Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 11/05/2015 07:23:18)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

 

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

 

For the quarterly period ended September 30 , 2015

 

OR

 

 

 

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

 

For the transition period from               to              

 

Commission file number 001-35699

 

PLANET PAYMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

Delaware

 

13-4084693

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

670 Long Beach Boulevard
Long Beach, New York

 

11561

(Address of Principal Executive Offices)

 

(Zip Code)

 

(516) 670-3200

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

 

Indicate by check mark whether the registrant has submitted electronically 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large Accelerated Filer

 

Accelerated Filer

 

 

 

Non-Accelerated Filer

 

Smaller Reporting Company

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

 

As of October  3 1 , 2015 ,   there were 53,667,947 shares of the registrant’s common stock outstanding.

 

 

 

 


 

Table of Contents

Planet Payment, Inc.

Report on Form 10-Q

For the Quarterly Period Ended September 30 , 2015

 

Table of Contents

 

 

 

 

 

 

Page

 

 

 

Part I.  

Financial Information

 

 

 

Item 1.  

Financial Statements

 

 

 

 

Condensed Con solidated Balance Sheets as of September 30 , 2015 (unaudited) and December 31, 2014

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30 , 2015 and 201 4 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended  September 30 , 2015 and 201 4 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30 , 2015 and 201 4  (unaudited)

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2.  

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

18 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

33 

 

 

 

Item 4.  

Controls and Procedures

33 

 

 

 

Part II.  

Other Information

33 

 

 

 

Item 1.  

Legal Proceedings

33 

 

 

 

Item 1A.  

Risk Factors

34 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

54 

 

 

 

Item 3.  

Defaults Upon Senior Securities

55 

 

 

 

Item 4.  

Mine Safety Disclosures

55 

 

 

 

Item 5.  

Other Information

55 

 

 

 

Item 6.  

Exhibits

56 

 

 

 

Signatures  

 

57 

 

Planet Payment®, iPAY® and Pay in Your Currency® , as well as our logo , are registered trademarks of Planet Payment and Shop in Your Currency ™ is an additional trademark of Planet Payment. All other service marks, trademarks and trade names appearing in this report are the property of their respective owners.

 

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Table of Contents

PART  I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Planet Payment, Inc.

Condensed Consolidated Balance Sheet s

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

 

(unaudited)

 

 

 

 

Current assets:

 

 

    

    

 

    

 

Cash and cash equivalents

 

$

12,964,168

 

$

9,837,791

 

Restricted cash

 

 

4,398,373

 

 

4,167,560

 

Accounts receivable, net of allowances of $0.1  million as of September 30, 2015 and December 31, 2014, respectively

 

 

6,267,434

 

 

6,948,595

 

Prepaid expenses and other assets

 

 

1,583,658

 

 

1,136,821

 

Total current assets

 

 

25,213,633

 

 

22,090,767

 

Other assets:

 

 

 

 

 

 

 

Restricted cash

 

 

551,914

 

 

432,094

 

Property and equipment, net

 

 

1,980,374

 

 

2,139,747

 

Software development costs, net

 

 

4,285,905

 

 

4,612,457

 

Intangible assets, net

 

 

1,529,001

 

 

2,046,700

 

Goodwill

 

 

295,715

 

 

319,671

 

Security deposits and other assets

 

 

4,181,446

 

 

2,289,858

 

Total other assets

 

 

12,824,355

 

 

11,840,527

 

Total assets

 

$

38,037,988

 

$

33,931,294

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

323,591

 

$

512,057

 

Accrued expenses

 

 

5,454,671

 

 

2,918,645

 

Due to merchants

 

 

4,583,135

 

 

4,352,199

 

Current portion of capital leases

 

 

342,938

 

 

458,812

 

Total current liabilities

 

 

10,704,335

 

 

8,241,713

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term portion of capital leases and deferred revenue

 

 

1,945,177

 

 

1,560,310

 

Total long-term liabilities

 

 

1,945,177

 

 

1,560,310

 

Total liabilities

 

 

12,649,512

 

 

9,802,023

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Convertible preferred stock— 10,000,000 shares authorized as of September 30, 2015 and December 31, 2014, $0.01 par value: Series A— 2,243,750   issued and outstanding as of September 30, 2015 and December 31, 2014; $8,975,000  aggregate liquidation preference

 

 

22,438

 

 

22,438

 

Common stock— 250,000,000 shares authorized as of September 30, 2015 and December 31, 2014, $0.01 par value, and  56,391,899 issued and 53,696,349 shares outstanding as of September 30, 2015, and 55,680,999 issued and 55,177,899 shares outstanding as of December 31, 2014

 

 

563,919

 

 

556,810

 

Treasury stock, at cost, 2,695,550 shares and 503,100 shares as of September 30, 2015 and December 31, 2014, respectively

 

 

(5,390,104)

 

 

(822,603)

 

Additional paid-in capital

 

 

105,666,009

 

 

103,277,253

 

Accumulated other comprehensive loss

 

 

(435,858)

 

 

(173,774)

 

Accumulated deficit

 

 

(75,037,928)

 

 

(78,730,853)

 

Total stockholders’ equity

 

 

25,388,476

 

 

24,129,271

 

Total liabilities and stockholders’ equity

 

$

38,037,988

 

$

33,931,294

 

 

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

 

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Planet Payment, Inc.

