuming projects that involve substantial expenditures on system software, implementation activities and business process reengineering. Any unexpected challenge or performance issue associated with the implementation of our new ERP system could adversely affect our ability to timely and accurately report financial information, including our ability to furnish our quarterly and annual reports with the SEC. Any such failure could also impact our ability to accurately make payments to vendors or our ability to invoice our customers. Data accuracy problems or other issues may occur which, if not corrected quickly, could impact our business or financial results. In addition, we may experience periodic or prolonged disruption to our financial functions arising from this implementation. If we encounter unforeseen problems with our financial system or related systems, our business, operations and overall system of internal controls could be adversely affected.

Certain anti-takeover provisions contained in our charter and under Delaware law could hinder a takeover attempt

We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short term, to the interests of our stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions relating to the limitation of liability and indemnification of our directors and officers, dividing our board of directors into three classes of directors serving three-year terms and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders.

Risks Related to our Indebtedness

Convertible Senior Notes, Note Hedges and Warrants

In December 2012, we issued, at par value, $189.8 million aggregate principal amount of 1.50% convertible senior notes due in December 2017 (the Notes). In connection with the pricing of the Notes, we purchased convertible note hedge transactions with a strike price equal to the initial conversion price of the Notes and we sold warrants with a strike price of $40.04 per share with certain counterparties. The note hedges and the warrants each cover approximately 6.3 million shares of our common stock.

 

23


Table of Contents

Servicing the Notes or future indebtedness will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the Notes or future indebtedness, resulting in a default under such indebtedness

Our ability to make scheduled payments of interest and, upon maturity or early conversion, the principal balance of the Notes, depends on our future performance which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt or equity financing on terms that may not be favorable to us or available to us at all. Our ability to refinance the Notes will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Notes or future indebtedness.

Our level of indebtedness may limit our financial flexibility

Our level of indebtedness affects our operations in several ways, including:

 

    a portion of our cash flows from operating activities must be used to service our indebtedness and is not available for other purposes;

 

    we may be at a competitive disadvantage as compared to similar companies that have less debt; and

 

    additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may have higher costs and contain restrictive covenants, or may not be available to us.

The factors that will affect our ability to obtain additional financing may be beyond our control and include financial market conditions, the value of our assets and our performance at the time we need financing.

The accounting for the Notes will result in our having to recognize interest expense significantly more than the stated interest rate of the Notes and may result in volatility to our consolidated statement of operations

Upon issuance of the Notes we were required to establish a separate initial value for the conversion option and to bifurcate this value from the value attributable to the balance of the Notes, or the debt component. As a result, for accounting purposes, we were required to treat the Notes as having been issued with a discount to their face principal amount, which is referred to as an original issue discount. We are accreting the original issue discount to interest expense ratably over the term of the Notes, which results in an effective interest rate in our consolidated statement of operations that is in excess of the stated coupon rate of the Notes. This will reduce our earnings and could adversely affect the price at which our common stock trades, but will have no effect on the amount of cash interest paid to holders or on our cash flows.

Certain derivative instruments issued in connection with the Notes were classified within stockholders’ equity at June 30, 2017. However, if we do not continue to satisfy all of the criteria required for equity classification, these instruments would be reclassified out of equity and be subject to re-measurement at fair value. Changes in fair value resulting from any such re-measurement would be reflected in earnings which could have a material impact on our financial statements.

The conditional conversion feature of the Notes, if triggered, and the requirement to repurchase the Notes upon a fundamental change may adversely affect our financial condition and operating results

In the event the conditional conversion feature of the Notes is triggered, holders of notes will be entitled to convert the Notes at their option during specified periods. If one or more holders elect to convert their notes, we would be required to settle the principal portion of the Notes in cash. Additionally, if we undergo a fundamental change (as described in the Indenture for the Notes), subject to certain conditions, holders of the Notes may require us to repurchase for cash all or part of their notes at a price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest. Either of these events could adversely affect our liquidity.

 

24


Table of Contents

We may be subject to significant future write-offs with respect to intangible assets or deferred tax assets

Certain of our assets, such as intangible assets and deferred tax assets, are subject to periodic tests of recoverability based on a variety of factors. Those factors typically include, at a minimum, projections of future income levels and cash flows. The accounting for the Notes will result in the recognition of a significant level of interest expense as the carrying value of debt is accreted to par value and as we amortize our debt issue costs, including the underwriters’ discount. We could be subject to future impairment charges with respect to these assets which would have a material adverse effect on our consolidated statement of operations.

The convertible note hedge and warrant transactions may affect the value of the Notes and our common stock

The outstanding warrants could have a dilutive effect on our earnings per share to the extent that the market price per share of our common stock exceeds the applicable strike price of the warrants. However, subject to certain conditions, we may elect to settle the warrants in cash.

From time to time, the counterparties to the convertible note hedge transactions or their affiliates may modify their respective hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions (and are likely to do so during any observation period related to a conversion of the Notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Notes.

Credit Facility

On December 9, 2016, we (as borrower) and certain of our domestic subsidiaries (as guarantors) entered into a credit agreement with Bank of America, N.A. and certain other lenders which provides for a revolving credit facility in the amount of up to $300 million (the Credit Facility). We intend to finance the repayment of the principal balance of the Notes through a combination of cash on hand and with borrowings under the Credit Facility.

The credit agreement contains financial and other covenants, and our failure to comply with any of those covenants could materially adversely impact us or limit or eliminate our ability to access funds under the Credit Facility

The credit agreement requires us to comply with certain financial covenants. Our ability to meet those financial covenants can be affected by events beyond our control, and while at June 30, 2017 we were in compliance with those covenants, we may fail to maintain compliance in future periods. 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. These restrictions could place us at a disadvantage relative to our competitors that are not subject to such limitations. A breach of any of these covenants or restrictions could result in an event of default under the credit agreement. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under the Credit Facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could seek recovery against our assets, including any collateral granted to them to secure the indebtedness. If the lenders under the Credit Facility were to accelerate the payment of any indebtedness, we cannot assure you that our assets would be sufficient to satisfy our obligations.

Our variable rate could cause our debt service obligations to increase or decrease based on changes in market rates

Borrowings under the Credit Facility are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. In July 2017, we entered into an interest rate swap

 

25


Table of Contents

intended to mitigate a portion of interest rate volatility arising from the Credit Facility. However, this interest rate swap, and any additional interest rate swap we may enter into in the future, might not fully mitigate our variable interest rate risk.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

The following table sets forth the location, the reportable segment(s) and approximate square footage of each of the principal properties used by us during fiscal year 2017. Our Portsmouth, New Hampshire facility serves as our corporate headquarters and is used by employees associated with all of our reportable segments in addition to our management, administrative, sales and marketing and customer support teams. All properties, except as noted below, are leased under operating leases.

 

Location

 

Reportable Segment(s)

  Approximate
Square Feet
 

North America:

   

Alpharetta, Georgia

  Payments and Transactional Documents, Digital Banking and Other     26,000  

Charlotte, North Carolina

  Digital Banking     3,000  

Englewood Cliffs, New Jersey

  Payments and Transactional Documents and Other     4,000  

Garden City, New York

  All segments     9,000  

Marlton, New Jersey

  Cloud Solutions     7,000  

Morrisville, North Carolina

  Payments and Transactional Documents and Other     8,000  

Portland, Maine

  Cloud Solutions     27,000  

Portsmouth, New Hampshire

  All segments     85,000  

Providence, Rhode Island

  Digital Banking     11,000  

Wilton, Connecticut

  Cloud Solutions     13,000  

Europe:

   

Geneva, Switzerland

  Cloud Solutions     16,000  

Hertford, England

  Payments and Transactional Documents     12,000  

London, England

  All segments     6,000  

Reading, England (1)

  All segments     28,000  

Asia-Pacific and Middle East:

   

Melbourne, Australia

  Payments and Transactional Documents and Digital Banking     2,000  

Sydney, Australia

  Payments and Transactional Documents     2,000  

Or-Yehuda, Israel

  Other     9,000  

 

 

 

(1)  We own 16,000 square feet in Reading, England currently used as our European headquarters.

 

Item 3. 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 disclosure in, our financial statements.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

26


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on The NASDAQ Global Select Market under the symbol EPAY. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as quoted on The NASDAQ Global Select Market.

 

Period

   High      Low  

Fiscal Year 2016

     

First quarter

   $     28.64      $     24.28  

Second quarter

   $ 31.58      $ 21.64  

Third quarter

   $ 31.41      $ 25.06  

Fourth quarter

   $ 31.52      $ 20.44  

Fiscal Year 2017

     

First quarter

   $ 23.98      $ 18.80  

Second quarter

   $ 25.41      $ 21.98  

Third quarter

   $ 26.99      $ 23.51  

Fourth quarter

   $ 26.43      $ 21.74  

As of August 18, 2017, there were approximately 594 holders of record of our common stock. Because many of the shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders represented by these holders of record.

The closing price for our common stock on August 18, 2017 was $28.96. For purposes of calculating the aggregate market value of the shares of our common stock held by non-affiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by non-affiliates except for the shares beneficially held by our directors and executive officers. However, there may be other persons who may be deemed to be affiliates of ours.

We have never paid dividends on our common stock. We do not anticipate paying any cash dividends on our common stock for the foreseeable future.

The following table provides information about purchases by us of our common stock during the quarter ended June 30, 2017:

 

Period

  Total Number of
Shares Purchased (1)
    Average Price Paid
per Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans

or Programs
    Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs
 

April 1, 2017 - April 30, 2017

    76,000     $ 22.70       76,000     $ 43,323,000  

May 1, 2017 - May 31, 2017

    924,000       25.09       924,000       20,140,000  

June 1, 2017 - June 30, 2017

                      20,140,000  
 

 

 

     

 

 

   

Total

    1,000,000     $ 24.91       1,000,000    
 

 

 

     

 

 

   

 

 

(1)  On July 8, 2016, our board of directors authorized a repurchase program of our common stock for an aggregate repurchase price not to exceed $60 million. This program expires on July 8, 2018.

 

27


Table of Contents

Stock Performance Graph

The stock performance graph below compares the percentage change in cumulative stockholder return on our common stock for the period from June 30, 2012 through June 30, 2017, with the cumulative total return on The NASDAQ Stock Market (U.S.) and the NASDAQ Computer & Data Processing Index.

This graph assumes the investment of $100.00 in our common stock (at the closing price of our common stock on June 29, 2012), the NASDAQ Stock Market (U.S.) and the NASDAQ Computer & Data Processing Index on June 29, 2012, and assumes dividends, if any, are reinvested.

The stock price performance shown on the following graph is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Bottomline Technologies (de), Inc., the NASDAQ Composite Index

and the NASDAQ Computer & Data Processing Index

 

LOGO

 

 

 

* $100 invested on 6/29/12 in stock or index, including reinvestment of dividends.

Fiscal year ending June 30.

 

     6/12     6/13     6/14     6/15     6/16     6/17  

Bottomline Technologies (de), Inc.

   $   100.00     $   140.11     $   165.76     $   154.07     $   119.28     $   142.33  

NASDAQ Composite

     100.00       117.69       155.50       177.19       173.36       221.11  

NASDAQ Computer & Data Processing

     100.00       123.37       176.05       197.82       225.78       290.57  

The information included under the heading Stock Performance Graph in Item 5 of this Annual Report on Form 10-K is furnished and not filed and shall not be deemed to be soliciting material or subject to Regulation 14A, shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the Securities Act).

Recent Sales of Unregistered Securities

None.

 

28


Table of Contents
Item 6. Selected Financial Data.

You should read the following consolidated financial data in conjunction with the Financial Statements, including the related notes, and Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations. The results shown herein are not necessarily indicative of the results to be expected for any future periods.

SELECTED CONSOLIDATED FINANCIAL DATA

 

    Fiscal Year Ended June 30,  
    2017     2016     2015     2014     2013  
    (in thousands, expect per share data)  

Revenues:

         

Subscriptions and transactions

  $ 222,997     $ 195,187     $ 171,361     $ 141,103     $ 118,016  

Software licenses

    11,685       20,826       21,907       20,769       22,546  

Service and maintenance

    109,633       120,292       130,183       131,531       106,389  

Other

    5,097       6,969       7,438       7,182       7,823  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    349,412       343,274       330,889       300,585       254,774  

Cost of revenues:

         

Subscriptions and transactions

    103,777       87,775       79,397       69,220       64,101  

Software licenses

    818       1,030       1,583       1,602       2,399  

Service and maintenance

    53,494       53,236       53,094       54,463       46,788  

Other

    3,737       5,059       5,367       5,383       5,998  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    161,826       147,100       139,441       130,668       119,286  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    187,586       196,174       191,448       169,917       135,488  

Operating expenses:

         

Sales and marketing

    77,470       84,068       80,151       72,707       62,825  

Product development and engineering

    53,002       47,355       47,185       39,725       32,974  

General and administrative

    46,527       39,324       34,492       33,721       27,076  

Amortization of intangible assets

    24,246       28,978       30,383       26,242       19,549  

Goodwill impairment charge

    7,529                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    208,774       199,725       192,211       172,395       142,424  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (21,188     (3,551     (763     (2,478     (6,936

Other expense, net

    (17,086     (15,312     (15,553     (14,544     (11,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (38,274     (18,863     (16,316     (17,022     (18,293

Income tax provision (benefit)

    (5,137     785       18,364       2,082       (3,898
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (33,137   $ (19,648   $ (34,680   $ (19,104   $ (14,395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

  $ (0.88   $ (0.52   $ (0.92   $ (0.52   $ (0.41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing basic and diluted net loss per share:

    37,842       37,957       37,806       36,834       35,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents
    At June 30,  
    2017     2016     2015     2014     2013  
    (in thousands)  

Balance Sheet Data:

         

Cash and cash equivalents

  $ 124,569     $ 97,174     $ 121,163     $ 167,673     $ 283,552  

Marketable securities

    1,973       35,209       23,225       23,805       9,525  

Working capital (1)

    (88,394     104,479       122,799       172,384       280,563  

Total assets (2)

    617,439       651,210       685,623       696,298       580,293  

Long-term debt (2) (3)

          169,857       156,899       144,750       133,353  

Total stockholders’ equity

    261,956       294,787       348,538       387,426       356,749  

 

(1)  At June 30, 2017, the negative working capital position arose due to the inclusion of our convertible senior notes, which mature in December 2017, as a current rather than long-term liability. We intend to finance the repayment of the principal balance of the Notes through a combination of cash on hand and with borrowings under the Credit Facility, as discussed in Note 10 Indebtedness to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

(2)  In fiscal year 2017, we adopted an accounting standard update requiring that we classify all debt issuance costs as a direct reduction to the carrying value of debt on our consolidated balance sheets. The standard was adopted on a retrospective basis. As a result of the adoption, total assets and long-term debt in the preceding table have been restated by $1.7 million, $2.9 million, $4.0 million and $5.2 million for fiscal years 2016, 2015, 2014 and 2013, respectively.

 

(3)  Our long-term debt as of June 30, 2016, 2015, 2014 and 2013 consisted of our convertible notes. The convertible notes are shown on our consolidated balance sheets at their carrying value which represents the principal balance of $189.8 million less the unamortized discount and debt issuance costs.

 

30


Table of Contents

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Selected Consolidated Financial Data and the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Annual 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 Annual Report on Form 10-K 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 in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and elsewhere in this Form 10-K. 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.

In the management discussion that follows we have highlighted those changes and operating factors 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 businesses pay and get paid. We make complex business payments simple, smart and secure by providing a trusted and easy-to-use set of cloud-based business payment, digital banking, fraud prevention, payment and financial document solutions. We offer cloud solutions, as well as software designed to run on-site at the customer’s location. The majority of our revenues are derived from offerings sold as SaaS-based solutions and paid for on a subscription and transaction basis.

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 banks and credit unions use to facilitate customer acquisition and growth. We offer legal spend management solutions that help manage and determine the right amount to pay for legal services and claims vendor expenditures for insurance companies and other large corporate consumers of outside legal services. Our corporate customers rely on our solutions to automate their 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 comprehensive 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

For fiscal year 2017, our revenue increased to $349.4 million from $343.3 million in the prior year. Our revenue for fiscal year 2017 was unfavorably impacted by $14.0 million due to the impact of foreign currency exchange rates primarily related to the British Pound Sterling that depreciated against the U.S. Dollar as compared to the prior year. The revenue increase, inclusive of foreign exchange impacts, was attributable to revenue increases in our Cloud Solutions segment of $16.2 million and Digital Banking segment of $8.5 million,

 

31


Table of Contents

offset by decreased revenue in our Payments and Transactional Documents segment of $17.1 million and Other segment of $1.5 million. Increased revenue from our legal spend management and settlement network solutions accounted for the revenue increase in our Cloud Solutions segment. The Digital Banking segment’s revenue increase was primarily due to increased subscription and transaction revenue from our cloud based solutions. The revenue decrease in our Payments and Transactional Documents segment was related to lower European and North American software license revenue and lower service and maintenance revenue in our payment and document automation products.

We incurred a net loss of $33.1 million in the fiscal year ended June 30, 2017 compared to a net loss of $19.6 million in the fiscal year ended June 30, 2016. Our net loss for the fiscal year ended June 30, 2017 was affected by the impact of decreased gross margins of $8.6 million and increased operating expenses of $9.0 million. The decrease in gross margins was primarily driven by decreases in revenue in our Payments and Transactional Documents and Other segments. The increase in our operating expenses was due primarily to a goodwill impairment charge of $7.5 million that we recorded in the quarter ended December 31, 2016, and increased global enterprise resource planning (ERP) implementation costs which did not qualify for capitalization of $4.6 million. Our operating expenses for the fiscal year ended June 30, 2017 were favorably impacted by $4.9 million due to the impact of foreign currency exchange rates primarily related to the British Pound Sterling which depreciated against the U.S. Dollar as compared to the prior year.

In the fiscal year ended June 30, 2017, we derived approximately 37% 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 by our digital banking, legal spend management and settlement network 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 believe that these initiatives have positioned us effectively for revenue growth in future years.

New Credit Agreement

On December 9, 2016, we (as borrower) and certain of our domestic subsidiaries (as guarantors) entered into a credit agreement with Bank of America, N.A. and certain other lenders. Please refer to Note 10 Indebtedness to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding this matter.

Revenue Sources

Our revenues are derived from multiple sources and are reported under the following classifications:

 

    Subscriptions and Transactions Fees. We derive subscription and transaction fees from a number of sources, principally our SaaS offerings. Subscription revenues are typically recognized on a ratable basis over the subscription period. Transaction revenues are typically recorded at the time transactions are processed. Some of our SaaS products require customers to pay non-refundable set up or installation fees. In these cases, since the up-front fees do not represent a separate revenue earnings process, these fees are deferred and recognized as revenue over the estimated life of the customer relationship, which is generally between five and ten years. A significant part of our focus remains on growing the revenue contribution from our SaaS offerings and subscriptions and transactions based revenue streams.

 

   

Software License Fees. Software license revenues, which we derive from our software applications, are generally based on the number of software applications and user licenses purchased. Fees from the sale of perpetual software licenses are generally recognized upon delivery of the software to the customer, assuming that payment from the customer is probable and there are no extended payment terms.

 

32


Table of Contents
 

However, certain of our software arrangements, particularly those related to financial institution customers, are recognized on a percentage of completion basis over the life of the project because they require significant customization and modification and involve extended implementation periods. Recently however, the number of percentage of completion arrangements we enter into has declined as we have continued to de-emphasize large, highly customized projects in lieu of standard product deployments and our cloud-based solutions.

 

    Service and Maintenance Fees. Our service and maintenance revenues consist of professional services fees and customer support and maintenance fees. Revenues relating to professional services not associated with highly customized software solutions are normally recognized at the time services are rendered. Professional services revenues associated with software license arrangements that include significant customization and modification are generally recognized on a percentage of completion basis over the life of the project. Software maintenance fees are recognized as revenue ratably over the respective maintenance period, which is typically one year.

 

    Other Revenues. We derive other revenues from the sale of printers, check paper and magnetic ink character recognition toners. These revenues are normally recognized at the time of delivery.

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 these specific areas generally 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. These critical accounting policies and estimates relate to revenue recognition, the valuation of goodwill and intangible assets, the valuation of acquired deferred revenue and income taxes. These critical policies and our procedures related to these policies are discussed below. In addition, refer to Note 2 Significant Accounting Policies to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding this matter.

Revenue Recognition

Software Arrangements

We recognize revenue on our software license arrangements when four basic criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is probable. We consider a fully executed agreement or a customer purchase order to be persuasive evidence of an arrangement. Delivery is deemed to have occurred upon transfer of the product to the customer or the completion of services rendered. We consider the arrangement fee to be fixed and determinable if it is not subject to adjustment and if the customer has not been granted extended payment terms. Excluding our long term contract arrangements for which revenue is recorded on a percentage of completion basis, extended payment terms are deemed to be present when any portion of the software license fee is due in excess of 90 days after the date of product delivery. In arrangements that contain extended payment terms, software revenue is recorded as customer payments become contractually due, assuming all other revenue recognition criteria have been met. We consider the arrangement fee to be probable of collection if our internal credit analysis indicates that the customer will be able to pay contractual amounts as they become due.

Our software arrangements often contain multiple revenue elements, such as software licenses, professional services and post-contract customer support. For multiple element software arrangements which qualify for separate element treatment, revenue is recognized for each element when each of the four basic criteria is met which, excluding post-contract customer support, is typically upon delivery. Revenue for post-contract customer support agreements is recognized ratably over the term of the agreement, which is generally one year. Revenue is allocated to each element, excluding the software license, based on vendor specific objective evidence (VSOE). VSOE is limited to the price charged when the element is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority. We do not have VSOE for our software licenses since they are seldom sold separately. Accordingly, revenue is allocated

 

33


Table of Contents

to the software license using the residual value method. Under the residual value method, revenue equal to VSOE of each undelivered element is recognized upon delivery of that element. Any remaining arrangement fee is then allocated to the software license. This has the effect of allocating any sales discount inherent in the arrangement to the software license fee.

