Billing Services Group Limited

 

Notes to Consolidated Financial Statements

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies

 

Organization

 

Billing Services Group Limited (the "Company" or "BSG Limited") commenced operations effective with the completion of its admission to AiM (a market operated by the London Stock Exchange plc) on June 15, 2005.  The Company was formed to succeed to the business of Billing Services Group, LLC and its subsidiaries.  Through its operating entities, the Company provides clearing and financial settlement products, innovative Wi-Fi roaming solutions to mobile carriers and network operators and third-party verification services to the telecommunications, cable and utilities industries.  The Company was incorporated and registered in Bermuda on May 13, 2005.

Principles of Consolidation

 

The Company's consolidated financial statements include the accounts of the Company and its subsidiaries, Billing Services Group North America, Inc. ("BSG North America") and BSG Wireless Ltd. ("BSG Wireless"), and their respective subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all cash and highly liquid investments with original maturities of three months or less.  The Company holds cash and cash equivalents at several major financial institutions in amounts that often exceed Federal Deposit Insurance Corporation insured limits for United States deposit accounts.  The Company has entered into control agreements with its lenders and certain financial institutions covering certain deposit accounts.

 

Restricted Cash

 

Restricted cash represents deposits made under the deposit account security and control agreement (the "Deposit Agreement") discussed in Note 8.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Purchased Receivables

 

The Company offers advance funding arrangements to certain customers.  Under the terms of the arrangements, the Company purchases the customer's accounts receivable for an amount equal to the face amount of the call record value submitted to the local exchange carriers ("LECs") by the Company, less various deductions, including financing fees, LEC charges, rejects and other similar charges.  The Company advances 20% to 75% of the purchased receivable to the customer and charges financing fees at rates up to 8% per annum over prime (prime was 3.25% per annum at December 31, 2014 and 2013) until the funds are received from the LECs.  The face amount of the call record value is recorded as purchased receivables in the consolidated balance sheets.

 

Financial Instruments

 

Due to their short maturity, the carrying amounts of accounts and purchased receivables, accounts payable and accrued liabilities approximated their fair values at December 31, 2014 and 2013.  The fair value of the current portion of long-term debt approximated its face value and is based on the amounts at which the debt could be settled (either transferred or paid back) in a current transaction exclusive of transaction costs.

 

Concentration of Credit Risk and Significant Customers

 

At December 31, 2014, ten customers represented approximately 44% of accounts receivable, and ten customers represented 100% of outstanding purchased receivables.  At December 31, 2013, ten customers represented approximately 50% of accounts receivable, and ten customers represented 100% of outstanding purchased receivables.  Credit risk with respect to trade accounts receivable generated through billing services is limited as the Company collects its fees through receipt of cash directly from the LECs.  The credit risk with respect to the purchase of accounts receivable is reduced as the Company only advances 20% to 75% of the gross accounts receivable purchased.  Management evaluates accounts receivable balances on an ongoing basis and provides allowances as necessary for amounts estimated to eventually become uncollectible.  In the event of complete nonperformance of accounts receivable, the maximum exposure to the Company is the recorded amount shown on the balance sheet.  For each of the years ended December 31, 2014 and December 31, 2013, twenty customers represented approximately 74% of consolidated revenues.  

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Property, Equipment and Software

 

Property, equipment and software are primarily composed of furniture and fixtures, telecommunication equipment, computer equipment and software and leasehold improvements, including capitalized interest, which are recorded at cost.  The cost of additions and substantial improvements to property and equipment, including software being developed for internal use, is capitalized.  The cost of maintenance and repairs of property and equipment is charged to operating expenses.  Property, equipment and software are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years.  Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset.  Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is reflected in other income (expense) for that period.

 

Capitalized Software Costs

 

The Company capitalizes the cost of internal-use software that has a useful life in excess of one year.  These costs consist of payments made to third parties and the salaries of employees working on such software development.  Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform.  Software maintenance and training costs are expensed in the period in which they are incurred.