Condensed Consolidated Statements of Operations (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

    

2014

    

Revenue:

    

 

    

    

 

    

    

 

    

 

 

    

 

Net revenue

 

$

12,618,413

 

$

11,312,303

 

$

37,434,542

 

$

34,372,025

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment processing service fees

 

 

2,692,090

 

 

2,613,327

 

 

7,871,179

 

 

7,507,005

 

Processing and service costs

 

 

3,776,232

 

 

3,222,608

 

 

10,399,830

 

 

10,182,522

 

Total cost of revenue

 

 

6,468,322

 

 

5,835,935

 

 

18,271,009

 

 

17,689,527

 

Selling, general and administrative expenses

 

 

5,657,740

 

 

4,369,155

 

 

14,840,844

 

 

13,953,925

 

Restructuring charges

 

 

283,726

 

 

512,589

 

 

283,726

 

 

1,195,556

 

Total operating expenses

 

 

12,409,788

 

 

10,717,679

 

 

33,395,579

 

 

32,839,008

 

Income from operations

 

 

208,625

 

 

594,624

 

 

4,038,963

 

 

1,533,017

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(10,372)

 

 

(15,201)

 

 

(38,815)

 

 

(47,187)

 

Interest income

 

 

392

 

 

1,245

 

 

1,183

 

 

1,708

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

16,949

 

Total other expense, net

 

 

(9,980)

 

 

(13,956)

 

 

(37,632)

 

 

(28,530)

 

Income from operations before provision for income taxes

 

 

198,645

 

 

580,668

 

 

4,001,331

 

 

1,504,487

 

Provision for income taxes

 

 

(92,674)

 

 

(112,543)

 

 

(308,406)

 

 

(306,238)

 

Net income

 

$

105,971

 

$

468,125

 

$

3,692,925

 

$

1,198,249

 

Basic net income per share applicable to common stockholders

 

$

0.00

 

$

0.01

 

$

0.06

 

$

0.02

 

Diluted net income per share applicable to common stockholders

 

$

0.00

 

$

0.01

 

$

0.06

 

$

0.02

 

Weighted average common stock outstanding (basic)

 

 

51,360,758

 

 

54,141,669

 

 

52,985,106

 

 

53,855,361

 

Weighted average common stock outstanding (diluted)

 

 

52,384,391

 

 

54,977,485

 

 

53,611,968

 

 

55,263,634

 

 

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

 

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Planet Payment, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

  

$

105,971

  

$

468,125

  

$

3,692,925

  

$

1,198,249

  

Foreign currency translation adjustment

 

 

(65,265)

 

 

(191,158)

 

 

(262,084)

 

 

(204,128)

 

Total comprehensive income

 

$

40,706

 

$

276,967

 

$

3,430,841

 

$

994,121

 

 

 

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

 

 

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Planet Payment, Inc.

  Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

    

 

    

    

 

    

    

Net income

 

$

3,692,925

 

$

1,198,249

 

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

1,197,741

 

 

951,390

 

Depreciation and amortization expense

 

 

2,175,220

 

 

2,308,057

 

Provision for doubtful accounts

 

 

7,403

 

 

29,133

 

Gain on insurance settlement

 

 

(517,930)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in settlement assets

 

 

(322,982)

 

 

938,937

 

Decrease in accounts receivables, prepaid expenses and other current assets

 

 

1,184,851

 

 

317,807

 

(Increase) in security deposits and other assets

 

 

(131,588)

 

 

(178,762)

 

Increase (decrease) in accounts payable and accrued expenses

 

 

559,792

 

 

(2,074,287)

 

Increase (decrease) in due to merchants

 

 

323,105

 

 

(565,414)

 

Other

 

 

(133,242)

 

 

(37,127)

 

Net cash provided by operating activities

 

 

8,035,295

 

 

2,887,983

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Increase in restricted cash

 

 

(27,651)

 

 

(1,995,596)

 

(Decrease) increase in merchant reserves

 

 

(92,169)

 

 

2,010,648

 

Purchase of property and equipment

 

 

(175,570)

 

 

(100,935)

 

Capitalized software development

 

 

(828,393)

 

 

(1,037,978)

 

Purchase of intangible assets

 

 

(16,500)

 

 

(106,264)

 

Net cash used in investing activities

 

 

(1,140,283)

 

 

(1,230,125)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

1,203,750

 

 

934,032

 

Purchase of treasury stock

 