Certain of our software arrangements require significant customization and modification and involve extended implementation periods. These arrangements do not qualify for separate element revenue recognition treatment as described above, and instead must be accounted for under contract accounting. Under contract accounting, companies must select from two generally accepted methods of accounting: the completed contract method and the percentage of completion method. The completed contract method recognizes revenue and costs upon contract completion, and all project costs and revenues are reported as deferred items in the balance sheet until that time. The percentage of completion method recognizes revenue and costs on a contract over time, as the work progresses.

We use the percentage of completion method of accounting for our long-term contracts, as we believe that we can make reasonably reliable estimates of progress toward completion. Progress is measured based on labor hours, as measured at the end of each reporting period, as a percentage of total expected labor hours. Accordingly, the revenue we record in any reporting period for arrangements accounted for on a percentage of completion basis is dependent upon our estimates of the remaining labor hours that will be incurred in fulfilling our contractual obligations. Our estimates at the end of any reporting period could prove to be materially different from final project results, as determined only at subsequent stages of project completion. To mitigate this risk, we solicit the input of our project professional staff on a monthly basis, as well as at the end of each financial reporting period, for purposes of evaluating cumulative labor hours incurred and verifying the estimated remaining effort to completion; this ensures that our estimates are always based on the most current projections available.

Non-Software Arrangements

For arrangements governed by general revenue recognition literature, such as with our SaaS offerings or equipment and supplies only sales, we recognize revenue when four basic criteria are met. These criteria are similar to those governing software transactions: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability is reasonably assured. For our SaaS offerings, revenue is generally recognized on a subscription or transaction basis over the period of performance.

For arrangements consisting of multiple elements, revenue is allocated to each element based on a selling price hierarchy. The selling price of each element is based on VSOE if available, third-party evidence (TPE) if VSOE is not available or estimated selling price (ESP) if neither VSOE nor TPE are available. The residual method of allocation in a non-software arrangement is not permitted and, instead, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable based on the proportion of each deliverable’s selling price to the total arrangement fee. We are typically unable to establish TPE, which is based on the selling price charged by unrelated third-party vendors for similar deliverables when they are sold separately, as we are generally unable to obtain sufficient information on actual vendor selling prices to substantiate TPE. The objective of ESP is to estimate the price at which we would transact if the deliverable were sold separately rather than as part of a multiple element arrangement. Our determination of ESP considers several factors, including actual selling prices for similar transactions, gross margin expectations and our ongoing pricing strategy. We formally analyze our ESP determinations on at least an annual basis.

Goodwill and Acquired Intangible Assets

Goodwill and acquired intangible assets are initially recorded at fair value and tested periodically for impairment. We performed our annual impairment test of the carrying value of our goodwill for fiscal year 2017

 

34


Table of Contents

during our fourth quarter, which is consistent with the historic timing of our annual goodwill impairment review. Our analysis of goodwill impairment was performed at the reporting unit level, which requires an estimate of the fair value of each reporting unit.

We had identified our Intellinx reporting unit as being at heightened risk of impairment during fiscal year 2016. In the second quarter of fiscal year 2017, based on continued shortfalls of revenue against our revenue projections, we performed the first step of the goodwill impairment test for the Intellinx reporting unit and determined the fair value was lower than its respective carrying value. Accordingly, we performed the second step of the goodwill impairment test which compared the estimated fair value of the Intellinx reporting unit’s goodwill to its carrying value. As a result of this test, we recorded a non-cash, pretax, goodwill impairment charge of $7.5 million. Please refer to Note 7 Goodwill and Other Intangible Assets to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding this matter.

Based on the results of our annual impairment review during the fourth quarter of fiscal year 2017, we concluded there was no additional goodwill impairment in our Intellinx reporting unit and no goodwill impairment in any of our other reporting units. However, there can be no assurance that there will not be impairment charges in subsequent periods as a result of our future impairment reviews. Further, we continue to assess the Intellinx reporting unit as being at a heightened risk of impairment. To the extent that future impairment charges occur, it would have a material impact on our financial results. At June 30, 2017, the carrying value of goodwill for all of our reporting units was approximately $194.7 million, and the carrying value of goodwill in our Intellinx reporting unit was $4.4 million.

In addition to our annual goodwill impairment review, we also perform periodic reviews of the carrying value and amortization periods of our other acquired intangible assets. These acquired intangible assets consist primarily of acquired customer related assets and acquired core technology. In evaluating potential impairment of these assets we specifically consider whether any indicators of impairment are present, including:

 

    whether there has been a significant adverse change in the business climate that affects the value of an asset;

 

    whether there has been a significant change in the extent or manner in which an asset is used; and

 

    whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.

If indicators of impairment are present, an estimate of the undiscounted cash flows that the specific asset is expected to generate must be made to ensure that the carrying value of the asset can be recovered. These estimates involve significant subjectivity. At June 30, 2017, the carrying value of our acquired intangible assets, excluding goodwill, was approximately $142.2 million. As a result of our fiscal year 2017 impairment review, we concluded that none of these assets were impaired.

Valuation of Acquired Intangible Assets and Acquired Deferred Revenue

In connection with our acquisitions, we have recorded acquired intangible assets relating principally to customer related assets, acquired technology and acquired contractual rights that include favorable economic terms as compared to overall market rates at the date of acquisition. The valuation process used to calculate the values assigned to these acquired intangible assets is complex and involves significant estimation relative to our financial projections. The principal component of the valuation process is the determination of discounted future cash flows, and there are a number of variables that we consider for purposes of projecting these future cash flows. There is inherent uncertainty involved with this estimation process and, while our estimates are consistent with our internal planning assumptions, the ultimate accuracy of these estimates is only verifiable over time. Further, the projections required for the valuation process generally utilize at least a ten-year forecast, which exceeds our normal internal planning and forecasting timeline. The particularly sensitive components of these estimates include, but are not limited to:

 

    the selection of an appropriate discount rate;

 

    the required return on all assets employed by the valued asset to generate future income streams;

 

35


Table of Contents
    our projected overall revenue growth and mix of revenue;

 

    our gross margin estimates (which are highly dependent on our mix of revenue);

 

    our technology and product life cycles;

 

    the attrition rate of our customers, particularly those who contribute to our recurring revenue streams, such as software maintenance;

 

    the determination of third party market rates for leases or other contractual rights we acquire, for purposes of assessing whether we have acquired a favorable, unfavorable or at-market contract;

 

    our planned level of operating expenses; and

 

    our effective tax rate.

Additionally, we are required to estimate the acquisition date fair value of acquired deferred revenue that we assume as part of any acquisition. The acquisition date fair value of deferred revenue is estimated based on the costs we expect to incur in fulfilling the obligations, plus a normal profit margin. These cost estimates exclude amounts relating to any selling effort, since those costs would have been incurred by the predecessor company rather than by us. In the case of acquired software maintenance contracts, the cost estimates also exclude any ongoing research and development expenses associated with product upgrades since these amounts typically do not represent a legal obligation that we assume at the time of acquisition.

Income Taxes

We are subject to the income tax laws of the United States (including its states and municipalities) as well as the tax laws of the foreign jurisdictions in which we operate. Our annual tax rate is determined based on our income, statutory tax rates and the tax impact of items treated differently for tax purposes than for financial statement purposes. The income tax expense we record in any interim period is based on our estimated tax rate for the full fiscal year, which requires us to estimate our annual pretax income and tax expense by jurisdiction. This process is inherently subjective and requires us to make estimates relative to our business plans, tax planning opportunities and operating results. An interim tax rate is subject to adjustment if, in later periods, there are changes to our estimate of total tax expense or pretax income, including income by jurisdiction. We update these estimates on a quarterly basis, so that our interim financial statements reflect our most current projections for the full fiscal year.

Our income tax expense consists of two components: current and deferred. Current tax expense represents our estimate of taxes to be paid for the current period, including income tax expense arising from uncertain tax positions. Deferred tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets and liabilities arise due to differences between when certain transactions are reflected in our financial statements and when those same items are included in a tax return. Deferred tax assets generally reflect the impact of a tax deduction, tax credit or operating loss carryforward that we have available for use in future year tax returns. Deferred tax liabilities generally reflect the impact of a deduction or expenditure that we have already taken in a tax return but that we have not yet reflected in our financial statements.

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. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

 

36


Table of Contents

We establish reserves to remove some or all of the tax benefit we would have otherwise recorded if a tax position is uncertain. In evaluating whether a tax position is uncertain, we base our assessment on existing tax legislation, case law and legal statute. We also presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize tax benefits related to uncertain tax positions at the largest amount deemed more likely than not will be realized upon tax examination. We review our tax positions quarterly and adjust the balances as necessary.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 Recent Accounting Pronouncements to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Results of Operations

Fiscal Year Ended June 30, 2017 Compared to Fiscal Year Ended June 30, 2016

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, Digital Banking, Payments and Transactional Documents and Other.

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

 

     Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
 
     2017     2016     $ Change
Inc (Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Segment revenue:

        

Cloud Solutions

   $ 154,821     $ 138,641     $ 16,180       11.7 %  

Digital Banking

     79,227       70,747       8,480       12.0 %  

Payments and Transactional Documents

     98,150       115,213       (17,063     (14.8)%  

Other

     17,214       18,673       (1,459     (7.8)%  
  

 

 

   

 

 

   

 

 

   

Total segment revenue

   $     349,412     $ 343,274     $ 6,138       1.8 %  
  

 

 

   

 

 

   

 

 

   

Segment measure of profit (loss):

        

Cloud Solutions

   $ 28,044     $ 23,380     $ 4,664       19.9 %  

Digital Banking

     2,901       5,696       (2,795     (49.1)%  

Payments and Transactional Documents

     29,832       34,225       (4,393     (12.8)%  

Other

     (3,075     (1,795     (1,280     (71.3)%  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total measure of segment profit

   $ 57,702     $ 61,506     $ (3,804     (6.2)%  
  

 

 

   

 

 

   

 

 

   

 

37


Table of Contents

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

 

     Fiscal Year Ended
June 30,
 
     2017     2016  
     (in thousands)  

Total measure of segment profit

   $ 57,702     $ 61,506  

Less:

    

Amortization of acquired intangible assets

     (24,246     (28,978

Goodwill impairment charge

     (7,529      

Fixed asset charge

     (2,399      

Stock-based compensation expense

     (31,913     (30,279

Acquisition and integration related expenses

     (2,596     (741

Restructuring expenses

     (547     (850

Minimum pension liability and related adjustments

     (1,079     (203

Other non-core income (expense)

                 223                   246  

Global ERP system implementation costs

     (8,804     (4,252

Other expense, net

     (17,086     (15,312
  

 

 

   

 

 

 

Loss before income taxes

   $ (38,274   $ (18,863
  

 

 

   

 

 

 

Cloud Solutions

Revenues from our Cloud Solutions segment increased $16.2 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $4.1 million, due primarily to increased revenue of $11.3 million from our legal spend management solutions and $4.9 million from our settlement network solutions. Segment profit increased $4.7 million for the fiscal year ended June 30, 2017, as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $0.4 million, due primarily to the revenue increase described above, partially offset by increased cost of revenues of $8.6 million and increased operating expenses of $2.9 million; the majority of which related to increased product development costs. We expect revenue and profit for the Cloud Solutions segment to increase in fiscal year 2018 as a result of increased revenue from our legal spend management solutions and settlement network solutions.

Digital Banking

Revenues from our Digital Banking segment increased $8.5 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, due primarily to increases of $6.7 million in subscription and transaction revenue and $3.3 million in service and maintenance revenue, partially offset by a decrease of $1.5 million in software license revenue. Segment profit decreased $2.8 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, due primarily to increased product development costs of $3.4 million, partially offset by increased gross margins of $0.7 million and reduced sales and marketing costs of $0.7 million. We expect revenue for the Digital Banking segment to increase and profit for the Digital Banking segment to remain relatively consistent in fiscal year 2018, as a result of our continued investment in certain of our newer digital banking solutions.

Payments and Transactional Documents

Revenues from our Payments and Transactional Documents segment decreased $17.1 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $9.5 million. The overall revenue decrease was primarily attributable to revenue decreases of $12.0 million in service and maintenance revenue, $6.9 million in software license revenue and $1.9 million in other revenue, partially offset by increases of $3.7 million in subscriptions and transactions

 

38


Table of Contents

revenue. The segment profit decrease of $4.4 million for the fiscal year ended June 30, 2017, as compared to the prior fiscal year, included an unfavorable impact of foreign currency exchange rates of $2.8 million, and was primarily attributable to the revenue decrease described above, partially offset by decreased cost of revenues of $5.7 million and decreased sales and marketing expenses of $5.3 million. We expect revenue and profit for the Payments and Transactional Documents segment to increase in fiscal year 2018 as a result of increased sales of our payment and document automation solutions.

Other

Revenues from our Other segment decreased $1.5 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, due primarily to decreases in subscriptions and transactions and software license revenue. Segment profit decreased $1.3 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, due primarily to the reduction in revenue. We expect Other segment revenue to increase and profit to increase slightly in fiscal year 2018 principally as the result of sales of our cyber fraud and risk management products.

Revenues by Category

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
     2017      2016      $ Change
Inc (Dec)
   

% Change
Inc (Dec)

     (Dollars in thousands)

Revenues:

          

Subscriptions and transactions

   $     222,997      $     195,187      $     27,810     14.2 %

Software licenses

     11,685        20,826        (9,141   (43.9)%

Service and maintenance

     109,633        120,292        (10,659   (8.9)%

Other

     5,097        6,969        (1,872   (26.9)%
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 349,412      $ 343,274      $ 6,138     1.8 %
  

 

 

    

 

 

    

 

 

   

Subscriptions and Transactions

Revenues from subscriptions and transactions increased $27.8 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $7.5 million. The overall revenue increase was due principally to increases in revenue from our Cloud Solutions segment and Digital Banking segment of $18.3 million and $6.7 million, respectively. We expect subscriptions and transactions revenues to increase in fiscal year 2018 primarily as a result of the revenue contribution from our legal spend management solutions, our settlement network solutions and revenue increases in our Digital Banking segment.

Software Licenses

Revenues from software licenses decreased $9.1 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $1.0 million. The overall revenue decrease was primarily as a result of decreases in revenue from our European payments and transactional documents solutions of $5.1 million, our North American payments and transactional documents solutions of $1.9 million and our Digital Banking segment of $1.5 million. We expect software license revenues to increase slightly in fiscal year 2018.

Service and Maintenance

Revenues from service and maintenance decreased $10.7 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $4.9 million. The overall decrease was primarily the result of decreases in revenue from our European payments and transactional documents solutions of $10.1 million. We expect that service and maintenance revenues will decrease slightly in fiscal year 2018.

 

39


Table of Contents

Other

Our other revenues in fiscal year 2017 consisted principally of equipment and supplies sales which remained minor components of our overall revenue. We expect that other revenues will remain relatively consistent in fiscal year 2018.

Cost of Revenues

 

    Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
    2017     2016     $ Change
Inc (Dec)
   

% Change
Inc (Dec)

    (Dollars in thousands)

Cost of revenues:

       

Subscriptions and transactions

  $ 103,777     $ 87,775     $ 16,002    

18.2 %

Software licenses

    818       1,030       (212  

(20.6)%

Service and maintenance

    53,494       53,236       258    

0.5 %

Other

    3,737       5,059       (1,322  

(26.1)%

 

 

 

   

 

 

   

 

 

   

Total cost of revenues

  $ 161,826     $     147,100     $     14,726     10.0 %
 

 

 

   

 

 

   

 

 

   

Gross profit

  $     187,586     $ 196,174     $ (8,588   (4.4)%
 

 

 

   

 

 

   

 

 

   

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 as a percentage of subscriptions and transactions revenues increased slightly to 47% for the fiscal year ended June 30, 2017 as compared to 45% for the prior fiscal year. We expect that subscriptions and transactions costs as a percentage of subscriptions and transactions revenues will remain relatively consistent in fiscal year 2018.

Software Licenses

Software license costs consist of expenses incurred by us to manufacture, package and 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 as a percentage of software license revenues increased slightly to 7% for the fiscal year ended June 30, 2017 as compared to 5% for the prior fiscal year, due primarily to a reduction in revenues from our European payments and transactional documents solutions and relatively unchanged cost of revenues. We expect that software license costs as a percentage of software license revenues will remain relatively consistent in fiscal year 2018.

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 as a percentage of service and maintenance revenues increased to 49% for the fiscal year ended June 30, 2017 as compared to 44% for the prior fiscal year, due primarily to the decrease in service and maintenance revenue in our European and North American payments and transactional documents solutions, and relatively unchanged cost of revenues. We expect that service and maintenance costs as a percentage of service and maintenance revenues will decrease in fiscal year 2018.

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 and remain minor components of our business. We expect that other costs as a percentage of other revenues will remain relatively consistent in fiscal year 2018.

 

40


Table of Contents

Operating Expenses

 

    Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
 
    2017     2016     $ Change Inc
(Dec)
    % Change
Inc (Dec)
 
    (Dollars in thousands)  

Operating expenses:

       

Sales and marketing

  $ 77,470     $ 84,068     $ (6,598     (7.8)%  

Product development and engineering

    53,002       47,355       5,647       11.9 %  

General and administrative

    46,527       39,324       7,203       18.3 %  

Amortization of intangible assets

    24,246       28,978       (4,732     (16.3)%  

Goodwill impairment charge

    7,529             7,529       100.0 %  
 

 

 

   

 

 

   

 

 

   

Total operating expenses

  $     208,774     $     199,725     $     9,049       4.5 %  
 

 

 

   

 

 

   

 

 

   

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 decreased by $6.6 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of a favorable impact of foreign currency exchange rates of $2.9 million, due primarily to a decrease in employee related costs of $4.0 million, advertising expenses of $1.0 million and travel expenses of $0.6 million. We expect sales and marketing expenses will remain relatively consistent as a percentage of revenue in fiscal year 2018.

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 increased by $5.6 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, principally as a result of an increase in headcount related costs. We expect product development and engineering expenses will remain relatively consistent as a percentage of revenue in fiscal year 2018.

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 by $7.2 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year, inclusive of a favorable impact of foreign currency exchange rates of $1.4 million, due primarily to an increase in costs associated with our global internal system implementations of $4.6 million and acquisition related costs of $1.4 million. We expect general and administrative expenses will decrease slightly as a percentage of revenue during fiscal year 2018, primarily as a result of decreased global internal system implementation costs.

Amortization of 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 of $4.7 million for the fiscal year ended June 30, 2017 as compared to the prior fiscal year occurred as a result of amortization rates decreasing over the underlying asset lives. We expect that total amortization expense for acquired intangible assets for fiscal year 2018 will be approximately $20.6 million.

Goodwill Impairment Charge

For the fiscal year ended June 30, 2017, we recorded a $7.5 million goodwill impairment charge as a result of an impairment test conducted for our Intellinx reporting unit. Please refer to Note 7 Goodwill and Other Intangible Assets to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding this matter.

 

41


Table of Contents

Other Income (Expense), Net

 

    Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
 
    2017     2016     $ Change Inc
(Dec)
    % Change
Inc (Dec)
 
    (Dollars in thousands)  

Interest income

  $ 451     $ 533     $ (82     (15.4)%  

Interest expense

    (17,059     (15,539         (1,520     (9.8)%  

Other expense, net

    (478     (306     (172     (56.2)%  
 

 

 

   

 

 

   

 

 

   

Other expense, net

  $     (17,086   $     (15,312   $ (1,774     (11.6)%  
 

 

 

   

 

 

   

 

 

   

Other Income (Expense), Net

For the fiscal year ended June 30, 2017 as compared to the prior fiscal year, interest income decreased slightly. Interest expense increased due to increased amortization of the debt discount related to our 1.50% convertible senior notes. Other expense in fiscal year 2017 was primarily the result of foreign exchange losses. We expect that interest income and other expense, net will remain relatively minor components of our overall operations during fiscal year 2018. We expect interest expense to increase slightly due to the continued amortization of debt discount costs and interest expense associated with our revolving credit facility, which we intend to draw on as a source of funding to facilitate repayment of the principal balance of the Notes in December 2017.

Provision for Income Taxes

We recorded an income tax benefit of $5.1 million for the fiscal year ended June 30, 2017 compared to income tax expense of $0.8 million for the fiscal year ended June 30, 2016. The tax benefit in fiscal year 2017 was primarily due to a discrete tax benefit in Switzerland of $4.5 million related to the impairment of its investment in Intellinx Ltd. We also recorded a tax benefit associated with our Swiss and Israeli operations and a discrete tax benefit of approximately $0.1 million from the enactment of legislation that decreased United Kingdom (UK) income tax rates. The income tax benefit was offset in part by tax expense associated with our U.S. and UK operations. The U.S. income tax expense was principally due to an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes. The tax expense in fiscal year 2016 was principally due to tax expense associated with our U.S. and UK operations, which was offset in part by a tax benefit associated with our Swiss and Israeli operations. Our tax expense in fiscal year 2016 was offset in part by a discrete tax benefit of approximately $0.2 million from the enactment of legislation that decreased UK income tax rates. The U.S. income tax expense was principally due to an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes.