 

The Company also develops software used in providing services.  The related software development costs are capitalized once technological feasibility of the software has been established.  Costs incurred prior to establishing technological feasibility are expensed as incurred.  Technological feasibility is established when the Company has completed all planning and high-level design activities that are necessary to determine that the software can be developed to meet design specifications, including functions, features and technical performance requirements.  Capitalization of costs ceases when the software is available for use.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Capitalized software development costs for completed software development projects, including capitalized interest, are transferred to computer software, and are then depreciated using the straight-line method over their estimated useful lives, which generally range from four to seven years.  When events or changes in circumstances indicate that the carrying amount of capitalized software may not be recoverable, the Company assesses the recoverability of such assets based on estimates of future undiscounted cash flows compared to net book value.  If the future undiscounted cash flow estimates are less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows.  The Company also evaluates the amortization periods of capitalized software assets to determine whether events or circumstances warrant revised estimates of useful lives.

 

For the years ended December 31, 2014 and 2013, the Company capitalized $0.9 million and $1.6 million of software development costs, respectively.  During 2014 and 2013, the Company transferred $0.8 million and $0.7 million, respectively, of software development costs to computer software.  Depreciation expense on computer software was $2.3 million and $4.6 million for the years ended December 31, 2014 and 2013, respectively.  At December 31, 2014 and 2013, the Company had undepreciated software costs of $4.4 million and $6.0 million, respectively.

 

Intangible Assets and Goodwill

 

The Company classifies intangible assets as definite-lived, indefinite-lived or goodwill.  The Company accounts for its intangible assets and goodwill in accordance with the provisions of Accounting Standards Codification ("ASC") 350, Intangibles - Goodwill and Other.

 

Definite-lived intangible assets consist of customer and local exchange carrier contracts, both of which are amortized over the respective lives of the agreements.  The Company periodically reviews the appropriateness of the amortization periods related to its definite-lived assets.  These assets are recorded at amortized cost.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

The Company tests for possible impairment of definite-lived intangible assets whenever events or changes in circumstances, such as a reduction in operating cash flow or a material change in the manner for which the asset is intended to be used, indicate that the carrying amount of the asset may not be recoverable.  If such indicators exist, the Company compares the undiscounted cash flows related to the asset to the carrying value of the asset.  If the carrying value is greater than the undiscounted cash flow amount, an impairment charge is recorded in amortization expense in the consolidated statements of operations for amounts necessary to reduce the carrying value of the asset to fair value. 

 

The Company's indefinite-lived intangible assets consist of trademarks, which were originally recorded at their acquisition date fair value.  The Company's indefinite-lived intangible assets are not subject to amortization but are tested for impairment at least annually.  The Company tests its indefinite-lived intangible assets for impairment annually on October 1, or more frequently when events or changes in circumstances indicate that impairment may have occurred.

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.  Goodwill is not subject to amortization, but is tested for impairment at least annually.  Impairment may exist when the carrying amount of the reporting unit exceeds its estimated fair value.  Assessing the recoverability of goodwill requires the Company to make estimates and assumptions about sales, operating margins, growth rates and discount rates based on its budgets, business plans, economic projections, anticipated future cash flows and marketplace data.  There are inherent uncertainties related to these factors and management's judgment in applying these factors.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

The Company tests goodwill for impairment using a two-step process.  The first step, used to screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill.  If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.  The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of goodwill.  After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis.  Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

 

Third-Party Payables

 

The Company provides clearing and financial settlement solutions to telecommunications and other service providers through billing agreements with LECs, which maintain the critical database of end-user names and addresses of the billed parties.  The Company receives individual call records from telecommunications and other service providers and processes and sorts the records for transmittal to various LECs.  Invoices to end-users are generated by the LECs, and the collected funds are remitted to the Company, which in turn remits these funds to its customers, net of fees, reserves, taxes and other charges.

 

Reserves represent cash withheld from customers to satisfy future obligations on behalf of the customers.  These obligations consist of bad debt, customer service, indemnification obligations and other miscellaneous charges.  The Company records trade accounts receivable and service revenue for fees charged to process the call records.  When the Company collects funds from the LECs, the Company's trade receivables are reduced by the amount corresponding to the processing fees, which are retained by the Company.  In certain instances, the Company also retains a reserve from its customers' settlement proceeds to cover the LECs' billing fees and other charges.  The remaining funds due to customers are recorded as liabilities and reported in third-party payables in the consolidated balance sheets.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Revenue Recognition

 

The Company provides its services to telecommunications and other service providers through billing arrangements with network operators.  Within its clearing and settlement business, the Company recognizes revenue from its services when its customers' records are processed and accepted by the Company.  For its Wi-Fi roaming solutions and third-party verification businesses, the Company recognizes revenue when services are rendered.