 

(4,567,501)

 

 

 —

 

Principal payments on capital lease obligations

 

 

(404,884)

 

 

(418,882)

 

Net cash (used in) provided by financing activities

 

 

(3,768,635)

 

 

515,150

 

Effect of exchange rate changes on cash and cash equivalents(*)

 

 

 —

 

 

 —

 

Net increase in cash and cash equivalents

 

 

3,126,377

 

 

2,173,008

 

Beginning of period

 

 

9,837,791

 

 

6,572,468

 

End of period

 

$

12,964,168

 

$

8,745,476

 

Supplemental disclosure:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

36,585

 

$

48,898

 

Income taxes

 

 

539,520

 

 

598,511

 

Non cash investing and financing activities:

 

 

 

 

 

 

 

Assets acquired under capital leases

 

 

156,129

 

 

429,611

 

Accrued capitalized hardware, software and fixed assets

 

 

39,158

 

 

32,937

 

Capitalized stock-based compensation

 

 

27,245

 

 

40,415

 

 


(*) For the nine months ended September 30 , 2015 and 201 4 , the effect of exchange rate changes on cash and cash equivalents was inconsequential.

 

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

 

 

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Planet Payment, Inc.

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1. Business description and basis of presentation

 

Business description

 

Planet Payment, Inc. together with its wholly - owned subsidiaries (“Planet Payment,” the “Company,” “we,” or “our”) is a provider of international payment and transaction processing and multi-currency processing services. The Company provides its services to approximately 109 , 000 active merchant locations in 23   countries and territories across the Asia Pacific region, the Americas, the Middle East, Africa and Europe, primarily through its acquiring bank and processor customers, as well as through its own direct sales force. The Company provides banks and their merchants with innovative services to accept, process and reconcile electronic payments. The Company’s point-of-sale and e-commerce services are integrated within the payment card transaction process , enabling its acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels. The Company’s ATM services provide its domestic and international acquirers with additional processing capabilities to help them increase revenue and improve customer satisfaction.  The Company also offers non-financial transaction processing services that allow merchants to offer a range of commercial services including pre-paid mobile phone top-up and bill payments using the same point-of-sale devices deployed to accept payment cards. The Company is a registered third party processor with the major card associations and operates in accordance with industry standards, including the Payment Card Industry, or PCI, Security Council’s Data Security Standards.

 

Basis of presentation

 

The unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

The accompanying unaudited condensed consolidated interim financial statements include the accounts of Planet Payment, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

 

Unaudited condensed consolidated interim financial information

 

The accompanying unaudited condensed consolidated inte rim financial statements as of September 30 ,   2015 and for the periods ended September 30 , 2015 and 2014 have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are normal and recurring, necessary for a fair presentation of the statement of operations, financial position and cash flows. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Operating result s for the interim period ended September 30 , 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 5 .  The December 31, 2014 balance sheet information has been derived from the audited financial statements at that date. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulation of the Securities and Exchange Commission (“ SEC ”) .

 

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2. Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09 ), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The new guidance includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.  The original effective date of ASU 2014-09 of January 1, 2017 has been delayed until January 1, 2018.  Early adoption is not permitted before the original effective date.  The standard allows for either retrospective application to each reporting period presented or retrospective application with the cumulative effect of initially applying this update recognized at the date of initial application.  The Company is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.

 

In April 2015, the F inancial A ccounting S tandards B oard issued A ccounting S tandards U pdate  N o . 2015-03, Interest-Imputation of Interest   Simplifying the Presentation of Debt Issuance Costs ( T opic 835) (“ASU No. 2015-03”).  The purpose of this update is to simplify presentation of debt issuance costs.  The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. We do not expect a material impact on our financial condition, results of operations or cash flows from the

adoption of this guidance.

 

In August 2015, the Financial Accounting Standards Board issued Accoun ting Standards Update No. 2015-15 ,   Interest-Imputation of Interest Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements (Subtopic 835-30) (“ASU No. 2015-15”).  The amendment in this update was to address the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit agreements.  A SU No. 2015-15 permits the Company to defer and present debt issuance costs as an asset and amortize the deferred debt issuance cost ratably over the term of the Company’s existing line of credit agreement with Citizens Bank , regardless of whether there are any outstanding borrowings thereon .   We do not expect a material impact on our financial condition, results of operations or cash flows from the adoption of this guidance.

 

3. Concentration of credit risk

 

The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash and receivables from clients. The Company places some of its cash, cash equivalents, and restricted cash with financial banking institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 . The Company also maintains cash balances at foreign banking institutions, which are not insured by the FDIC.

 

The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of customers’ financial condition.

 

The Company’s accounts receivable concentrations of 10% and greater are as follows:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2015

 

2014

 

 

Customer A

    

14

%  

28

%  

 

Customer B

 

*

 

13

 

 

Customer C

 

10

 

17

 

 

Customer H

 

21

 

*

 

 

 

* Less than 10% accounts receivable concentration.