 

42


Table of Contents

Fiscal Year Ended June 30, 2016 Compared to Fiscal Year Ended June 30, 2015

Segment Information

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

 

     Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
     2016     2015     $ Change Inc
(Dec)
   

% Change
Inc (Dec)

     (Dollars in thousands)

Segment revenue:

        

Cloud Solutions

   $ 138,641     $ 126,178     $ 12,463    

9.9 %

Digital Banking

     70,747       77,184       (6,437  

(8.3)%

Payments and Transactional Documents

     115,213       116,685       (1,472  

(1.3)%

Other

     18,673       10,842       7,831    

72.2 %

  

 

 

   

 

 

   

 

 

   

Total segment revenue

   $   343,274     $   330,889     $     12,385     3.7 %
  

 

 

   

 

 

   

 

 

   

Segment measure of profit (loss):

        

Cloud Solutions

   $ 23,380     $ 15,329     $ 8,051    

52.5 %

Digital Banking

     5,696       12,440       (6,744  

(54.2)%

Payments and Transactional Documents

     34,225       36,010       (1,785  

(5.0)%

Other

     (1,795     (2,870     1,075    

(37.5)%

  

 

 

   

 

 

   

 

 

   

Total measure of segment profit

   $ 61,506     $ 60,909     $ 597     1.0 %
  

 

 

   

 

 

   

 

 

   

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

 

     Fiscal Year Ended
June 30,
 
     2016     2015  
     (in thousands)  

Total measure of segment profit

   $     61,506     $     60,909  

Less:

    

Amortization of acquired intangible assets

     (28,978     (30,383

Stock-based compensation expense

     (30,279     (27,025

Acquisition and integration related expenses

     (741     (2,835

Restructuring expenses

     (850     (1,297

Minimum pension liability and related adjustments

     (203     (56

Other non-core income (expense)

     246       (76

Global ERP system implementation costs

     (4,252      

Other expense, net

     (15,312     (15,553
  

 

 

   

 

 

 

Loss before income taxes

   $ (18,863   $ (16,316
  

 

 

   

 

 

 

Cloud Solutions

The revenue increase in our Cloud Solutions segment for the fiscal year ended June 30, 2016 compared to the prior fiscal year was due to increased legal spend management and settlement network solutions revenue. The increased revenue includes the unfavorable effect of foreign exchange rates of approximately $2.9 million when compared to the prior fiscal year. The segment profit increase of $8.1 million for the fiscal year ended June 30,

 

43


Table of Contents

2016 compared to the prior fiscal year, inclusive of an unfavorable impact of foreign currency exchange rates of $0.7 million, arose from improved gross margins of $7.9 million as a result of the increased revenue and improved subscriptions and transactions gross margins from our settlement network solutions.

Digital Banking

The revenue decrease in our Digital Banking segment for the fiscal year ended June 30, 2016 compared to the prior fiscal year was primarily due to a decrease of $10.2 million in professional services revenue as a result of the continued de-emphasis of large, highly customized banking projects in lieu of standard product deployments and our cloud-based solutions, partially offset by an increase in subscription and transaction revenue of $3.2 million. The segment profit decrease of $6.7 million for the fiscal year ended June 30, 2016 compared to the prior fiscal year was primarily attributable to the decreased revenue and increased operating expenses of $1.1 million, mainly arising from an increase in sales and marketing expenses.

Payments and Transactional Documents

The slight revenue decrease for the fiscal year ended June 30, 2016 compared to the prior fiscal year includes the unfavorable effect of foreign exchange rates of approximately $4.8 million primarily associated with the British Pound Sterling, which depreciated against the U.S. Dollar when compared to the prior fiscal year. The decreased revenue, inclusive of the unfavorable effect of foreign exchange rates, was primarily attributable to decreases in services and maintenance revenues of $2.9 million, software license revenue of $2.8 million, and other revenue of $0.4 million, partially offset by an increase in subscription and transaction revenue of $4.6 million. The revenue decreases were primarily attributable to decreased North American software license and service and maintenance revenue. The segment profit decrease of $1.8 million for the fiscal year ended June 30, 2016 compared to the prior fiscal year, including an unfavorable impact of foreign currency exchange rates of $1.5 million, was primarily due to the decrease in revenue as discussed above.

Other

The revenue increase in our Other segment for the fiscal year ended June 30, 2016 compared to the prior fiscal year was primarily due the full year impact of the January 2015 Intellinx acquisition. The segment profit increase of $1.1 million for the fiscal year ended June 30, 2016 compared to the prior fiscal year was primarily the result of the increased revenue described above.

Revenues by Category

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
     2016      2015      $ Change Inc
(Dec)
   

% Change
Inc (Dec)

     (Dollars in thousands)

Revenues:

          

Subscriptions and transactions

   $ 195,187      $ 171,361      $     23,826     13.9 %

Software licenses

     20,826        21,907        (1,081   (4.9)%

Service and maintenance

     120,292        130,183        (9,891   (7.6)%

Other

     6,969        7,438        (469   (6.3)%
  

 

 

    

 

 

    

 

 

   

Total revenues

   $   343,274      $   330,889      $ 12,385     3.7 %
  

 

 

    

 

 

    

 

 

   

Subscriptions and Transactions

Revenues for the fiscal year ended June 30, 2016 were unfavorably impacted by $2.6 million due to the impact of foreign currency exchange rates. The overall increase in subscriptions and transactions revenues was due to an increase in the revenue contribution from our Cloud Solutions segment of $14.5 million, our Payments and Transactional Documents segment of $4.6 million, our Digital Banking segment of $3.2 million and our Other segment of $1.5 million. The Cloud Solutions segment revenue increases were driven primarily by our settlement network solutions and, to a lesser extent, from our legal spend management solutions.

 

44


Table of Contents

Software Licenses

The decrease in software license revenues was attributable to decreases in North American revenues within our Payments and Transactional Documents segment, offset in part by increased revenue in our cyber fraud and risk management solutions and certain European solutions. Software license revenue for the fiscal year ended June 30, 2016 was unfavorably impacted by $0.7 million due to the impact of foreign currency exchange rates primarily associated with the British Pound Sterling which depreciated against the U.S. Dollar when compared to the prior fiscal year.

Service and Maintenance

Revenues for the fiscal year ended June 30, 2016 were unfavorably impacted by $4.4 million due to the impact of foreign currency exchange rates. The overall decrease in service and maintenance revenues was primarily the result of decreases in professional services revenue of $10.2 million in our Digital Banking segment as we continued to de-emphasize large and highly customized banking projects in lieu of standard product deployments and our cloud-based solutions. This decrease was partially offset by an increase in revenue from our cyber fraud and risk management solutions primarily related to the full year impact of our January 2015 Intellinx acquisition.

Other

Other revenues decreased slightly in fiscal year 2016 as compared to fiscal year 2015.

Cost of Revenues

 

     Fiscal Year Ended
June 30,
     Increase (Decrease)
Between Periods
 
     2016      2015      $ Change Inc
(Dec)
    % Change
Inc (Dec)
 
     (Dollars in thousands)  

Cost of revenues:

          

Subscriptions and transactions

   $ 87,775      $ 79,397      $ 8,378       10.6 %  

Software licenses

     1,030        1,583        (553     (34.9)%  

Service and maintenance

     53,236        53,094        142       0.3 %  

Other

     5,059        5,367        (308     (5.7)%  
  

 

 

    

 

 

    

 

 

   

Total cost of revenues

   $ 147,100      $ 139,441      $ 7,659       5.5 %  
  

 

 

    

 

 

    

 

 

   

Gross profit

   $   196,174      $   191,448      $ 4,726       2.5 %  
  

 

 

    

 

 

    

 

 

   

Subscriptions and Transactions

Subscriptions and transactions costs decreased slightly to 45% of subscriptions and transactions revenues for the fiscal year ended June 30, 2016 as compared to 46% of subscriptions and transactions revenues in the fiscal year ended June 30, 2015.

Software Licenses

Software license costs decreased to 5% of software license revenues for the fiscal year ended June 30, 2016 as compared to 7% of software license revenues in the fiscal year ended June 30, 2015.

Service and Maintenance

Service and maintenance costs increased to 44% of service and maintenance revenues for the fiscal year ended June 30, 2016 as compared to 41% for the fiscal year ended June 30, 2015. The increase in costs as a percent of service and maintenance revenues was driven by a decrease in professional services revenues and gross margins in our Digital Banking segment as we continued to de-emphasize large, highly customized banking projects in lieu of standard deployments.

 

45


Table of Contents

Other

Other costs remained consistent at 73% of other revenues for the fiscal year ended June 30, 2016 compared to 72% of other revenues for the prior fiscal year.

Operating Expenses

 

    Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
    2016     2015     $ Change Inc
(Dec)
   

% Change
Inc (Dec)

    (Dollars in thousands)

Operating expenses:

       

Sales and marketing

  $ 84,068     $ 80,151     $       3,917    

4.9 %

Product development and engineering

    47,355       47,185       170    

0.4 %

General and administrative

    39,324       34,492       4,832    

14.0 %

Amortization of intangible assets

    28,978       30,383       (1,405  

(4.6)%

 

 

 

   

 

 

   

 

 

   

Total operating expenses

  $   199,725     $   192,211     $ 7,514     3.9 %
 

 

 

   

 

 

   

 

 

   

Sales and Marketing

Sales and marketing expenses increased $3.9 million in the fiscal year ended June 30, 2016 as compared to the fiscal year ended June 30, 2015 principally due to an increase in headcount related costs. This increase was generally due to the operating costs of our fiscal year 2015 acquisitions and the impact of resources we hired to sell and promote our newer products.

Product Development and Engineering

The increase in product development and engineering expenses of $0.2 million in the fiscal year ended June 30, 2016 as compared to the fiscal year ended June 30, 2015 was primarily a result of an increase in employee and professional services related costs.

General and Administrative

The increase in general and administrative expenses of $4.8 million in the fiscal year ended June 30, 2016 as compared to the fiscal year ended June 30, 2015 was principally attributable to an increase in costs associated with global internal system implementations and an increase in employee related costs, partially attributable to our recent acquisitions, offset in part by a decrease in acquisition and integration related expenses.

Amortization of Intangible Assets

The decrease in amortization expense for the fiscal year ended June 30, 2016 as compared to the prior fiscal year occurred as a result of amortization rates decreasing over the underlying assets lives.

Other Income (Expense), Net

 

     Fiscal Year Ended
June 30,
    Increase (Decrease)
Between Periods
     2016     2015     $ Change
Inc (Dec)
   

% Change
Inc (Dec)

     (Dollars in thousands)

Interest income

   $ 533     $ 499     $ 34     6.8 %

Interest expense

     (15,539     (14,765     (774   (5.2)%

Other expense, net

     (306     (1,287             981     76.2 %
  

 

 

   

 

 

   

 

 

   

Other expense, net

   $   (15,312   $   (15,553   $ 241     1.5 %
  

 

 

   

 

 

   

 

 

   

 

46


Table of Contents

Other Income (Expense), Net

For the fiscal year ended June 30, 2016 as compared to the prior fiscal year, interest income increased slightly. Interest expense increased slightly due to increased amortization of our debt discount. Other expense in fiscal year 2016 was primarily the result of foreign exchange losses.

Provision for Income Taxes

We recorded income tax expense of $0.8 million for the fiscal year ended June 30, 2016 compared to income tax expense of $18.4 million for the fiscal year ended June 30, 2015. The tax expense in fiscal year 2016 was principally due to tax expense associated with our U.S. and UK operations, which was offset in part by a tax benefit associated with our Swiss and Israeli operations. Our tax expense in fiscal year 2016 was offset in part by a discrete tax benefit of approximately $0.2 million from the enactment of legislation that decreased UK income tax rates. The U.S. income tax expense was principally due to an increase in deferred tax liabilities for goodwill that is deductible for tax purposes but not amortized for financial reporting purposes. The tax expense in fiscal year 2015 was predominantly due to $16.0 million of tax expense arising from a reserve we established against a portion of our U.S. deferred tax assets. To a lesser extent in fiscal year 2015, we also recorded tax expense associated with our U.S. and UK operations, offset in part by an income tax benefit associated with our Swiss and Israeli operations.

Liquidity and Capital Resources

We have financed our operations primarily from cash provided by operating activities, the sale of our common stock and the issuance of the Notes in December 2012. 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.

In addition to our operating cash requirements, we will require cash to pay interest on the Notes and to make principal payments on the Notes at maturity or upon conversion. We are permitted to settle any conversion obligation under the Notes in excess of the principal balance in either cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. We intend to satisfy any conversion premium by issuing shares of our common stock. We believe that the cash generated from our operations and the cash and cash equivalents we have on hand, together with available funds under the credit agreement we entered in December 2016, will be sufficient to meet our future cash obligations. If our existing cash resources along with cash generated from operations is insufficient to satisfy our funding requirements we may need to sell additional equity or debt securities or seek other financing arrangements.

On December 9, 2016, we (as borrower) and certain of our domestic subsidiaries (as guarantors) entered into a credit agreement with Bank of America, N.A. and certain other lenders, that provides for a five-year revolving credit facility in the amount of up to $300 million (the Credit Facility). We intend to finance the repayment of the principal balance of the Notes through a combination of cash on hand and with borrowings under the Credit Facility. Please refer to Note 10 Indebtedness to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details regarding this matter.

As of June 30, 2017, we were in compliance with the covenants associated with the Credit Facility.

 

47


Table of Contents

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 fiscal years ended June 30, 2017 and 2016 are summarized in the tables below:

 

    June 30,      June 30,  
    2017      2016  
    (in thousands)  

Cash and cash equivalents

  $     124,569      $ 97,174  

Marketable securities

    1,973        35,209  

Convertible senior notes (1)

    183,682        169,857  

 

 

 

(1)  The Notes are shown on our Consolidated Balance Sheets at their carrying value, which represents the principal balance of $189.8 million less unamortized discount and debt issuance costs.

 

    Fiscal Year Ended
June 30,
 
    2017     2016  
    (in thousands)  

Cash provided by operating activities

  $     60,975     $     67,157  

Cash provided by (used in) investing activities

    4,755       (45,759

Cash used in financing activities

    (38,992     (40,170

Effect of exchange rates on cash

    657       (5,217

Cash, cash equivalents and marketable securities. At June 30, 2017, our cash and cash equivalents of $124.6 million consisted primarily of cash deposits held at major banks and money market funds. The $27.4 million increase in cash and cash equivalents from June 30, 2016 was primarily due to cash provided by operating activities of $61.0 million and proceeds from the sale of available-for-sale securities of $47.0 million, partially offset by $28.2 million used for capital expenditures, including capitalization of software costs, cash used for purchases of available-for-sale securities of $14.1 million and cash used to repurchase shares of our common stock of $39.9 million.

At June 30, 2017, our marketable securities of $2.0 million consisted primarily of U.S. corporate debt securities.

Cash, cash equivalents and marketable securities included approximately $59.3 million held by our foreign subsidiaries as of June 30, 2017. Our current intention is to reinvest these amounts in the growth of our foreign operations. If our reinvestment plans change based on future events and we decide to repatriate these amounts to fund our domestic operations, the amounts would generally become subject to 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. Changes in the foreign currency exchange rates of the British Pound, Euro and Swiss Franc to the U.S. Dollar increased our overall cash balances by approximately $0.7 million for the fiscal year ended June 30, 2017. Further changes in the foreign currency exchange rates of these 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 frequently experience, are adequate to meet our operating requirements for the foreseeable future.

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 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 decreased by $6.2 million for the fiscal year ended

 

48


Table of Contents

June 30, 2017 versus the prior fiscal year. In addition to the increase in our net loss for the fiscal year ended June 30, 2017 versus the prior fiscal year of $13.5 million, the decrease in cash generated from operations was primarily related to a decrease in cash flows from deferred revenue of $8.0 million, partially offset by an increase in cash flows from other assets of $5.3 million, accrued expenses of $2.8 million and non-cash adjustments to our net loss of $6.0 million.

At June 30, 2017, we had U.S. net operating loss carryforwards of $104.8 million which expire at various times through fiscal year 2037, Swiss net operating loss carryforwards of $25.8 million which expire in fiscal year 2024, Canadian net operating loss carryforwards of $0.3 million which expire principally in fiscal year 2035, and other foreign net operating loss carryforwards of $22.1 million, primarily in Europe and Israel, which have no statutory expiration date. We also have approximately $6.0 million of research and development tax credit carryforwards available which expire at various points through fiscal year 2037. Our operating losses and tax credit carryforwards may be subject to limitations under provisions of the Internal Revenue Code.

At June 30, 2017, 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 acquisition of businesses and assets. The $50.5 million increase in net cash provided by investing activities for the fiscal year ended June 30, 2017 versus the prior fiscal year was primarily due to an increase in cash provided by proceeds from sales of available-for-sale securities of $31.2 million, a reduction in purchases of available-for-sale securities of $14.1 million and a reduction in purchases of cost-method investments of $4.0 million.

Financing Activities. Financing cash flows consist primarily of repurchases of common stock, issuance and repayment of long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans. The $1.2 million decrease in cash used in financing activities for the fiscal year ended June 30, 2017 as compared to the prior fiscal year was due to a decrease in cash used to repurchase our common stock of $4.0 million, partially offset by debt issuance costs of $2.2 million related to our Credit Facility.

Contractual Obligations

Following is a summary of future payments that we are required to make under existing contractual obligations as of June 30, 2017:

 

    Payment Due by Fiscal Year  
    2018     2019-2020     2021-2022     Thereafter     Total  
    (in thousands)  

Convertible senior notes

         

Principal payment (due December 2017)

  $     189,750     $     $     $     $ 189,750  

Interest payments

    1,423                         1,423  

Credit Facility commitment fee (1)

    750       1,500       1,081             3,331  

Operating leases

    5,261       8,912       6,604       6,470       27,247  

Purchase commitments

    8,011       4,953       4             12,968  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $ 205,195     $     15,365     $     7,689     $     6,470     $     234,719  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1)  The Credit Facility agreement includes a commitment fee, which we have included in the table above, based on the applicable interest rate as of June 30, 2017 and our unborrowed capacity of $300 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

 

49


Table of Contents

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 $1.4 million, has been excluded from the table above. These amounts have been excluded because, as of June 30, 2017, 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.

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 2018, which is $1.6 million based on foreign exchange rates in effect on June 30, 2017. We have not disclosed contributions for periods after fiscal year 2018, as those amounts are subject to future changes.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the fiscal year ended June 30, 2017.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Interest rate risk

Our exposure to financial risk, including changes in interest rates, relates primarily to our cash and cash equivalents and marketable securities. Our cash and cash equivalents typically consist of demand deposit accounts, money market mutual funds and U.S. Treasury securities. Based on our current average balances of cash and cash equivalents, a significant change in interest rates could have a material effect on our operating results. Based on our average cash and cash equivalents balance, average actual interest rates and actual interest income during the respective annual periods, a 100 basis point increase in interest rates would result in a hypothetical increase of approximately $1.1 million, $1.1 million and $1.4 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, in our results of operations and cash flows. A 100 basis point decrease in interest rates would reduce our interest income to zero.

Our marketable securities are held in U.S. corporate debt securities with maturities of less than one year. A 100 basis point change in interest rates would not have had a significant impact on our income from marketable securities for the fiscal years ended June 30, 2017, 2016 and 2015.

The Notes are at a fixed rate of interest. Our Credit Facility bears interest at variable interest rates. We entered into an interest rate swap agreement in July 2017 to minimize our exposure to interest rate fluctuations under our Credit Facility.

Foreign currency exchange rate risk

We have significant operations located in the United Kingdom, where the functional currency is British Pound Sterling and in Switzerland, where the functional currency is the Swiss Franc. We also have operations in Australia, where the functional currency is the Australian Dollar; in Germany and France, where the functional currency is the European Euro; in Singapore, where the functional currency is the Singapore Dollar; and in Canada, where the functional currency is the Canadian Dollar. 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.

 

50


Table of Contents

Foreign currency translation risk

The following sensitivity analysis is based on a hypothetical 10 percent increase or decrease in foreign currency exchange rates and presents the impact that such an increase or decrease would have had on our cash balances as of June 30, 2017 and 2016:

 

    Effect of a 10% Increase or
Decrease in Average
Exchange Rates
 
    Cash and cash equivalents  
    2017     2016  
    (in thousands)  

Between U.S. Dollar and:

   

British Pound Sterling (+/-)

  $     4,115     $     3,974  

Swiss Franc (+/-)

    1,418       993  

European Euro (+/-)

    337       192  

Australian Dollar (+/-)

    293       278  

A 10% increase or decrease in the exchange rate between the Israeli Shekel and the U.S. Dollar, the Singapore Dollar and the U.S. Dollar or the Canadian Dollar and the U.S. Dollar would not have had a significant impact on our cash and cash equivalents at June 30, 2017 or June 30, 2016.

The following sensitivity analysis is based on a hypothetical 10 percent increase or decrease in foreign currency exchange rates and presents the impact that such an increase or decrease would have had on our revenue and net loss for the fiscal years ended June 30, 2017, 2016 and 2015:

 

    Effect of a 10% Increase or Decrease in Average Exchange Rates  
    Revenue     Net loss  
    2017     2016     2015     2017     2016     2015  
    (in thousands)  

Between U.S. Dollar and:

           

British Pound Sterling (+/-)

  $     8,042     $     9,624     $     9,374     $     268     $     754     $     934  

Swiss Franc (+/-)

    3,496       3,467       3,298       544       197       629  

European Euro (+/-)

    363       420       515       20       27       34  

Australian Dollar (+/-)

    332       299       375       7       2       22  

Israeli Shekel (+/-)

    547       542       206       1,847       1,046       31  

A 10% increase or decrease in the average exchange rate between the Singapore Dollar and the U.S. Dollar or the Canadian Dollar and the U.S. Dollar would not have had a significant impact on our revenue or net loss for the fiscal years ended June 30, 2017, 2016 or 2015.

Foreign currency transaction risk

Foreign currency transaction gains and losses are generally not significant and our financial results would not be significantly impacted in the event of a 10% increase or decrease in the average exchange rates between the U.S. dollar and the respective functional currencies of our international subsidiaries.

Derivative instruments risk

We are a party to various derivative instruments related to the issuance of our convertible notes. At June 30, 2017, all of our derivative instruments qualified for classification within stockholders’ equity. We are required, however, for the remaining term of the Notes, to assess whether we continue to meet the stockholders’ equity classification requirements and if in any future period we fail to satisfy those requirements we would need to reclassify these instruments out of stockholders’ equity and back into a derivative asset or liability; at which point we would again be required to record any changes in fair value through earnings.

 

51


Table of Contents
Item 8. Consolidated Financial Statements and Supplementary Data.

BOTTOMLINE TECHNOLOGIES (de), INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Reports of Independent Registered Public Accounting Firm

     53  

Consolidated Balance Sheets as of June 30, 2017 and 2016

     55  

Consolidated Statements of Comprehensive Loss for the fiscal years ended June 30, 2017, 2016 and 2015

     56  

Consolidated Statements of Stockholders’ Equity for the fiscal years ended June 30, 2017, 2016 and 2015

     57  

Consolidated Statements of Cash Flows for the fiscal years ended June  30, 2017, 2016 and 2015

     58  

Notes to Consolidated Financial Statements

     59  

 

52


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bottomline Technologies (de), Inc.