 

Earnings Per Share

 

The Company computes earnings per share under the provisions of ASC 260, Earnings Per Share, whereby basic earnings per share are computed by dividing net income or loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.  Diluted earnings per share are determined in the same manner as basic earnings per share except that the number of shares is increased to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase would be anti-dilutive.

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses and gains and losses be included in net income.  Although certain changes in assets and liabilities, such as translation gains and losses, are reported as a separate component of the equity section on the balance sheet, such items, along with net income, are components of comprehensive income.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.  The components of the deferred tax assets and liabilities are individually classified as current and noncurrent based on their characteristics.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized.

 

Stock-Based Compensation

 

Under the fair value recognition provisions of ASC 718-10, Compensation - Stock Compensation, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense on a straight-line basis over the vesting period.  Determining the fair value of stock-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors.

 

Foreign Currency

 

Results of operations of the Company, as appropriate, are translated into U.S. dollars using the average exchange rates during the year.  The assets and liabilities of those entities are translated into U.S. dollars using the exchange rates at the balance sheet date.  The related translation adjustments are recorded in a separate component of shareholders' equity, "Accumulated other comprehensive income."  Foreign currency transaction gains and losses are included in operations.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

1.     Organization and Summary of Significant Accounting Policies (continued)

 

Advertising Costs

 

The Company records advertising expense as it is incurred.  

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results could differ from those estimates.

 

New Accounting Standards and Disclosures

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The updated standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method.  The updated standard will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.

 

Subsequent Events

 

Subsequent events were evaluated through March 27, 2015, the date at which the consolidated financial statements were available to be issued.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

2.     Property, Equipment and Software

 

Property, equipment and software consisted of the following:

 

		December 31
		2014		2013
		(In thousands)
Furniture and fixtures	$	278	$		278
Telecommunication equipment		1,839			1,839
Computer equipment		6,123			5,983
Computer software		35,752			35,050
Software development, $196 of capitalized
interest at December 31, 2014 and 2013		372			366
Leasehold improvements		2,172			2,172
		46,536			45,688
Less accumulated depreciation		41,510			39,041
Net property, equipment and software	$	5,026	$		6,647

 

 

Depreciation expense was $2.4 million and $5.0 million for the years ended December 31, 2014 and 2013, respectively.

 

 

3.     Intangible Assets and Goodwill

 

Definite-lived intangible assets consist of customer and local exchange carrier contracts, which are amortized over their respective estimated lives.  The weighted-average amortization period is approximately ten years.

 

Indefinite-lived intangible assets consist of trademarks. Trademarks are not subject to amortization but are tested for impairment at least annually. 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

3.     Intangible Assets and Goodwill (continued)

 

The following table presents the gross carrying amount and accumulated amortization for each major category of intangible assets:

 

		2014					2013
		Gross					Gross
		Carrying			Accumulated		Carrying		Accumulated		Amortization
		Amount			Amortization		Amount		Amortization		Period
		(In thousands)
Customer contracts	$	70,689	$		69,195	$	70,543	$	68,934		10 years
Local exchange
carrier contracts		6,640			4,888		6,640		4,445		15 years
Trademarks		4,928			-		5,008		-		N/A
	$	82,257	$		74,083	$	82,191	$	73,379

 

 

Total amortization expense from definite-lived intangibles was $0.7 million and $6.8 million for the years ended December 31, 2014 and 2013, respectively.  The estimate of amortization expense for the five succeeding fiscal years for definite-lived intangibles is $0.6 million each for 2015 through 2018 and $0.2 million for 2019.