 

 

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The Company’s revenue concentrations of 10% and greater are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

 

 

2015

 

2014

 

2015

 

2014

 

  

Customer A

    

17

%  

21

%  

19

%  

21

%

 

Customer C

 

*

 

*

 

*

 

10

 

 

Customer H

 

13

 

*

 

*

 

*

 

 

 

* Less than 10% revenue concentration.

 

 

a

 

4 .   Net income per share

 

The Company computes net income per share in accordance with ASC 260, Earnings per Share (“ASC topic 260”). Under ASC topic 260, securities that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. The Company’s preferred stockholders are entitled to participate in dividends and earnings when, and if, dividends are declared on the common stock. As such, the Company calculates net income per share using the two-class method. The two-class method is an earnings formula that treats a participating security as having rights to dividends that otherwise would have been available to common and preferred stockholders based on their respective rights to receive dividends. Losses are not allocated to the preferred stockholders for computing net loss per share under the two-class method because the preferred stockholders do not have contractual obligations to share in the losses of the Company.

 

Basic earnings per share is calculated by dividing net income, adjusted for amounts allocated to participating securities under the two-class method, if applicable, by the weighted average number of common stock outstanding during the period.

 

Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding, assuming dilution, during the period. The diluted earnings per share calculation assumes (i) all stock options and warrants which are in the money are exercised at the beginning of the period and (ii) each issue or series of issues of potential common stock are considered in sequence from the most dilutive to the least dilutive. That is, dilutive potential common stock with the lowest “earnings add-back per incremental share” shall be included in dilutive earnings per share before those shares with higher earnings add back per incremental share.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

105,971

 

$

468,125

 

$

3,692,925

 

$

1,198,249

 

Amounts allocated to participating preferred stockholders under the two-class method

 

 

(12,284)

 

 

(52,490)

 

 

(428,090)

 

 

(134,357)

 

Net income applicable to common stockholders (basic and dilutive)

 

$

93,687

 

$

415,635

 

$

3,264,835

 

$

1,063,892

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding (basic)

 

 

51,360,758

 

 

54,141,669

 

 

52,985,106

 

 

53,855,361

 

Common equivalent shares from options and warrants to purchase common stock

 

 

1,023,633

 

 

835,816

 

 

626,862

 

 

1,408,273

 

Weighted average common stock outstanding (diluted)(1)

 

 

52,384,391

 

 

54,977,485

 

 

53,611,968

 

 

55,263,634

 

Basic net income per share applicable to common stockholders

 

$

0.00

 

$

0.01

 

$

0.06

 

$

0.02

 

Diluted net income per share applicable to common stockholders(1)

 

$

0.00

 

$

0.01

 

$

0.06

 

$

0.02

 


9


 

Table of Contents

(1)

In accordance with ASC 260-10-45-48 , for the three and nine months ended September 30 , 2015 and 2014, the Company has excluded 1 , 446,500 and 1, 394,550 , respectively, of contingently issued restricted shares from diluted weighted average common stock outstanding as the contingencies (a) were not satisfied at the reporting date nor (b) would have been satisfied if the reporting date was at the end of the contingency period.

 

The following table sets forth the weighted average securities outstanding that have been excluded from the diluted net income per share calculation because the effect would have been anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

    

2014

 

2015

    

2014

 

Stock options

 

3,588,862

 

5,110,132

 

5,096,019

 

3,638,125

 

Restricted stock awards

 

 —

 

149,174

 

98,147

 

51,590

 

Warrants

 

 —

 

33,426

 

 —

 

29,913

 

Convertible preferred stock(1)

 

6,851,144

 

6,851,144

 

6,851,144

 

6,851,144

 

Total anti-dilutive securities

 

10,440,006

 

12,143,876

 

12,045,310

 

10,570,772

 

 


(1)

Diluted net income per share increases when convertible preferred stock is included in the required sequence in the diluted earnings per share computation. As such, convertible preferred stock is excluded from the computation of diluted earnings per share for the three and nine months ended September 30 , 2015 and 2014.

 

5. Stock-based compensation expense and assumptions

 

Stock-based compensation expense is measured at the grant date based on fair value, and recognized as an expense over the requisite service period, net of an estimated forfeiture rate.

 

During the first and second quarters of 2015, stock options granted to certain employees of the Company were 0.2 million and 0.1 million, respectively, with a grant fair value of $0.2 million and $0.1 million, respectively. The actual number of shares that will be issued upon exercise of the options is subject to the achievement of service-based vesting conditions.  Stock-based compensation expense is recorded on a straight line basis from the date of the grant over the requisite service period of 36 months.