We have audited Bottomline Technologies (de), Inc.’s internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Bottomline Technologies (de), Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Bottomline Technologies (de), Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bottomline Technologies (de), Inc. as of June 30, 2017 and 2016, and the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2017 of Bottomline Technologies (de), Inc. and our report dated August 28, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

August 28, 2017

 

53


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bottomline Technologies (de), Inc.

We have audited the accompanying consolidated balance sheets of Bottomline Technologies (de), Inc. as of June 30, 2017 and 2016, and the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2017. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bottomline Technologies (de), Inc. at June 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bottomline Technologies (de), Inc.’s internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 28, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

August 28, 2017

 

54


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     June 30,     June 30,  
     2017     2016  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $     124,569     $ 97,174  

Marketable securities

     1,973       35,209  

Accounts receivable net of allowances for doubtful accounts of $923 at June 30, 2017 and $982 at June 30, 2016

     64,244       61,773  

Deferred tax assets

           6,244  

Prepaid expenses and other current assets

     16,807       16,141  
  

 

 

   

 

 

 

Total current assets

     207,593       216,541  

Property and equipment, net

     55,307       51,029  

Goodwill

     194,700       202,028  

Intangible assets, net

     142,168       164,930  

Other assets

     17,671       16,682  
  

 

 

   

 

 

 

Total assets

   $ 617,439     $ 651,210  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 9,013     $ 10,218  

Accrued expenses

     29,179       27,512  

Deferred revenue

     74,113       74,332  

Convertible senior notes

     183,682        
  

 

 

   

 

 

 

Total current liabilities

     295,987       112,062  

Convertible senior notes

           169,857  

Deferred revenue, non-current

     22,047       19,086  

Deferred income taxes

     15,433       28,147  

Other liabilities

     22,016       27,271  
  

 

 

   

 

 

 

Total liabilities

     355,483       356,423  

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-42,797 at June 30, 2017 and 41,602 at June 30, 2016; outstanding shares-37,443 at June 30, 2017 and 37,770 at June 30, 2016

     43       42  

Additional paid-in-capital

     624,001       591,800  

Accumulated other comprehensive loss

     (32,325     (37,668

Treasury stock: 5,354 shares at June 30, 2017 and 3,832 shares at June 30, 2016, at cost

     (113,071     (75,832

Accumulated deficit

     (216,692     (183,555
  

 

 

   

 

 

 

Total stockholders’ equity

     261,956       294,787  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 617,439     $ 651,210  
  

 

 

   

 

 

 

See accompanying notes.

 

55


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share amounts)

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  

Revenues:

      

Subscriptions and transactions

   $     222,997     $     195,187     $     171,361  

Software licenses

     11,685       20,826       21,907  

Service and maintenance

     109,633       120,292       130,183  

Other

     5,097       6,969       7,438  
  

 

 

   

 

 

   

 

 

 

Total revenues

     349,412       343,274       330,889  
  

 

 

   

 

 

   

 

 

 

Cost of revenues:

      

Subscriptions and transactions

     103,777       87,775       79,397  

Software licenses

     818       1,030       1,583  

Service and maintenance

     53,494       53,236       53,094  

Other

     3,737       5,059       5,367  
  

 

 

   

 

 

   

 

 

 

Total cost of revenues

     161,826       147,100       139,441  
  

 

 

   

 

 

   

 

 

 

Gross profit

     187,586       196,174       191,448  

Operating expenses:

      

Sales and marketing

     77,470       84,068       80,151  

Product development and engineering

     53,002       47,355       47,185  

General and administrative

     46,527       39,324       34,492  

Amortization of intangible assets

     24,246       28,978       30,383  

Goodwill impairment charge

     7,529              
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     208,774       199,725       192,211  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,188     (3,551     (763

Interest income

     451       533       499  

Interest expense

     (17,059     (15,539     (14,765

Other expense, net

     (478     (306     (1,287
  

 

 

   

 

 

   

 

 

 

Other expense, net

     (17,086     (15,312     (15,553
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (38,274     (18,863     (16,316

Income tax provision (benefit)

     (5,137     785       18,364  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (33,137   $ (19,648   $ (34,680
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share:

   $ (0.88   $ (0.52   $ (0.92
  

 

 

   

 

 

   

 

 

 

Shares used in computing basic and diluted net loss per share:

     37,842       37,957       37,806  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

      

Unrealized gain (loss) on available for sale securities

     (75     55       (10

Minimum pension liability adjustments (net of income tax provision (benefit) of $1,558, ($2,020) and ($949))

     4,859       (6,198     (3,032

Foreign currency translation adjustments

     559       (18,014     (17,285
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

     5,343       (24,157     (20,327
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (27,794   $ (43,805   $ (55,007
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

56


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

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

Balance at June 30, 2014

    39,224     $ 39     $ 530,377     $ 6,816       1,747     $ (20,579   $ (129,227   $ 387,426  

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

    136         2,638         (109     1,453         4,091  

Vesting of restricted stock awards

    977       1       (1              

Stock compensation expense

        27,025               27,025  

Amortization of previously capitalized stock compensation expense

        (48             (48

Repurchase of common stock to be held in treasury

            594       (15,041       (15,041

Tax benefit (deficit) associated with non qualified stock option exercises and forfeitures

        92               92  

Minimum pension liability adjustments, net of tax

          (3,032           (3,032

Net income

                (34,680     (34,680

Unrealized gain (loss) on available for sale securities, net of tax

          (10           (10

Foreign currency translation adjustment

          (17,285           (17,285
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    40,337     $ 40     $ 560,083     $ (13,511     2,232     $ (34,167   $ (163,907   $ 348,538  

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

    92       1       1,229         (125     2,297         3,527  

Vesting of restricted stock awards

    1,173       1       (1              

Stock compensation expense

        30,279               30,279  

Repurchase of common stock to be held in treasury

            1,725       (43,962       (43,962

Tax benefit (deficit) associated with non qualified stock option exercises and forfeitures

        210               210  

Minimum pension liability adjustments, net of tax

          (6,198           (6,198

Net income

                (19,648     (19,648

Unrealized gain (loss) on available for sale securities, net of tax

          55             55  

Foreign currency translation adjustment

          (18,014           (18,014
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

    41,602     $ 42     $ 591,800     $ (37,668     3,832     $ (75,832   $ (183,555   $ 294,787  

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

    32             301         (133     2,674         2,975  

Vesting of restricted stock awards

    1,163       1       (1              

Stock compensation expense

        31,913               31,913  

Repurchase of common stock to be held in treasury

            1,655       (39,913       (39,913

Tax benefit (deficit) associated with non qualified stock option exercises and forfeitures

        (12             (12

Minimum pension liability adjustments, net of tax

          4,859             4,859  

Net income

                (33,137     (33,137

Unrealized gain (loss) on available for sale securities, net of tax

          (75           (75

Foreign currency translation adjustment

          559             559  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

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

See accompanying notes.

 

57


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  

Operating activities:

      

Net loss

   $ (33,137   $ (19,648   $ (34,680

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Amortization of acquired intangible assets

         24,246           28,978           30,383  

Stock compensation expense

     31,913       30,279       27,025  

Depreciation and amortization

     19,528       13,489       10,507  

Goodwill impairment charge

     7,529              

Deferred income tax expense (benefit)

     (7,996     (3,111     12,173  

Provision for allowances on accounts receivable

     121       415       248  

Excess tax benefits associated with stock compensation

     (109     (265     (133

Amortization of debt issuance costs

     1,426       1,184       1,184  

Amortization of debt discount

     12,641       11,774       10,965  

Amortization of premium on investments

     238       338       388  

Loss on disposal of equipment

     111       24       4  

Write down of fixed assets

           17        

(Gain) loss on foreign exchange

     (310     171       (2

Changes in operating assets and liabilities:

      

Accounts receivable

     (2,447     (543     (310

Prepaid expenses and other current assets

     (666     (2,449     180  

Other assets

     910       (4,412     222  

Accounts payable

     (900     (682     (3,193

Accrued expenses

     4,587       1,835       (1,333

Deferred revenue

     2,337       10,361       7,561  

Other liabilities

     953       (598     1,511  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     60,975       67,157       62,700  

Investing activities:

      

Acquisition of businesses and assets, net of cash acquired

           (1,763     (68,017

Purchases of cost-method investments

           (4,010      

Purchases of held-to-maturity securities

           (168     (96

Proceeds from sales of held-to-maturity securities

           168       96  

Purchase of available-for-sale securities

     (14,058     (28,113     (15,185

Proceeds from sales of available-for-sale securities

     46,986       15,836       15,347  

Capital expenditures, including capitalization of software costs

     (28,173     (27,717     (23,297

Proceeds from disposal of property and equipment

           8        
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     4,755       (45,759     (91,152

Financing activities:

      

Repurchase of common stock

     (39,913     (43,962     (15,041

Debt issuance costs related to credit facility

     (2,163            

Proceeds from exercise of stock options and employee stock purchase plan

     2,975       3,527       4,091  

Excess tax benefits associated with stock compensation

     109       265       133  
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (38,992     (40,170     (10,817

Effect of exchange rate changes on cash

     657       (5,217     (7,241
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     27,395       (23,989     (46,510

Cash and cash equivalents at beginning of period

     97,174       121,163       167,673  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 124,569     $ 97,174     $ 121,163  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid during the year for:

      

Interest, net of amounts capitalized

   $ 2,964     $ 2,847     $ 2,854  

Income taxes

   $ 3,321     $ 4,771     $ 7,507  

See accompanying notes.

 

58


Table of Contents

BOTTOMLINE TECHNOLOGIES (de), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended June 30, 2017, 2016 and 2015

Note 1—Organization and Nature of Business

Bottomline Technologies (de), Inc. is a Delaware corporation that helps businesses pay and get paid. We make complex business payments simple, smart and secure by providing a trusted and easy-to-use set of cloud-based business payment, digital banking, fraud prevention, payment and financial document solutions. We offer cloud solutions, as well as software designed to run on-site at the customer’s location. Our products and services are sold to customers operating in many different industries throughout the world, but principally in the U.S., United Kingdom (UK) and continental Europe regions.

Note 2—Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates include, but are not limited to, revenue recognition (particularly revenue recognition associated with contracts accounted for on a percentage of completion basis), allowances for doubtful accounts, recoverability of deferred tax assets, determining the fair value associated with acquired assets and liabilities including deferred revenue, intangible asset and goodwill impairment, pension benefit obligations and certain other of our accrued liabilities. Actual results could differ from those estimates.

Foreign Currency Translation

We have international subsidiaries in Europe, the Asia-Pacific region and Canada, whose functional currencies are either the British Pound Sterling, Swiss Franc or European Euro (in respect of our European subsidiaries), the Australian Dollar and Singapore Dollar (in respect of our Asia Pacific subsidiaries) or the Canadian Dollar (in respect of our Canadian subsidiary). Assets and liabilities of all of our international subsidiaries have been translated into U.S. dollars at year-end exchange rates, and results of operations and cash flows have been translated at the average exchange rates in effect during the year. Gains or losses resulting from foreign currency translation are included as a component of accumulated other comprehensive income or loss. Foreign currency transaction gains and losses are included in results of operations as incurred and are not significant to our overall operations.

Cash and Cash Equivalents

We consider all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The carrying value of these instruments approximates their fair value. At June 30, 2017, our cash equivalents consisted of demand deposit accounts and money market funds.

Marketable Securities

All marketable securities must be classified as one of the following: held to maturity, available for sale, or trading. At June 30, 2017, we held $2.0 million of marketable securities which consisted primarily of U.S. corporate debt securities.

 

59


Table of Contents

Our held to maturity investments, all of which mature within one year, are recorded at amortized cost and interest income is recognized in earnings when earned. The cost of securities sold is determined based on the specific identification method. At June 30, 2017 and 2016 the amortized cost of our held-to-maturity investments approximated their fair value.

Our securities classified as available for sale are recorded at fair value, with all unrealized gains or losses recorded as a component of accumulated other comprehensive income (loss). At June 30, 2017 and 2016, $1.9 million and $20.0 million, respectively, of our available for sale securities had maturities of less than one year. At June 30, 2016, the remaining $15.1 million had maturities between one and five years. The cost of securities sold is determined based on the specific identification method. At June 30, 2017 and 2016, our net unrealized loss associated with our investment securities was not significant.

The table below presents information regarding our marketable securities by major security type as of June 30, 2017 and 2016.

 

    June 30, 2017     June 30, 2016  
    Held to
Maturity
    Available
for Sale
    Total     Held to
Maturity
    Available
for Sale
    Total  
    (in thousands)  

Marketable securities:

           

Corporate and other debt securities

  $ 67     $       1,906     $       1,973     $             63     $     35,146     $     35,209  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total marketable securities

  $           67     $ 1,906     $ 1,973     $ 63     $ 35,146     $ 35,209  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

All of our available for sale marketable securities are classified as current assets as we do not have the positive intent to hold these investments until maturity. At June 30, 2017 and June 30, 2016, the difference between the fair value of our available for sale securities and their amortized cost was not significant.

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 June 30, 2017 and June 30, 2016, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

 

     At June 30, 2017      At June 30, 2016  
     Less than 12 Months  
     Fair Value      Unrealized Loss      Fair Value      Unrealized Loss  
     (in thousands)      (in thousands)  

US Corporate

   $           1,628      $                 1      $           2,760      $                 2  

Residential mortgage-backed

                   4,229        5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $           1,628      $                 1      $           6,989      $                 7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Investments

We have certain other investments accounted for at cost. The carrying value of these investments was $7.7 million at both June 30, 2017 and 2016, and they are reported as a component of our other assets. The investments are evaluated periodically for indicators of impairment and impairment losses, to the extent occurring, would be recorded as an operating expense in the period incurred. At June 30, 2017, we reviewed the carrying value of these investments and concluded that they were not impaired.

For all but one of our investments, we are unable to exercise significant influence over the investee. In respect of one of our investments, we are able to exercise significant influence over the investee, although we are unable to exercise control. Relative to this investment, we do not hold common stock or in-substance common stock since the equity underlying our investment is preferred stock which includes a substantial liquidation preference not available to common stockholders. Accordingly, this investment is also accounted for under the cost-method of accounting.

 

60


Table of Contents

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and cash equivalents and accounts receivable. We had approximately $114.9 million of cash and cash equivalents invested with six financial institutions at June 30, 2017. Balances of cash and cash equivalents are typically in excess of any insurance, such as FDIC coverage, that may protect our deposits.

Our accounts receivable are reported in our consolidated balance sheets net of allowances for uncollectible accounts. We believe that the concentration of credit risk with respect to accounts receivable is limited due to the large number of companies and diverse industries comprising our customer base. On-going credit evaluations are performed, generally with a focus on new customers or customers with whom we have had no prior collections history, and collateral is generally not required. We maintain reserves for potential losses based on customer specific situations as well as our historic experience and such losses, in the aggregate, have not historically exceeded our expectations. There were no customers that, individually, accounted for more than 10% of our consolidated accounts receivable balance at June 30, 2017 or 2016. For the fiscal years ended June 30, 2017, 2016, and 2015, we had no customer that accounted for 10% or greater of our consolidated revenues.

Financial Instruments

The fair value of our financial instruments, which include cash and cash equivalents, marketable securities, accounts receivable, accounts payable and our convertible senior notes are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. Please refer to Note 4 Fair Value for further details on the fair value of these financial instruments.

Accounts Receivable

Accounts receivable includes unbilled receivables of approximately $4.2 million and $4.1 million at June 30, 2017 and 2016, respectively. Unbilled receivables include revenues recognized for which billings have not yet been presented to the customers, based on the contractually stipulated billing requirements.

Property and Equipment

Property and equipment are stated at cost, net of accumulated amortization and depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets as follows:

 

Property, equipment, furniture, fixtures and vehicles    3-7 years
Software    3-5 years
Technical equipment    3-5 years
Building (Reading, England)    50 years
Leasehold improvements    Lower of estimated life or remaining lease term

Periodically, based on specific transactions, we may assign a life outside of the general range of useful lives noted here if a particular asset’s estimated period of use falls outside of the normal range.

Goodwill and Other Intangible Assets

We initially record goodwill and other acquired intangible assets at their estimated fair values, and we review these assets periodically for impairment. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is tested at least annually for impairment; historically during our fourth quarter.

Our specifically identifiable intangible assets, which consist principally of customer related assets and core technology, are reported net of accumulated amortization and are amortized over their estimated useful lives at amortization rates that are proportional to each asset’s estimated economic benefit. We review the carrying value of these intangible assets annually, or more frequently if indicators of impairment are present.

 

61


Table of Contents

In performing our review of the recoverability of goodwill and other intangible assets we consider several factors, including whether there have been significant changes in legal factors or the overall business climate that could affect the underlying value of an asset. We also consider whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life. In the case of goodwill, we must estimate the fair value of the reporting unit to which the goodwill is assigned. If as a result of examining any of these factors we conclude that the carrying value of goodwill or any other intangible asset exceeds its estimated fair value, we will recognize an impairment charge and reduce the carrying value of the asset to its estimated fair value.

Advertising Costs

We expense advertising costs as incurred. Advertising costs were $2.6 million, $2.6 million, and $1.3 million for the years ended June 30, 2017, 2016 and 2015, respectively.

Shipping and Handling Costs

We expense all shipping, handling and delivery costs in the period incurred, generally as a component of other cost of revenues.

Commissions Expense

We record commissions as a component of sales and marketing expense when earned by the respective salesperson. Excluding certain arrangements within our Digital Banking segment, for which commissions are earned as revenue is recorded over the period of project performance, substantially all software commissions are earned in the month in which a customer order is received. Commissions associated with professional services are typically earned in the month that services are rendered. Commissions associated with post-contract customer support arrangements and subscription-based arrangements are typically earned when the customer is billed for the underlying contractual period, or in the period the order is received. Commissions are normally paid within thirty days of the month in which they are earned.

Research and Development Expenditures

Research and development costs incurred prior to the establishment of technological feasibility (for software to be sold, leased or otherwise marketed), or prior to application development (for internal-use software) are expensed as incurred.

Debt Issuance Costs

We incurred certain third party costs in connection with our issuance of the 1.5% Convertible Senior Notes maturing December 1, 2017 (the Notes), as more fully described in Note 10 Indebtedness, principally related to underwriting and legal fees. These costs are included as a direct reduction to the carrying value of the debt as part of the Notes on our consolidated balance sheets and are being amortized to interest expense ratably over the five-year term of the Notes.

We also incurred certain third party costs in connection with the Credit Facility, as defined in Note 10 Indebtedness, principally related to underwriting and legal fees. These costs are included as part of our other assets on our consolidated balance sheets and are being amortized to interest expense ratably over the five-year term of the Credit Facility.

Income Taxes and Income Tax Uncertainties

We recognize deferred tax assets and deferred tax liabilities based on differences in the financial reporting and tax basis of the underlying assets or liabilities, measured at tax rates that are expected to be in effect when the differences reverse. A valuation allowance to reduce the carrying value of deferred tax assets is recorded if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

62


Table of Contents

In respect of income tax uncertainties, we perform a two-step analysis for all tax positions. The first step involves an evaluation of the underlying tax position based solely on technical merits (such as tax law) and the second step involves measuring the tax position based on the probability of it being sustained in the event of a tax examination. We recognize tax benefits at the largest amount that we deem more likely than not will be realized upon ultimate settlement of any tax uncertainty. Tax positions that fail to qualify for recognition are recognized in the period in which the more-likely-than-not standard has been reached, when the tax positions are resolved with the respective taxing authority or when the statute of limitations for tax examination has expired.

We record any interest or penalties accruing in respect of uncertain tax positions as a component of income tax expense.

Share-Based Compensation

We recognize expense for the estimated fair value of our share-based compensation. The expense associated with share-based payment awards is recognized on a straight-line basis over the award’s vesting period.

Capitalized Software Costs

Capitalization of software development costs for software that is to be sold, leased or otherwise marketed begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by us with respect to certain factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized costs commence amortization on the date of general release using the greater of the straight-line method over the estimated useful life, or the ratio of revenue in the period to total expected revenues over the product’s expected useful life. For the fiscal years ended June 30, 2017, 2016 and 2015, we capitalized $3.4 million, $7.8 million and $5.0 million, respectively and expensed $2.2 million, $1.2 million and $0.0 million of software development costs, respectively, excluding software developed for internal use. At June 30, 2017 and 2016, the net carrying value of capitalized software excluding software developed for internal use, which is included in intangible assets, net on our consolidated balance sheets, was $12.9 million and $11.7 million, respectively.

We capitalize certain development costs associated with internal use software incurred during the application development stage. We expense costs associated with preliminary project phase activities, training, maintenance and any post-implementation period costs as incurred. For the fiscal years ended June 30, 2017, 2016 and 2015, we capitalized $6.6 million, $6.0 million and $5.7 million, respectively, of internal use software development costs associated with our SaaS-based technology platforms. In addition, during fiscal years ended June 30, 2017 and 2016, we capitalized $3.1 million and $0.2 million, respectively, of costs associated with our implementation of a new, global ERP solution. Capitalized internal use software costs are normally amortized over estimated useful lives ranging from 2 to 7 years once the related project has been completed and deployed for customer use. For the fiscal years ended June 30, 2017, 2016 and 2015, we expensed $3.8 million, $2.5 million and $1.3 million of capitalized internal use software costs associated with our SaaS-based technology platforms. At June 30, 2017 and 2016, the net carrying value of capitalized internal use software associated with our SaaS-based technology platforms, which is included in property and equipment, net on our consolidated balance sheets, was $15.7 million and $12.9 million, respectively.