 

During 2013, the Company made an adjustment to reduce goodwill by $8.8 million related to the 2003 purchase of one of the Company's clearing and settlement businesses for wireline service providers.  In 2003, the aggregate goodwill which arose from the transaction was allocated to each of the Company's operating entities.  During 2013, the Company consolidated its business activity into fewer operating units, and accordingly recognized an impairment charge on the portion of goodwill which had been allocated to two entities involved in enhanced services billing for which cash flows generally ceased during 2013.  These two entities were substantially liquidated as of December 31, 2013.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

3.     Intangible Assets and Goodwill (continued)

 

The following table presents the change in carrying amount of goodwill for the years ended December 31, 2014 and 2013:

 

		Total
		(In thousands)
Balance as of December 31, 2012	$	34,100
Adjustments - 2013		(8,816)
Balance as of December 31, 2013		25,284
Adjustments - 2014		(3)
Balance as of December 31, 2014	$	25,281

 

 

4.     Debt

 

Long-term debt is as follows:

 

		December 31
		2014		2013
		(In thousands)
Total debt outstanding	$	6,281	$	15,979
Less current portion		6,281		9,600
	$	-	$	6,379

 

 

On June 30, 2011, the Company refinanced its debt and entered into a $48 million credit agreement (the "Term Loan Facility").  The Term Loan Facility is secured by all of BSG North America's assets and guarantees from most of the Company's subsidiaries.

 

In August 2012, the Company borrowed $3.5 million to facilitate its purchase of Connection Services Holdings Limited (the "CSL Loan"), and in December 2012, the Company borrowed $2.8 million in connection with a dividend payment (the "Dividend Loan").  Both the CSL Loan and the Dividend Loan were repaid in February 2013.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

4.     Debt (continued)

 

Interest under the Term Loan Facility is charged, at the Company's option, at the U.S. prime rate plus a specified margin, or the London Interbank Offered Rate ("LIBOR") plus a specified margin, and if the LIBOR option is selected, a LIBOR floor of 0.75% per annum.  The margin is determined based on the Company's leverage ratio, as defined in the credit agreement.  At December 31, 2014, the interest rate on the Term Loan Facility was 3.25% per annum.

 

The Term Loan Facility requires quarterly principal payments of $2.4 million through March 2015 and a payment of any remaining outstanding balance at its maturity in June 2015.  It also requires mandatory prepayments relating to (i) 75% of BSG North America's excess cash flow, as defined; and (ii) certain other occurrences for which mandatory prepayment is a usual and customary consequence in credit agreements of this nature.  Outstanding loans may be prepaid at any time without prepayment premium or penalty.

 

The CSL Loan and the Dividend Loan each had a maturity date of March 31, 2013.  As noted above, these loans were repaid in February 2013.

 

During 2014 and 2013, the Company did not generate any consolidated excess cash flow, as defined in the Term Loan Facility.  Accordingly, no related additional principal payment was required.  In 2014, the Company made a $0.1 million mandatory prepayment resulting from the sale of certain assets.

 

The Term Loan Facility includes covenants requiring the Company to maintain certain minimum levels of debt service coverage and maximum levels of leverage and capital expenditures.  The agreement also includes various representations, restrictions and other terms and conditions that are usual and customary in credit agreements of this nature.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

5.     Income Taxes

 

The components of the Company's income tax expense (benefit) are as follows:

 

		Years Ended December 31
		2014		2013
		(In thousands)
Current expense (benefit):
Federal	$	127	$	1,675
State		121		151
		248		1,826
Deferred expense (benefit):
Federal		521		(5,207)
State		9		9
		530		(5,198)
Total income tax expense (benefit)	$	778	$	(3,372)

 

 

The income tax provision differs from amounts computed by applying the U.S. federal statutory tax rate to income before income taxes as follows:

 

		Years Ended December 31
		2014		2013
		(In thousands)
Estimated federal tax expense (benefit) at 35%	$	1,002	$	(3,342)
Increases (reductions) from:
State tax, net of federal deferred tax benefit		88		107
Tax credits and permanent differences		(648)		(109)
Foreign tax rate differential		302		437
Unrecognized tax benefits		-		(627)
Provision to return adjustment		(152)		(11)
Other		186		173
Income tax expense (benefit)	$	778	$	(3,372)

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

5.     Income Taxes (continued)

 

Deferred income taxes result from temporary differences between the bases of assets and liabilities for financial statement purposes and income tax purposes.  The net deferred tax assets and liabilities reflected in the consolidated balance sheets include the following amounts:

 