 

During the third quarter of 2015, 1.6 million stock options with a grant fair value of $1.5 million were granted to certain employees of the Company.  The actual number of shares that will be issued upon exercise of the options is subject to the achievement of service-based vesting conditions.   Stock-based compensation expense is recorded on a straight line basis from the date of the grant over the requisite service period of 24 to 36 months.

 

During the first quarter of 2015, 0.1 million restricted stock awards with a grant fair value of $0.1 million were granted to an employee of the Company.  The final number of vested shares is subject to service-based vesting conditions.  Expense is recorded on a straight line basis from the date of the grant over the applicable service period of 36 months.

 

During the third quarter of 2015, 0.1 million restricted stock awards with a grant fair value of $0.2 million were granted to certain members of the Company’s Board of Directors.  The final number of vested shares is subject to service-based vesting conditions.  Expense is recorded on a straight line basis from the date of the grant over the requisite service period of 12 months.

 

During the third quarter of 2015, the Company granted 0.3 million restricted stock awards to certain officers of the Company. These 0.3 million shares vest in four tranches.

 

·

The first three tranches consist of 0.1 million shares which expire May 1, 2018 .   V esting is contingent on satisfying a combination of market and service based conditions. The market condition shall be satisfied any time after the grant and before the expiration date if the Company’s stock price on NASDAQ is greater than or equal to $4.00 per share for either seven consecutive trading days, or any ten trading days over a consecutive thirty-five day period. Once such s tock p rice is achieved the market condition shall be forever satisfied, even in the event that it subsequently falls below $4.00 per share, and in such event, the vesting of shares shall be

10


 

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subject only to the vesting schedule.  All shares will be forfeited if the aforementioned market condition is not achieved by the expiration date. The first three tranches of the award were valued at $0.1 million.

·

The fourth tranche consists of 0.2 million shares which expire December 31, 2017 .   V esting is contingent on satisfying either a market or performance based condition. The market condition shall be satisfied at any time after the grant and before the expiration date if the Company’s stock on NASDAQ is greater than or equal to $3.50 per share for seven consecutive trading days, or any ten trading days over a consecutive thirty-five day period ,   or if the Company achieves Adjusted EBITDA of not less than $18.0 million in respect of any fiscal year ending on or prior to December 31, 2017.  Once th e aforementioned stock price or Adjusted EBITDA p erformance condition are achieved , all shares in this tranche will immediately vest. All such shares will be forfeited if the aforementioned stock price or performance condition are not achieved by the expiration date.  The market and performance condition   were valued separately at $0.3 million and $0.6 million, respectively.

 

During the third quarter of 2015, the Company also granted 0.3 million restricted stock awards to a certain officer of the Company. These 0.3 million shares vest in three tranches. The first two tranches expire May 1, 2017 ; vesting terms are consistent with the terms of the first three tranches of the grant described above.  The third tranche expires December 31, 2017 ; vesting terms are consistent with the terms of the fourth tranche of the grant described above.  The first two tranches of the award were valued at $0.1 million. The market and performance condition of the third tranche of the award were valued separately at $0.3 million and $0.6 million, respectively.

 

In accordance with ASC 718-10, the Company valued the market condition and performance condition awards using binomial lattice-based and Black-Scholes valuation pricing models, respectively. For the market condition awards the expense will be recorded on a straight-line basis over the derived service period for each tranche. For the awards with both the market condition and performance condition, if the p erformance c ondition is achieved prior to the s tock p rice target , the expense is trued up to the value of the p erformance c ondition. The expense related to the market condition portion of the award is not reversed even if the market conditions are not satisfied. As of September 30, 2015, no amounts have been expensed in relation to the performance condition of the award as it was not deemed probable that the performance conditions would be satisfied. 

 

The following summarizes stock-based compensation expense recognized by income statement classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Processing and service costs

 

$

43,030

 

$

69,275

 

$

143,611

 

$

195,585

 

Selling, general and administrative expenses

 

 

656,197

 

 

207,405

 

 

1,017,206

 

 

631,755

 

Restructuring charges

 

 

36,924

 

 

88,917

 

 

36,924

 

 

124,050

 

Total stock-based compensation expense

 

$

736,151

 

$

365,597

 

$

1,197,741

 

$

951,390

 

 

The following summarizes stock-based compensation expense recognized by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

    

2014

    

2015

    

2014

 

Stock options

 

$

528,249

 

$

235,573

 

$

783,954

 

$

655,965

 

Restricted stock awards

 

 

207,902

 

 

130,024

 

 

413,787

 

 

295,425

 

Total stock-based compensation expense

 

$

736,151

 

$

365,597

 

$

1,197,741

 

$

951,390

 

 

 

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6. Property and equipment

 

Property and equipment, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

As of

 

As of

 

 

 

useful life

 

September 30,

 

December 31,

 

 

 

(in years)

 

2015

 

2014

 

Equipment

 

2

-

7

 

$

959,995

    

$

945,116

 

Computer hardware

 

3

-

5

 

 

3,264,672

 

 