Revenue Recognition

Software Arrangements

We recognize revenue on our software license arrangements when four basic criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is probable. We consider a fully executed agreement or a customer purchase order to be persuasive evidence of an arrangement. Delivery is deemed to have occurred upon transfer of the product to the customer or the completion of services rendered. We consider the arrangement fee to be fixed and determinable if it is not

 

63


Table of Contents

subject to adjustment and if the customer has not been granted extended payment terms. Excluding our long term contract arrangements where revenue is recorded on a percentage of completion basis, extended payment terms are deemed to be present when any portion of the software license fee is due in excess of 90 days after the date of product delivery. In arrangements that contain extended payment terms, software revenue is recorded as customer payments become contractually due, assuming all other revenue recognition criteria have been met. We consider the arrangement fee to be probable of collection if our internal credit analysis indicates that the customer will be able to pay contractual amounts as they become due.

Our software arrangements often contain multiple revenue elements, such as software licenses, professional services and post-contract customer support. For multiple element software arrangements which qualify for separate element treatment, revenue is recognized for each element when each of the four basic criteria is met which, excluding post-contract customer support, is typically upon delivery. Revenue for post-contract customer support agreements is recognized ratably over the term of the agreement, which is generally one year. Revenue is allocated to each element, excluding the software license, based on vendor specific objective evidence (VSOE). VSOE is limited to the price charged when the element is sold separately or, for an element not yet being sold separately, the price established by management having the relevant authority. We do not have VSOE for our software licenses since they are seldom sold separately. Accordingly, revenue is allocated to the software license using the residual value method. Under the residual value method, revenue equal to VSOE of each undelivered element is recognized upon delivery of that element. Any remaining arrangement fee is then allocated to the software license. This has the effect of allocating any sales discount inherent in the arrangement to the software license fee.

Certain of our software arrangements require significant customization and modification and involve extended implementation periods. These arrangements do not qualify for separate element revenue recognition treatment as described above, and instead must be accounted for under contract accounting. Under contract accounting, companies must select from two generally accepted methods of accounting: the completed contract method and the percentage of completion method. The completed contract method recognizes revenue and costs upon contract completion, and all project costs and revenues are reported as deferred items in the balance sheet until that time. The percentage of completion method recognizes revenue and costs on a contract over time, as the work progresses.

We use the percentage of completion method of accounting for our long-term contracts, as we believe that we can make reasonably reliable estimates of progress toward completion. Progress is measured based on labor hours, as measured at the end of each reporting period, as a percentage of total expected labor hours. Accordingly, the revenue we record in any reporting period for arrangements accounted for on a percentage of completion basis is dependent upon our estimates of the remaining labor hours that will be incurred in fulfilling our contractual obligations. Our estimates at the end of any reporting period could prove to be materially different from final project results, as determined only at subsequent stages of project completion. To mitigate this risk, we solicit the input of our project professional staff on a monthly basis, as well as at the end of each financial reporting period, for purposes of evaluating cumulative labor hours incurred and verifying the estimated remaining effort to completion; this ensures that our estimates are always based on the most current projections available.

Non-Software Arrangements

For arrangements governed by general revenue recognition literature, such as with our SaaS offerings or equipment and supplies only sales, we recognize revenue when four basic criteria are met. These criteria are similar to those governing software transactions: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability is reasonably assured. For our SaaS offerings, revenue is generally recognized on a subscription or transaction basis over the period of performance.

For arrangements consisting of multiple elements, revenue is allocated to each element based on a selling price hierarchy. The selling price of each element is based on VSOE if available, third-party evidence (TPE) if

 

64


Table of Contents

VSOE is not available or estimated selling price (ESP) if neither VSOE nor TPE are available. The residual method of allocation in a non-software arrangement is not permitted and, instead, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable based on the proportion of each deliverable’s selling price to the total arrangement fee. We are typically unable to establish TPE, which is based on the selling price charged by unrelated third-party vendors for similar deliverables when they are sold separately, as we are generally unable to obtain sufficient information on actual vendor selling prices to substantiate TPE. The objective of ESP is to estimate the price at which we would transact if the deliverable were sold separately rather than as part of a multiple element arrangement. Our determination of ESP considers several factors including actual selling prices for similar transactions, gross margin expectations and our ongoing pricing strategy. We formally analyze our ESP determinations on at least an annual basis.

Whether a deliverable represents a separate unit of accounting, thus resulting in discrete revenue recognition as the revenue recognition criteria for that deliverable are met, is dependent on whether the deliverable has value to the customer on a standalone basis. A deliverable has standalone value if it is sold separately by us or any other vendor or if the deliverable could be resold by the customer. Additionally, in an arrangement that includes a general right of return related to delivered items, delivery or performance of any undelivered items must be considered probable and substantially within our control.

We periodically charge up-front fees related to installation and integration services in connection with certain of our SaaS offerings. These fees typically do not have stand-alone value and are deferred and recognized as revenue ratably over the estimated customer relationship period (generally five to ten years). The revenue recognition period associated with these fees normally commences upon customer implementation.

Contract origination costs and incremental direct costs are expensed as incurred.

Arrangements Including Both Software and Non-Software Deliverables

Periodically we will enter an arrangement that contains both software and non-software deliverables. In such a transaction, the arrangement consideration is allocated to the software deliverables and non-software deliverables as a group, using the relative selling prices of each of the deliverables, by following the aforementioned selling price hierarchy. After this allocation is completed, the arrangement consideration allocated to the software deliverables is further allocated using the residual value method described above.

Regardless of the allocation methodology or the nature of the deliverables, we limit the amount of revenue that can be recognized for delivered items to the amount that is not contingent on future deliverables or subject to customer specific return or refund rights.

Earnings per Share

We report both basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding and excludes the dilutive effect of warrants, stock options or any other type of convertible securities. Diluted earnings per share is calculated based on the weighted average number of shares of common stock outstanding and the dilutive effect of stock options, warrants and other types of convertible securities are included in the calculation. Dilutive securities are excluded from the diluted earnings per share calculation if their effect is anti-dilutive.

Comprehensive Income or Loss

Comprehensive income or loss includes all changes in equity during a period from non-owner sources, such as net income or loss, foreign currency translation adjustments, certain pension adjustments and unrealized gains and losses on available for sale securities.

 

65


Table of Contents

Note 3—Recent Accounting Pronouncements

Recently Adopted Pronouncements

Development Stage Entities: In June 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update which eliminated the definition of a development stage entity and the financial reporting requirements specific to development stage entities. The update also eliminated an exception that previously existed in the consolidation accounting standard for determining whether a development stage entity had sufficient equity at risk and therefore was a variable interest entity (VIE). We adopted this standard effective July 1, 2016. Upon adoption, we were required to re-assess whether one of the entities in which we have an equity investment is a VIE. Based on that re-assessment, we concluded that this entity is a VIE, but that we are not the primary beneficiary and therefore we are not required to consolidate the VIE. Accordingly, the adoption of this standard did not have a material impact on our financial statements.

Going Concern: In August 2014, the FASB issued an accounting standard update which requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This standard is applicable for our annual reporting in fiscal year 2017 and interim periods beginning July 1, 2017. The adoption of this standard did not have a material impact on our financial statements.

Cloud Computing Arrangements: In April 2015, the FASB issued an accounting standard update which provides guidance as to whether a cloud computing arrangement (e.g., software as a service, platform as a service, infrastructure as a service, and other similar arrangements) includes a software license and, based on that determination, how to account for such arrangements. We adopted this standard effective July 1, 2016 on a prospective basis. The adoption of this standard did not have a material impact on our financial statements. In December 2016, the FASB issued a technical update to this standard, clarifying that any software license within the scope of this accounting standard shall be accounted for as the acquisition of an intangible asset by the licensee. The technical update to this standard is effective for us on July 1, 2017. Upon adoption, software licenses will be classified as an intangible asset rather than as a component of property and equipment in our consolidated balance sheet. We do not anticipate any impact to our statement of comprehensive loss or cash flows.

Debt Issuance Costs - Classification: In April 2015, the FASB issued an accounting standard update which requires that debt issuance costs be presented in the balance sheet as a direct reduction to the carrying value of the debt. We retrospectively adopted this standard effective July 1, 2016 and reclassified debt issuance costs from non-current assets to convertible senior notes in our consolidated balance sheets in all periods presented. Deferred debt issuance costs were approximately $0.5 million at June 30, 2017 and $1.7 million at June 30, 2016. Debt issuance costs related to our Credit Facility are classified as other assets in our consolidated balance sheets for all periods presented.

Deferred Taxes - Classification: In November 2015, the FASB issued an accounting standard update which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in the balance sheet. As a result, each separate tax jurisdiction will have one net tax position, either a noncurrent deferred tax asset or a noncurrent deferred tax liability. The standard is effective for us on July 1, 2017, with early adoption permitted. We elected to adopt this standard as of July 1, 2016 on a prospective basis. If we had adopted the standard retrospectively, the impact would have resulted in a $6.2 million reduction to current deferred tax assets and noncurrent deferred tax liabilities in our June 30, 2016 balance sheet. The adoption of this standard did not have an impact on our statements of comprehensive loss or cash flows.

Accounting Pronouncements to be Adopted

Revenue Recognition: In May 2014, the FASB issued an accounting standard update which provides for new revenue recognition guidance, superseding nearly all existing revenue recognition guidance. The core principle of the new guidance is to recognize revenue when promised goods or services are transferred to

 

66


Table of Contents

customers, in an amount that reflects the consideration to which the vendor expects to receive for those goods or services. The new standard is expected to require significantly more judgment and estimation within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations. The new standard is also expected to significantly increase the financial statement disclosure related to revenue recognition. This standard is currently effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019 (fiscal year 2019)) using one of two methods of adoption, subject to the election of certain practical expedients: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined within the standard; or (ii) modified retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application inclusive of certain additional disclosures.

We are continuing to evaluate the expected impact of this standard on our consolidated financial statements and currently plan to adopt the standard using the modified retrospective method. While our assessment of the impact of this standard is not complete, we currently believe that the most significant impact will be in certain areas:

 

    Under the new standard, vendor specific objective evidence (VSOE) will no longer be required to determine the fair value of elements in arrangement. As a result, the absence of VSOE in certain software arrangements will no longer result in strict revenue deferral. Absent a change in how we license our products, we believe that this will result in greater up-front recognition of software revenue for certain of our license arrangements.

 

    Under the new standard, certain expenses we incur will require deferral and recognition over the period in which revenue is recognized, subject to certain exceptions. We believe that this will result in the deferral of certain fulfillment costs associated with our SaaS offerings which would then be recognized as expense over a multi-year period; such costs are expensed directly as incurred today.

 

    Under the new standard, costs to obtain a contract, including sales commissions, will be capitalized and amortized on a basis that is consistent with the transfer of goods and services to its customer. We anticipate that this will result in the deferral of certain commission related costs that, today, are expensed as incurred.

 

    Significantly enhanced financial statement disclosures related to revenue, including information related to the allocation of transaction price across undelivered performance obligations.

However, we are unable to quantify the impact of these outcomes at this time, nor can we ensure that our continuing analysis and interpretation of the standard will result in these financial reporting outcomes.

Financial Instruments - Classification and Measurement: In January 2016, the FASB issued an accounting standard update which requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in earnings. Under the standard, entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available for sale as a component of other comprehensive income. Subject to certain exceptions, entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, plus or minus adjustments for observable price changes, with all such changes recognized in earnings. This new standard does not change the guidance for classifying and measuring investments in debt securities and loans. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year 2019) on a prospective basis. We are currently evaluating the anticipated impact of this standard on our financial statements. We have certain cost method investments of $7.7 million at June 30, 2017, and to the extent that there are observable price changes following the date of adoption, the accounting for these investments could be affected.

Leases: In February 2016, the FASB issued an accounting standard update which requires balance sheet recognition of a lease liability and a corresponding right-of-use asset for all leases with terms longer than twelve months. The pattern of recognition of lease related revenue and expenses will be dependent on its classification.

 

67


Table of Contents

The updated standard requires additional disclosures to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This standard is effective for us on July 1, 2019 (the first quarter of our fiscal year ending June 30, 2020) with early adoption permitted; adoption is on a modified retrospective basis. We anticipate that the adoption of this standard will have a material impact to our consolidated balance sheet due to the recognition of right of use assets and lease liabilities; however, we are still evaluating the anticipated impact of this standard on our financial statements.

Share-Based Compensation: In March 2016, the FASB issued an accounting standard update intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact of excess tax benefits and tax deficiencies, accounting for forfeitures, statutory tax withholding requirements and the presentation of excess tax benefits in the statement of cash flows. This standard is effective for us on July 1, 2017 (the first quarter of our fiscal year ending June 30, 2018 (fiscal year 2018)) with early adoption permitted. We are adopting this update under a modified retrospective method. We currently have significant excess tax benefits that have not been reflected as a component of our deferred tax assets since, under current accounting standards, these amounts are recognized only when they provide an actual reduction to currently payable income taxes. Under the new standard, we will be required to recognize excess tax benefits as a component of our deferred tax assets, subject to an assessment of whether such amounts are recoverable. We anticipate that the substantial majority of any increase to our deferred tax assets as a result of these excess tax benefits will be offset with a valuation allowance. The new standard allows companies to make an accounting policy election to either estimate expected forfeitures or account for them as they occur, and we have elected to continue to estimate forfeitures. Starting in the first quarter of fiscal year 2018, we will recognize all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event; any excess tax benefits will be presented as an operating activity in the statements of cash flows.

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 (the first quarter of our fiscal year ending June 30, 2021) with early application permitted. We are currently evaluating the anticipated impact of this standard on our financial statements.

Statement of Cash Flows: In August and November of 2016, the FASB issued updates to the accounting standard which addresses the classification and presentation of certain cash receipts, cash payments and restricted cash in the statement of cash flows. The standard is effective for us on July 1, 2018 (the first quarter of our fiscal year 2019) and requires a retrospective approach. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the anticipated impact of this standard on our financial statements.

Consolidation: In October 2016, the FASB issued an accounting standard update to remove the requirement that a single decision maker consider, in its assessment of primary beneficiary, its indirect interest held through related parties under common control to be the equivalent of a direct interest in the VIE. Instead, indirect interest held through related parties under common control will be included in the primary beneficiary assessment based on proportionate basis, consistent with the indirect interest held through other parties. The standard is effective for us on July 1, 2017 (the first quarter of our fiscal year 2018), with early application permitted. We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Business Combinations: In January 2017, the FASB issued an accounting standard update to clarify the definition of a business and to provide guidance on determining whether an integrated set of assets and activities constitutes a business. The standard is effective for us July 1, 2018 (the first quarter of our fiscal year 2019), on a prospective basis. We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

 

68


Table of Contents

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 (the first quarter of our fiscal year ending June 30, 2021) on a prospective basis, with early adoption permitted for periods beginning on or after January 1, 2017. We are currently evaluating the impact of this standard on our financial statements and the timing of adoption.

Defined Benefit Plan Expenses: In March 2017, the FASB issued an accounting standard update that changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components of net periodic defined benefit cost). Under the revised standard, the operating expense component will be reported with similar compensation costs, while the non-operating components will be reported in Other Income and Expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as property, plant and equipment. This standard is effective for us on July 1, 2018 (the first quarter of our fiscal year ending June 30, 2019). We do not currently believe that the adoption of this standard will have a material impact on our financial statements.

Note 4—Fair Value

Fair Value 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 June 30, 2017 and June 30, 2016, our assets and liabilities measured at fair value on a recurring basis were as follows:

 

    June 30, 2017     June 30, 2016  
    Fair Value Measurements Using
Input Types
          Fair Value Measurements Using
Input Types
       

(in thousands)

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
    (in thousands)  

Money market funds (cash and cash equivalents)

  $     593     $     $         —     $ 593     $     117     $     $       —     $ 117  

Available for sale securities

             

Debt

             

U.S. Corporate

  $     $     1,906     $     $     1,906     $     $ 9,580     $     $ 9,580  

Residential mortgage-backed

                                  9,604             9,604  

Government - U.S.

                                  15,962             15,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale securities

  $     $ 1,906     $     $ 1,906     $     $   35,146     $     $   35,146  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

69


Table of Contents

Fair Value of Financial Instruments

We have certain financial instruments which consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and the Notes as more fully described in Note 10 Indebtedness. Fair value information for each of these instruments is as follows:

 

    Cash and cash equivalents, accounts receivable and accounts payable fair value approximates their carrying values, due to the short-term nature of these instruments.

 

    Marketable securities classified as held to maturity are recorded at amortized cost, which at June 30, 2017 and June 30, 2016, approximated fair value.

 

    Marketable securities classified as available for sale are recorded at fair value. Unrealized gains and losses are included as a component of other accumulated comprehensive loss in shareholders’ equity, net of tax. We use the specific identification method to determine any realized gains or losses from the sale of our marketable securities classified as available for sale.

 

    The carrying value of assets related to deposits we have made to fund future requirements associated with Israeli severance arrangements was $1.5 million and $1.4 million at June 30, 2017 and June 30, 2016, respectively, which approximated their fair value.

 

    We have certain other investments accounted for at cost. The carrying value of these investments was $7.7 million at both June 30, 2017 and June 30, 2016 and they are reported as a component of our other assets. These investments are recorded at cost, less any write-downs for other-than-temporary impairment charges. To determine the fair value of these investments, we use all available financial information including information based on recent or pending third-party equity investments in these entities. In certain instances, a cost method investment’s fair value may not be estimated if there are no identified events or changes in circumstances that would indicate a significant adverse effect on the fair value of the investment and to do so would be impractical, and as a result, we have not estimated the fair value of these investments.

 

    The Notes were recorded at $133.3 million upon issuance, which reflected their principal value less the fair value of the embedded conversion option (Conversion Feature). The carrying value (net of debt issuance costs) of the Notes, $183.7 million at June 30, 2017, will be accreted over the remaining term to maturity to their principal value of $189.8 million. The fair value of the Notes (inclusive of the Conversion Feature) was approximately $192.2 million as of June 30, 2017. We estimated the fair value of the Notes by reference to quoted market prices (Level 1); however, the Notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which the Notes could be retired or transferred.

Note 5—Other Investments

In December 2015, we made a $3.5 million investment in preferred stock of a privately held, early-stage technology company. We have the ability to exercise significant influence over this company; however, we have no ability to exercise control. Investments in common stock or in-substance common stock, through which an investor has the ability to exercise significant influence over the operating or financial policies of the investee, are accounted for under the equity method of accounting. In-substance common stock is an investment that has risk and reward characteristics that are substantially similar to an entity’s common stock. The preferred stock underlying our investment is not in-substance common stock as its terms include a substantive liquidation preference not available to common stockholders. Accordingly, we accounted for our investment under the cost method of accounting, subject to periodic review for impairment. Impairment losses, to the extent occurring, would be recorded as an operating expense in the period incurred. Our maximum investment exposure, which is determined based on the cost of our investment, is $3.5 million as of June 30, 2017. There were no indicators of impairment identified as of June 30, 2017.

We concluded that this company is a VIE as it lacks sufficient equity to finance its activities. However, we also concluded that we are not the primary beneficiary of the VIE as we do not have the power to exercise control

 

70


Table of Contents

or direct the activities that most significantly impact the VIE’s economic performance. As we have determined we are not the primary beneficiary, consolidation of the VIE is not required.

Note 6—Property and Equipment

Property and equipment consisted of the following:

 

    June 30,  
    2017     2016  
    (in thousands)  

Land

  $ 246     $ 251  

Building and Improvements

    17,054       17,774  

Furniture and fixtures

    6,573       6,015  

Technical equipment

    42,491       45,590  

Software

    54,489       46,505  

Motor Vehicles

    31       30  
 

 

 

   

 

 

 

Total property and equipment, gross

    120,884       116,165  

Less: Accumulated depreciation and amortization

    65,577       65,136  
 

 

 

   

 

 

 

Total property and equipment, net

  $     55,307     $     51,029  
 

 

 

   

 

 

 

Note 7—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 whenever indicators of potential impairment arise.

During fiscal year 2016, we identified our Intellinx reporting unit as being at heightened risk of impairment. In the second quarter of fiscal year 2017, based on continued shortfalls of revenue against our revenue projections, we performed the first step of the goodwill impairment test for this reporting unit and determined that its fair value was lower than its carrying value. Accordingly, we performed the second step of the goodwill impairment test which compared the estimated fair value of this reporting unit’s goodwill to its carrying value. As a result of this test, we recorded a non-cash, pretax, goodwill impairment charge of $7.5 million. The goodwill impairment charge does not affect our liquidity or the financial covenants in any of our outstanding debt agreements. The primary driver of this impairment charge was related to revenue estimates being below the revenue estimates we made at the time of our Intellinx acquisition (January 2015). Our Intellinx reporting unit is a component of our Other reportable segment.

In calculating the goodwill impairment charge recorded during the second quarter of fiscal year 2017, we completed a discounted cash flow model associated with our Intellinx business, including the amount and timing of future expected cash flows, tax attributes, technology and customer attrition rates, a terminal value growth rate and an appropriate market-participant, risk-adjusted, weighted average cost of capital in each case using estimates that we considered to be reasonable and appropriate. The overall fair value estimate utilized a combination of a discounted cash flow methodology and a consideration of market multiples.

Prior to performing the goodwill impairment test, we performed a test of recoverability for the finite lived intangible assets related to the Intellinx reporting unit, including the core technology intangible asset. The test of recoverability for these assets is based on an undiscounted cash flow model. Based on that analysis, we concluded the finite lived intangible assets were not impaired.

In addition to the aforementioned Intellinx reporting unit goodwill impairment test performed on an interim basis, we also performed our annual impairment test during the fourth quarter of fiscal year 2017. Based on this review, we concluded that there was no additional goodwill impairment, although we believe that the Intellinx reporting unit remains at a heightened risk of impairment.

 

71


Table of Contents

There can be no assurance that there will not be additional 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. At June 30, 2017, the carrying value of goodwill for all of our reporting units was $194.7 million, and the carrying value of goodwill in the Intellinx reporting unit was $4.4 million.