		December 31
		2014		2013
		(In thousands)
Current deferred tax assets (liabilities):
Reserve for bad debts	$	37	$	54
Accrued liabilities		211		272
State taxes		339		348
Stock-based compensation expense		434		407
Prepaid expense		(117)		(114)
Net operating loss carryforward		-		680
Total deferred tax assets		904		1,647
Noncurrent deferred tax assets (liabilities):
Property, equipment and software		422		354
Intangible assets		498		1,334
Capitalized interest		(1,379)		(1,379)
Net operating loss carryforward		1,178		-
Valuation allowance on NOL		(210)		-
Cancellation of debt deferral		(970)		(983)
Total deferred tax liabilities		(461)		(674)
Net deferred tax assets	$	443	$	973

 

 

At December 31, 2014, BSG North America had state net operating loss credit carryforwards of approximately $0.5 million, which will expire in 2026.  At December 31, 2014, BSG Wireless had a net operating loss of $5.8 million, with a corresponding valuation allowance of $1.1 million that has no expiration.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

5.     Income Taxes (continued)

 

Realization of deferred tax assets is dependent upon, among other things, the ability to generate taxable income of the appropriate character in the future.  Management is of the opinion that it is more likely than not that its deferred tax assets, less applicable valuation allowances, will be realized.

 

At December 31, 2012, the Company had a reserve for uncertain tax positions of $0.5 million.  This reserve was eliminated during 2013 due to the expiration of the statute for the tax year ended December 31, 2009.  As a result, the Company does not currently have any reserves for uncertain tax positions in the provision for income taxes in the consolidated statements of operations.  

 

A reconciliation of the beginning and ending amounts of unrecognized tax benefits follows:

 

		Total
		(In thousands)
Balance as of December 31, 2012	$	545
Changes based on tax positions related to the current year		(545)
Balance as of December 31, 2013		-
Changes based on tax positions related to the current year		-
Balance as of December 31, 2014	$	-

 

 

 

BSG North America has completed an Internal Revenue Service examination for the tax years 2010, 2011 and 2012 and the statute is now closed with regard to these years.  The Company is no longer subject to examination by most state tax authorities for years before 2010.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

6.     Earnings Per Share

 

Earnings per share are calculated based on the weighted-average number of shares of the Company's common stock outstanding during the period.

 

The following is a summary of the elements used in calculating basic and diluted income (loss) per share:

 

 

		December 31
		2014		2013
		(In thousands except per
		share amounts)
Numerator:
Net income (loss)	$	2,084	$	(6,177)
Denominator:
Weighted-average shares - basic		282,416		282,416
Effect of diluted securities:
Options		9,110		-
Weighted-average shares - diluted		291,526		282,416
Net income (loss) per common share:
Basic and diluted	$	0.01	$	(0.02)

 

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

7.     Commitments

 

The Company leases certain office space and equipment under various operating leases.  Annual future minimum lease commitments as of December 31, 2014, are as follows (in thousands):

 

Year ending December 31:
2015	$        622
2016	656
2017	622
2018	472

 

Rental expense under these operating leases approximated $0.7 million for each of the years ended December 31, 2014 and 2013.

 

 

8.     Contingencies

 

The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business.  The Company believes it is unlikely that the final outcome of any of the claims, litigation or proceedings to which the Company is a party will have a material adverse effect on the Company's consolidated financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's consolidated financial position and results of operations for the fiscal period in which such resolution occurs.

 

In June 2012, the Company executed an agreement regarding reserves (the "Reserve Agreement"), as well as a deposit account security and control agreement (the "Deposit Agreement"), with one of the largest U.S. LECs.  These agreements were prompted by this LEC's intention to settle a nationwide class action and the resulting indemnification obligations that would be owed by the Company to the LEC as a result of the settlement.  The Reserve Agreement permits this LEC to deduct funds from amounts otherwise payable to the Company to cover obligations under the Billing and Collection Agreement between the Company and the LEC.  The Deposit Agreement permits this LEC to deposit amounts in an account held in the name of both the LEC and Company; however, funds can only be released at the sole direction of the LEC.  The amount of restricted cash, as indicated on the consolidated balance sheets, represents the net deposits made by the LEC in connection with the Deposit Agreement.  Included in accrued liabilities at December 31, 2014 and 2013 are approximately $24.4 million and $23.2 million, respectively, in reserves which are comprised of these deposits and other payables available to satisfy potential future obligations.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

9.     Employee Benefit Plan

 

A Company subsidiary sponsors a 401(k) retirement plan (the "Retirement Plan"), which is offered to eligible employees.  Generally, all U.S.-based employees are eligible for participation in the Retirement Plan.  The Retirement Plan is a defined contribution plan, which provides that participants may make voluntary salary deferral contributions, on a pretax basis, in the form of voluntary payroll deductions, subject to annual Internal Revenue Service limitations.  The Company matches a defined percentage of a participant's contributions, subject to certain limits, and may make additional discretionary contributions.  During each of the years ended December 31, 2014 and 2013, the Company's matching contributions totaled $0.1 million.  No discretionary contributions were made in either period.