2,963,629

 

Furniture and fixtures

 

5

-

7

 

 

193,137

 

 

194,399

 

Leasehold improvements

 

3

-

10

 

 

756,787

 

 

749,275

 

Total property and equipment, gross

 

 

 

 

 

 

5,174,591

 

 

4,852,419

 

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

(3,194,217)

 

 

(2,712,672)

 

Property and equipment, net

 

 

 

 

 

$

1,980,374

 

$

2,139,747

 

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

    

2015

    

2014

 

Depreciation and amortization expense

 

$

164,538

    

$

164,253

 

$

489,010

 

$

460,444

 

 

 

7. Goodwill and intangible assets

 

The change in carrying amount of goodwill for the nine months ended September 30 , 2015 is as follows:

 

 

 

 

 

 

Goodwill, gross, as of December 31, 2014

    

$

319,671

 

Impact of change in Euro exchange rate

 

 

(23,956)

 

Accumulated impairment losses as of September 30, 2015

 

 

 —

 

Goodwill, net, as of September 30, 2015

 

$

295,715

 

 

 

The entire goodwill balance is assigned to the payment processing services segment as this is the reporting unit expected to benefit from the synergies of the combination.

 

Intangible assets are recorded at estimated fair value and are amortized ratably over their estimated useful lives to processing and service costs, which are included in cost of revenue.

 

The gross book value, accumulated amortization and amortization periods of intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

As of December 31, 2014

 

Amortization

 

 

Gross book

 

Accumulated

 

Net book

 

Gross book

 

Accumulated

 

Net book

 

period

 

 

value

 

amortization

 

value

 

value

 

amortization

 

value

 

(in years)

 

Trademarks and patents

$

1,170,162

  

$

(451,454)

  

$

718,708

  

$

1,158,572

  

$

(387,134)

  

$

771,438

  

15

-

21

 

Technology

 

2,462,655

 

 

(1,652,362)

 

 

810,293

 

 

2,662,164

 

 

(1,386,902)

 

 

1,275,262

 

5

 

 

 

Intangible assets, net

$

3,632,817

 

$

(2,103,816)

 

$

1,529,001

 

$

3,820,736

 

$

(1,774,036)

 

$

2,046,700

 

 

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Amortization expense

 

$

143,599

 

$

210,627

 

$

431,388

    

$

550,082

 

 

 

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8. Commitments and contingencies

 

Employment agreements

 

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $0. 9 million as of September 30 , 2015 and $0.8 million as of December 31, 2014, in the event of an involuntary termination , as defined in the employment agreements. Additionally, in the event of termination upon a change of control, as defined in the agreements, the Company had a commitment to pay severance of approximately $ 1.1 million as of September 30 , 2015 and $1.0 million as of December 31, 2014.

 

Contingent liabilities

 

In instances where the Company is acting as the merchant acquirer, the Company bears a risk that a merchant may engage in fraud by submitting for payment certain credit card transactions that may have been manipulated, are fictitious, or are otherwise not bona fide. Similarly, the Company bears the risk that a merchant becomes insolvent, owing money to cardholders. To the extent that such fraud or insolvency occurs in circumstances where the Company is liable to make good on any resultant losses, this could affect the Company’s operating results and cash flows. The Company has required certain merchants to post cash reserves of approximately $0. 9   million with the sponsoring bank against such liabilities and has itself paid the acquirer a reserve of $0. 3 million in connection therewith, which is included in long-term “Restricted cash” on the condensed consolidated balance sheets. In addition, the Company holds merchant reserves of approximately  $ 2 . 2 million. This reserve amount is included in “Restricted cash” with an offset in “Due to merchants . ” Under FASB ASC 460, Guarantees , the Company evaluates its ultimate risk and records an estimate of potential loss for chargeback’s related to merchant fraud and processing errors based upon an assessment of actual historical fraud rates and errors in processing compared to recent bank card processing volume levels . No contingent liability has been recorded as of September 30 , 2015 and December 31, 2014, as the risk of material loss is considered remote. The Company monitors these contingent liabilities on a quarterly basis and will provide for a reserve if deemed necessary .

 

Outstanding litigation

 

From time to time, the Company’s operating entities are involved in legal proceeding in the ordinary course of business. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.

 

Acquiring bank sponsorship agreement

 

In order to offer merchant acquiring services for Visa and MasterCard transactions, the Company must be sponsored by a financial institution that is a principal member of the Visa and MasterCard networks.

 

The Company entered into a five-year agreement with a sponsoring bank effective September 1, 2013. The Company wa s required to pay minimum annual sponsorship transaction fees of $0. 3 million in year one.  The minimum fees escalate each subsequent year with minimum fees of $0. 5 million due in year five for total minimum fees of $ 1 . 8 million to be paid over the term of the agreement.  Sponsorship fees are recorded to payment processing service fees cost of sales with the total agreement minimum of $ 1 . 8 million recognized on a straight line basis over the term of the agreement.