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

 

    As of June 30, 2017  
    Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Value
    Weighted Average
Remaining Life
 
    (in thousands)     (in years)  

Amortized intangible assets:

       

Customer related

  $ 190,965     $ (122,698   $ 68,267       8.7  

Core technology

    130,572       (74,452     56,120       8.8  

Other intangible assets

    20,591       (15,691     4,900       6.6  

Capitalized software development costs

    16,304       (3,423     12,881       5.0  
 

 

 

   

 

 

   

 

 

   

Total

  $ 358,432     $ (216,264   $ 142,168    
 

 

 

   

 

 

     

Unamortized intangible assets:

       

Goodwill

        194,700    
     

 

 

   

Total intangible assets

      $ 336,868    
     

 

 

   

 

    As of June 30, 2016  
    Gross Carrying
Amount
    Accumulated
Amortization
    Net Carrying
Value
    Weighted Average
Remaining Life
 
    (in thousands)     (in years)  

Amortized intangible assets:

       

Customer related

  $ 190,549     $ (110,356   $ 80,193       9.6  

Core technology

    130,434       (64,591     65,843       9.5  

Other intangible assets

    20,469       (13,320     7,149       6.1  

Capitalized software development costs

    12,993       (1,248     11,745       6.0  
 

 

 

   

 

 

   

 

 

   

Total

  $ 354,445     $ (189,515   $ 164,930    
 

 

 

   

 

 

     

Unamortized intangible assets:

       

Goodwill

        202,028    
     

 

 

   

Total intangible assets

      $ 366,958    
     

 

 

   

 

72


Table of Contents

Estimated amortization expense for fiscal year 2018 and subsequent fiscal years for acquired intangible assets is as follows:

 

     (in thousands)  

2018

   $         20,628  

2019

     18,680  

2020

     16,589  

2021

     15,024  

2022

     13,062  

2023 and thereafter

     45,304  

Estimated amortization expense for fiscal year 2018 and subsequent fiscal years for capitalized software development costs using a straight-line methodology is stated below. Each period 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.

 

     (in thousands)  

2018

   $         2,576  

2019

     2,576  

2020

     2,576  

2021

     2,576  

2022

     2,577  

2023 and thereafter

      

The following table represents a rollforward of our goodwill balances, by reportable segment:

 

    Cloud
Solutions
    Digital
Banking
    Payments and
Transactional
Documents
    Other     Total  

Balance at June 30, 2015

  $ 97,861     $ 35,880     $ 64,540     $ 17,079     $ 215,360  

Purchase accounting adjustments

                      (1,356     (1,356

Impact of foreign currency translation

    (8,288           (3,688           (11,976
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

  $ 89,573     $ 35,880     $ 60,852     $ 15,723     $ 202,028  

Goodwill impairment

                      (7,529     (7,529

Impact of foreign currency translation

    496             (295           201  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017 (1)

  $ 90,069     $ 35,880     $ 60,557     $ 8,194     $ 194,700  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Other goodwill balance is net of $7.5 million accumulated impairment losses.

 

73


Table of Contents

Note 8—Accrued Expenses

Accrued expenses consisted of the following:

 

    June 30,  
    2017     2016  
    (in thousands)  

Employee compensation and benefits

  $ 16,092     $ 13,665  

Professional fees

    2,163       1,528  

Accrued income taxes payable

    1,172       1,181  

Sales and value added taxes

    1,790       817  

Accrued royalties

    287       323  

Accrued interest

    237       237  

Other

    7,438       9,761  
 

 

 

   

 

 

 

Total accrued expenses

  $ 29,179     $ 27,512  
 

 

 

   

 

 

 

Note 9—Commitments and Contingencies

Leases

We lease our principal office facility in Portsmouth, NH under a non-cancelable operating lease expiring in 2027. In addition, we have two five-year options to further extend the term of this lease. Rent expense is fixed for the base term of the lease. We are also required to pay certain incremental operating costs above the base rent.

We lease office space in certain other cities worldwide under operating leases that expire at various dates. In addition to the base rent, we are typically also responsible for a portion of the operating expenses associated with these facilities. Where operating leases contain rent escalation clauses or certain types of landlord concessions, the estimated financial effect of these items are included in the determination of the straight-line expense over the lease term.

Rent expense, net of sublease income, for the fiscal years ended June 30, 2017, 2016, and 2015 was $6.7 million, $6.4 million and $6.9 million, respectively. Sublease income for the fiscal years ended June 30, 2017, 2016, and 2015 was insignificant.

Future minimum annual rental commitments under our facilities, equipment, and vehicle leases at June 30, 2017 are as follows:

 

     (in thousands)  

2018

   $ 5,261  

2019

     4,762  

2020

     4,150  

2021

     3,659  

2022

     2,945  

2023 and thereafter

     6,470  
  

 

 

 
   $         27,247  
  

 

 

 

Long Term Service Arrangements

We have entered into service agreements with initial minimum commitments ranging between one and five years that expire between the fiscal years 2018 and 2021, primarily for software licenses, hosting services and

 

74


Table of Contents

disaster recovery services. In addition to the base terms, we have certain options to extend the terms of the service agreements. Payments are fixed for the initial terms and are subject to increase in the event that we elect to extend the service.

Future minimum annual commitments under our long term service arrangements as of June 30, 2017 are as follows:

 

    (in thousands)  

2018

  $ 8,011  

2019

    4,350  

2020

    603  

2021

    4  
 

 

 

 
  $         12,968  
 

 

 

 

Legal Matters

During fiscal year 2016, we agreed to indemnify a customer against costs it may incur as a result of a lawsuit filed against them for alleged patent infringement related to certain technology licensed from us, which we license and resell from an outside supplier. We in turn received indemnification from the outside supplier. Bottomline was not named as a party to this lawsuit. In September 2016, we were notified by the supplier that the litigation had been resolved. We were not a party to the settlement, and neither we nor our customer incurred any monetary or other damages in connection therewith.

In May 2017, we received notification from a customer alleging a warranty claim associated with software we licensed to them in September 2013. Their claim seeks recovery of $1.269 million in software, professional services and support fees, inclusive of related sales tax. We believe the claim is without merit and intend to vigorously defend ourselves. At June 30, 2017 we had not accrued for any losses associated with this matter as we do not believe a loss is probable.

We are, from time to time, a party to legal proceedings and claims that arise out of the ordinary course of our business. We are not currently a party to any material legal proceedings.

Note 10—Indebtedness

Credit Agreement

On December 9, 2016, we (as borrower) and certain of our existing and future domestic material restricted subsidiaries (the Guarantors) entered into a credit agreement (the Credit Agreement) with Bank of America, N.A. and certain other lenders (the Lenders) a five-year revolving credit facility in the amount of up to $300 million (the Credit Facility). We intend to finance the repayment of the principal balance of the Notes through a combination of cash on hand and with borrowings under the Credit Facility.

Under the Credit Agreement, we also have the right to request an increase of the aggregate commitments under the Credit Facility by up to $150 million without the consent of any Lenders not participating in such increase, subject to specified conditions.

The proceeds of the Credit Facility may be used for lawful corporate purposes of Bottomline and its subsidiaries, including acquisitions, share buybacks, capital expenditures, the repayment or refinancing of indebtedness, redemption of the Notes and general corporate purposes. The Credit Facility is available for the issuance of up to $20 million of letters of credit and up to $20 million of swing line loans. The Credit Facility will terminate on December 8, 2021.

Loans outstanding under the Credit Facility will bear interest, at our option, at either (i) a Eurodollar rate plus a margin of between 1.50% and 2.25% (which is initially 1.75%) based on the Consolidated Net Leverage

 

75


Table of Contents

Ratio (as defined in the Credit Agreement), or (ii) a base rate plus a margin of between 0.50% and 1.25% (which is initially 0.75%) based on the Consolidated Net Leverage Ratio. Loans under the Credit Agreement may be prepaid at par and commitments under the Credit Agreement may be reduced at any time, in whole or in part, without premium or penalty (except for LIBOR breakage costs).

The Credit Facility is guaranteed by the Guarantors and is secured by substantially all of our domestic assets and those of the Guarantors, including a pledge of all of the shares of capital stock of the Guarantors and 65% of the shares of the capital stock of our first-tier foreign subsidiaries or those of any Guarantor, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, any real property or the capital stock or any assets of any unrestricted subsidiary.

The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to, material adverse events, specified restrictions on indebtedness, liens, investments, acquisitions, sales of assets, dividends and other restricted payments, and transactions with affiliates. We are required to comply with (a) a maximum consolidated net leverage ratio of 3.75 to 1.00, stepping down to 3.50 to 1.00 for the quarter ending June 30, 2018; (b) a minimum consolidated interest coverage ratio of 3.00 to 1.00; and (c) a minimum liquidity requirement at all times that the Notes are outstanding, where the outstanding principal amount of the Notes must not exceed the sum of the unutilized availability under the Credit Agreement plus our domestic cash and marketable securities.

The Credit Agreement also contains customary events of default and related cure provisions. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies on behalf of the Lenders, including the acceleration of any outstanding loans.

Interest Rate Swap

On July 10, 2017, we entered into an interest rate swap agreement to hedge our exposure to market risk resulting from fluctuations in interest rates. The agreement has a notional debt value of $100.0 million, is effective as of December 1, 2017 and expires on December 1, 2021. The notional amount of the swap will match the corresponding principal amount of the borrowings under the Credit Agreement with the Lenders. During the term of the agreement, we have a fixed interest rate of 1.9275 percent on the notional amount and Citizens Bank, National Association, as counterparty to the agreement, will pay us interest at a floating rate based on the 1 month USD-LIBOR-BBA swap rate on the notional amount. Interest payments are made quarterly on a net settlement basis.

The hedge will be measured for effectiveness at the end of each of our fiscal quarters. If a derivative qualifies for hedge accounting, changes in fair value of the hedge instrument will be recognized in accumulated other comprehensive loss and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivatives will be recognized in earnings.

Convertible Senior Notes

On December 12, 2012, we issued $189.8 million aggregate principal amount of the Notes, inclusive of the underwriters’ exercise in full of their over-allotment option of $24.8 million. Cash interest at a rate of 1.50% per year began to accrue on December 12, 2012 and is payable semi-annually on June 1 and December 1 of each year beginning on June 1, 2013. We received net proceeds from the offering of approximately $167.3 million after adjusting for debt issue costs, including the underwriting discount, and the net cash used to purchase the Note Hedges and sell the Warrants which are discussed below.

The Notes were issued under an indenture dated December 12, 2012 (the Base Indenture) by and between us and The Bank of New York Mellon Trust Company, N.A., as Trustee and a First Supplemental Indenture dated December 12, 2012 (the First Supplemental Indenture) by and between us and the Trustee (the Base Indenture and the First Supplemental Indenture are collectively referred to as the Indenture). There are no financial or operating covenants relating to the Notes.

 

76


Table of Contents

The Notes are senior unsecured obligations of ours and rank senior in right of payment to any future unsecured indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of our existing and future unsecured indebtedness that is not subordinated. The Notes are effectively junior in right of payment to any of our secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of our subsidiaries. Prior to this offering, neither we nor our subsidiaries had any outstanding indebtedness for borrowed money. The Indenture does not limit the amount of debt that we or our subsidiaries may incur. The Notes are not guaranteed by us or any of our subsidiaries.

Holders may convert their Notes at their option, prior to the close of business on the business day immediately preceding June 1, 2017, in multiples of $1,000 principal amount, only under the following circumstances:

 

    during any calendar quarter commencing after the calendar quarter ending on March 31, 2013 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

    during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of the convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of our common stock and the conversion rate on each trading day; or

 

    upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of our assets.

Effective June 1, 2017 and until the close of business on the second scheduled trading day immediately preceding the maturity date of December 1, 2017, holders may convert their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

The conversion rate for the Notes is initially 33.3042 shares per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $30.03 per share of our common stock). The conversion rate is subject to customary adjustment for certain events as described in the Indenture.

The principal balance of the Notes is always required to be settled in cash. However, we are permitted at our election to settle any conversion obligation in excess of the principal portion in cash, shares of our common stock, or a combination of cash and shares of our common stock.

We may not redeem the Notes prior to their maturity date. If we undergo a fundamental change (as described in the Indenture), subject to certain conditions, holders may require us to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture contains customary events of default with respect to the Notes and provides that upon certain events of default occurring and continuing, the Trustee may, and the Trustee at the request of such holders of at least 25% in principal amount of the convertible notes shall, declare 100% of the principal of and accrued and unpaid interest, if any, on the Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

Under limited circumstances, we may be required to pay contingent interest on the Notes as a result of failure to comply with the reporting obligations in the Indenture or failure to file required Securities and Exchange Commission documents and reports. When applicable, the contingent interest payable per $1,000 principal amount is 0.25% per annum over the applicable term as provided under the Indenture. The contingent

 

77


Table of Contents

interest features of the Notes are embedded derivative instruments. The estimated fair value of the contingent interest features of the Notes was zero at issuance and at June 30, 2017, as the likelihood of any liability being incurred under these provisions was deemed remote and, to the extent occurring, the time period during which a contingent interest charge would apply is projected to be short.

The Notes were recorded upon issuance using a residual method of valuation, meaning since the Conversion Feature was initially a derivative instrument recorded at fair value, we allocated debt proceeds to the Conversion Feature based on the fair value of that instrument and the residual proceeds were allocated to the Notes. The carrying amount of the Notes will be accreted to the principal amount over the remaining term to maturity and we will record a corresponding charge to interest expense.

The net carrying amount of the Notes at June 30, 2017 was as follows:

 

     (in thousands)  

Principal amount

   $ 189,750  

Unamortized discount

     (5,575

Unamortized debt issuance costs

     (493
  

 

 

 

Net carrying value

   $         183,682  
  

 

 

 

We incurred certain third party costs in connection with our issuance of the Notes, principally related to underwriting and legal fees, which are being amortized to interest expense ratably over the five-year term of the Notes.

The following table sets forth total interest expense related to the Notes:

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

Contractual interest expense (cash)

   $ 2,846     $ 2,846     $ 2,846  

Amortization of debt discount (non-cash)

     12,641       11,774       10,965  

Amortization of debt issue costs (non-cash)

     1,184       1,184       1,184  
  

 

 

   

 

 

   

 

 

 
   $   16,671     $   15,804     $   14,995  
  

 

 

   

 

 

   

 

 

 

Effective interest rate of the liability component

     8.16     7.70     7.28
  

 

 

   

 

 

   

 

 

 

Note Hedges

In December 2012, we entered into privately negotiated transactions to purchase hedge instruments (the Note Hedges), covering approximately 6.3 million shares of our common stock. The Note Hedges are subject to anti-dilution provisions substantially similar to those of the Notes, have a strike price that corresponds to the conversion price of the Notes, are exercisable by us upon any conversion under the Notes and expire on December 1, 2017.

The Note Hedges are generally expected to reduce the potential dilution to our common stock (or, in the event the Conversion Feature is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Notes. The cost of the Note Hedges, $42.3 million, is expected to be tax deductible as an original issue discount over the life of the Notes, as the Notes and the Note Hedges represent an integrated debt instrument for tax purposes.

The Note Hedges are transactions that are separate from the terms of the Notes and the Warrants (discussed below), and holders of the Notes and the Warrants have no rights with respect to the Note Hedges.

 

78


Table of Contents

Warrants

In December 2012, we received aggregate proceeds of $25.8 million, net of issue costs, from the sale of warrants (the Warrants), for the purchase of up to 6.3 million shares of our common stock, subject to antidilution adjustments, at a strike price of $40.04 per share. The Warrants are exercisable in equal tranches over a period of 150 days beginning on March 1, 2018, and ending on October 18, 2018.

The Warrants are transactions that are separate from the terms of the Notes and the Note Hedges, and holders of the Notes and Note Hedges have no rights with respect to the Warrants.

Note 11—Derivative Instruments

Our derivative instruments for the fiscal year ended June 30, 2017 consisted of the Note Hedges, Conversion Feature and Warrants as discussed in Note 10 Indebtedness. As of June 30, 2017, each of these instruments continued to meet the classification requirements for inclusion within stockholders’ equity and as such they were not subject to fair value re-measurement. We are required, for the remaining term of the Notes, to assess whether we continue to meet the stockholders’ equity classification requirements. If in any future period we failed to satisfy those requirements, we would be required to reclassify the derivative instruments out of stockholders’ equity, to either assets or liabilities depending on their nature, and record those instruments at fair value with changes in fair value reflected in earnings.

Note 12—Postretirement and Other Employee Benefits

Defined Contribution Pension Plans

We have a 401(k) Plan (the Plan), whereby eligible U.S. employees may contribute up to 60% of their eligible compensation, subject to limitations established by the Internal Revenue Code. We may contribute a discretionary matching contribution annually equal to 50% of each such participant’s contribution to the Plan up to the first 5% of their annual eligible compensation. We charged approximately $2.1 million, $1.8 million and $1.8 million to expense in the fiscal years ended June 30, 2017, 2016, and 2015, respectively, associated with our matching contribution for those years.

We have a Group Personal Pension Plan (GPPP) for employees in the UK, whereby eligible employees may contribute a portion of their compensation, subject to their age and other limitations established by HM Revenue & Customs. We contribute 3% of the employee’s annual compensation as long as the individual contributes a minimum of 1% of their annual compensation to the GPPP. We charged approximately $1.3 million, $1.5 million and $1.2 million to expense in the fiscal years ended June 30, 2017, 2016, and 2015, respectively, under the GPPP.

We have a GPPP related to European employees from our acquisition of Sterci and governed by local regulatory requirements. We contributed approximately $1.4 million in each fiscal year ended June 30, 2017, 2016, and 2015 under the GPPP.

We are required by Australian government regulation to pay a certain percentage, currently 9.5%, of gross salary to a compliant Superannuation Fund for the benefit of our Australian employees. We charged approximately $0.1 million, $0.1 million and $0.2 million to expense in the fiscal years ended June 30, 2017, 2016, and 2015, respectively, reflecting our contribution to the Superannuation Fund.

We have a retirement contribution plan with respect to our employees in Israel (Israel plan) under which we contribute 5% of each eligible employee’s annual compensation. Employees are entitled to amounts accumulated in the Israel plan upon reaching retirement age. We charged approximately $0.4 million, $0.3 million and $0.2 million to expense in the fiscal years ended June 30, 2017, 2016, and 2015, respectively, related to the Israel plan.

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. As of June 30, 2017, we had 113 employees, which is approximately

 

79


Table of Contents

7% of our workforce, covered under the Swiss pension plan. The Swiss pension plan is governed by the Swiss Federal Law on Occupational Retirements, Survivors’ and Disability Pension plans. We use a third party pension fund, Profond, to administer this plan. We charged approximately $2.8 million, $1.9 million and $1.9 million to expense in the fiscal years ended June 30, 2017, 2016, and 2015, respectively, related to this plan. The annual measurement date for our pension benefits is June 30.

During fiscal year 2014, Profond decreased the pension benefit conversion rates over a five year period from a maximum of 7.2% to 6.8%, which reduced the projected benefit at retirement for all employees. This event qualified as a plan amendment and the prior service credit arising from this amendment was recorded as a component of accumulated other comprehensive income (loss) for the fiscal year ended June 30, 2014. In fiscal year 2018, we expect to recognize approximately $0.1 million as a reduction of our overall net periodic benefit cost related to this plan amendment.

The accumulated benefit obligation (ABO) represents the obligations of a pension plan for past service as of the measurement date, which is the present value of benefits earned to date based on current compensation levels. The Swiss pension plan ABO as of June 30, 2017 was $48.8 million. The projected benefit obligation (PBO) is the ABO adjusted to reflect the impact of future compensation levels. The following table represents the PBO, change in plan assets, funded status and amounts recognized in our consolidated balance sheets at June 30, 2017 and 2016:

 

    June 30,  
    2017     2016  
    (in thousands)  

Change in benefit obligation:

   

Projected benefit obligation at beginning of year

  $ 50,550     $ 41,136  

Service cost

    2,954       2,279  

Interest cost

    123       484  

Actuarial (gain) loss

    (3,889     7,939  

Plan participant contributions

    787       835  

Benefits paid, net of transfers into plan

    228       (266

Effect of foreign currency exchange rate changes

    1,151       (1,857
 

 

 

   

 

 

 

Projected benefit obligation at end of year

  $ 51,904     $ 50,550  
 

 

 

   

 

 

 

Change in plan assets:

   

Fair value of plan assets at beginning of year

  $ 29,268     $ 27,776  

Actual return on plan assets

    2,873       446  

Employer contribution

    1,674       1,734  

Plan participant contributions

    787       835  

Benefits paid, net of transfers into plan

    228       (266

Effect of foreign currency exchange rate changes

    858       (1,257
 

 

 

   

 

 

 

Fair value of plan assets at end of year

  $ 35,688     $ 29,268  
 

 

 

   

 

 

 

Pension liability at end of fiscal year

  $ (16,216   $ (21,282

Accumulated other comprehensive loss consists of the following:

   

Net prior service credit

  $ 817     $ 888  

Net actuarial loss

    (6,214     (12,682
 

 

 

   

 

 

 

Accumulated other comprehensive loss, before income tax

  $     (5,397   $     (11,794
 

 

 

   

 

 

 

 

80


Table of Contents

For the fiscal year ended June 30, 2017, we reclassified approximately $0.6 million of net actuarial loss and $0.1 million of net prior service credit as components of net periodic benefit cost from accumulated other comprehensive loss. For the fiscal year ending June 30, 2018, we expect to reclassify approximately $0.2 million of net actuarial loss and $0.1 million of net prior service credit as components of net periodic benefit cost from accumulated other comprehensive loss.

The net unfunded balance of our defined benefit pension plan is recorded as a non-current liability and all unrecognized gains or losses, net of tax, are recorded as a component of other comprehensive loss within stockholders’ equity at June 30, 2017.

Assumptions:

 

    Fiscal Year Ended June 30,  
        2017             2016             2015      

Weighted-average assumptions used to determine net benefit costs:

     

Discount rate

    0.25     1.25     2.00

Expected return on plan assets

    3.00     3.00     4.00

Rate of compensation increase

    1.50     1.75     2.00

Weighted-average assumptions used to determine benefit obligations at year end:

     

Discount rate

    0.70     0.25     1.25

Expected return on plan assets

    3.50     3.00     3.00

Rate of compensation increase

    1.50     1.50     1.75

The expected return on plan assets is determined by adjusting the market value of assets to reflect the investment gains and losses from prior years. We amortize gains and losses in our net periodic benefit cost which result from actual experience different from that assumed and from changes in assumptions. If, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the projected benefit obligation and the market related value of plan assets, the amortization is that excess divided by the average remaining service period of participating employees expected to receive benefits under the plan.