 

 

10.   Stock Option Plans

 

The Company adopted a stock option plan in 2005.  On August 15, 2008, the Board of Directors adopted resolutions to amend and restate both the Billing Services Group Limited Stock Option Plan and the BSG Clearing Solutions North America, Inc. Stock Option Plan (the "BSG Limited Plan" and the "BSG North America Plan," respectively).  In December 2012, the Company's shareholders approved a resolution to amend the BSG Limited Plan and the BSG North America Plan.  This resolution enables the Company's directors, under the BSG Limited Plan and the BSG North America Plan, to grant options up to an aggregate amount of 15% of the number of common shares in issue at the time of the proposed grant.  Prior to this resolution, the aggregate number of options granted was limited to 10% of the number of common shares in issue at the time of the proposed grant.

 

Options may be granted at the discretion of the remuneration committee to any director or employee and are generally granted with an exercise price equal to or greater than the market price of the Company's stock at the grant date.  Directors may be granted options in the BSG Limited Plan and employees may be granted options in the BSG North America Plan.  Options granted under the BSG North America Plan are exercisable into shares of the Company.

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

10.   Stock Option Plans (continued)

 

Outstanding options generally vest over a three-year period following the grant date.  One-quarter of the total number of options typically vest on the grant date, and the remaining 75% of options vest in equal tranches on the first, second and third anniversary of the grant.  Generally, an option is exercisable only if the holder is in the employment of the Company or one of its affiliates (or for a period of time following employment, subject to the discretion of the remuneration committee), or in the event of a change in control of the Company.  Upon a change in control, generally, all options vest immediately.  The options have a contractual life of ten years.

 

The fair value of the options is computed using the Black-Scholes option pricing model.  The following table sets forth the assumptions used in arriving at the fair value of the options granted during 2014 and 2013:

 

			Assumptions
	Grant Date		Risk-free	Dividend	Expected	Expected
Grant Date	Fair Value		Interest Rate	Yield	Volatility	Life (years)
October 2013	1.6 pence		1.93%	0%	85.3%	5.75
October 2014	1.6 pence		2.39%	0%	53.1%	5.75

 

 

Risk-free interest rates reflect the yield on the ten-year U.S. Treasury note.  Expected dividend yield presumes no set dividend paid.  Expected volatility is based on implied volatility from historical market data for the Company.  The expected option lives are based on a mathematical average with respect to vesting and contractual terms.

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

10.   Stock Option Plans (continued)

 

The following is a summary of option activity:

 

				Weighted-
				Average
		Options		Exercise
		Outstanding		Price
Options outstanding at December 31, 2012		11,251,772		9.3 pence
Granted		20,000
Exercised		-
Forfeited		(447,500)
Options outstanding at December 31, 2013		10,824,272		9.3 pence
Granted		947,500
Exercised		-
Forfeited		(191,250)
Options outstanding at December 31, 2014		11,580,522		8.9 pence
Options exercisable at December 31, 2014		9,109,897		9.2 pence
Options available for grant at December 31, 2014		17,758,558

 

 

All of the options granted during 2014 and 2013 were granted under the BSG North America Plan.

 

As of December 31, 2014, there was $0.1 million of total unrecognized noncash compensation cost related to nonvested share-based compensation arrangements granted under the BSG North America Plan.  That cost is expected to be recognized during 2015 through 2017.

 

 

Billing Services Group Limited

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2014 and 2013

 

 

11.   Subsequent Event

 

In February 2015, a LEC made payments totaling approximately $3.7 million to consumers in connection with its settlement of class action litigation, as discussed in Note 8.  This amount related to the Company's service providers and will be deducted from each respective service provider's account balance in 2015.  The Company's third-party accounts payable balance will be adjusted accordingly.