 

Pursuant to the agreement, the Company is liable for all losses incurred by the sponsoring bank with respect to the activities of its merchants sponsored under the agreement.  No contingent liability has been recorded as of September 30 , 2015 as the risk of material loss is considered remote based on historical information.  The Company monitors this contingent liability on a quarterly basis and will provide for a reserve if deemed necessary.

 

Insurance reimbursement

 

Based on the loss recovery model the Company recorded an insurance reimbursement gain of $0. 5 million in selling, general and administrative expens es during the nine months ended September   30, 2015.  The insurance reimbursement was related to a previous property and casualty loss recognized by the Company. 

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9. Credit Facility

 

On June 10, 2015, the Company entered into a $10.0 million secured revolving credit facility (the “Credit Facility”) with Citizens Bank, N.A. (“Citizens”) pursuant to a Credit and Security Agreement by and among the Company, certain affiliates thereof as borrowers or guarantors, and Citizens (the “Credit Agreement”).  The line of credit under the Credit Agreement is secured by substantially all of the Company’s personal property, including the Company’s intellectual property and that of its subsidiaries that are borrowers or guarantors.  The interest rate applicable to committed borrowings is tied to LIBOR plus a margin of 2.5%.  The Credit Agreement also provides for a letter of credit sub-facility of up to $2.0 million. The Credit Agreement contains customary affirmative and negative covenants, including, among others, financial covenants based on the Company’s leverage and fixed charge coverage ratios, as well as an obligation to maintain a minimum availability requirement of at least $5.0 million in the aggregate of cash and availability under the line of credit.  The Credit Facility will provide funds for general corporate purposes and repurchases of issued and outstanding capital stock of the Company.  The Credit Facility matures on June 10, 2020 and is payable in full upon maturity.  As of September 30 , 2015, the Company was in compliance with all financial covenants contained in the Credit Agreement and no amounts were outstanding.    

 

10 . Related party transactions

 

The Company incurred the following amounts to companies that are principally owned by executives, directors or stockholders of the Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

    

2015

 

2014

 

Rent

 

$

 —

 

$

126,451

 

$

90,887

    

$

377,544

 

Consulting and professional fees

 

 

 —

 

 

1,414

 

 

1,929

 

 

4,840

 

 

Rent was paid to BDP Realty Associates LLC, a company in which our former C hief E xecutive O fficer and Chairman of the Board of Directors, Philip Beck has a one-third (1/3 rd ) interest. Furthermore, c onsulting and professional fees were paid to a professional services company where a family member of Philip Beck has  a substantial interest . Mr. Beck does not have any direct financial interest in such company.

 

In February 2015, Philip Beck ceased to serve as the Company’s Director and Chairman of the Board.  The Company’s related party expense for 2015 is for the two months Philip Beck was Chairman of the Board of Directors.

 

11 . Accrued expenses

 

The following are the components of accrued expenses:

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Deferred revenue(*)

 

$

794,046

 

$

800,650

 

Deferred incentive(**)

 

 

1,075,000

 

 

 —

 

Other(***)

 

 

3,585,625

 

 

2,117,995

 

Total accrued expenses

 

$

5,454,671

 

$

2,918,645

 

 


(*) Current deferred revenue will be recognized as revenue ratably over the next 12 months.  As of September 30 , 2015, i ncluded in the balance sheet classification “Long-term portion of capital leases and deferred revenue” is the non-current portion of deferred revenue in the amount of $0 . 7 million . The non-current deferred revenue balance as of December 31, 2014 was ap proximately $ 1 . 0 million .  

 

(**) As of September 30 , 2015, the Company recorded a pproximately  $ 1 . 1 million in   short term incentive s   in relation to future obligations under a   contract.

 

(** * ) No amounts included in “Other” exceed 10% of total current liabilities .  

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Table of Contents

 

12. Segment information

 

General information

 

The segment and geographic information provided in the table below is being reported consistent with the Company’s method of internal reporting. Operating segments are defined as components of an enterprise for which separate financial information is available and which is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CODM reviews net revenue and gross profit by service by geographical region. The Company operates in two reportable segments: multi-currency processing services and payment processing services.

 

Information about revenue, profit and assets

 

The CODM evaluates performance and allocates resources based on net revenue and gross profit of each segment. For purposes of analyzing segments, gross profit of the multi-currency processing services segment is equal to net revenue less multi-currency cost of sales of $1.0 million and $0.4 million, which is included in “processing and services costs” for the three months ended September 30, 2015 and 2014, respectively, and $2.3 million and $1.5 million for the nine months ended September 30, 2015 and 2014, respectively. The gross profit for the payment processing services segment includes net revenue of the segment less the cost of revenue component “payment processing services fees, which includes interchange and card network fees and assessments. Net revenue and gross profit by geographical region is based upon where the transaction originated. Lastly, the Company does not evaluate performance or allocate resources using segment asset data. Long-lived assets are primarily located in the Americas and Europe and as of September 30, 2015 and December 31, 2014, long-lived asset amounts are $8 .1 million and $9.1 million, respectively.