The fair value of plan assets for the Swiss pension plan was $35.7 million at June 30, 2017. As is customary with Swiss pension plans, the plan assets are invested in a collective fund with multiple employers through a Swiss insurance company. We do not have rights to the individual assets of the plan nor do we have investment authority over the assets of the plan. The collective fund maintains a variety of investment positions primarily in equity securities and highly rated debt securities. The valuation of the collective fund assets as a whole is a Level 3 measurement; however the individual investments of the fund are generally Level 1 (equity securities), Level 2 (fixed income) and Level 3 (real estate) investments. We determine the fair value of the plan assets based on information provided by the collective fund, through review of the collective fund’s annual financial statements, and we further consider whether there are other indicators that the investment balances reported by the fund could be impaired. We concluded that no such impairment indicators were present at June 30, 2017.

The Swiss pension plan’s actual asset allocation as compared to Profond’s target asset allocations for fiscal year 2017 were as follows:

 

   

    Actual    

 

    Target    

Asset Category:

   

Cash and cash equivalents

  9%   2%

Equity Securities

  51%   49%

Fixed Income

  10%   17%

Real Estate

  27%   27%

Other

  3%   5%

 

81


Table of Contents

As of June 30, 2017, the estimated future benefit payments (inclusive of any future service) were as follows:

 

         (in thousands)      

2018

   $ 1,430  

2019

     1,847  

2020

     1,657  

2021

     2,273  

2022

     2,099  

2023-2027

     10,586  

Net periodic pension costs for the Swiss pension plan included the following components:

 

    Fiscal Year Ended June 30,  
        2017             2016             2015      
    (in thousands)  

Components of net periodic cost

     

Service cost

  $ 2,954     $ 2,279     $ 2,300  

Interest cost

    123       484       673  

Net prior service credit

    (89     (90     (93

Net actuarial loss

    648       69        

Expected return on plan assets

    (884     (805     (1,003
 

 

 

   

 

 

   

 

 

 

Net periodic cost

  $     2,752     $     1,937     $     1,877  
 

 

 

   

 

 

   

 

 

 

We expect to make a contribution of approximately $1.6 million to our pension plan in fiscal year 2018, which is the legal funding regulation minimum for the Swiss pension plan.

Israeli Severance Pay

We provide severance payments based on the Israeli severance pay law and certain other circumstances to employees of our Israeli subsidiary.

Our liability for severance pay for service periods prior to January 12, 2015 is calculated based on the most recent employee salaries multiplied by the number of years of employment as of January 12, 2015. We make monthly deposits in insurance funds designed to fund a portion of this overall severance liability and the value of these deposits, inclusive of earnings and losses attributable to these deposits, is recorded as an asset on our consolidated balance sheet. In the event of a separation, the employee receives the balance in deposited funds with any remaining severance liability balance paid by us. As of June 30, 2017, for service periods prior to January 12, 2015, our severance liability (classified in other liabilities within our consolidated balance sheet) was $1.6 million and our severance deposit (classified as other assets within the consolidated balance sheet) was $1.5 million.

Effective January 12, 2015, our statutory severance liability is covered under the provisions of Section 14 of the Israel severance pay law (Section 14). Under Section 14 we are released from any future severance liability once we fund the statutory severance requirement via payment to an insurance fund on behalf of the employee. As a result, for severance obligations arising after January 12, 2015, we do not recognize any liability (or asset) for severance related obligations once we fund the statutory severance requirement.

Note 13—Share-Based Payments

We recognize expense for the estimated fair value of all share-based payments to employees on a straight-line basis over the award vesting period. For the fiscal years ended June 30, 2017, 2016, and 2015, we recorded

 

82


Table of Contents

expense of approximately $31.9 million, $30.3 million and $27.0 million, respectively, in connection with our share-based payment awards. For the fiscal years ended June 30, 2017, 2016, and 2015, we recognized tax benefits of $1.8 million, $1.8 million and $9.1 million, respectively, related to the expense recorded in connection with our share-based payment awards.

Share-Based Compensation Plans

Employee Stock Purchase Plan

On November 16, 2000, we adopted the 2000 Employee Stock Purchase Plan, which was amended on November 18, 2004 and November 18, 2010, and which provides for the issuance of up to a total of 4,000,000 shares of common stock to participating employees. At the end of each designated purchase period, which occurs every six months on March 31 and September 30, employees can elect to purchase shares of our common stock with contributions of between 1% and 10% of their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of the fair market value of the common stock on the first day of each 24-month offering period or the last day of the applicable six-month purchase period.

Our employee stock purchase plan has several complex features that make determining fair value on the grant date impracticable. Accordingly, we measure the fair value of these awards at intrinsic value (the value of our common stock less the employee purchase price) at the end of each reporting period. For the fiscal year ended June 30, 2017, we recorded compensation cost of approximately $0.6 million associated with our employee stock purchase plan. As a result of employee stock purchases in fiscal year 2017 we issued approximately 133,000 shares of our common stock. The aggregate intrinsic value of shares issued under the employee stock plan during fiscal year 2017 was $0.6 million. At June 30, 2017, based on employee withholdings and our common stock price at that date, approximately 37,000 shares of common stock, with an approximate intrinsic value of $0.2 million would have been eligible for issuance were June 30, 2017 to have been a designated stock purchase date.

Stock Incentive Plans

2009 Stock Incentive Plan

On November 19, 2009, we adopted the 2009 Stock Incentive Plan (the 2009 Plan), which provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. Stock option awards under this plan have a 10-year maximum contractual term and must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The 2009 Plan is administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise and what other restrictions, if any, should apply. Vesting for awards granted to date under the 2009 Plan is principally over four years from the date of the grant, with 25% of the award vesting after one year and 6.25% of the award vesting each quarter thereafter.

We initially reserved 2,750,000 shares of our common stock for issuance under the 2009 Plan, plus additional shares equal to the number of shares subject to outstanding awards under our prior plans which expire, terminate or are otherwise surrendered, cancelled, forfeited, or repurchased by us. On November 14, 2013, November 20, 2014 and November 17, 2016 we adopted amendments to our 2009 Stock Incentive Plan to increase the number of shares of common stock authorized for issuance under the 2009 Plan by an additional 2,400,000, 1,500,000 and 800,000 shares, respectively. The plan remained unchanged in all other respects.

Valuation and Related Activity

Stock options are valued using a Black Scholes method of valuation and the resulting fair value is recorded as compensation cost on a straight line basis over the option vesting period. There were no stock option grants during the fiscal years ended June 30, 2017, 2016, and 2015.

 

83


Table of Contents

A summary of stock option and restricted stock activity for the fiscal year ended June 30, 2017 is as follows; in respect of shares available for grant, the shares are available for issuance by us as either a stock option or as a restricted stock award:

 

          Non-vested Stock     Stock Options  
    Shares
Available
for Grant
    Number of
Shares
    Weighted
Average
Grant Date
Fair Value
    Number of
Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
    (in thousands, except per share data)  

Awards outstanding at June 30, 2016

    2,879       2,111     $ 27.57       170     $ 10.45       2.8     $ 1,882  

Plan Amendment

    800        

Awards granted (1)

    (1,206     942       22.28      

Shares vested

      (953     27.57      

Stock options exercised

                  (32     11.14      

Awards forfeited (1)

    148       (110     27.00                  

Awards expired

        (8     11.21      
 

 

 

   

 

 

     

 

 

       

 

 

 

Awards outstanding at June 30, 2017

    2,621       1,990     $     25.10       130     $ 10.23       2.0     $ 2,005  
 

 

 

   

 

 

     

 

 

       

 

 

 

Stock options exercisable at June 30, 2017

        130     $     10.23       2.0     $ 2,005  
             

 

 

 

 

 

 

(1)  The 2009 Plan has a fungible share pool in which restricted stock awards are counted against the plan (or replenished within the plan, in respect of award forfeitures) as 1.28 shares for each one share of common stock subject to such restricted stock award.

The total intrinsic value of stock options exercised during the fiscal years ended June 30, 2017, 2016, and 2015 was approximately $0.5 million, $1.6 million and $2.0 million, respectively. The total fair value of stock options that vested during the fiscal years ended June 30, 2017, 2016 and 2015 was approximately $0.0 million, $0.1 million and $0.2 million, respectively.

The majority of our restricted stock awards vest over a four year period on a vesting schedule similar to our employee stock options; however, certain restricted stock awards vest over either a two or five year period and restricted stock awards granted to our non-employee directors upon his or her election to the Board of Directors and annually thereafter vest after a one year period. Restricted stock awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded on a straight line basis over the share vesting period. The weighted average grant date fair value for restricted stock awards granted during the fiscal years ended June 30, 2017, 2016 and 2015 was $22.28, $27.40 and $27.05, respectively. The total fair value of restricted stock awards that vested during the fiscal years ended June 30, 2017, 2016, and 2015 was approximately $27.5 million, $32.4 million and $26.4 million, respectively. We recorded expense of approximately $31.3 million associated with our restricted stock awards for the fiscal year ended June 30, 2017. As of June 30, 2017, there was approximately $50.8 million of unrecognized compensation cost related to restricted stock awards that will be recognized as expense over a weighted average period of 1.3 years. Excluding the impact of shares issued as purchase consideration with forfeiture provisions, approximately 1.0 million shares of restricted stock awards vested during the fiscal year ended June 30, 2017.

Stock Issued in Acquisitions

Retention of key personnel in businesses we acquire is critical to us because it helps to ensure that we maximize the value of companies we acquire, which we believe is vitally important to our stockholders.

 

84


Table of Contents

Accordingly, in order to maximize the retention of key employees, we attach forfeiture provisions to the shares we issue to acquire certain businesses. This has the effect of requiring key employees to stay in our employment, post-acquisition, in order to earn the full value of the stock we issue. These shares are issued as purchase consideration, but as a result of the forfeiture provisions we attach they are categorized as compensatory awards under U.S. GAAP. The forfeiture provisions on these shares typically lapse over a four or five year period.

During the fiscal year ended June 30, 2015, we issued 774,000, 60,000 and 4,999 shares of our common stock as purchase consideration in our acquisitions of Intellinx, Arian and Litco, respectively. The shares were issued to certain equity holders of the acquired companies, all of whom joined us as employees or were otherwise required to render post-acquisition services in order to vest in the shares.

Activity associated with shares issued as purchase consideration with forfeiture provisions for the fiscal year ended June 30, 2017 is reflected in the table below. These shares were not issued out of our shareholder approved stock plans and do not represent grants or awards of shares from those plans. No such shares were issued during fiscal year 2017.

 

    Non-vested Stock  
    Number
of
Shares
(in thousands)
    Weighted
Average
Grant Date
Fair Value
 

Purchase consideration shares with forfeiture provisions outstanding at June 30, 2016

    613     $ 23.11  

Lapse of forfeiture provisions

    (210     23.59  

Shares forfeited

    (23     23.81  
 

 

 

   

Purchase consideration shares with forfeiture provisions outstanding at June 30, 2017

    380     $     22.81  
 

 

 

   

Note 14—Net Loss Per Share

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

 

     Fiscal Year Ended June 30,  
           2017                 2016                 2015        
     (in thousands, except per share amounts)  

Numerator - basic and diluted:

      

Net loss

   $ (33,137   $ (19,648   $ (34,680
  

 

 

   

 

 

   

 

 

 

Denominator:

      

Shares used in computing basic and diluted net loss per share attributable to common stockholders

         37,842           37,957           37,806  
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common stockholders

   $ (0.88   $ (0.52   $ (0.92
  

 

 

   

 

 

   

 

 

 

For the fiscal years ended June 30, 2017, 2016 and 2015, approximately 2.9 million, 3.1 million and 2.9 million shares of unvested restricted stock and stock options, respectively, were excluded from the calculation of diluted earnings per share as their effect on the calculation would have been anti-dilutive.

As more fully discussed in Note 10 Indebtedness, in December 2012 we issued the Notes. We intend, upon conversion or maturity of the Notes, to satisfy any conversion premium by issuing shares of our common stock. We have also issued warrants for up to 6.3 million shares of our common stock at an exercise price of $40.04 per share. For the fiscal years ended June 30, 2017, 2016 and 2015, shares potentially issuable upon conversion or maturity of the Notes or upon exercise of the warrants were excluded from our earnings per share calculations as their effect would have been anti-dilutive.

 

85


Table of Contents

Note 15—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 organized principally by the type of product or service offered and by geography.

Similar operating segments have been aggregated into four reportable segments as follows:

Cloud Solutions. Our Cloud Solutions segment provides customers predominately with SaaS technology offerings that facilitate electronic payment, electronic invoicing, and spend management. Our legal spend management solutions, which enable customers to create more efficient processes for managing invoices generated by outside law firms while offering insight into important legal spend factors such as expense monitoring and outside counsel performance, are included within this segment. This segment also incorporates our settlement network solutions (financial messaging and Paymode-X). Our settlement network solutions are highly scalable, secure and cost effective and facilitate cash payment and transaction settlement between businesses, their vendors and banks. Revenue within this segment is generally recognized on a subscription or transaction basis or ratably over the estimated life of the customer relationship.

Digital Banking. Our Digital Banking segment provides solutions that are specifically designed for banking and financial institution customers. Our Digital Banking products are now sold predominantly on a subscription basis, which has the effect of contributing to recurring subscription and transaction revenue and the revenue predictability of future periods, but which also delays revenue recognition over a longer period.

Payments and Transactional Documents. Our Payments and Transactional Documents segment is a supplier of software products that provide a range of financial business process management solutions including making and collecting payments, sending and receiving invoices, and generating and storing business documents. This segment also incorporates our payments automation software for direct debit and receivables management and provides a range of standard professional services and equipment and supplies that complement and enhance our core software products. Revenue associated with the aforementioned products and services is typically recorded upon delivery. This segment also incorporates certain other solutions that are licensed on a subscription basis, revenue for which is typically recorded on a subscription or transaction basis, or ratably over the expected life of the customer relationship.

Other. Our Other segment consists of our healthcare and cyber fraud and risk management operating segments. Our cyber fraud and risk management solutions non-invasively monitor, replay and analyze user behavior to flag and even stop suspicious activity in real time. Our healthcare solutions for patient registration, electronic signature, mobile document and payments allow healthcare organizations to improve business efficiencies, reduce costs and improve care quality. When licensed on a perpetual license basis, revenue for our cyber fraud and risk management and healthcare products is typically recorded upon delivery, with the exception of software maintenance which is normally recorded ratably over a twelve-month period. When products are licensed on a subscription basis, revenue is normally recorded ratably over the subscription period.

Periodically a sales person in one operating segment will sell products and services that are typically sold within a different operating segment. In such cases, the transaction is generally recorded by the operating segment to which the sales person is assigned. Accordingly, segment results can include the results of transactions that have been allocated to a specific segment based on the contributing sales resources, rather than the nature of the product or service. Conversely, a transaction can be recorded by the operating segment primarily responsible for delivery to the customer, even if the sales person is assigned to a different operating segment.

Our chief operating decision maker assesses segment performance based on a variety of factors that normally include segment revenue and a segment measure of profit or loss. Each segment’s measure of profit or loss is on a pre-tax basis and excludes stock compensation expense, acquisition and integration related expenses

 

86


Table of Contents

(including acquisition related contingent consideration), amortization of acquired intangible assets, impairment of goodwill, fixed asset charges, restructuring related charges, minimum pension liability adjustments, non-core charges related to the Notes and the Credit Facility, global enterprise resource planning (ERP) system implementation costs and other non-core or non-recurring gains and losses that arise from time to time. 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 fiscal years ended June 30, 2017, 2016 and 2015, according to the segment descriptions above, is as follows:

 

    Fiscal Year Ended June 30,  
    2017     2016     2015  
    (in thousands)  

Segment revenue:

     

Cloud Solutions (1)

  $     154,821     $     138,641     $     126,178  

Digital Banking

    79,227       70,747       77,184  

Payments and Transactional Documents

    98,150       115,213       116,685  

Other

    17,214       18,673       10,842  
 

 

 

   

 

 

   

 

 

 

Total segment revenue

  $ 349,412     $ 343,274     $ 330,889  
 

 

 

   

 

 

   

 

 

 

Segment measure of profit (loss):

     

Cloud Solutions

  $ 28,044     $ 23,380     $ 15,329  

Digital Banking

    2,901       5,696       12,440  

Payments and Transactional Documents

    29,832       34,225       36,010  

Other

    (3,075     (1,795     (2,870
 

 

 

   

 

 

   

 

 

 

Total measure of segment profit

  $ 57,702     $ 61,506     $ 60,909  
 

 

 

   

 

 

   

 

 

 

 

(1)  Revenues from our legal spend management solutions were $58.6 million, $47.3 million and $44.6 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Revenues from our settlement network solutions were $96.2 million, $91.3 million and $81.6 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.

 

87


Table of Contents

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

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

Total measure of segment profit

   $     57,702     $     61,506     $     60,909  

Less:

      

Amortization of acquired intangible assets

     (24,246     (28,978     (30,383

Goodwill impairment charge

     (7,529            

Fixed asset charge

     (2,399            

Stock-based compensation expense

     (31,913     (30,279     (27,025

Acquisition and integration related expenses

     (2,596     (741     (2,835

Restructuring expenses

     (547     (850     (1,297

Minimum pension liability and related adjustments

     (1,079     (203     (56

Other non-core income (expense)

     223       246       (76

Global ERP system implementation costs

     (8,804     (4,252      

Other expense, net

     (17,086     (15,312     (15,553
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

   $ (38,274   $ (18,863   $ (16,316
  

 

 

   

 

 

   

 

 

 

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

 

     Fiscal Year Ended June 30,  
     2017      2016      2015  
     (in thousands)  

Depreciation and other amortization expense:

        

Cloud Solutions

   $     8,078      $     6,088      $     5,134  

Digital Banking

     7,856        4,093        2,643  

Payments and Transactional Documents

     3,214        2,861        2,489  

Other

     380        447        241  
  

 

 

    

 

 

    

 

 

 

Total depreciation and other amortization expense

   $     19,528      $     13,489      $     10,507  
  

 

 

    

 

 

    

 

 

 

 

88


Table of Contents

Geographic Information

We have presented geographic information about our revenues below. This presentation allocates revenue based on the point of sale, not the location of the customer. Accordingly, we derive revenues from geographic locations based on the location of the customer that would vary from the geographic areas listed here, particularly in respect of financial institution customers located in Australia for which the point of sale was North America and customers located in Africa for which the point of sale was Israel.

 

     Fiscal Year Ended June 30,  
     2017      2016      2015  
     (in thousands)  

North America

   $     221,608      $     199,765      $     193,286  

United Kingdom

     80,421        96,244        93,735  

Continental Europe

     38,590        38,849        38,053  

Asia-Pacific and Middle East

     8,793        8,416        5,815  
  

 

 

    

 

 

    

 

 

 

Total revenues from unaffiliated customers

   $ 349,412      $ 343,274      $ 330,889  
  

 

 

    

 

 

    

 

 

 

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

 

     At June 30,  
     2017      2016  
     (in thousands)  

Long-lived assets:

     

North America

   $     59,800      $     56,885  

United Kingdom

     8,705        8,499  

Continental Europe

     2,449        1,924  

Asia-Pacific and Middle East

     2,024        2,080  
  

 

 

    

 

 

 

Total long-lived assets

   $ 72,978      $ 69,388  
  

 

 

    

 

 

 

Note 16—Income Taxes

Provision for Income Taxes

We file U.S. federal income tax returns and returns in various state, local and foreign jurisdictions. Generally, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2001. We are currently under audit by the Internal Revenue Service on our U.S. federal tax return for the fiscal year ended June 30, 2015 and by the Israeli Tax Authority on our 2012 to 2015 Israeli tax returns. We anticipate these audits will take several quarters to complete.

We permanently reinvest the earnings, if any, of our international subsidiaries and therefore we do not provide for U.S. income 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. income taxes, net of the impact of any available foreign tax credits. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these undistributed earnings.

 

89


Table of Contents

Our provision for (benefit from) income taxes consisted of the following:

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

Current:

      

Federal

   $ 41     $ (362   $ 1,433  

State

     32       43       188  

Foreign

     2,786       4,215       4,570  
  

 

 

   

 

 

   

 

 

 
             2,859               3,896               6,191  

Deferred:

      

Federal

     700       1,004       14,720  

State

     81       217       1,154  

Foreign

     (8,777     (4,332     (3,701
  

 

 

   

 

 

   

 

 

 
     (7,996     (3,111     12,173  
  

 

 

   

 

 

   

 

 

 
   $ (5,137   $ 785     $ 18,364  
  

 

 

   

 

 

   

 

 

 

Our income tax expense (benefit) included a tax benefit of $0.3 million, $0.2 million and $0.2 million in fiscal years 2017, 2016 and 2015, respectively, relating to a reduction in our unrecognized tax benefits upon the expiration of certain statutes of limitations.

We recorded a decrease to other comprehensive income of $1.6 million during fiscal year 2017 as a result of the deferred tax consequence of minimum pension liability adjustments related to our Swiss pension.

Income (loss) before income taxes by geographic area is as follows:

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  
     (in thousands)  

North America

   $     (25,315   $     (19,892   $     (18,277

United Kingdom

     7,263       15,400       16,728  

Continental Europe

     86       (2,191     (7,608

Asia-Pacific and Middle East

     (20,308     (12,180     (7,159
  

 

 

   

 

 

   

 

 

 
   $ (38,274   $ (18,863   $ (16,316
  

 

 

   

 

 

   

 

 

 

 

90


Table of Contents

A reconciliation of the federal statutory rate to the effective income tax rate is as follows:

 

     Fiscal Year Ended June 30,  
     2017     2016     2015  

Tax benefit at federal statutory rate

     (35.0%     (35.0%     (35.0%

State taxes, net of federal benefit

     (4.0%     (4.3%     (5.2%

Change in valuation allowance

     30.3%       16.8%       98.6%  

Investment impairment

     (29.6%     —%       —%  

Tax rate differential on foreign earnings

     9.3%       (3.5%     (4.2%

Goodwill impairment

     6.9%       —%       —%  

Foreign branch operations, net of foreign tax deductions

     2.7%       19.0%       33.1%  

Changes in uncertain tax positions

     2.2%       8.6%       13.0%  

Non-deductible executive compensation

     2.5%       5.2%       5.3%  

Non-deductible other expenses

     1.6%       1.6%       1.8%  

Non-deductible share-based payments

     1.2%       3.7%       3.6%  

Non-deductible acquisition costs

     0.8%       0.5%       3.0%  

Changes in tax laws or rates

     (0.2%     1.1%       (1.8%

Research and development credit

     (2.9%     (8.5%     (2.7%

Other

     0.8%       (1.0%     3.1%  
  

 

 

   

 

 

   

 

 

 
         (13.4%         4.2%           112.6%  
  

 

 

   

 

 

   

 

 

 

The excess of our effective tax rate (or decrease in our effective tax benefit rate) over statutory tax rates was primarily due to the inability to benefit U.S. and Swiss losses, an increase of our U.S. valuation allowance in fiscal year 2015, and our inability to utilize certain foreign tax credits as a reduction to foreign income that is included in our U.S. tax return. This has the effect of taxing certain income twice, resulting in a higher overall tax rate.

 

91


Table of Contents

Deferred Tax Assets and Liabilities

We recognize deferred tax assets and liabilities based on the differences between their financial reporting and tax basis by applying tax rates that are expected to be in effect when the differences reverse. Significant components of our deferred income taxes are as follows:

 

     June 30,  
     2017     2016  
     (in thousands)  

Deferred tax assets:

    

Net operating loss carryforwards

   $ 35,503     $ 18,951  

Research and development and other credits

     6,755       6,095  

Deferred revenue

     6,433       9,083  

Stock compensation

     6,414       6,313  

Accrued pension

     3,898       5,116  

Various accrued expenses

     3,774       3,290  

Allowances and reserves

     252       273  

Property and equipment

     229       8  

Other

     98       38  
  

 

 

   

 

 

 

Total deferred tax assets

   $     63,356     $     49,167  

Valuation allowance

     (37,415     (26,506
  

 

 

   

 

 

 

Deferred tax assets, net of valuation allowance

     25,941       22,661  

Deferred tax liabilities:

    

Intangible assets

     (26,229     (30,229

Property and equipment, inclusive of capitalized software

     (14,434     (12,324

Convertible debt

     (588     (1,876

Other

     (123     (135
  

 

 

   

 

 

 

Total deferred tax liabilities

     (41,374     (44,564
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (15,433   $ (21,903
  

 

 

   

 

 

 

At June 30, 2017, we had U.S. net operating loss carryforwards of $104.8 million which expire at various times through fiscal year 2037. Included within this amount is approximately $55.6 million of excess tax deductions associated with restricted stock awards that have vested and with non-qualified stock options that have been exercised. Approximately $46.7 million of the aforementioned excess tax benefits have not been reflected as a component of our deferred tax assets at June 30, 2017, as these amounts would be recognized for financial reporting purposes only when they actually reduced currently payable income taxes. Historically, when these excess tax benefits actually resulted in a reduction to currently payable income taxes, the benefit would have been recorded as an increase to additional paid-in capital. However, upon adoption effective July 1, 2017 of the accounting standard relating to share-based payments, our deferred tax assets will be increased by this portion of excess tax benefits (net of any required valuation allowance), and future utilization of excess tax benefits will be recorded as a decrease to deferred tax assets.

From a foreign tax perspective, we had Swiss net operating loss carryforwards of $25.8 million which expire in fiscal year 2024, Canadian net operating loss carryforwards of $0.3 million which principally expire in fiscal year 2035, and foreign net operating loss carryforwards (primarily in Europe and Israel) of $22.1 million which have no statutory expiration date.

 

92


Table of Contents

We utilized approximately $1.9 million of net operating losses in fiscal year 2017, consisting of $0.6 million utilized in the U.S. and $1.3 million utilized in our foreign operations, predominately in Europe.

We have approximately $6.0 million of research and development tax credit carryforwards available, which expire at various points through fiscal year 2037. Our operating losses and tax credit carryforwards may be subject to limitations under provisions of the Internal Revenue Code.

Valuation Allowance

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. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

At June 30, 2017 we have a $37.4 million valuation allowance against certain deferred tax assets given the uncertainty of recoverability of these amounts. The valuation allowance increased by $10.9 million in fiscal year 2017 from fiscal year 2016 primarily due to an increase to the U.S. and Switzerland valuation allowances.

For the fiscal year ended June 30, 2015, we established a significant valuation allowance against our U.S. deferred tax assets as we concluded that it was more likely than not that a portion of these assets may not be recovered. This analysis was based on both positive and negative factors. As a result, we increased our valuation allowance in fiscal year 2015 and recorded income tax expense in the amount of $16.0 million. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets to reduce cash tax payments in the future to the extent that we generate U.S. taxable income.

Uncertain Tax Positions

As of June 30, 2017, we had approximately $8.7 million of total gross unrecognized tax benefits, of which approximately $1.4 million represented the amount of unrecognized tax benefits that, if recognized, would favorably affect our effective income tax rate in future periods. Approximately $4.1 million of the gross unrecognized tax benefits resulted in reductions to the deferred tax asset relating to net operating losses and to the valuation allowance, and approximately $3.2 million of the gross unrecognized tax benefits resulted in a reduction to tax credit carryforwards and other deferred tax assets. 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.

 

93


Table of Contents

A summary of the changes in the gross amount of unrecognized tax benefits is shown below:

 

     (in thousands)  

Balance at July 1, 2014

   $ 4,085  

Additions related to current year tax positions

     2,392  

Additions related to prior year tax positions

     145  

Reductions due to lapse of statute of limitations

     (213

Foreign currency translation

     (104
  

 

 

 

Balance at July 1, 2015

     6,305  

Additions related to current year tax positions

     1,647  

Additions related to prior year tax positions

     215  

Reductions due to lapse of statute of limitations

     (229

Foreign currency translation

     (129
  

 

 

 

Balance at July 1, 2016

     7,809  

Additions related to current year tax positions

     1,160  

Additions related to prior year tax positions

     13  

Reductions due to lapse of statute of limitations

     (335

Foreign currency translation

     9  
  

 

 

 

Balance at July 1, 2017

   $     8,656  
  

 

 

 

We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. To the extent that the accrued interest and penalties do not ultimately become payable, the amounts accrued will be derecognized and reflected as an income tax benefit in the period that such a determination is made. Our accrued interest and penalties related to uncertain tax positions as of June 30, 2017 and 2016, and recorded in each of the annual periods ending June 30, 2017, 2016, and 2015, were not significant.

Note 17—Guarantees

We generally offer a standard warranty on our products and services, specifying that our software products will perform in accordance with published product specifications and that any professional services will conform with applicable specifications and industry standards. Further, we offer, as an element of our standard licensing arrangements, an indemnification clause that protects the licensee against liability and damages, including legal defense costs arising from claims of patent, copyright, trademark or other similar infringements by our software products. At June 30, 2017 and 2016, warranty accruals were not significant.

Certain of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain service level requirements; however, we have not incurred any related material penalties to date.

Note 18—Subsequent Events

On August 14, 2017, we acquired Decillion Solutions Pte Ltd. (“Decillion”) for 6.2 million Singapore Dollars (approximately $4.6 million) in cash. Decillion is headquartered in Singapore and is a leading provider of financial messaging solutions in the Asia-Pacific region. The acquisition is expected to expand the breadth of our financial messaging solutions in this region.

As more fully described in Note 10 Indebtedness, in July 2017, we entered into an interest rate swap designed to reduce our exposure to variable interest rate risk under the Credit Facility.

 

94


Table of Contents

Note 19—Quarterly Financial Data (unaudited)

The following table contains selected quarterly financial data for the fiscal years ended June 30, 2017 and 2016. The quarterly earnings per share information is computed separately for each period. Therefore, the sum of the quarterly per share amounts may differ from the total year per share amounts.

 

    For the quarters ended  
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
 
    (in thousands, except per share data)  

Revenues

  $   82,881     $   86,048     $   86,233     $   88,112     $   83,084     $   86,728     $   86,099     $   93,501  

Gross profit

    47,546       49,941       49,014       49,673       44,907       47,156       46,525       48,998  

Net loss (1)

  $ (4,253   $ (5,239   $ (4,230   $ (5,926   $ (10,508   $ (10,346   $ (6,624   $ (5,659

Basic and diluted net loss per share

  $ (0.11   $ (0.14   $ (0.11   $ (0.16   $ (0.28   $ (0.27   $ (0.17   $ (0.15

Shares used in computing basic and diluted net loss per share

    38,004       37,774       38,101       37,949       37,940       37,769       37,965       37,693  

 

 

 

(1)  We recorded an impairment charge related to goodwill in the second quarter of fiscal year 2017 in the amount of $7.5 million.

 

95


Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

Evaluation of Disclosure 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 June 30, 2017. 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 June 30, 2017, 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.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

    Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

    Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

    Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

96


Table of Contents

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework).

Based on our assessment, management concluded that, as of June 30, 2017, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm has issued an audit report on the Company’s internal control over financial reporting, which is included within Part II, Item 8 of this Form 10-K.

 

Item 9B. Other Information.

Not applicable.

 

97


Table of Contents

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

See Executive Officers and Other Key Employees of the Registrant in Part I of this Annual Report on Form 10-K. We will file with the Securities and Exchange Commission a definitive Proxy Statement (the Proxy Statement) not later than 120 days after the close of the fiscal year ended June 30, 2017. The information required by this item is incorporated herein by reference to the information contained under the captions Proposal I - Election of Class I Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance of the Proxy Statement.

We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of our Code of Business Conduct and Ethics is posted in the Corporate Governance section of our website, www.bottomline.com. We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.

 

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information contained under the captions Executive Compensation, Director Compensation, Compensation Committee Interlocks and Insider Participation, Compensation Committee Report, and Employment and Other Agreements and Potential Payments Upon Termination or Change in Control of the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated herein by reference to the information contained under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information of the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is incorporated herein by reference to the information contained under the captions Employment and Other Agreements and Potential Payments Upon Termination or Change in Control, Proposal I - Election of Class I Directors, Corporate Governance and Certain Relationships and Related Transactions of the Proxy Statement.

 

Item 14. Principal Accountant Fees and Services.

The information required to be disclosed by this item is incorporated herein by reference to the information contained under the captions Principal Accounting Fees and Services and Pre-Approval Policies and Procedures of the Proxy Statement.

 

98


Table of Contents

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

  (a) Financial Statements, Financial Statement Schedule and Exhibits

 

         Page  

(1)

  Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K      52  

(2)

 

Financial Statement Schedule for the Years Ended June 30, 2017, 2016 and 2015:

Schedule II-Valuation and Qualifying Accounts

     102  
  Financial statement schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes.   

(3)

  Exhibits:   

 

          Incorporated by Reference         
Exhibit Number    Description    Form      File No.      Exhibit      Filing
Date
     Filed
Herewith
 

    3.1

   Amended and Restated Certificate of Incorporation of the Registrant, as amended.      8-K        000-25259        3.1        1/18/2013     

    3.2

   Amended and Restated By-Laws of the Registrant, as amended.      10-K        000-25259        3.2        9/12/2007     

    4.1

   Specimen Certificate for Shares of Common Stock.      S-1        333-67309        4.1        1/7/1999     

    4.2

   Warrant dated September 14, 2009 issued by the Registrant to Bank of America, N.A.      10-Q        000-25259        4.1        11/9/2009     

    4.3

   Registration Rights Agreement dated September 14, 2009 between the Registrant and Bank of America, N.A.      10-Q        000-25259        4.2        11/9/2009     

  10.1

   Sublease dated August 31, 2000, between the Registrant and 325 Corporate Drive II, LLC.      10-K        000-25259        10.35        9/28/2000     

  10.2

   First Amendment to Sublease between the Registrant and 325 Corporate Drive II, LLC.      10-K        000-25259        10.52        9/30/2002     

  10.3

   Second Amendment to Sublease, effective as of October 1, 2001, between the Registrant and 325 Corporate Drive II, LLC.      10-Q        000-25259        10.1        11/13/2001     

  10.4

   Third Amendment to Sublease, effective as of June 30, 2010, between the Registrant and 325 Corporate Drive II, LLC.      10-K        000-25259        10.45        9/10/2010     

  10.5

   Fourth Amendment to Sublease, effective as of April 1, 2012, between the Registrant and 325 Corporate Drive II, LLC.      10-K        000-25259        10.7        8/27/2012     

  10.6

   Fifth Amendment to Sublease, effective as of March 12, 2014, between the Registrant and 325 Corporate Drive II, LLC.      10-K        000-25259        10.8        8/28/2014     

  10.7

   Legal Charge dated as of December 17, 2001 between Bottomline Technologies Europe Ltd and National Westminster Bank Plc.      10-Q        000-25259        10.4        2/14/2002     

  10.8

   Debenture dated as of December 17, 2001 between Bottomline Technologies Europe Ltd and National Westminster Bank Plc.      10-Q        000-25259        10.5        2/14/2002     

  10.9†

   Services Agreement dated September 14, 2009 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.1        1/14/2010     

  10.10

   First Amendment to Services Agreement dated September 29, 2010 between the Registrant and Bank of America, N.A.      10-K        000-25259        10.19        9/9/2011     

  10.11†

   Second Amendment to Services Agreement dated September 27, 2010 between the Registrant and Bank of America, N.A.      10-K        000-25259        10.2        9/9/2011     

  10.12†

   Third Amendment to Services Agreement dated February 1, 2011 between the Registrant and Bank of America, N.A.      10-K        000-25259        10.21        9/9/2011     

 

99


Table of Contents
          Incorporated by Reference         
Exhibit Number    Description    Form      File No.      Exhibit      Filing
Date
     Filed
Herewith
 

  10.13†

   Fourth Amendment to Services Agreement dated September 15, 2011 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.1        11/8/2011     

  10.14†

   Fifth Amendment to Services Agreement dated September 15, 2011 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.1        2/7/2012     

  10.15†

   Sixth Amendment to Services Agreement dated September 15, 2011 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.2        2/7/2012     

  10.16†

   Seventh Amendment to Services Agreement dated October 25, 2011 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.3        2/7/2012     

  10.17†

   Eighth Amendment to Services Agreement dated January 5, 2012 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.1        5/10/2012     

  10.18†

   Ninth Amendment to Services Agreement dated January 13, 2012 between the Registrant and Bank of America, N.A.      10-Q        000-25259        10.2        5/10/2012     

  10.19

   Credit Agreement dated as of December 9, 2016 among the Registrant; the domestic subsidiaries of the Registrant identified therein from time to time party thereto as guarantors; Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer; and the Lenders identified therein from time to time party thereto.      8-K        000-25259        10.1        12/14/2016     

  10.20#

   1998 Director Stock Option Plan, including form of non-statutory stock option agreement.      S-1        333-67309        10.3        11/13/1998     

  10.21#

   Forms of Restricted Stock Agreement under 2000 Stock Incentive Plan.      10-Q        000-25259        10.1        2/9/2006     

  10.22#

   2009 Stock Incentive Plan, as amended.      8-K        000-25259        99.2        11/22/2016     

  10.23#

   Form of Restricted Stock Agreement for UK Participants under 2009 Stock Incentive Plan.      10-Q        000-25259        10.1        5/7/2010     

  10.24#

   Form of Restricted Stock Agreement for Robert A. Eberle under 2009 Stock Incentive Plan.      10-Q        000-25259        10.2        5/7/2010     

  10.25#

   Form of Restricted Stock Agreement for US Participants under 2009 Stock Incentive Plan.      10-Q        000-25259        10.3        5/7/2010     

  10.26#

   Form of Stock Option Agreement for US Participants under 2009 Stock Incentive Plan.      10-Q        000-25259        10.5        5/7/2010     

  10.27#

   Form of Stock Option Agreement for UK Participants under 2009 Stock Incentive Plan.      10-Q        000-25259        10.6        5/7/2010     

  10.28#

   2000 Stock Incentive Plan, including form of stock option agreement for incentive and non-statutory stock options and form of stock option agreement for United Kingdom personnel.      10-K        000-25259        10.16        9/14/2004     

  10.29#

   Amended and Restated 2000 Employee Stock Purchase Plan.      8-K        000-25259        99.2        11/19/2010     

  10.30#

   Form of Restricted Stock Agreement for Non-Employee Directors under 2009 Stock Incentive Plan.      10-Q        000-25259        10.4        5/7/2010     

  10.31

   Form of Indemnification Letter dated as of September 21, 2000.      10-Q        000-25259        10.1        11/14/2000     

  10.32#

   Amended and Restated Employment Agreement dated as of November 21, 2002 between the Registrant and Joseph L. Mullen.       10-Q        000-25259        10.1        2/12/2003     

  10.33#

   Amended and Restated Employment Agreement dated as of November 21, 2002 between the Registrant and Robert A. Eberle.       10-Q        000-25259        10.2        2/12/2003     

  10.34#

   Letter Agreement dated as of September  30, 2005 between the Registrant and Joseph L. Mullen amending the Amendment and Restated Employment Agreement of Mr. Mullen dated as of November 21, 2002.      10-Q        000-25259        10.1        11/8/2005     

 

100


Table of Contents
          Incorporated by Reference         
Exhibit Number    Description    Form      File No.      Exhibit      Filing
Date
     Filed
Herewith
 

  10.35#

   Letter Agreement dated as of September  30, 2005 between the Registrant and Robert A. Eberle amending the Amendment and Restated Employment Agreement of Mr. Eberle dated as of November 21, 2002.      10-Q        000-25259        10.2        11/8/2005     

  10.36#

   Letter Agreement dated as of November 16, 2006 between the Registrant and Robert A. Eberle.      10-Q        000-25259        10.4        2/8/2007     

  10.37#

   Letter Agreement dated November 18, 2010 with Joseph L. Mullen.       10-Q        000-25259        10.1        2/7/2011     

  10.38#

   Amendment dated November 17, 2016 to Letter Agreement dated November 18, 2010 with Joseph L. Mullen.      10-Q        000-25259        10.3        2/8/2017     

  10.39#

   Service Agreement dated November 22, 1999 between Bottomline Technologies Limited and Nigel Savory.      10-Q/A        000-25259        10.1        11/8/2010     

  10.40#

   Deed of Variation to Service Agreement dated February 18, 2011 between Bottomline Technologies Limited and Nigel Savory.      10-Q        000-25259        10.1        5/6/2011     

  10.41#

   Letter Agreement dated as of December 23, 2008 between the Registrant and Robert A. Eberle.      10-Q        000-25259        10.2        2/6/2009     

  10.42#

   Employment Agreement dated October 10, 2011 between the Registrant and Norman J. Deluca.      10-Q        000-25259        10.1        5/8/2015     

  10.43#

   Employment Agreement dated March 31, 2015 between the Registrant and Richard D. Booth.      8-K        000-25259        10.1        5/5/2015     

  10.44#

   Executive Retention Agreement dated as of August 5, 2016 between the Registrant and John F. Kelly.      8-K        000-25259        10.1        8/5/2016     

  10.45#

   Form of Indemnification Agreement.      8-K        000-25259        10.1        11/24/2015     

  21.1

   List of Subsidiaries.                  X  

  23.1

   Consent of Ernst & Young LLP.                  X  

  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 Extension Calculation Linkbase Document.                  X  

101.DEF**

   XBRL Taxonomy Extension Definition Linkbase Document.                  X  

101.LAB**

   XBRL Taxonomy Extension Label Linkbase Document.                  X  

101.PRE**

   XBRL Taxonomy Extension Presentation Linkbase Document .                  X  

 

 

 

# Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of Form 10-K.
Indicates confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Request.

 

** Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2017 and 2016, (ii) Consolidated Statements of Comprehensive Loss for the years ended June 30, 2017, 2016 and 2015, (iii) Consolidated Statements of Stockholders’ Equity and Comprehensive Income and Loss for the years ended June 30, 2017, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.

 

101


Table of Contents

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Years Ended June 30, 2017, 2016, and 2015

 

     Activity  
Year Ended    Balance at
Beginning
of Year
     (Charged to
Revenue,
Costs and
Expenses)
     Additions and
Recoveries (1)
     Deductions (2)     Balance at
End of
Year
 
     (in thousands)  

June 30, 2017

   $ 982        121               (180   $ 923  

June 30, 2016

   $ 924        415        39        (396   $ 982  

June 30, 2015

   $     862        248        79        (265   $ 924  

 

 

 

(1)  Additions primarily represent increases to the allowance for doubtful accounts balance as a result of the impact of increases in foreign currency exchange rates.

 

(2)  Deductions are principally write-offs as well as the impact of decreases in foreign currency exchange rates.

 

102


Table of Contents

Item 16.     Form 10-K Summary.

None.

 

103


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:  August 28, 2017     By:   /S/    RICHARD D. BOOTH
      Richard D. Booth
      Chief Financial Officer and Treasurer
      (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Name

  

Title

 

Date

/S/    JOSEPH L. MULLEN

Joseph L. Mullen

  

Chairman of the Board

  August 28, 2017

/S/    ROBERT A. EBERLE

Robert A. Eberle

  

President, Chief Executive Officer and

Director (Principal Executive Officer)

  August 28, 2017

/S/    RICHARD D. BOOTH

Richard D. Booth

  

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

  August 28, 2017

/S/    KENNETH J. D’AMATO

Kenneth J. D’Amato

  

Director

  August 28, 2017

/S/    PETER GIBSON

Peter Gibson

  

Director

  August 28, 2017

/S/    JENNIFER M. GRAY

Jennifer M. Gray

  

Director

  August 28, 2017

/S/    PAUL H. HOUGH

Paul H. Hough

  

Director

  August 28, 2017

/S/    JEFFREY C. LEATHE

Jeffrey C. Leathe

  

Director

  August 28, 2017

/S/    BENJAMIN E. ROBINSON III

Benjamin E. Robinson III

  

Director

  August 28, 2017

 

104