 

The Company conducts its business primarily in three geographical regions: Asia Pacific (“APAC”), the Americas, and Europe, Middle East and Africa (“EMEA”). The following table provides revenue concentration by geographic region. Analysis of revenue by segment and geographical region and reconciliations to consolidated revenue, gross profit, and income before the provision for income taxes are as follows:

15


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

3,573,478

 

$

3,967,352

 

$

11,836,523

 

$

11,955,505

 

Americas

 

 

1,870,722

 

 

1,862,440

 

 

5,114,772

 

 

5,152,889

 

EMEA

 

 

2,348,129

 

 

1,240,311

 

 

6,584,488

 

 

5,525,690

 

Total multi-currency processing services revenue

 

 

7,792,329

 

 

7,070,103

 

 

23,535,783

 

 

22,634,084

 

Payment processing services revenue

 

 

4,826,084

 

 

4,242,200

 

 

13,898,759

 

 

11,737,941

 

Net revenue

 

$

12,618,413

 

$

11,312,303

 

$

37,434,542

 

$

34,372,025

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

3,547,202

 

$

3,948,116

 

$

11,741,027

 

$

11,886,221

 

Americas

 

 

1,761,686

 

 

1,811,231

 

 

4,799,928

 

 

5,033,286

 

EMEA

 

 

1,450,650

 

 

921,507

 

 

4,662,273

 

 

4,211,680

 

Total multi-currency processing services gross profit

 

 

6,759,538

 

 

6,680,854

 

 

21,203,228

 

 

21,131,187

 

Payment processing services gross profit

 

 

2,133,994

 

 

1,628,873

 

 

6,027,578

 

 

4,230,936

 

Total reportable segment gross profit

 

 

8,893,532

 

 

8,309,727

 

 

27,230,806

 

 

25,362,123

 

Corporate allocated cost of sales

 

 

2,743,441

 

 

2,833,359

 

 

8,067,273

 

 

8,679,625

 

Total gross profit

 

$

6,150,091

 

$

5,476,368

 

$

19,163,533

 

$

16,682,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

$

6,150,091

 

$

5,476,368

 

$

19,163,533

 

$

16,682,498

 

Selling, general and administrative expenses

 

 

5,657,740

 

 

4,369,155

 

 

14,840,844

 

 

13,953,925

 

Restructuring charges

 

 

283,726

 

 

512,589

 

 

283,726

 

 

1,195,556

 

Income from operations

 

 

208,625

 

 

594,624

 

 

4,038,963

 

 

1,533,017

 

Interest expense

 

 

(10,372)

 

 

(15,201)

 

 

(38,815)

 

 

(47,187)

 

Interest income

 

 

392

 

 

1,245

 

 

1,183

 

 

1,708

 

Other income

 

 

 —

 

 

 —

 

 

 —

 

 

16,949

 

Total other expense, net

 

 

(9,980)

 

 

(13,956)

 

 

(37,632)

 

 

(28,530)

 

Income from operations before provision for income taxes

 

$

198,645

 

$

580,668

 

$

4,001,331

 

$

1,504,487

 

 

Payment processing services revenue and gross profit are the result of transactions that primarily originated in the Americas. For the three months ended September 30, 2015, Customer B and Customer G had revenue concentration of 15% and 24%, respectively, and for the nine months ended September 30, 2015, Customer B and Customer G had revenue concentration of 15% and 22%, respectively. No individual customer of the payment processing segment was greater than 10% of segment revenue for the three and nine months ended September 30, 2014.

 

Concentration of revenue by customer by geographical region:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Multi-currency processing services revenue:

    

 

 

 

 

 

 

 

 

APAC:

 

 

 

 

 

 

 

 

 

Customer A

 

59

%  

61

%  

59

%  

61

%  

Americas:

 

 

 

 

 

 

 

 

 

Customer E

 

19

 

24

 

19

 

22

 

Customer D

 

10

 

18

 

13

 

18

 

Customer I

 

*

 

21

 

10

 

19

 

EMEA:

 

 

 

 

 

 

 

 

 

Customer C

 

27

 

57

 

48

 

60

 

Customer H

 

72

 

43

 

52

 

40

 


16


 

Table of Contents

(*) Less than 10% revenue concentration.

 

1 3 . Restructuring charges

 

In 2014, the Company initiated a realignment of its workforce aimed at achieving greater operational efficiencies. As a result of the realignment, the Company incurred total restructuring charges during the nine months ended September 30 , 201 5 of approximately $0. 3 million.

 

The table below sets forth the cash components and activity associated with the realignment of workforce and business for the nine months ended September 30 , 2015: